Who Wants To Be Short?

What do you get print guzzle down sweets? Eating as much as an elephant eats? What are you at getting terribly fat? What do you think will come from that? I don’t like the look of it! Well someone better tell someone at the Federal Reserve as they are literally gobbling up anything that isn’t nailed down. The treasury literally cannot issue debt fast enough to keep up. There’s only one problem with that and at the danger of sounding like a broken record: You cannot print yourself out of a demand crisis.

As the Fed is lowering interest rates they are also buying junk – and I mean real junk like HYG and JNK. Not surprisingly it’s been Mr. Toad’s Wild ride in the junk sector and anyone short here is probably buying vaseline in bulk at Amazon.

IWM got a boost as well but it is still lagging behind the SPX which is interesting. Speaking of which, Janet Yellen (retired chairwoman of the Federal Reserve) is rumored to be busy lobbying Capital Hill to grant the Fed permission to purchase vast amounts of equity ETFs.

Apparently last week’s announcement of an additional $2.3 Trillion (no typo) stimulus by the Fed in response to a 16.6 Million initial jobless claims is not expected to fully exorcise the bearish demons that have plagued the market. Our balance sheet has now reached the $6 Trillion mark with no end in sight.

What we are witnessing here, ladies and leeches, is a panic move that in the longer term will inflect significant structural damage on our economy. Of course that does not mean we are going to see a market response tomorrow. I mean should we really care after a decade of concerted quantitative easing?

I’m sure you remember the numerous doomsday voices that predicted that a $1 Trillion or $2 Trillion balance sheet would effectively kill the U.S. Dollar’s status as the world’s reserve currency?

Well, several more trillions in and it’s still trading near the 100 mark. So let’s leave politics to the pundits and instead focus on what we do best, make money and prosper economically so that we can afford to extract ourselves to greener pastures when the proverbial economic excrement really hits the fan.

That may be next week, next month, next year, or in the next decade. Nobody knows and anyone claiming they know is most likely selling you something. In the interim XLF is gapping to the upside every other day courtesy of the Fed, which commands a purported unlimited put.

That said I updated my VIX backwardation graph this morning with new values from the VX futures going all the way out to August of 2020. On the left side you see an idealized example of what you should see under ‘normal’ market conditions. On the right you see the situation on the ground right now – clearly futures traders are expecting significant volatility over the short to medium term.

Given the rapid sequence of events over the past month there is significant downside potential here. Tech stocks in particular look like a fruit ripe for the plucking. While SPY is lagging junk bonds it’s the QQQ that’s leading everything else. With earnings season just getting warmed up this may change quickly, so it may be time to start looking for short victims.

I recommend you grab yourself a cup or glass of your favorite morning beverage as this is going to be a massive post:

MSFT more than doubled its expected move (EM) and then pulled back. It’s been pretty volatile over the past two months and once the wheels come off it’ll be a wonder to behold.

AMZN also far exceeded its EM last week but here I would probably wait for a sign of weakness. Earnings are over a week away I believe, so we may see a strong push into that followed by a big sobering.

GOOG also more than doubled its EM last week but as soon as I see a short formation on the hourly I’ll grab myself an I/O put spread. Which is a strategy Tony and I will be covering in the future.

Quite a few more short victims (and a few long candidates) waiting below the fold for my intrepid subs:

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