I'm going to be brief about this. If you haven't read this and you are a bull in this market. Please, I beg you, understand the concepts in this article.
Margin debt - to - GDP and average three year return on stocks probably doesn't mean jack to you... but it means everything to the hedge funds and Vanguards of the world. Margin debt is amount of money floating around the market holding up purchased securities from people with margin accounts (from the funds all the way down to you and me).
Traders you know what I'm talking about but let me explain to the non-traders out there with a digestible example (don't critique the non-exactness of the math, this is an explanation for the noobs). Say you have 1000 shares of a $1 stock that doubles to $2, and you are still holding it. That's amazing! Those gains are unrealized since you haven't cashed out. So you have two more options - either cash out of those 1000 shares and put the $2k in your pocket, or you could use that additional $1000 unrealized and reinvest in the $2 stock - buying 500 more shares. And so on, and so on. You are buying stocks with money that you technically don't really have--money that's only there because it's loaned to you using the value of your current growing portfolio as collateral. Without going to detailed in the math, this is the mechanic of how margin inflates the market. Do this above, but with billions of dollars...trillions even.
In case you couldn't just feel this while reading, the above paragraph implies that to keep everything going it requires growth over the long haul to keep everyone from getting into the situation of forced liquidation; i.e. margin calls. So enter the margin debt to GDP versus three year return in stocks. If the projected return in stocks is flattening out, the growing bull market instead becomes a race to who is the first one out to not be forced into liquidation during a sell off. We all saw the movie Margin Call. Yeah, that stuff.
And the above article basically says the momentum of growth in the markets just isn't there to sustain the currently level of leveraged money acting as the helium in the balloon that is today's market.
**Other standard issue "I told you so" bear stuff that you'll learn this time around, so you can become a millionaire when it happens again in ten years."
If you still want to be bullish you may enjoy a few good months from here max. But please observe the following. Unemployment is up from 4.9 to 5.0%. Non farm payrolls last week were up, but in a rapid decline from the last weeks. The PMI showed a little bit of growth, but with the lack of fiscal stimulus (re: bailouts), those trapped in this over leveraged market have no place to go but...to get out. And soon. I'm talking by August 2016 or sooner--soon. Unless the Fed or any of the other central banks or the government puts more money into the hands of the retail banks and it circulates back into equities, there is no way this over-inflated market sustains. That is the problem after all. There is not enough money available to go into the markets to sustain growth in equities against the GDP.
A crash isn't happening in April, or even May really. So you're probably ok. So let's just talk about this week shall we? Onto the technicals!
BEARISH STUFF
SPX
Starting with the obvious. Friday's move in the SPY/SPX (take your pick) was controlled by the ESM6 contract trading right up to resistance and stopping there... and being rejected today. This coincides with the targets from our previous videos and likely the edge of the cliff we are looking over now. The SPX is looking to pull back to that 1940 for a 50% retrace of the last move, before trekking back up to re-test the current levels so the risk-managers of the world can answer the question "is this a bull or a bear market?" If you watched our videos, you will know that then is when this question is answered, that second run from 1940 to 2100 somewhere in the May - June time frame. And if that doesn't pan out bullish, July through August will be a very nasty downtrend as equities are sold off because of the margin currently inflating the market. This first "retrace" to 1940 as we call it is supported by a flattening off of the SPX/ES near the top, and a flattening off and double bottom against a long standing support in the VIX. Two "bullish" binary events of Janet Yellen's dovish remarks and a bullish PMI and the VIX is still rejecting that support.
Please understand that Janet Yellen's dovish comments are not signs of a bull market. They are signs of intense fear of tightening an already strained market, an worry about growing economical problems on the global scale. Remember that from 2003-2007 it was the gradual rate HIKES under the Greenspan plan which gave investors faith in the growing economy. If they have to slow it down, it must be going to the moon, right?
Oil
CRUDE OIL is doing it's yearly switcharoo. Commercial Refiners usually secure contracts in two waves, sometimes three. This is the Shell's of the world. They get in at the lows locking in contracts in contango, oil trades up. Hedge funds buy to speculate. Then when the commercials stop buying it falls back when hedge funds dump their contracts pre-expiration (what we're seeing now). When it gets somewhere between this high and the low of last year, the commercials will buy again. You're almost certain to see a second spike if history serves oil correctly. But don't expect that this week, the OVX is healthily trending up. This means that people are buying OOM puts in oil because of recent Saudi / Iran comments about not cutting production. Seriously... get a reality show you two.
My favorite volatile junk stock to long/short during these cycles is OAS which is a resistance leading trade right now and looking to continue it's path downward as long as oil goes down.
Shoes
Because someone asked, we looked at SKX. Time to walk away from Sketchers... and NKE as well. Wakka wakka wakka.
BULLISH STUFF
It's not all going to crap yet. There are still a few gems. AAPL and TSLA broke through their longer standing resistances and are taking a turn up--AAPL because or forecasted sales this season, and TSLA because Elon Mush is booking a few billion dollars in Model 3 preorders.
With that being said, always trade cautiously because good fundamentals sometimes can't avoid the wave of a selloff because of Margin debt. If a fund needs to liquidate something to keep something else on the books... it might just make more sense to dump the best performers to free up the most cash... just for survival.
And if you can't get enough of our handsome faces and Clooney-esque voices, you can catch our last Sunday's podcast here as well as our other videos following these micro moves in the market.
Have a great week everyone, and as always (enter corny sign off line here)
-DTP_Matt
Submitted April 04, 2016 at 08:12PM by trader_matt http://ift.tt/1qlSPE8
No comments:
Post a Comment