"It is always by way of pain one arrives at pleasure."

- Marquis de Sade

Today's Dow Jones decline is the worst since March 21, 2017 -- pulled down materially by weakness in Johnson & Johnson (JNJ) and Goldman Sachs (GS) . Stocks are down for the fourth day of five.

Given this and the highly unpredictable market action -- dominated by ETFs and price momentum based strategies -- I have covered the balance of my small short positions in  SPDR S&P 500 ETF Trust (SPY) and PowerShares QQQ Trust, Series 1 (ETF) (QQQ) in today's whoosh lower.

At the same time I have added to some of my favorite individual shorts -- keeping my aggregate net exposure in market neutral.

I continue to believe that the complexion of the market is changing - for the worse. While the technicals, as Rev Shark relates, are ugly, the machines, algos and ETFs run the asylum.

But that doesn't mean that stocks will move straight down.

Indeed, if I am correct that bonds are witnessing a buying climax and a slow but steady rate rise may follow -- stocks (even of a financial-kind) may be able to stabilize over the near term.

Regardless of my view, its probably a good time to try to stay out of trouble with larger-than-average cash positions.

My guess is that the market, without memory from day to day -- see Mel Brooks and The Markets (Part Trois) -- will frustrate both bulls and bears with its inconsistencies in the days ahead.

I plan to remain flexible and opportunistic. I am still very bearish, however, over the balance of the year.

I also plan to short some anticipated strength, when appropriate.

There will be no Takeaways today because, quite frankly, I am exhausted from trading!

In the past i have observed the consistent lack of correlation and tracking between two levered gold exchange traded funds (Market Vectors Junior Gold Miners ETF (GDXJ) and Dx Dl Jr Gld Min 3X (JNUG) ) and the price of gold.

Today, Zero Hedge highlighted the structural problem when ETFs  get too large relative to their component holdings. 

This is an instructive and important discussion in light of the broad proliferation and popularity of exchange traded funds.

This also explains the poor tracking record recently which could be an issue in many other ETFs -- along different asset classes -- that have grown too large to their underlying components and market.

Be forewarned for, as night follows day, ETFs will likely be the source of the next bout of market indigestion.

I was clearly wrong in the timing of yesterday's Trade of the Week -- buying ProShares UltraShort Lehman 20+ Yr(ETF) (TBT) .

Today the yield on the 10-year U.S. note is down by six basis points to 2.19% and the long bond is trading at a 2.855% yield (down a similar amount in yield).

In my view, there is a 50/50 chance that today's rise in bond prices is a buying climax -- in part based on more saber rattling against North Korea and in part a function of short covering and technicals.

Nevertheless, I will be disciplined and take off half of my position, for a loss, by the end of the trading day. (I am sorry for that!)

That said, I am now adding to my investment short in iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT)  which I remain convicted about.

Fastenal (FAST) has been a long standing investment short of mine.

The shares was placed on my Best Ideas List (short) at $51.25 in January, 2017 -- and are trading more than one dollar lower  to $44.75 in today's session after lateral play and distributor competitor W W Grainger (GWW)  tumbled on a large earnings miss. 

Here is a recent column i wrote on Fastenal where I was critical of shorting (naked) puts, "Beware of Fastenal as a Put Play," and here is a recent update on the company: "Not So Fast, Fastenal".

"Don't wait for the last judgment -- it takes place every day."

-- Albert Camus

Like Sonny the Cuckoo Bird, throughout the last three months business commentators, money managers and strategists have been "cuckoo for Cocoa Puffs" when it comes to bank stocks. Indeed, if you do a Google search you will see that the banking industry has been the most touted sector since the election. That consistent endorsement has been a self-confident one and remains so despite the 8% fall in the sector from the March highs.

I believe the consensus optimism on banks is misplaced. And I also believe that if I prove to be correct, we predictably will hear crickets from the "carpet sweepers" who confidently have endorsed the group.

-- Kass Diary, Judgment Day For Financials Is At Hand

Last week I suggested that we were approaching the judgment day for financials.

Judgment Day has come and gone and the market appears to be making a clear verdict and is giving banks/brokerages/selected financials a Bronx Cheer as the Financial Select Sector SPDR Fund (XLF) breaks down through some support levels following mixed money center earnings and poor results at Goldman Sachs (GS) .

