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I am in my fourth decade of being a student of the markets and I still marvel at how much remains for me to learn. My academic and early career background focused on financial analysis and macro economic analysis so naturally that is the lens through which I saw the financial world. There were many times, particularly after the Federal Reserve started to become more activist in the late 1980's in manipulating interest rates, when my lens became a little out of focus, to say the least, with the realities of the market.
When ego dominates our thinking it is hard not to become frustrated in such a situation, and believe me, I did. "Why isn't the market doing what it is supposed to do? Why doesn't the market see what I see? That is our ego talking and it is preventing us from seeing what is.
As the US stock markets are closed on Monday, we can take the queue from the futures and Asian / European markets about the coming week. In any case, it is expected to be a red week. January option expiration, MLK week and mid-January seasonality, all points to a lower direction. And in any case, markets are over bought, over extended and need to be corrected. So at least for the next week I am bearish.
The title is a borrowed expression from Hungarian. Soc is short for Socialism (and not Social) and real is short for reality.
This article is based on two SOC-REAL jokes and some parallels I found with S&P downgrades.
Where I grew up, people live in 10 story flats. Ok, I shall attempt the first joke then, excuse if it is not the best translation.
A woman falls out of the 10th floor. A hand reaches out and grabs her leg by the 8th floor. – Do you s…ck? – asks the person on the inside. – No! – says the woman. The hand lets go of her. A hand catches her leg by the 6th floor. – Do you f…ck? – asks the voice from inside. – Absolutely not! – is the answer. The hand lets go. Falling further another hand grabs her at the 4th floor. – I s..ck, I f…ck, I do whatever you want me to! – says the woman on the outside. – You whore! – answers the voice from inside…
Joke no 2.:
A guy is making his first jump from the airplane. While falling, he's trying to open his parachute, but cannot recall how. Pulling on this string, pulling on that, growing impatient. Finally a man arrives next to him, so he asks. – How to operate this chute, buddy? – I haven't a clue. I'm just a poor ammunition factory worker, and this isn't my lucky day… – was his answer.
Back to the stock market. I've been saying that the outcome of news would not be independent from the inner state of the market. Namely the direction it is in and how much more can it go.
The first joke happened in august. The market fell off the 10th floor. And S&P was on the 4th floor.
In the second joke the market is the ammunition factory worker, and is on the way up.
As I pointed out earlier, I saw suspicious options buying activity on Friday. Craig Severson (optionslinebacker.com) posted in his newsletter that he was conservative and didn't think the ES would sell off more than 15 points on the news of the 9 European countries' downgrades. So far it hasn't gone half that distance, nor does it look like it would want any further.
As you can see on the image, we're in the upper half of the value area, holding above the point of control as well as above the Thursday low, which would make for a perfect right shoulder on an IHS.
The second image shows the long term mean at 1280, that we are above (EMAs on lower timeframes are already bullish).
What do I want to say with this? Was the downgrade already priced in? No. The inner state, the direction the market is headed in is different, therefore the news would be absorbed differently.
As things are going right now, bears would have tough times ahead.
The above mentioned clue I had was the 128 weakly call option's behavior on Friday.
Notice that this option, that went for 0.25 at the beginning of the day quadrupled by the end and then somebody kept buying in the after hours paying a 40% additional premium without minding it in the face of the coming S&P downgrade. Were they bears trying to hedge the upside risk? Don't think so. They knew that that was the best price they will be able to get a hold of SPY shares for a while.
Why? Because there will be no sell off. In fact, prices are likely to proceed higher for months to come. Why? Because there is no foreseeable hurdle that can easily break this buying spree.
SPX daily stochastics e.g. have been embedded for the last 8 trading days and K is still at 90.87 after Friday's sell-off.
A quick mention here about people rolling out vix upside protection already from February to March. They'd have to do it a couple of more times, I think.
Image: NYSI weekly summation index with 20 period MA.
All of the higher timeframes' energy is maxed out, this market is as capable as it has ever been.
Why up then? Because almost everyone missed the turning point, when we didn't go down to the lower trendline.
And the chasing hasn't really started yet either.
At the Online Trading Academy they told me this example. Your favorite ice cream costs 3 dollars. One day they raise its price to 6. No matter how you love it, you won't buy it. But what happens when they lower the price to 1.50? You buy two. It should be the same with stocks, but it isn't.
While I was taking notes on the 8th of December, the market was selling off hard. I was hedged. And sold most of my TNA at reasonable prices in the 45-46 region. I wrote on the wall a day before 42.15 and 41.80. That was my idea of buying TNA at. Could had been filled, but had no bids in. Days later I started the buy, and heavily. Then price started dropping below 41 and on the wash out move it ultimately went to 39.69. Below 40 I started unloading and hedging! – despite of the ICE CREAM print on my wall… Now TNA is at 49.44. I have no positions. I guess I made my point (though it was lengthy).
One more thing about Friday. Watching on balance volume could have helped you to identify the end of selling (yellow line on the lower study).
In closing I'd like to add that I'm making an effort to quit the fortune telling business and get more on the reaction side. What I've found lately, and now is my cornerstone, that options turn before the market.
(Flahsback) Realization for the day: I took a trade on the long side reluctantly in options at the bear flag formation. I got out at the bottom of the cloud – oversold stochastics! – with minor gains. Once it pushed in the cloud, the option jumped from .40 to .60. We are watching too many lines and edges and expecting the market to make a turn at each and everyone. This was a proof for me that the trend is still up.
My idea of trading in the future would be via options mainly, not holding overnight if possible; scaling in when the options are getting too stretched in a direction, betting on a reversal and would refrain myself to posting not much else during the day other than "I bought" and "I sold".
I am happy to join with you today in what will go down in history as the greatest demonstration for freedom in the history of Slope.
Five years ago, a great American, in whose symbolic shadow we stand today, began shorting the market. This momentous decree came as a great beacon light of hope to millions of bears who had been seared in the flames of withering injustice. It came as a joyous daybreak to end the long night of their captivity.