Quick post here...busy studying for CFA exam.
Bears have had every chance to take this market down: 1) extreme IT overbought condition in early May 2) A huge spike in bond yields 3)Plunging dollar.....but yet they can't close the deal.
Now....the market has just about worked off it’s IT overbought condition without much damage done.
Markets have gone sideways and there's a triangle forming in the chart which suggests a breakout one way or the other is coming....and it looks like up to me. I'm still seeing plenty of skepticism/cautiousness. Sure, there's more bulls out there compared to a few months ago but that's only natural after a 30% pop. There are still plenty of skeptics especially amongst the retail crowd. Everyone seems to be bashing the "green shoots" and everyone wants the 10% pullback it seems. And bears are still as angry as ever when the market rallies. Sorry bears, you can jump up and down like a 4 year old, yell, spew your dogma and swear at your computer all day...the market won't give a rat's ass and will punish sheep-like behavior...and just like in early 2002...once the market has shaken out and bankrupted enough bears then the downward slide will resume. Until then...it will likely be pain, pain and more pain for the dogmatists.
If the SPX breaks 870, then it would make sense to join the bears for more of an IT time frame. Until then, the bulls are in control and playing the bear side is only optimal for 1-3 days max.
Investor sentiment as measured by the Investor's Intelligence and American Association of Individual Investors is neutral and never did get to giddy levels of bullishness for even 1 single week since this rally began.
The consensus opinion seems to be that we get a pullback during the summer followed by a launch in the fall. Like I said before....don't count on this playing out. A more likely scenario is the opposite or a massive pullback in the summer.
I'll be providing more substance in future posts....after this damn exam is over in about a weeks time.
Friday, May 29, 2009
Friday, May 22, 2009
Got nicely whipsawed
Gotta love it when you get stopped out only to see things ramp the other way. Nice way to end the week....obviously there's tons of sarcasm here.
I got shaken out just prior to when the market crapped out. I didn't lose money but I missed out on a small gain. Oh well, this shit happens....and it sucks ass but that's the price of disipline. Defense first offense second.
I got shaken out just prior to when the market crapped out. I didn't lose money but I missed out on a small gain. Oh well, this shit happens....and it sucks ass but that's the price of disipline. Defense first offense second.
Long SRS @21.9
Just for the day. put/call ratio is very low despite only modest gains and financials are lagging. SRS is showing excellent relative strength.
update 1:23 pm
putting a stop at 21.93....running out of patience here
update 3:06 pm
moved up stop to 22.06....I was lucky that SRS was a champ today with respect to relative strength....it showed relative strength early on hence the reason why I selected this bear etf but I didn't expect this kind of strength....I should have been stopped out long time ago given that the market is near its highs of the day... lucky indeed am I.
update 3:12
stopped at 22.06 lol! that was fast. The market was a tough nut to crack today.
update 1:23 pm
putting a stop at 21.93....running out of patience here
update 3:06 pm
moved up stop to 22.06....I was lucky that SRS was a champ today with respect to relative strength....it showed relative strength early on hence the reason why I selected this bear etf but I didn't expect this kind of strength....I should have been stopped out long time ago given that the market is near its highs of the day... lucky indeed am I.
update 3:12
stopped at 22.06 lol! that was fast. The market was a tough nut to crack today.
Thursday, May 21, 2009
Market in precarious position for tommorow
Despite the damage today the market is not short term oversold so it has room to go lower but there is the 880-875 support zone close by. Bond yields spike today...not good bulls, not good. The 2003 comparison is no longer valid. This rally is looking more now like the post 911 rally. I did say originally that the rally reminded me of a combo of the post 911 and 2003 rally. That post 911 rally had quite a number of downside head fakes and before the market rolled over to make a new down leg plenty of bears were shaken out and too frustrated/burned to take advantage. We've definitely seen signs of that.
I am STILL seeing euphoric and very angry comments like "fuck you longs" from bears on the message boards who no doubt got burned shorting too early. Is such euphoria justified with the market only 5% off its highest point of this rally? If you check out the SPY board on yahoo finance you will see what I mean. Bearish posters dominate the message boards everywhere it seems. Therefore, don't be surprised to see yet another surge in the market some time in the near future to once again shake out and humble bears.
