Russia is a riddle wrapped in a mystery inside an enigma.

Winston Churchill

Which is more or less where the markets are currently, save for the fact that they just keep rising. There are many arguments that have validity as to why they shouldn’t, but they just do.

This week’s COT number comes in at [-16.4%]. The markets have been moving higher on COT selling. This if anything underlines the strength of the bull move. Obviously, do not stand in front of the train.

Interest rates and the ‘Great Rotation’.

The 10 year Treasury in particular, has been moving higher, as have stocks. Over longer periods of time, rising interest rates are a negative for stock markets, however in the short-term currently there seems to be a different dynamic at work.

That is the rotation out of bonds and into stocks. The bond bull market that started in 1982 must have picked up a tremendous dollar value of holdings which are now being unwound either for profits or losses and recycled into stocks. How long this trade will work is anybodies guess, but you do not want to be short this trade.

Earnings Season.

Has been successful as far as beating the number and stocks moving higher, but revenue growth forcasts have been dismal. Essentially, a significant number of companies are lowering forward guidance on top line growth. How much spare flesh is left to cut to maintain margins without revenue growth? Not much.

Now, this would you think, be a negative for the market. Well no, the market trades higher if the low number from last quarter is beaten, and no mind is paid to the further lowering of future guidance. If you are shorting stocks on that basis, more than likely you are getting rolled over.

Volatility is low, another sign of a benign market moving higher. That its historically low, and that volatility cones suggest that at some point volatility picks up, the timing of that trade is best handled as we are currently trading it, via buying low volatility and market neutral positions. Although currently there has not been a profit returned to the volatility component…at some point rest assured it will arrive.

The market has the air and feel of abnormality. To stay long, which is the only trade that has any profit accruing to it is very uncomfortable due to the major disconnect between the market and economic fundamentals.

The result of this as you move around blogoland and/or follow more mainstream commentary, seems to be a shortening of trading time frames. There are of course exceptions, but on aggregate, swing trades feel to be getting shorter.

If that is true, or even if it isn’t, stretching the trading time frame seems the best way forward. Profits take longer to accrue, but, the destruction of capital involved in frequent trades is eliminated. This in-of-itself will create nice annual profits on capital invested. The only provision being to lock in profits when they occur, creating a risk free position that allows the trade to run and potentially grow those profits risk free. Trades become very easy to manage once they have locked in profits.

Technical: SPY

On the 5 day time frame on SPY, the trend is down. The market rallied hard Friday, and there will undoubtedly be some follow through on Monday, but, the market looks vulnerable to a pullback after the open and I would expect the market to trade lower into the close. The point that I would look for the upward momentum to stall would be approximately $169.5o.

It remains to be seen if the short term trend can be turned around again, and stocks move higher. On the longer time frames stocks are over extended and the negative COT number has some validity over this longer time frame, but as we have seen, technically, fundamentally, going short this market has been very dangerous.

Moving to the 10 day time frame, the story is very different. The market has come off of its lows, reached the midpoint, stalled a little, but has plenty of upside to $170.25. Therefore, watch the open, and look to initiate longs circa $167.20, which could be a very choppy area.

To this week’s trade. MGM

Until next week,
jog on