Mr. Market continued to walk up higher in another day of narrow trading.

Retail was a downside leader -- much like the New York Yankees -- with the bitter pills of Berkowitz's resignation from the Sears board (SHLD) and Nordstroms (JWN) somewhat strange (and temporary) hiatus of trying to go private (in the face of difficult financing conditions).

The banks continue to resemble the LA Dodgers -- their "league leading" advance was an upside feature.

Tech leaders remained leaders -- Baidu (BIDU) and Micron (MU) .

Big Pharma and biotech remain in the doghouse -- based on Trump's comments on drug pricing and the Restasis court decision.

FANGs caught a small bid as investors awaited Netflix's (NFLX) quarterly results. 

Ns over Ss and Rs.

Crude oil was better by nearly $0.45, while gold slipped by ten beaners. (Junior mining ETFs foreshadowed this weakness last week). Lumber continued its tear (+$9)

The U.S. dollar continues to strengthen.

"We are disappointed by the Federal District Court's decision on the Restasis patents. We are carefully reviewing the decision and are considering all options. Allergan remains committed to vigorously defending the intellectual property of our products, which allows us to continue to invest in developing and bringing forward new medicines for millions of patients."

-- Allergan

The adverse federal court ruling (due to "obviousness") on Allergan's (AGN) Restasis patents has yielded different responses:

* Cowen argues that this is a "clearing event" that will allow investors to move past the product's controversies. The brokerage feels that AGN's growth prospects remain at the top of its peer group.

* JPMorgan is saying that generic Restasis risk is discounted in Allergan's share price.

* Wells Fargo sees the court decision as a negative but generic Restasis introductions are still only a 2019 event.

I expect Allergan to appeal the court decision -- which will likely weigh on AGN's shares over the near term.

If I felt more confident about the broader market averages I would be buying the stock today as today's decision was not entirely unexpected.

But I am not confident about the market's prospects and I have not yet added to this small and recently reduced position.

The tweets of the day:

And:

Today's board resignation of Bruce Berkowitz (the company's largest outside shareholder) likely marks that the end is near for Sears Holdings (SHLD) .

As to the impact on the entire retail industry -- while it may be viewed positively over the longer term (in the sense that product supply is permanently reduced) -- a Sears bankruptcy could spell another tough headwind for the beleaguered sector by bringing on to the markets, over the next few months, a lot of closeout products available at low prices, as well as having a disruptive impact on the nation's real estate and jobs markets..

Allergan (AGN) has continued to decline today on a just received and adverse court decision on Restasis patents.

Here are my recent thoughts on the name. 

"Drug companies are getting away with murder."

- PresidentTrump

And these words, corralling fears of drug price controls, are taking down Allergan (AGN) , Teva (TEVA) (which I would sell), big pharma shares and other drug company share prices now.

My sole investment in the drug/biotech space is a small position in Allergan -- which was taken down on the last price rise over a week ago.  (While there are a number of attractive smaller and speculative biotech stocks -- many have binary outcomes, a condition which is not consistent with my risk profile/appetite).

The chart of the day:

I plan to slowly add to my Amazon (AMZN) , Facebook FB and Apple (AAPL) shorts on any more strength.

Indeed I added small on this morning's ramp just now.

I am extraordinarily liquid now after having downsized my gross exposure over the last few weeks.

I have mostly reduced my individual shorts and longs to small-sized while keeping most of my index shorts and adding to put positions (that provide me with leverage to the downside but with little employed capital).

As I have often written, timeframes and risk appetites/profiles differ by person -- and are usually a function of age, health, expenses (and other financial responsibility), income, wealth, family structure, etc.

While my risk profile is fairly conservative -- in terms of portfolio exposure size and composition (individual and sector commitments) and to leverage employed -- a change in market direction (lower) will likely get me to become more aggressive (and reactive) on the short side.

Three months ago I committed a large cash reserve into 90-day Treasury bills.

Those bills matured on Oct. 12 and I plan to purchase an even larger amount -- reflecting higher cash reserves after reducing my book's gross exposure -- this time of six-month Treasury bills in Monday's auction (they're currently yielding about 1.25%).

This move reflects my view that the downside is roughly 4 times the upside over the next six to 12 months for the S&P 500 Index.

Later on this week I will explain my fair market value calculus for the S&P Index.

