First a little about last week, probably the most hyped market event was the Facebook IPO, as Mark Cuban said, the Facebook IPO may be one of the most important IPOs ever as the market views the potential of FB to bring retail investors back in the market. As you may recall, we followed the trend of Domestic Equity Fund outflows for a while through 2011 and in to 2012, retail investors have been moving out of the market at break neck speed; the continuity of outflows and the size clearly show it's not market dependent, a most of the outflows occurred while the market was rallying, they have been consistent from week to week and large. In the scheme of things I think it's foolish to believe FB can rescue the market, but clearly there was some sentiment hoping for a good showing from FB to lure retail money (mostly FB users) back in to the market.
Beyond that, I also think Friday's FB trade was an interesting peak in to Wall Street that we rarely get to see. On Saturday I posted this,
FaceBook and MS Defending $38; you can clearly see that was the case in the price action alone, $40 was the first level in which they tried to hold, but $38 was crucial as that was the IPO issuance. It's way too early to determine what the future of FB will be, but as noted in the post linked above, it was VERY clear from price action and the flow and size of orders that Morgan Stanley (an underwriter of the FB IPO) were desperate to keep FB above $38. FB's US trade low of the day was exactly $38; not only did the order book show the huge bids at $38 and above, but this is one of those times when you can see 3C picking up on the institutional activity (also in the post above). My guess is that FB will probably be a decent scalp trade if you can buy near $38 and sell at higher levels, for Morgan Stanley, this is a matter of future IPO business which can be very lucrative, FB falling below the IPO price on the first day or probably even the first week won't reflect well on MS and their future in the IPO business. The problem with the scalp trade is there's no leverage as FB is not yet trading options, I believe May 29th they start.
I'm not sure what the total float ended at, but most of it was turned over. If anyone watched the movie Social Networking about FB, then you'll probably remember their strategy was not to take the quick money, but to grow FB and go for the large payday. I wonder if insiders were dumping shares and finally cashing in on the long awaited pay day. From my recollection of IPOs, there's usually a 6 month lockout window in which insiders can't sell, I don't know if that was in effect for the FB IPO. In any case, clearly MS defended $38 and it's an interesting peak in to the market when institutional money is working in the wide open rather than their usual quiet (cards close to the chest) accumulation and distribution, although it's east to understand why they were so out in the open Friday, MS had no choice as their future IPO business and reputation were on the line, that will be the key to scalping FB, "How long does MS have to defend the IPO price as to not damage their reputation regarding future IPO business?"
One of the other interesting events of last week was the early in the week discovery of something going on in the EUR/USD pair. As you may recall last Tuesday I posted a quick headline,
"Someone Knows Something About the Euro"
That post was right about where the red arrow is in this multi-week chart of the Euro/USD, 3C was showing a change in the underlying trade while the Euro still looked nasty and destined for more downside.
I detailed the changes on the chart in a post the same day (Tuesday),
EUR/$USD and sure enough, the change in price character shortly followed the 3C signals that were Euro positive (market supportive) and $USD negative (market supportive).
In many posts since then I have shown you the closely FX correlated commodity sector trading up and against the normal risk off market relationship (many of the Risk Asset Layout Updates showed this behavior not only in the commodity sector, but a few market industry groups and several leading indicators we use such as yields/rates). In other words, the stock market was trading AGAINST its normal legacy arbitrage relationship to the Euro and also against the legacy arbitrage inverse correlation to the $USD, my guess is it had something to do with an op-ex pin and also to create a very bearish environment, getting all traders on one side of the boat and potentially setting them up for a massive bear trap.
The change in the 3C underlying trade was definitive toward the end of Tuesday 5/15, the changes in the Euro began to follow those 3C signals almost immediately while the market headed off doing its own thing in contradiction to many 3C signals, the FX correlation and many Risk Asset Layout leading indicators which all diverged bullishly.
As you can see on this 60 min chart of the SPY vs the Euro (white), the Euro started losing downside momentum the next day and started looking like it was forming a short term base. The volume in the SPY shows clearly how negative sentiment has been, see the chart below.
As we have seen many, many times and the reason I don't like shorting the first initial break of important support, there's often a trap set and we see a counter trend move that shakes out traders, Friday we saw the largest volume of the year, a lot of that is op-ex volume, but clearly bearish sentiment has hit a new peak. As you know, I am bearish the market, very bearish, but I also know that there are opportunities to be found when the market sentiment swings too far in one direction. As mentioned Friday, Wall Street makes money not by selling widgets, but by taking it from traders and this bearish set up is ripe for a counter trend snap back which would be an amazing opportunity for us to sell short in to strength as we have been going at these short bouts of market strength...