However, tomorrow is setting up to be another down day from the looks of it. What I really mean by this is that the bears have the window of opportunity here because the short-term trend is now down and the market is not ST oversold yet.
We'll see what tomorrow brings....
I am STILL seeing euphoric and very angry comments like "fuck you longs" from bears on the message boards who no doubt got burned shorting too early. Is such euphoria justified with the market only 5% off its highest point of this rally? If you check out the SPY board on yahoo finance you will see what I mean. Bearish posters dominate the message boards everywhere it seems. Therefore, don't be surprised to see yet another surge in the market some time in the near future to once again shake out and humble bears.
However, tomorrow is setting up to be another down day from the looks of it. What I really mean by this is that the bears have the window of opportunity here because the short-term trend is now down and the market is not ST oversold yet.
We'll see what tomorrow brings....
Sold NEM puts for .40
very, very frustrating to see the gold sector underpreform the market in the morning and then out of nowhere surge into the green. The market is telling me "not so fast asshole" and so I bailed. This could very well be a whipsaw and I end up looking like a donkey but I don't believe in hope as a viable strategy. This trade was made based on sentiment and technical factors and so it may be the case that there factors may get more extreme before reversing....or again I got whipsawed. Whatever....I can always get back in if I want.
Wednesday, May 20, 2009
Bot NEM 39 June Puts @ 0.35
A small spec here. Reasons for the trade will follow in a post later on.
Another bear trap???
Did yesterday's fizzle suck in bears giving them false hope yet again? Well, given that the market is now higher than yesterday's highest point and is only 10 pts away from the previous rally high of SPX 930 I'm stepping aside from the morning short trade I had in mind.
But I will stress again, morning strength like this is indicative of emotional buying which I consider to be poor market action. Ultimately moves made in the fashion tend to get reversed but it doesn't have to happen right away. For instance, a lot of the downside that occured in Feburary was emotional selling which didn't get revesed until several weeks later.
The way the market has gaps and runs like this on both the downside and upside makes it difficult for traders to capture any swings unless they hold overnight but doing so doesn't allow them to manage risk effectivily given the gap action.
Keep an eye on the QQQQ which hit a rally high of about 35. That will likely serve as a magnet for this move.
I might end up actually playing the bull side today for the "bear capitulation" trade. If the strength can hold here there is no resistance until SPX 930, QQQQ 35ish.
Be careful out there...
But I will stress again, morning strength like this is indicative of emotional buying which I consider to be poor market action. Ultimately moves made in the fashion tend to get reversed but it doesn't have to happen right away. For instance, a lot of the downside that occured in Feburary was emotional selling which didn't get revesed until several weeks later.
The way the market has gaps and runs like this on both the downside and upside makes it difficult for traders to capture any swings unless they hold overnight but doing so doesn't allow them to manage risk effectivily given the gap action.
Keep an eye on the QQQQ which hit a rally high of about 35. That will likely serve as a magnet for this move.
I might end up actually playing the bull side today for the "bear capitulation" trade. If the strength can hold here there is no resistance until SPX 930, QQQQ 35ish.
Be careful out there...
Bulls waisted a lot of energy today
A weak rally attempt fizzled today while bond yields climbed and the VIX collapsed....tisk tisk bulls, you wasted tons of energy and got nowhere.
The collapse in the VIX to normalized levels was something I predicted but did not fully capitalize on...to say the least. I sold my VIX calls weeks ago for a 25% gain when I could have made a 300% gain had I just stuck with my guns! I am such a donkey. This is my biggest weakness by far....pulling the trigger too soon. My other weakness is that I tend to under trade because I wait for everything to be near perfect before pulling the trigger. Most traders have the opposite problem...overtrading and overconfidence.
The trader's own worst enemy is himself and it's a battle I face all the time. To fight off impulsive instincts can be quite difficult for me sometimes. I feel like I have 2 personalities inside me...one is brutally unbiased and objective and fully taps into his instincts and intuition buried deep down inside which more often than not turn out to be correct. The other character I have inside me is like George Castanza...neurotic, impulsive and emotional. This blog helps me to bring out the former character, but once I have a trade on I often have to fight off the Castanza in me.