The optimism with regard to the popular financial stocks -- that I have continually questioned in 2017  -- is now being discarded in favor of a more realistic view with regard to valuation, regulatory reform and the expected "hockey stick" to earnings.

Bank stocks have been far too popular and are likely now over-owned (with many Johnny come lately buyers coming in earlier in the year at unattractive and higher prices).

It is now probably too late to sell but too early to buy banks and selected financials.

The bullish thesis for the private mortgage insurance companies, in general and for Radian (RDN) , in specific is improving.

Specifically, there continues to be more evidence that the new administration plans to rein in the responsibilities and liabilities of the Federal Housing Administration.

During his confirmation hearings, HUD Secretary Ben Carson seemed to be amenable to having private mortgage insurance companies taking a larger share of the U.S. mortgage insurance markets as a way of lowering taxpayers risks and exposure to FHA.

Pennsylvania Senator Pat Toomey has been in the forefront of moving the private mortgage insurers into a more significant role through a "risk sharing" with the U.S. government agency. This might include a deep cover mortgage insurance program combined with a cut in the government sponsored agency's guarantee fees and loan level pricing adjustments.

Finally, The Choice Act is slated to be enacted shortly. This will allow the president to fire the Federal Housing Finance Agency director at any time and for any reason. In all likelihood, former Democratic Congressman Mel Watt, now FHFA head, will be replaced with a Republican who is aligned with Radian and the other mortgage insurers.

After reviewing the economic data, Goldman Sachs (GS) offered an economic update this morning.

Despite the softer housing and manufacturing data, sharply higher utilities output suggests a faster pace of services consumption in March. Accordingly, the brokerage increased their 1Q2017 Real GDP tracking estimate by one tenth to +1.3%.

That's well above the Atlanta Fed's projection of about +0.5% - mentioned last week.

I have added to my short bond position all morning.

Talk of the Pentagon considering the disabling of North Korean missile tests has lifted bond prices this morning.

Should this sabre-rattling be denied, I would expect yields to move back up and bond prices to retreat.

Stay tuned.

Regular readers of my diary know I sometimes post things that replicate the theme of the "Tell Me Something I Don't Know" segment on MSNBC's " Hardball With Chris Matthews."

So ... "Tell me something I don't know, Dougie."

OK, here goes:

It appears the Treasury is circulating a questionnaire with the following question (Hat Tip Sir Mark J Grant):

Please discuss the potential volume of demand for long-duration sovereign products. What factors should Treasury consider when structuring a security with a maturity greater than 30 years (e.g., 40-, 50-, or 100-year)? At what price, relative to the current 30-year bond offering, could Treasury reasonably expect an ultra-long to price?

Wells Fargo views Allergan's AGN partnership with Novartis NVS to conduct a Phase IIb study using its cenicriviroc and Novartis' lead FXR agonist for the treatment of nonalcoholic steatohepatitis as a "promising free option." The deal is a way to maximize Allergan's shots-on-goal in combination NASH treatments.

Wells has an outperform on AGN.

I have been adding on recent weakness.

The weakness in the U.S. dollar coupled with higher bond prices have investors embracing safety plays, such as consumer staples.

Even Campbell Soup (CPB) has caught a bid!

"That's it and let's roll ... and, hey, let's be careful out there!"

--Sargeant Esterhaus, "Hill Street Blues"

In a nutshell, we should be all be paying attention to Sargeant Esterhaus (MIchael Conrad) from Hill Street Blues!

What is my strategy over the next few weeks of uncertainty?

Answer: To stay out of trouble!

While I am holding to a bearish view over the intermediate term (nine to 12 months), the role of machines and price-momentum strategies is really screwing up the market mechanism and is even making opportunistic trading difficult to conduct (my preferred tact now).

As I mentioned, I suspect at least 10 S&P handles higher were program-driven late yesterday afternoon as ETFs rebalanced to the buy side and quant strategies -- volatility trending and risk parity -- were likely responsible for the late rip on Monday even in the face of news that tax reform would be delayed.

The market is getting hard to navigate and I don't mind admitting this.

From Jim "El Capitan" Cramer on showing up and doing your damn job!

