• Comments for January 12, 2017

     
    3 Comments Comments
    Markets broke out yesterday and pushed small caps higher on a short squeeze frenzy. This is what I feared when I opened my recent short positions: a general market squeeze. I Hence covered half of my shorts and will now have to rethink my timing.

    Interest rates expectations are leading market narratives for now: strong Treasuries auctions combined to a poor employment report rest rates hikes expectations lower.

    Yesterday's Money flow was 350% of a normal days' money flow. This certainly must be respected.



    The Cumulative Tick bounced back above its average trend line. This move should also be respected as it looks similar to past surges. This is bullish for the small caps.



    The Russell 2000 also bounced back up and so did the IWM ETF. Hence, all the small caps bearishness disappeared in one bullish day.







    Fixed income assets still look somehow bearish: the 10 Years Treasuries have a hard time bouncing, while money continues to leave Utilities and REITs.







    Conclusions:

    Being short the small caps is not a good idea anymore.

    Besides buying AMZN/FB/AAPL/TSLA/NFLX with everybody else and shorting the VIX, I have no good idea that could work. I am not even sure on the rationale behind buying them here except for general trend following tendencies.The small caps squeeze will probably continue today.

    Overnight, the US$ has lost ground again against all major currencies. Is this a sign that rates differentials are going to fall?

    I will need to wait probably for another week before entering new positions. I guess that waiting for the first earrings reports would be the way to go.
    Comments 3 Comments
    1. stharp's Avatar
      Pascal,
      In this institutional driven surge, for however long the climate is sustained:
      If you are long investor, wait for a -3 to -4% pullback, buy AMZN, FB, NFLX, GOOGL, NVDA, ADBE. Sit still for the runup and be ready to sell before the 10 to 20% pullback.

      If you are a trader, trade around in those long stocks with taking a small position on a -1.5 to -2% pullback (like FB today, STZ last week), in 3 to 5 days sell at the 5 to 6% rise (typically breaking to the new high) previous to pullback. I'm looking for the 4 to 8% delta. NFLX can be banked on, cautiously. NVDA is like Pecos Bill riding a tornado. Repeat as necessary until day before 10 to 20% pullback. I guess maybe, March? EV analysis can give the clues. Ride through the earnings reporting period.
      Steve
      Reply
    1. Pascal's Avatar
      Hi Steve.


      Thank you for posting your trend following trading method. It sure will work in the current environment. The equities markets look more and more like crypto-currencies where underlying valuations do not matter as far as we can find greater fools to buy.

      Now, who could post an alert message just the day before the 10%-20% drop? Any reader living living in Hawaii? They seem to get real news rather early...


      Pascal

      Quote Originally Posted by stharp View Post
      Pascal,
      In this institutional driven surge, for however long the climate is sustained:
      If you are long investor, wait for a -3 to -4% pullback, buy AMZN, FB, NFLX, GOOGL, NVDA, ADBE. Sit still for the runup and be ready to sell before the 10 to 20% pullback.

      If you are a trader, trade around in those long stocks with taking a small position on a -1.5 to -2% pullback (like FB today, STZ last week), in 3 to 5 days sell at the 5 to 6% rise (typically breaking to the new high) previous to pullback. I'm looking for the 4 to 8% delta. NFLX can be banked on, cautiously. NVDA is like Pecos Bill riding a tornado. Repeat as necessary until day before 10 to 20% pullback. I guess maybe, March? EV analysis can give the clues. Ride through the earnings reporting period.
      Steve
      Reply
    1. Pascal's Avatar
      Quote Originally Posted by stharp View Post
      Pascal,
      In this institutional driven surge, for however long the climate is sustained:
      If you are long investor, wait for a -3 to -4% pullback, buy AMZN, FB, NFLX, GOOGL, NVDA, ADBE. Sit still for the runup and be ready to sell before the 10 to 20% pullback.

      If you are a trader, trade around in those long stocks with taking a small position on a -1.5 to -2% pullback (like FB today, STZ last week), in 3 to 5 days sell at the 5 to 6% rise (typically breaking to the new high) previous to pullback. I'm looking for the 4 to 8% delta. NFLX can be banked on, cautiously. NVDA is like Pecos Bill riding a tornado. Repeat as necessary until day before 10 to 20% pullback. I guess maybe, March? EV analysis can give the clues. Ride through the earnings reporting period.
      Steve
      Steve,


      I calculated the Risk/Reward ration for two types of trades on FB: buying Oversold levels and Shorting a bounce after a breakdown on volume.

      We can see below that FB had a breakdown on volume on Friday. The most recent BDV patterns have been buying oversold opportunities.

      Attachment 43416

      Buying at this level has been a good idea in the past 300 days:

      Attachment 43413

      The sensitivity analysis shows that we can buy between 177.78 and 184.3

      Attachment 43412

      On the other hand, shorting a bounce on Tuesday to 186.13 should also work well.

      Attachment 43415

      Hence, the strategy could be to buy low and sell on Tuesday if FB bounces back to 186.13, or keep the long trade otherwise.
      Reply