Thus, I have realized that I need to be more disciplined by having a pre determined game plan. However, I strongly believe that even with such a game plan there are times you must abort it early due to changing circumstance in the market...this is where George C gets in the way, because once I have a trade on my objectivity can become significantly diminished. I also think that constantly watching the tape intraday when a trade is meant to be for a multi-day hold does damage.... similar to how myopic loss aversion hurt investors. In my case it tends to be myopic gain aversion.
I need to also start taking partial positions instead of waiting for everything to be line up perfectly.... things rarely do. I'm getting better at this though but still nowhere near ideal.
Anyhow...back to the markets. After today's failed move it leaves the market vulnerable. I believe morning weakness will occur again tomorrow and if a good opportunity presents itself I will try and take advantage. I know I just said that I can be overcautious but it has actually been better to be this way during the past several months because the market has tended to whipsaw everyone due to the gap and run type moves that seem to be a lot more common than normal.
If we now assume that the VIX is behaving like it did in "normal" conditions then we should be looking for a move to the mid-low 20s to signal a top in the market. But, these are anything but normal times...however, credit conditions are definitely normalizing…yes, the economy is weak but it's always weak near a market bottom.
On the sentiment perspective, more people are embracing the notion that this could be a bull market after all and it’s no longer as embarrassing to say it. This is of course the goal of every bear market rally….it has to convince a great deal of people that it’s the real deal…not everyone…because there will always be skeptics even if the SPX were to go to 1600 by the end of the year. And there’s still a ton of skeptics out who can be converted to believers thus fueling the market even higher. If this is a bonafied bull market the market should rip to 1050 by the end of June. It should not give convenient entry points such as move back to 800-850 before ripping to new highs like a lot of bulls and even bears are calling for.
I think what could ultimately cause another run for the lows is after when credit conditions are fully normalized and the stimulus induced jolt in the economy wares off and we actually see a decent positive quarter of GDP. At that point economists and analysts would start taking out their “recovery” playbooks and revise expectations higher. That might be the point where investors would start getting disappointed again as they realize that the economy is a shadow of it’s former self and can no longer rely on high degrees of leverage for growth….just a thought here and as always subject to change.
The collapse in the VIX to normalized levels was something I predicted but did not fully capitalize on...to say the least. I sold my VIX calls weeks ago for a 25% gain when I could have made a 300% gain had I just stuck with my guns! I am such a donkey. This is my biggest weakness by far....pulling the trigger too soon. My other weakness is that I tend to under trade because I wait for everything to be near perfect before pulling the trigger. Most traders have the opposite problem...overtrading and overconfidence.
The trader's own worst enemy is himself and it's a battle I face all the time. To fight off impulsive instincts can be quite difficult for me sometimes. I feel like I have 2 personalities inside me...one is brutally unbiased and objective and fully taps into his instincts and intuition buried deep down inside which more often than not turn out to be correct. The other character I have inside me is like George Castanza...neurotic, impulsive and emotional. This blog helps me to bring out the former character, but once I have a trade on I often have to fight off the Castanza in me.
Thus, I have realized that I need to be more disciplined by having a pre determined game plan. However, I strongly believe that even with such a game plan there are times you must abort it early due to changing circumstance in the market...this is where George C gets in the way, because once I have a trade on my objectivity can become significantly diminished. I also think that constantly watching the tape intraday when a trade is meant to be for a multi-day hold does damage.... similar to how myopic loss aversion hurt investors. In my case it tends to be myopic gain aversion.
I need to also start taking partial positions instead of waiting for everything to be line up perfectly.... things rarely do. I'm getting better at this though but still nowhere near ideal.
Anyhow...back to the markets. After today's failed move it leaves the market vulnerable. I believe morning weakness will occur again tomorrow and if a good opportunity presents itself I will try and take advantage. I know I just said that I can be overcautious but it has actually been better to be this way during the past several months because the market has tended to whipsaw everyone due to the gap and run type moves that seem to be a lot more common than normal.
If we now assume that the VIX is behaving like it did in "normal" conditions then we should be looking for a move to the mid-low 20s to signal a top in the market. But, these are anything but normal times...however, credit conditions are definitely normalizing…yes, the economy is weak but it's always weak near a market bottom.