This is a classic and well-stated.

Everyone can learn from his comments. (Hat Tip Business Insider)

The Lindsey Group's Peter Boockvar comments on the housing data: 

Housing starts in March totaled 1.215mm annualized, 35k less than expected while February was revised up by 15k to 1.303mm which was the highest since October. Let's assume February was goosed by the mild winter and thus let's average February and March and then compare. Single family starts averaged 848k vs 813k in January and vs 868k seen in October before the election. As I always like to provide perspective, the 848k compares with the 25 year average of 1.03mm. Multi family starts, the bastion of strength within housing, averaged 411k vs 428k in January and vs 452k back in October. This compares favorably with the 25 yr average of 294k in response to 4-5% annual gains in rents.

On the permit side, they were slightly ahead of forecasts at 1.26mm, 10k more than expected and up from 1.215mm in February. It was all multi family as permits here bounced by 53k to 437k although is very volatile month to month as it fell by 102k in February. Single family starts fell 9k to 823 and is very volatile too. It printed 780k in November, 830k in December, 807k in January and 832k in February to make the point.

Bottom line, coincident with the lift in the NAHB builder confidence survey since the election, we have seen a pickup in single family starts over the past 6 months. Including October which was right before the election and which included a print of 868k, the 6 month average in single family starts is 835k vs 768k in the first 9 months of last year and vs 713k in 2015. Thus, some improvement is being seen but as stated above, we have a long way to go just to get back to average which is not adjusted for the increase in population. I've said a million times that the market needs more homes priced below $250,000 but its costly to do so from the builder perspective in terms of margins and profits because of the high costs of lots, labor and permits. Multi family construction continues to be where it's at with the homeownership rate not far above the lowest level since 1965 and 150 bps below the average since then. Rents gains are already softening in some big city markets like NYC and SF in response to the growing supply.

I am adding to ProShares UltraShort 20+ Year Treasury Bond ETF  (TBT) under $37.17 in pre-market trading; it's my Trade of the Week.

So far I have only picked up an odd lot.

My friend Peter Boockvar, chief market analyst with The Lindsey Group, discusses global politics and bonds -- a subject close to my heart; see the last two paragraphs of Peter's piece and my case to sell bonds: 

Ah the French. They can't stop being tempted by fringe politics and crackpot, socialist economics. The utopian dream is alive and free market capitalism remains something to loathe. I really thought this election was an Emmanuel Macron layup but talking about pulling defeat from the jaws of victory if he doesn't win. Marine Le Pen is certainly the real problem because she believes in fundamentally altering the state of the euro. Jean-Luc Melenchon would be a socialist/communist disaster for the French economy but what else is new? He is just a bit more economically extreme than Hollande. I mean it was Hollande that instituted the 75% income tax on income above 1mm euros (and later admitted it was 'too much and too heavy') and Melenchon says why not raise it to 100% for those making more than 400k euros. Either way the end result is a brick wall. It was Macron by the way that referred to the Hollande tax as helping to create "Cuba without the sun." The CAC is trading at a 4 week low ahead of this weekend's first round vote. The euro though trades great at $1.07 while the French 10 yr yield is down by 2 bps to just .895%. Quite a mixed market response.

Then around 5:30 am est time Theresa May says she wanted to make a statement (Sky News thought she wanted to resign due to health reasons) that came about a half hour later saying that she wants to be an elected official in order to move forward rather than appointed by default after David Cameron quit. So on June 8th, the Brits will go to the polls, almost one year to the day of the Brexit vote last year. Her reasoning for calling for a snap election is she wants a more clearer mandate on negotiating the UK leave from the EU in response to the Parliamentary pushback from certain areas she seems to be getting. She said "There should be unity here in Westminster but instead there is division." Considering the Conservative Party is well ahead of Labour in the polls by more than 20 points, I don't see a problem for her and maybe the response in the pound agrees with that. It's ripping higher by a $1 to north of $1.265, a 4 month high. I remain bullish on the pound and I say Theresa May's move is smart as she'll most likely win. The 10 yr Gilt yield is lower by 1.5 bps to just above 1% at 1.03% but the FTSE 100 is down about 1.5% on that pound strength. The FTSE 250 which is much less sensitive to pound moves is down by about .9%.

