I am calling it a day as I have some travelling for a morning meeting.
Thanks for reading my Diary and enjoy your evening.

I have added to my (SPY) short at $277.28 just now.

Blame it on the bossa nova with its magic spell
Blame it on the bossa nova that he did so well
Oh, it all began with just one little dance
But then it ended up a big romance
Blame it on the bossa nova
The dance of love
- Edyie Gorme, Blame It On The Bossa Nova

The Brazilian stock market is getting blasted today, now down by almost 6% and the Real is lower by 2.7%. This is also dragging down some other EM currencies like the South African Rand, and Mexican Peso (worries about NAFTA). Brazil is coming off a brutal week of strikes which hurt their economy at the same time political worries ahead of their fall election are picking up.

Italian yields after being down in the morning ended up closing higher with the 2-year yield up 28 bps after a jump of 36 bps yesterday. Both Italy and Brazil seem to be the reason for the bid to treasuries after Europe closed as European bond weakness pressured U.S. treasuries during their session. After touching 2.99% this morning, the 10-year yield is down to 2.92% (that's six basis points lower on the day).

I'm only surmising that it is also the reason why stocks are mostly lower, but they were due for a rest anyway after the impressive rally seen as RSI's (relative strength index) have gotten stretched.

Go to today's Wall Street Journal and look at the large amount of convertibles being offered by the Street.

Boom!

Moved to a small net short exposure after my short SPDR S&P 500 ETF (SPY) stop was hit at $276.75.

Here are the major points I made in my Bloomberg "Market Surveillance" interview this morning (about half of which was included in the podcast):

The Markets

* With all the good news on the EPS front, the S&P Index is only +3% year to date. Last year Wall Street outpaced Main Street as the multiple on the S&P expanded by three multiples. This year, valuations are contracting and Main Street is outpacing Wall Street.
* The market has no sector memory from day to day. Earlier in the week tech spurted, then retail -- both were subdued yesterday and financials took over on the upside.
* It strikes me that the buying in recent days is panicky, a possible attempt by money managers to "catch up" to a rallying market.
* Our markets continue to be distorted by machines and algos and other price momentum based strategies and products which result in exaggerated short term moves and present a market landscape in which "buyers living higher and sellers living lower."
* So, we are in a great backdrop for opportunistic and unimpassioned trading -- not so great for the buy-and-hold crowd.
* The Italian debt crisis and the fading EU economies (look at the two-year low in Citi's Economic Surprise Index) underscore the ambiguity of global economic growth -- which oddly separates me from my more pessimistic market scenarios and outcomes because the stress of inflation and interest rates will be muted. As my pal Byron Wien likes to say, "Disasters have a way of not happening."
* The next big problem which could take the market down is the second order impact of irresponsible fiscal policy. The U.S. leads all other developed countries in terms of debt/GDP growth. Our enormous late cycle stimulus may, in some quarters be seen as political gold but it's really economic poison.
* When rates really move higher, we will see more signposts of malinvestments, like are now apparent in Italy, Deutsche Bank (DB) and many of the other European banks. This is probably a second half 2018/first half 2019 event.
* The market is stretched (at the top end of where i see the trading range), I am staying long but I am using trailing stops to short the market and immunize my portfolio should the price momentum abruptly change -- which I suspect will occur reasonably soon.

Italy

The Italian debt crisis is not an oddity -- it lies at the epicenter of a world (both in the private and public sectors) which is immersed in debt as the global economic recovery ages. It is an example of the systemic financial problems and risks in Europe that have been swept under the rug -- and that, over the intermediate term, should not be dismissed as a "one off." This is particularly true if the ECB, as planned, moves away from a "money for nothing" policy.

As Buffett has said we don't know who is swimming naked until the tide has gone out.

The one positive is that the Italian indigestion could elongate our domestic economic expansion (rendering some pessimistic market forecasts moot) -- as the risk of a short-term shock in higher inflation and interest rates abates -- we should not lose sight that the synchronized economic expansion is growing more ambiguous and that the world, like never before, is flat and interconnected.

Citigroup's Surprise Economic Indices for EU are at a two year low, global surprise index has turned lower and the US Surprise Index has flattened out.

Deutsche Bank

I have written quite alot about DB over the last year (its shares are -40% year to date) and I have been short the name at times -- calling it the next Black Swan for the EU economy.

Deutsche Bank "is the Sears Holdings of the global bank industry."

Possible Disruptive Event That May Lie Ahead

Some disruptive events we should be alert about as interest rates rise and financial conditions tighten:

1. Funding stress of U.S. dollar denominated debt by non U.S. entities
2. Deutsche Bank -- counterparty risk, ton of credit default swaps out there. DB is likely on the end of a lot of them
3. Fiscal irresponsibilities in the U.S. and elsewhere (mentioned previously)
4. Other malinvestments may be discovered as rates rise -- a global financial mishap?