Here are several bounces in which we used price strength to sell short in to, it seems counter intuitive to short a market moving higher and close to what would be potential new breakout highs, but take emotion and specifically fear out of the equation and the truth is, these are the best places to short as they are not only high probability, excellent entry points, but they are also MUCH less risky than chasing market weakness. You can call it contrarian trading, but not for the sake of being contrarian, we had an edge on every bounce we shorted as 3C showed us distribution in to the bounces, which hopefully made it easier for you to short with confidence.
I see no reason for Wall Street to run a contrarian trade (bounce or counter-trend rally) higher if it is not going to move sentiment, crate a short squeeze and probably create a scenario in which traders lose their conviction and are not sure which way to go. I have kept to my convictions and held the shorts this entire time with them now at very nice gains for positions that are pure equity shorts using no leverage (like options); BIDU is up 20.58% (that was a beautiful head fake position that we stalked, were patient with and it really paid off), CAT is at +17.64%, PCLN is at +17.04%, AAPL +13.52%, BEAV +8.37%, XOM at 4.89 % (I closed a put position on XOM for a 20+% gain in anticipation of a countertrend move higher) and the newest short, GOOG at a 3.43% gain.
The GOOG trade I may close on a countertrend move in hopes of getting a better position, but as of now, GOOG did exactly what I expected and this is the very reason I shorted it.
This is the same idea used on the GLD +215% short (Put) trade, the same as the BIDU trade (which we were patient with for excellent positioning). At point "A" there's clear resistance, very often this leads to a head fake trade as a break through that resistance brings long buyers in to the trade, they are essentially in a bull trap. Point "B" is where I opened the short position, I considered closing it on a break above $630.10, depending on how 3C looked. At point "C" there was a break above, but a close lower, this is one of the main reasons I prefer to execute trades on the close, if I had closed the trade intraday I would have not have had a successful trade, I relied on the 3C charts to tell me whether this was something to be concerned about or just noise, obviously I determined it was noise as I didn't cover the short. At point "D" the head fake (bull trap) move is complete, the buyers of the breakout are at a loss and start selling, volume rises, momentum snowballs and we get an ugly day like Friday down -3.64%.
Here are the GOOG 3C charts that kept me in the trade.
May 17th (Thursday) was the day GOOG broke above the area I considered to be an area I would stop out of the trade (having less than 2% overall portfolio risk on the trade), the 1 min chart (just like the GLD trade) showed the probability that GOOG would make a breakout above resistance, setting up the head fake/bull trap. On the 17th as GOOG gapped above my potential stop, 3C showed distribution in to that move and ever since has shown confirmation to the downside.
The 2 min chart also showed a negative divergence on the 17th's gap higher, thus I stuck with the short trade.
Although I believe we will see a counter trend /short squeeze move higher, unlike many 15 min charts that are in leading positive position, GOOG is not. Usually the bulk of stocks follow the market so it would stand to reason that a short squeeze move higher would take GOOG with it, I have held GOOG short because its 15 min chart does not look like the others and it stands a good chance of not following the market in any short squeeze move higher. If GOOG should move higher, I'll address it at that point, but for now, the charts tell me the probabilities look best staying short GOOG.
This brings me to the overall portfolio positioning of the shorts. Even though there are many signs of a short squeeze move higher, I WILL NOT abandon any of my shorts or try to trade around them (meaning covering here at a decent profit and trying to short them at higher prices. This is not a reflection of my confidence of the most probable outcome-a short squeeze higher, it is a lot of experience with tops and knowing each one is individual and they all get very unpredictable at the end stages, each being different. I have worked hard to get good positioning on these shorts and I have found that sometimes when you try to get too fancy and too nimble, you often get left out in the cold as the market (even with a powerful short squeeze) will often turn on you and leave you holding few to no short positions to capitalize on. A few months ago I probably would have traded around the market to maximize returns, we are simply at a different place now, a Greek exit of the Euro-zone is a huge potential Black Swan event that didn't exist a few months ago to the extent it does today and the potential gains are not worth the overall risk of being left high and dry with no short positions. That said, I do have some speculative longs in anticipation of such a move and I will look to aggressively add to current positions and start a few new ones on any price strength at the appropriate time.
As for weekend data/economic events, this one falls in to the macro data with Spain itself representing a significant BlackSwan event. There's always been a trend whether in the market or politics, to release bad news on a Friday night when the least amount of people are paying attention, Spain dropped such a bomb Friday night. As you know from posts last week, LCH Clearnet raised margin maintenance on Spanish bonds that have a maturity of over 1.25 years, this will hit the already floundering Spanish banking sector hard as they will have to find extra capital to meet the new margin requirements being they hold a lot of Spain's sovereign debt. To make matters worse, Friday night Spain announced that its budget deficit for 2011(originally supposed to be 6% which was raised to 8.5%) is now 8.9% of GDP or an extra $95.5 billion Euros.
This weekend's G-8 meeting was a toothless tiger, there's not much to see here but a bunch of hot air from politician's that know the situation is out of control, so they did what politician's do best and blew more hot air and paper promises, if you have the slightest inclination to read their statement,
you can find it here at the WSJ blog.