The bubble that won't pop and keeps getting inflated every time some air leaks out is in China and we saw property price data last night. Of 70 cities surveyed in March, 68 saw price gains for new apartments vs last year and there were 62 cities that reported gains for existing apartments. Both are the most in a while. From February, more cities saw price gains for both new and existing apartments, 62 for the former and 64 for the latter. The data is not a surprise considering the household loan data we've seen and the fixed asset investment news over the past few months. I counted 24 cities that saw double digit y/o/y price gains led by the city of Hefei where home prices rose 34.5 y/o/y. Price gains slowed to 17% in Shanghai and 19% in Beijing. Many in China have no faith in stocks, don't like the low yields in savings and bonds and are thus left with property and wealth management products. The amount of WMP's outstanding in China is $3.9T and are essentially 'leap of faith' products with implicit government backing. This size compares with nominal GDP in China at about $13T. The Shanghai property stock index was little changed but the Shanghai comp itself was lower by .8% and is now quietly trading at a 10-week low.

For all the worries about North Korea, the South Korean Kospi is at the highest level in more than a week and higher by 6% ytd. I'm still bullish on it due to cheap valuations and change likely coming to the entire chaebol structure but I of course assume no bombs.

Back here in the US, foreigners still don't like our Treasury paper. For the 10th month in the past 11 up until February, foreigners have been net sellers of US notes and bonds. In February they sold another $13.5b. Since 2014, foreigners have sold $367b worth on a net basis of notes and bonds. In February, both private owners and central banks were sellers. China added $8.6b of Treasuries but almost all of that was in bills. They bought a net $1.55b in notes and bonds but Hong Kong was a net seller of $5.6b and that could have been a conduit for mainland selling . Japan again was a seller of notes and bonds but more than offset that by buying bills. We also saw the impact of likely hedge fund liquidation in February as $18.9b of selling came from the Cayman Islands.

Bottom line, the persistent selling of US Treasuries over the past two years has of course not had any noticeable impact on the level of US rates thanks to the persistent buying by the Fed and from other buyers. The question though from here is what happens if the foreign selling continues at the same time shrinkage occurs with the Fed's balance sheet. We just might soon see. Also, if a weaker dollar is now upon us with the blessing of the President, foreigners may even pick up the pace of selling at the same time import prices rise.

"The operating environment was mixed, with client activity challenged in certain market-making businesses and a more attractive backdrop for underwriting in our investment banking franchise. As the economy improves, we are well positioned to not only meet our clients' diverse needs, but also to generate operating leverage for our shareholders."

--Lloyd Blankfein, Goldman Sachs CEO 

Goldman Sachs (GS) was put on my Best Ideas List as a short at $242 in early January. 

At the time, GS was a Wall Street darling, pushed by analysts, strategists, money managers and business media commentators.

The shares were seen as a leveraged capital market play.

It didn't work out.

Today's earnings report fell short on a number of metrics and the shares are trading down $6 lower to about $220 a share -- back to November 2016 levels: 

View Chart »View in New Window »

Yesterday, Bobby Lang wrote a skeptical view of the shares' technical posture. 

As I wrote in "Genuine Gibberish," always do your own homework and consider the contrary.

Another lesson learned.

Dark Helmet (played by Rick Moranis), watching himself on a video cassette of Spaceballs: "No, no, no. Go past this. Pass this part. In fact, never play this again."

--Mel Brooks, "Spaceballs" 

As Robert Kennedy said in a famous 1966 speech:

"There is a Chinese curse which says, 'May we live in interesting times.'"

Today we do live in interesting times.

I have written frequently that the market has no memory from day to day and about how Wall Street these days is looking more and more like a Mel Brooks film festival.

We even have, like in Brooks' "Spaceballs" a mad man from a dark peninsula (North Korea) who is threatening the world.

A compounding element is last November's election of Donald Trump, which will make volatility and uncertainty great again.

It's important to continue to ask yourself the seven questions I ask myself every morning. The uncertainty of the answer, in and of themselves, will lead to more uncertainty and volatility.

