Thursday, April 11, 2013

Capitulation

No - Not me, of course...

But hedge funds can't take this kind of pain. After massively underperforming last year and again in the first quarter of this year, they have no choice but to buy the market unhedged or find a new job. The goal of this robo market is to make hedging and risk management impossible...Which is a necessary and sufficient condition for generating an underwear staining panic during the inevitable sell-off...


A chart like the one above is a hedge fund's worst nightmare. Each leg higher has less and less range or volatility. The entire model of a hedge fund is to use hedging instruments to cushion declines and therefore give an edge over the unhedged market. But if the market never declines, the hedges constantly degrade performance and can never be monetized. We know they are covering their short bets, because ZH shows that the most heavily shorted stocks are ramping. And we know they aren't buying puts on the indices because the index/put call ratio has been consistently below 1 for three weeks now, which is extremely rare. Meanwhile, the ISE call/put ratio has been trending higher indicating bullish call buying is outpacing hedging. 

Attenuating Asymptote
And sometimes we need to step back and look at the monthly view above to truly understand the level of risk. As we see, there have been no down months for six months now. And look at volume (ignore the current month since it's not over yet). Low volume plus low volatility = attenuation = loss of signal. Not a healthy market. 

Bad Breadth
Speaking of unhealthy internals, this next chart shows (red line), the percentage of stocks above their 50 day moving average. You can see it's trending down and it's now at a level that I circled in blue that led to major sell-offs in the past. This indicates that fewer and fewer stocks are participating in the rally. The bigger issue is that the market is much higher now than in those prior periods, so the velocity of decline should be commensurately greater.


Distribution
IBD still has six distribution days on the books for the S&P and Nasdaq (since the March 5th breakout), which means institutions are looking to get out. As you see below, the latest up days' volume bars have not offset the prior distribution, so this latest spike could be a major head-fake:



"The Rally Has Tested The Courage of Even the Most Stubborn Bear"
This is a timely article right here, saying the same thing - bears are throwing in the towel. Short interest is now at a 12 month low.  The headfake drop that came after last week's abysmal jobs number, followed by the  whiplash rally to new highs, drove the capitulation - you can see it plain as day on the chart above. Investors are being punished severely for believing in any form of economic reality and are therefore all embracing the group think that Central Banks can levitate the markets indefinitely. It's a wicked market that wants as many suckers, fools, hedge funds or combination thereof, it can get its hands on, before rolling over and never looking back.

All we are seeing in real-time is another manic blow-off top just slighly above the same levels where we topped in 2000 and 2007. This is where the bodies are buried, and this is where they will be buried again...