On the sentiment perspective, more people are embracing the notion that this could be a bull market after all and it’s no longer as embarrassing to say it. This is of course the goal of every bear market rally….it has to convince a great deal of people that it’s the real deal…not everyone…because there will always be skeptics even if the SPX were to go to 1600 by the end of the year. And there’s still a ton of skeptics out who can be converted to believers thus fueling the market even higher. If this is a bonafied bull market the market should rip to 1050 by the end of June. It should not give convenient entry points such as move back to 800-850 before ripping to new highs like a lot of bulls and even bears are calling for.
I think what could ultimately cause another run for the lows is after when credit conditions are fully normalized and the stimulus induced jolt in the economy wares off and we actually see a decent positive quarter of GDP. At that point economists and analysts would start taking out their “recovery” playbooks and revise expectations higher. That might be the point where investors would start getting disappointed again as they realize that the economy is a shadow of it’s former self and can no longer rely on high degrees of leverage for growth….just a thought here and as always subject to change.
Tuesday, May 19, 2009
Bears got badly trapped and hurt
Markets did a gap and run move again today except this time to the upside. It was rather unmerciless to the bears who I know for the most part are hiding somewhere in the FAZ/SKF/SRS troika of death complex which got destroyed today. Bond yields shot up again today which as I mentioned before is not good if they keep climbing further from here.
Browsing the bear blogs lately I've noticed it's somewhat of a ghost town in terms of comments from the drones that follow them. Usually you would see a lot of whining and complaining from them on a day like this but this time...it's rather silent. I doubt they have converted or given up for good....but rather they are moving along the to stage 3 or 4 of the 5 stages of grief I mentioned before. Just like after the tech bubble burst it took a solid year if not more for the bagholders who got duped into believing the hype of the flavor of the months (this time around it's Roubini, Schiff, Whitney).
I've outlined my bullish thesis but I don't like the way the market gapped up like this nor do I like it how bonds have sold off. If this sort of action continues I will be inclined to believe that this is in fact a bear market rally abliet one that may go higher.
I'm not sure what tommorow will bring....probably some morning weakness but after that I'm not sure....if not too much damage is done we could see the bulls take this to 930 by the end of the week.
Browsing the bear blogs lately I've noticed it's somewhat of a ghost town in terms of comments from the drones that follow them. Usually you would see a lot of whining and complaining from them on a day like this but this time...it's rather silent. I doubt they have converted or given up for good....but rather they are moving along the to stage 3 or 4 of the 5 stages of grief I mentioned before. Just like after the tech bubble burst it took a solid year if not more for the bagholders who got duped into believing the hype of the flavor of the months (this time around it's Roubini, Schiff, Whitney).
I've outlined my bullish thesis but I don't like the way the market gapped up like this nor do I like it how bonds have sold off. If this sort of action continues I will be inclined to believe that this is in fact a bear market rally abliet one that may go higher.
I'm not sure what tommorow will bring....probably some morning weakness but after that I'm not sure....if not too much damage is done we could see the bulls take this to 930 by the end of the week.
Saturday, May 16, 2009
Weekend Thoughts
Have I lost my mind? Am I way too overboard with that bullish rant I made? Maybe I am....maybe I'm not. Here's the deal....I strongly suspect that the low we saw in March is NOT the once in a generation low that pundit Doug Kass called. One day...and I don't know when, it could be months or years, I believe that low is going to get violated.
I just read an article from a Canadian financial writer Gordon Pape who believes we are in a bull market but that we will see a 10-15% correction followed by 1-2 month sideways action. This seems to be the consensus from the bulls as I heard another bullish pundit say the same thing on BNN today (the Canadian equivalent to CNBC). Don't get me wrong.... I don't think the majority are bullish.... but there's definitely a lot more bulls on TV compared to 2 months ago, mind you there's just as many if not more skeptics. The bulls are cautious here for the ST but that's not necessarily a bullish contrarian indicator because expecting a ST pullback to buy on the dip is often what you see at major turning points. That dip ends up being the first move of a bear market. Remember when oil went to $140? Bulls were saying it's overheated but a dip back to $100 would be a great buy...Abbey J. Cohen said to take profits in tech stocks in March 2000. Good call, but she was calling for a correction only.