• In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
• In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
• With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?
• Remember when the big argument in favor of President Trump was that he was a dealmaker who knew how to get things done? That was when he was doing real estate deals. Now he has to deal with 535 other politically partisan legislators in Congress -- on their own real estate turf.
• Does the administration have the depth of experience, understand the extent of the legwork and organization required for passing legislation or have a coherent idea or shared vision of what it wants to achieve and what problems it means to solve?
• If President Trump can't easily put through a health care package,- what does that mean for more difficult regulatory reforms and his tax- and fiscal-policy agenda?
• President Trump took credit for the stock market's advance since his election victory. Will he take responsibility for a correction? And is it a slippery slope for an administration to use the S&P 500 as a barometer of success? And is a pro-business and anti-domestic programs (in education, the arts, etc.) agenda going to benefit those in the lower and middle class (largely his base) who have suffered the most over the last decade?

The Fed Tries the Ol' Razzle Dazzle

Though the Federal Reserve is now in a tightening mode, most central bankers around the world continue to depend on their old tricks, using dated policies and ever-cheaper money to try to respond to new headwinds.

But this only has helped the bond and stock markets push aside natural price discovery. Quant strategies have been disruptive to the markets, rendering both fundamental and technical analysis less useful.

Meanwhile, recent inflation data indicate that the Fed and other central banks are close to achieving their inflation targets. However, central bankers should be careful what they wish for. Higher costs of living can threaten the disposable income of the average Joe and Jane as wages continue to stagnate. The Fed's trickle-down policies have been a failure over the past decade, as the benefits have only trickled up. And some would argue that the new administration's reforms will do the same, serving to widen the income and wealth gaps.

Central Banks No Longer Can Save Us

"As long as the world is turning and spinning, we're gonna be dizzy and we're gonna make mistakes."

--Mel Brooks

The markets are trying to grapple with a complex confluence of events and disintermediation of investor and asset classes. For instance, we're seeing:

• Subpar global economic growth.
• The rising occurrence of "black swans" (and a potential "orange swan" in President Trump) and growing political and geopolitical uncertainties.
• The disruptions of many companies and industries -- in retail and elsewhere.
• And so does the proliferation of ETFs pose a threat to market stability.
• The rising role of machines and algos that tend to exaggerate short-term price momentum. Yesterday afternoon was a very good example, where the rebalancing of ETFs and price momentum strategies likely added at least 10 S&P handles to the advance late in the afternoon.
• The lost influence of retail and traditional institutional investors (i.e., "Peak Hedge Funds"). This poses a profound threat to the market.
• Artificial stock prices in a world of monetary-policy largesse and fiscal-policy inertia. This eventually will fade, but if it does so in an absence of self-sustaining growth and "escape velocity," it'll be "Katie, bar the doors!" for stocks.

There is always a bull market somewhere, but I see more possible adverse and market-unfriendly outcomes than at any time in my investment career -- all at a time in which valuations are near all-time highs.

Add it all up and we're likely to see more volatility, less predictability and a market that could continue to chop up most investors and many traders. Unfortunately, I see no change for the better in sight on any of this.

The Bottom Line

[After finding that the 'Self-Destruct Cancellation' button has yet to be installed] "Out of order? FXXk! Even in the future nothing works!"

--Dark Helmet, "Spaceballs"

I remain bearish in the market without memory from day to day and I am unwilling to add much risk in the face of broad uncertainties and outcomes of global policy.

And the aforementioned lack of memory makes me more inclined to trade opportunistically and less inclined to buy and hold.

Those with the right fortitude, risk profile and time frame that extends to months can consider shorting the markets as a hedge against a fuzzy future, but shorting isn't for everyone.

Given today's unpredictable markets, where the only certainty is the lack of certainty, most players might want to simply sit on the sidelines with larger-than-normal amounts of cash in the market without memory from day to day.

I am currently market neutral, I am trading opportunistically and I plan to be a seller on any strength. I have six longs on my "Best Ideas" list right now, but 14 shorts. Many more stocks look shortable to me, but few meet my standards to buy.

Overall, looking at the next six to 12 months my view is unchanged -- by my calculus the downside is roughly three times the upside for the S&P 500 Index.

The one thing that I am certain about is that the investment game is likely to grow more difficult and less predictable in 2017.

May the Schwartz Be With Us.