As for other EU events, expect to read about
German Finance Minister Schäuble and former ECB president Trichet in the coming weeks to talk about proposals for more Euro area integration, it' more or less meaningless, a Greek exit or Spanish collapse is what is really on the table, but you should see some news regarding integration.
Merkel and Hollande will likely hold negotiations regarding the Eruo fiscal compact, there may be photo-ops and promises of cooperation, but France's position since the election is now 180 degrees different than under Sarkozy and the new French Finance Minister has already made clear France WILL NOT ratify the pact unless there are new, strong commitments to promote financial growth, whereas Germany is focussed on austerity measures, the two ideas are diametrically opposed and at this point neither will work, but headline scanning algos may pick up on "promising" headlines and this could move the market briefly if there seems to be an air of cooperation, as usual though, even when the leaders of the EU were all on the same page, they could never get anything done or done right, so this is a non-starter.
The EU Commission is looking to implement a strategy to prop up failing EU banks (the list grows larger by the day), the proposed measures are scheduled to take effect June 6th, the fact is the banks can't raise capital, the ECB's LTRO 1 and 2 both meant to re-cap banks or at least used to that effect may have slowed the bleeding, but the ECB doesn't have the resources to re-cap the EU banks, again, a headline that may garner some brief market optimism, but one that is going nowhere, even if the ECB eases again.
As you probably already know from previous posts last week, Fitch downgraded Greece's sovereign rating from B- to CCC. The downgrade doesn't much matter at this point for Greece, but what was interesting is that Fitch said, "Should new elections fail to result in a mandate for a new government to continue austerity measures, a Greek exit from the monetary union would be "probable"." Polling data shows New Democracy (pro-bailout) back in the lead while other polls shows Syriza still in the lead. These are of course the same polls that virtually guaranteed a pro-bailout win while 60% of the country voted for anti-bailout parties, so a big grain of salt on the polling data, however watch for even more pressure from the Troika to try to influence elections in Greece as we already saw last week with the ECB backing away from sending promised bailout money to Greece - to be fair it isn't exactly like Greece has held up their end of the deal either.
There are rumors and trade that suggest a major bank or banks in France are about to fall due to their own circa 2007/2008 mortgage crisis, I suspect this is going to escalate rapidly this week, we may see French ban nationalizations, etc. Some of the French bank bonds are trading like a major crisis is in the making.
While not crucial to the EU train wreck, we should see some headlines out of Hungary as they try to negotiate with the IMF and yet still do the absolute minimum the IMF is requiring.
What we will probably see more than anything over the next week is more news on the ongoing bank runs across Europe. Remember the downgrades, the margin hikes, the capital shortfalls, etc and add bank runs, the banking situation in the EU is way past situation critical and there are no good or realistic ways in which it can be dealt with. There's an off chance of some globally coordinated easing, that would certainly be a brief market positive and as I have mentioned, it seems someone knows something that isn't out yet by the way the Euro/USD is acting-that is what I'm most interested in, what is this really about? 3C is showing some major changes that suggest someone is in the know about something that hasn't been released yet.
Finally, the opening Sunday night trade in the EUR/USD has picked up where Friday left off with a major move higher in the Euro, again on no news, but a break of an important regional resistance area as well as a long standing downtrend of several weeks.
Here are the charts.
Here's opening trade for the EUR/USD for this week, as you can see the Euro has moved even higher than it was on Friday.
The recent 2+ week downtrend in the Euro has been broken to the upside (market positive).
On Friday we saw extreme upside momentum in the Euro on no news, it broke above the downtrend line, held support and the momentum came from that, not stop hunting-this was a solid technical move higher. This move led to this major positive divergence in the Euro vs the SPY...
The Ero (white) and the market (SPY green) usually move together. It seems like common sense the market did not follow the Euro higher due to an options expiration pin, but this leaves the market with some nice head room to move higher based on the correlation and stronger Euro/weaker dollar.
This is the area of resistance I said last Friday morning to watch as a break above that level would lead to upside momentum, it clearly did.
Although many markets are not open yet, the ES CONTEXT model is still very positively divergent, suggesting ES should be higher and leaving head room for ES and the market to move higher. We'll see if this changes as the bond and treasury markets open, but this trend has been going on for the better part of last week, again suggesting the market action to the downside was all about an options expiration pin.
Although it's still very early and Europe hasn't opened, ES is moving higher from Friday's close, no doubt in large part due to the positive Euro divergence. 3C is positive in ES as ES opened for trade Sunday night. We still have a long night ahead of us, but many leading indicators, 3C, and the FX action all suggest the market is about to make a move higher and as I stated earlier, there's no point in doing so unless it is a strong move that can really influence sentiment and cause a short squeeze.
That's it for tonight, see you in the a.m. and have a great week ahead, I'm really looking forward to it.