I have added to my Wells Fargo (WFC) long and I am down to tag ends in my Disney (DIS) and Starbucks (SBUX) shorts.

The Nordstrom family has issued a statement that their plans to take retailer Nordstrom (JWN) private will cease until after the holiday season

Here is the statement. 

While everyone realized that the transaction would be difficult in a hostile retail backdrop, frankly I am not sure I entirely understand the reasons for this decision (a hiatus for the negotiations until post-holiday), but I sold my long position at $41.20 for a loss and I am taking JWN off of my Best Ideas List.

This leaves me only with Dillard's (DDS) in the retail space.

The Lindsey Group's Peter Boockvar examines the components of the rise in the October New York manufacturing Index:

The October NY manufacturing index rose almost 6 pts to 30.2 and that was about 10 pts above the estimate. The index level also matches the best level in 8 years. Notwithstanding the headline jump, the internals were more mixed. New orders fell 7 pts to a 3 month low at 18 after rising by 4.3 pts in September. Backlogs dropped by 6.6 pts to 2.3 and inventories fell below zero at -7.8 from +6.5. Shipments did jump by 11.3 pts but follows previous orders. Employment rose 5 pts but the average workweek fell by 5.7 pts. Prices paid and received both fell m/o/m. The overall 6 month business activity outlook rose 5.5 pts after dropping by 5.9 pts last month. Capital spending plans fell by 2.5 pts after more than doubling last month. Tech spending plans fell slightly but also after jumping in September.

Bottom line, the headline jump in this index masked a more mixed picture underneath (the headline number is not a sum of its parts) and US Treasuries didn't respond at all to the number (it rarely does). This said, likely helped by the weaker dollar and rebound in overseas economies, manufacturing confidence has clearly improved. We see the Philly regional survey on Thursday.

NY MANUFACTURING INDEX

The early-market bias is again to the upside.

Here is a good summary from Zero Hedge of overnight price action along several asset classes. 

"At the end of his email blitz, which had loaded me up on data, Dougie sent me this summary:

At the root of my concern is that the Bull Market in Complacency has been stimulated by:

* the excess liquidity provided by the world's central bankers,

* serving up a virtuous cycle of fund inflows into ever more popular ETFs (passive investors) that buy not when stocks are cheap but when inflows are readily flowing,

* the dominance of risk parity and volatility trending, who worship at the altar of price momentum brought on by those ETFs (and are also agnostic to "value," balance sheets," income statements),

* the reduced role of active investors like hedge funds - the slack is picked up by ETFs and Quant strategies,

* creating an almost systemic "buy on the dip" mentality and conditioning.

When coupled with precarious positioning by speculators and market participants:

* who have profited from shorting volatility and have gotten so one-sided (by shorting VIX and VXX futures) that any quick market sell off will likely be exacerbated, much like portfolio insurance's role in a previous large drawdown,

* which in turn will force leveraged risk parity portfolios to de-risk (and reducing the chance of fast turn back up in the markets),

* and could lead to an end of the virtuous cycle - if ETFs start to sell, who is left to buy?"

- John Maudlin, "The World Turned Upside Down," Thoughts from the Frontline

The Bull Market in Complacency, the absence of market volatility and the rising probability that a flash crash may occur -- a theme I steadfastly have endorsed in my Diary -- were important elements of this weekend's news flow. Indeed, these three articles are variations on the same theme:

* John Mauldin, "The World Turned Upside Down"

* Barron's, "Black Monday 2.0, The Next Machine-Driven Meltdown" (Ben Levisohn)

* Barron's, "The Trouble With Those Can't-Miss Trades" (Randall Forsyth)

For those who are of the view that potentially adverse market outcomes are unlikely when Barron's or others like myself bring up the concerns, I have a message for you: A small group of us vehemently expressed deep concerns over the risks of portfolio insurance in the summer of 1987 (which preceded a 21% market decline in October) and, more significantly, the possible contagion of packaging financial weapons of mass destruction (mortgage derivatives) in the summer of 2007 (which preceded The Great Recession of 2008-09).

Those threats were confidently ignored in 1987 and 2007 by the bullish cabal. After all, many had said, computers really can't harm markets (1987) and home prices never can retreat (2007). Indeed, back then, market skeptics were often laughed at publicly; they were called Cassandras, and worse.

