Feb 19/15 – The Yellowstone Grizzlies better go back to bed

2015-02-19 9am EDT  |  #Einhorn #stocks #Tepper #VIX #Yellowstone

Negative yielding bonds, absurdly large quantitative easing programs, Central Banks trading S&P 500 futures – there is no doubt the world has come unglued. Therefore it should be no surprise that even the Yellowstone grizzly bears are feeling a little disoriented these days.

Although we have had a brutally cold winter in eastern North America, the west has been suffering with strangely warm temperatures. This has resulted in the Yellowstone grizzly bears awakening from their hibernation. Usually the earliest we see our furry friends is mid March. This year they have already been spotted out and about looking for food. Given the relentless bid in risk assets, I suggest that maybe they should just head back in for a little more hibernation…

Over the past few weeks I have been preaching caution when it comes to US equities. This call has been embarrassingly wrong as the “cleanest shirt in the dirty laundry pile” theme just continues chugging along. No matter what the news, stocks just keep rising. And I am not afraid to admit that I feel a little like the grizzlies waking up a couple of months early – I am confused and out of sorts.

I had been long some nasdaq put options from last month, but I sold them a couple of days ago as they had cruised through the strike and I was about to get eaten up with some wicked theta decay. I have not yet replaced them, and I am not sure I am going to.

Which brings me to the main point of today’s post. I am highly suspicious about my inability to maintain my short. I don’t trust this market, and the fact that I am giving up on my short position should bring no solace to the bulls. I view this capitulation as a great sign that the top might be near.

I noticed that I am by no means alone in this capitulation. Yesterday one of the newsletter guys I read also puked his short position. Although I enjoy this guy’s writing, I consider much of his thinking to be “hedge fund consensus.” Almost all hedge funds believe they are thinking outside the box, but they are much more herd like than they would ever admit. When you study these guys, you realize that they all move together. This newsletter guy is often a perfect indicator of their trading.

Many technicians (and hedge funds too) are getting all hot and bothered about the “breakout” in the Nasdaq.

As usual the technicians are the most bullish after it has already been rallying for three weeks.

Maybe this time the index will trade “clean.” Maybe we breakout and never look back. Maybe it makes sense to chase stocks up here.

But I would be surprised if that was the case. I think we are in the midst of a squeeze that is largely the result of hedge funds (and mopes like me) covering their shorts.

I noticed that for the first time in a long while, the speculators were net long VIX futures.

This obviously reflects their worry about potential negative shocks. And this worry has also translated into hedge funds selling stocks during the past month.

The large funds have to release monthly statements on the changes in their holdings. Golden boy David Tepper reported that he had dramatically reduced his equity positions in January. Shrewd David Einhorn announced that he had sold stocks mainly in response to the worries I have been alluding to (high US dollar, the lack of global economic demand). However, these reports are backward looking, and to a large extent, this lightening up of equity exposure by the hedge funds was the reason the market struggled in the second half of January.

Yet here we are, with all sorts of bad news on the market’s doorstep, hitting new highs daily. The strength is incredible. I can’t take the pain anymore, and I am giving up fighting it for the time being.

But make no mistake, when skeptics like me finally give up, it is not a bullish sign. I don’t know how much more short covering is left to be done, but you should be looking for signs of exhaustion that collapse in on itself. The only thing worse than me giving up on my short position is if I suddenly converted to being a bull…