Marketview: Historically Difficult Bull

Tough market?

Here are some of the questions we were forced to ponder this week:

– Did Mark Zuckerberg just troll the capital markets for $100+ billion?  This is a legitimate concern of more than a handful of investors.

– Could Jamie Dimon’s legendary insistence that complex derivative strategies take up no more than single page have anything to do with the current problem at JP Morgan?

– Is Greece going to stage a Grexit and face the risk of poverty and social exclusion while setting the world financial markets ablaze?

Between the re-boiled European crisis and the Facebook-fueled social bloodbath, the past week was absolutely brutal.  Even if you were net short this week you’re probably kicking yourself for covering too early.  We identified the fact that option expiration weeks tend to trend and that Monday and Tuesday’s direction would offer a tell but I never imagined the magnitude of the move — nevermind capitalizing on it.

As the human participants leave the market and take their squishy human emotions with them, they’re replaced are replaced with emotionless algorithms.  It’s no wonder the selloffs feel clinical and devoid of emotion.  Downside moves that used to take months now take weeks.  The visceral human element that used to drive markets is gone.  The fear doesn’t turn into greed as fast as it once did, and greed certainly doesn’t morph to fear too quickly either.  Most algorithms are built to follow the path of least resistance and have no residual emotion from the last trade.  As long as there is “more to go” the algos are happy to assist in price discovery.  More to go means more stops to hit, more buyers to pull off the sidelines and more of human inefficiencies to capture.  As traders we have to recognize and embrace these changes, not lament them.  For better or worse this is the system we operate within.  Adjust your time horizons, adjust your bet size, and manage your expectations of how history fits in with the current conditions.  Most importantly: write your own algos.  How many models are build for a market crash or crash-like scenario every year?  Maybe more should be?

It feels as though we’re sitting at a very similar junction as we were in early January except the other way around.  The market has discounted a fraction of a Euro endgame and we’ll see if there’s more to go.  One thing I do know is that there’s no catalyst yet.  Which means I don’t really have a read.  There’s simply not enough information to make even an educated guess.  What I do know is that when the catalyst does show up the only thing that matters is how the market reacts.  Until then the next 60-90 $SPX handles hang in the balance.  As hard as it is to imagine the next 60-90 points being higher, it was just as difficult to imagine them being lower back in April, so don’t count that out.  My gut (and history) says that we retrace some or all of the last leg down.  But my gut has put me in a few tight spots before and my indicators are still firmly bearish.  If and when we get our catalyst I’ll have a better idea if this is a new bull market to be embraced or just a series of upticks to be treated with contempt.  Anticipate, monitor and adjust.

A couple bright spots: 1) Large cap tech held up pretty well this week all things considered, 2) the TED spread hasn’t budged to the upside during the selloff.

Winners: $WMT, $PG, $MO, $VZ, $T, $SO, $GOOG, $CSCO

Losers: $MET, $MS, $C, $FCX, $WMB, $APA, $CAT, $QCOM


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