Since David Rosenberg mentioned "Uncle" Bob Farrell in his tweet this morning -- it is time to dust off Bob's 10 Rules of Investing -- which I first wrote about in late 2016:

"This tight consensus, envisioning such benign outcomes, recently moved not one, but two sage market observers -- David Rosenberg, Gluskin Sheff chief economist and strategist, and Doug Kass, head of Seabreeze Partners -- to invoke Rule No. 9 of Bob Farrell, Merrill Lynch's legendary former market guru: 'When all the forecasters and experts agree, something else is going to happen.'"

-- Barron's: "Everyone's Optimistic About the Markets. Is It Time to Worry?"

Over the weekend, in Barron's, I quoted my long-standing pal, "Uncle" Bob Farrell, who has written in the past about his 10 Rules of Investing.

For those that are new to the business, Bob is a Wall Street legend. A graduate of Columbia Business School who initially was fundamentally inclined, he turned to technical analysis and led Merrill Lynch's technical analysis department for years.

His Ten Rules are an outgrowth of his long career in following the investment markets.

Here is a great summary of Bob's rules, courtesy of StockCharts:

1. Markets tend to return to the mean over time.

Translation: Trends that get overextended in one direction or another return to their long-term average. Even during a strong uptrend or strong downtrend, prices often move back (revert) to a long-term moving average. The chart below shows the S&P 500 over a 15-year period with a 52-week exponential moving average. The blue arrows show several reversions back to this moving average in both uptrends and downtrends. The indicator window shows the Percent Price Oscillator (1,52,1) reverting back to the zero line.

1. Excesses in one direction will lead to an opposite excess in the other direction.

Translation: Markets that overshoot on the upside will also overshoot on the downside, kind of like a pendulum. The further it swings to one side, the further it rebounds to the other side. The chart below shows the Nasdaq bubble in 1999 and the Percent Price Oscillator (52,1,1) moving above 40%. This means the Nasdaq was over 40% above its 52-week moving average and way overextended. This excess gave way to a similar excess when the Nasdaq plunged in 2000-2001 and the Percent Price Oscillator moved below -40%.

1. There are no new eras -- excesses are never permanent.

Translation: There will be a hot group of stocks every few years, but speculation fads do not last forever. In fact, over the last 100 years we have seen speculative bubbles involving various stock groups. Autos, radio and electricity powered the roaring 20s. The nifty-fifty powered the bull market in the early 70s. Biotechs bubble up every 10 years or so and there was the dot-com bubble in the late 90s. "This time it is different" is perhaps the most dangerous phrase in investing. As Jesse Livermore puts is:

A lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.

1. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

Translation: Even though a hot group will ultimately revert back to the mean, a strong trend can extend for a long time. Once this trend ends, however, the correction tends to be sharp. The chart below shows the Shanghai Composite ($SSEC) advancing from July 2005 until October 2007. This index was overbought in July 2006, early 2007 and mid 2007, but these levels did not mark a top as the trend extended with a parabolic move.

1. The public buys the most at the top and the least at the bottom.

Translation: The average individual investor is most bullish at market tops and most bearish at market bottoms. The survey from the American Association of Individual Investors is often cited as a barometer for investor sentiment. In theory, excessively bullish sentiment warns of a market top, while excessively bearish sentiment warns of a market bottom.

1. Fear and greed are stronger than long-term resolve.

Translation: Don't let emotions cloud your decisions or affect your long-term plan. Plan your trade and trade your plan. Prepare for different scenarios so you will not be taken by surprise with sharp adverse price movement. Sharp declines and losses can increase the fear factor and lead to panic decisions in the heat of battle. Similarly, sharp advances and outsized gains can lead to overconfidence and deviations from the long-term plan. To paraphrase Rudyard Kipling, you will be a much better trader or investor if you can keep your head about you when all about are losing theirs. When the emotions are running high, take a breather, step back and analyze the situation from a greater distance.

1. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Translation: Breadth is important. A rally on narrow breadth indicates limited participation and the chances of failure are above average. The market cannot continue to rally with just a few large-caps (generals) leading the way. Small and mid caps (troops) must also be on board to give the rally credibility. A rally that lifts all boats indicates far-reaching strength and increases the chances of further gains.

1. Bear markets have three stages - sharp down, reflexive rebound and a drawn-out fundamental downtrend.

Translation: Bear markets often start with a sharp and swift decline. After this decline, there is an oversold bounce that retraces a portion of that decline. The decline then continues, but at a slower and more grinding pace as the fundamentals deteriorate. Dow Theory suggests that bear markets consists of three down legs with reflexive rebounds in between.