Memories are short, and with the S&P 500 much higher many of these non-critical talking heads who dismissed the concerns of 30 years ago and 10 years ago are back self-confidently ushering in a new paradigm of uninterrupted economic growth with few accompanying market risks.

In A Flat, Networked and Interconnected World...

The only certainty is the lack of certainty, and the one thing I am certain of is that never in history have we faced so many potentially adverse political, geopolitical, economic, social and market outcomes.

From my pal, The Lindsey Group's Peter Boockvar:

There was also a new high in the net speculative short position in VIX futures for the week ended last Tuesday.

NET SPEC SHORT POSITION in VIX FUTURES

Low-probability events do happen.

And risk is underpriced, perhaps materially so, in our interconnected world.

My pal Peter Boockvar, chief market analyst with The Lindsey Group, discusses rising commodity prices and the European Central Bank:

Just as central bankers in DC over the past week mused over the mystery of inflation, commodity prices continue higher. Copper is ripping up by more than 2% to a 3 year high and up for a 6th straight day. Nickel prices are higher for a 7th straight day. Palladium is trading at a 16 year high. Also rallying is tin, aluminum, lead, platinum and silver. This move comes after China reported a 6.9% y/o/y rise in PPI in September, above the estimate of up 6.4% and vs 6.3% in August. As for the factors, it's partly demand but also the perception that supply continues to get cut. Outside of China over the past two years there has been a sharp decline in mining investment while in China it's difficult to gauge what the net result is of their cuts in capacity because many times it is offset by new, more updated production. It seems that inefficient and old capacity in China is what is getting cut, in part to the government mandate on cutting pollution. Bottom line, inflation is not dead.

The consumer price index in China was higher by 1.6% y/o/y as expected in September, basically in line with the 6 month trend. Keeping a lid on it was the decline in food prices but if we take out food and energy, prices were up 2.3% y/o/y, the most since January. The Shanghai comp closed down by 1/3 of a percent but the H share index was higher by .7%. The yuan was down slightly while the Chinese 10 yr bond yield rose to the highest level since December 2014 at 3.71%.

I don't want to hear anymore that this is a hated bull market. In Friday's UoM consumer confidence number, the number of respondents that think the stock market will be up in the next 12 months hit a record in this 15 yr question. See chart and notice the previous peaks in June '15 and July '07.

PERCENT CHANCE THAT STOCK PRICES WILL BE HIGHER IN THE NEXT YEAR

There was also a new high in the net spec short position in VIX futures for the week ended last Tuesday.

NET SPEC SHORT POSITION in VIX FUTURES

We keep getting trial balloons floated from unnamed ECB officials ahead of next week's meeting on how they will end QE next year. The new one from Bloomberg news basically says officials acknowledge they are running out of things to buy under the current capital key criteria and that they only have room to buy about 200b more of bonds as of January. Assuming they want to stretch it out to September, that means cutting monthly purchases to about 20-25b euros from the current run rate of 60b. If the case, on an annualized run rate we are talking about 500b euros of less buying. AGAIN, the liquidity spigot is slowing down.

Just as Fed members tried to calm markets down ahead of QT in telling us it won't be a big deal (I say just you wait), the head of the French central bank Francois Villeroy is trying to do the same. Yesterday he said "No one should fear a further reduction in the intensity of our monthly net asset purchases, and their possible end thereafter, insofar as we will maintain a very accommodative monetary policy, to be judged on all its instruments." Start again the flow vs stock debate. Central bankers believe in the latter, market participants firmly have faith in the former as do I.

So we have extreme stock market bullishness, record shorts in the VIX and QE going in reverse. Interesting times.

Lastly on the inflation aspect of today's note, German PPI in September rose .6% m/o/m and 3.4% y/o/y (a 5 month high). But, notwithstanding this stat and the ECB chatter, European sovereign bonds are rallying slightly with yields down about 1-2 bps. In Austria following the election, yields are down too and the Austrian stock market is lower by .2%. I guess for now, European bond markets are less focused on the end of QE and more so on it getting stretched to September and the end of NIRP not happening until 2019. I still remain steadfast that Europe bonds are a train wreck waiting to happen and the seeds continue to be sown.

At least in August, the stronger euro had little impact on eurozone exports which rose 2.5% m/o/m and because imports were higher by just .4%, the surplus rose again (and another reason why the euro trades so well) to 21.6b euros. The peak was seen back in May 2016 at 24.8b.