1. When all the experts and forecasts agree - something else is going to happen.

Translation: This rule fits with Farrell's contrarian streak. When all analysts have a buy rating on a stock, there is only one way left to go (downgrade). Excessive bullish sentiment from newsletter writers and analysts should be viewed as a warning sign. Investors should consider buying when stocks are unloved and the news is all bad. Conversely, investors should consider selling when stocks are the talk of the town and the news is all good. Such a contrarian investment strategy usually rewards patient investors.

1. Bull markets are more fun than bear markets.

Translation: Wall Street and Main Street are much more in tune with bull markets than bear markets.

Here is the podcast of my Bloomberg "Market Surveillance" interview this morning -- (at the 26 minute mark!).

Trade of the Week Update - PG

PG is trading up by about 2% on continued rumors of a breakup.

For the second time in three weeks I selected PG as my Trade of the Week (that's either good conviction or stupidity!):

Trade of the Week - Buying PG (Again!)

Jun 4, 2018 ' 8:53 AM EDT

* Consumer packaged goods stocks are oversold and now represent value
* Given the share price decline, I expect pressure on PG management to split the company into three parts

"Low Expectations Are Now Discounted: Today, sales, profit, and market (investor sentiment) expectations are low for Procter and Gamble (PG) - its historically premium valuation has cratered (and now stands at a lowly 16x forward 2019 consensus estimates of $4.42/share). Deutsche Bank, BankAmerica and Argus Research have recently downgraded the shares in late April, 2018.

Even without a breakup, PG's share price is relatively inexpensive - back to July, 2012 levels - and the reward vs risk has turned more favorable (over a time frame of 12 months upside reward is +$5 to +$8 against downside risk of -$2 to -$4). A breakup (which now appears to be increasingly possible) would yield a much higher upside (in the mid $80s).

Investors are now being paid handsomely to be patient as, based on a dividend rate of $2.87/year, the dividend yield is very close to 4% and its market capitalization is down to $181 billion and its enterprise value down to $217 billion."

- Kass Diary, I Am Double Upgrading Procter & Gamble

For the reasons mentioned in my lengthy analysis in mid-May, and for the second time in three weeks, I am making Procter & Gamble my Trade of the Week, again.

Stay alert as there are potentially big and developing divergences.

Check out (QQQ) dive, Russell weakness as Spyders  (SPY) turn slightly lower.

I got elected on my short sell stock on more (SPY) at $277.25.
This puts me back into market neutral exposure - where I feel much more comfortable now.
I have another sell stop at $276.75 which would make me small net short in exposure.

I have called an audible and started a (SPY) hedge at $277.85.
I am now small sized in overall exposure.

I am raising my trailing sell short (SPY) to $277.25 now.

Pressing my Allstate  (ALL) short this morning.

*Staying medium sized long but raising my trailing (SPY) short stop

The big take from yesterday was the continuation of a violent rotation between groups - in the market without sector memory from day to day.
This is an example of the new regime of volatility I have been expecting.
While retail and technology cooled off, the banks took off.
This is a good thing as I have advanced the idea that banks stocks were ridiculously inexpensive earlier in the week (here and here). I have a large and expanding position in the group - the largest individual sector weighting (on the long side) that I have had in a long time.
Industrials, like long (DWDP) , also fared well - as did media (e.g. (CMCSA) ), another holding. (If only Berkshire (BRK.A) (BRK.B) would step up and buy Campbell Soup (CPB) - all would be good in the world!)
Yesterday I initiated a new trading short rental in Allstate  (ALL) based on Amazon's (AMZN) possible entry into the home insurance market.
Uncharacteristically, I am still medium sized long in exposure. (Unlike some I expect - and own - large cap, liquid stocks to lead this advancing stage of the market).
Not surprisingly, many that were Bearish two weeks ago (when I covered my SPY short hedge) seem to be joining in the Bullish chorus over the last few trading days.
I remain suspicious of the market's advance and the panicky rotation but will stay reactionary (and not anticipatory - a big hat tip Rev Shark who taught me this lesson) - recognizing that in a market dominated by machines and algos, "buyers live higher and sellers live lower."
Last week, based on my assessment that the Italian debt crisis would reduce the risk of interest rate and inflation stress, I raised the upper end of my anticipated trading range from 2725-2750 to 2750-2800. Adjusted for the S&P futures, we are now in the middle of the projected upper end of the range (2775).
I have been raising my trailing Spyder sell stop (short) for several days - and I am doing so again this morning (my new stop is $276.75). If elected I would move back to market neutral exposure.

Jefferies has assumed coverage of Comcast (CMCSA) with a buy - and a $41 price target.

The brokerage bases this on the basis that the stock has overreacted to the possible deals to acquire Fox  (FOXA) and Sky - at the expense of reduced buybacks.

I have a very large position in Comcast - having added all week.

I will be on Bloomberg's "Market Surveillance" with Tom Keene at about 9:15 am.