Therefore, like I said before, if we get a 10% correction then I think the rally is done. A bull market in its early stages doesn't give you such convenient entry points. I've said this before.....always be aware of when the market appears to hand you a gift for that gift is usually a guillotine in disguise destined to chop off your head. The best trades are usually the toughest to make and if you feel quite comfortable after a trade chances are it's the wrong trade or you are early.
A 10% correction would be far too easy to buy. If this is a true bull run any correction and consolidation should not result in more than a 5-6% drop from the highest point.... I’ll even stretch it to 7% max. Anything more and I would be very suspicious about this bull.
Therefore, I believe that if this is a bull run we should see a rally attempt be made starting next week sometime. It's possible 875 will be retested or even slightly breached first. If next week is another 5% down week then I believe the bear has returned even if the week after is positive.
I just read an article from a Canadian financial writer Gordon Pape who believes we are in a bull market but that we will see a 10-15% correction followed by 1-2 month sideways action. This seems to be the consensus from the bulls as I heard another bullish pundit say the same thing on BNN today (the Canadian equivalent to CNBC). Don't get me wrong.... I don't think the majority are bullish.... but there's definitely a lot more bulls on TV compared to 2 months ago, mind you there's just as many if not more skeptics. The bulls are cautious here for the ST but that's not necessarily a bullish contrarian indicator because expecting a ST pullback to buy on the dip is often what you see at major turning points. That dip ends up being the first move of a bear market. Remember when oil went to $140? Bulls were saying it's overheated but a dip back to $100 would be a great buy...Abbey J. Cohen said to take profits in tech stocks in March 2000. Good call, but she was calling for a correction only.
Therefore, like I said before, if we get a 10% correction then I think the rally is done. A bull market in its early stages doesn't give you such convenient entry points. I've said this before.....always be aware of when the market appears to hand you a gift for that gift is usually a guillotine in disguise destined to chop off your head. The best trades are usually the toughest to make and if you feel quite comfortable after a trade chances are it's the wrong trade or you are early.
A 10% correction would be far too easy to buy. If this is a true bull run any correction and consolidation should not result in more than a 5-6% drop from the highest point.... I’ll even stretch it to 7% max. Anything more and I would be very suspicious about this bull.
Therefore, I believe that if this is a bull run we should see a rally attempt be made starting next week sometime. It's possible 875 will be retested or even slightly breached first. If next week is another 5% down week then I believe the bear has returned even if the week after is positive.
Friday, May 15, 2009
Bearish group think alive and well
just browsing the posts made on stocktwits and I see the traders there were pressing the bear side quite a bit as the market broke down mainly via FAZ. Regardless of whether they will make money or get squeezed (more likely) it just goes to show what the herd is thinking and it goes to show you that no matter how many times people have gotten their fingers burned with FAZ they just keep comming back for more.
I hope this site never goes down because it is a fantastic way to check the pulse of what the herd is actually doing with their money. Sentiment survey's and anecdotes aren't as good as the real deal.
I hope this site never goes down because it is a fantastic way to check the pulse of what the herd is actually doing with their money. Sentiment survey's and anecdotes aren't as good as the real deal.
put/call ratio still quite low
not much fear out there so I might reload on those calls later on today.....options expiration volatility is always the wild card however.
Bot some MAY 23 SRS calls at .55
just sold half at 1.1. Riding the rest on the house. Just a little gamble here. Now I'm going to yell what the bears have been yelling for 2 months "come on you fucking market tank! tank! tank!"
update: kicked the balance of the calls at 1.40....now watch the market drop like a anvil though paper lol!
update: kicked the balance of the calls at 1.40....now watch the market drop like a anvil though paper lol!
Thinking the unthinkable
The bearish scenario to 885 panned out and now we got a bounce. So now what? I did say that if the market hit 885 the rally would be done and I did say that I believed a 1-2 month consolidation phase would occur but guess what? I many not be bullish enough. Ya you heard me....here's why. I looked at the 1974, 1982, 1990 and 2003 bottoms. All of them produced a sharp rally for 2 months. Then, they took a little dip for about 5-6% at about that 2 month mark before ripping higher for another month or 2 to really send a message....then we got the 1-3 month sideways action.
Therefore, I believe 1 of 2 things is going on here....
1) We are building an IT top before rolling over into another down leg to retest the lows or
2) We are going to start to make another leg higher to 1000-1100 in the not too distant future after perhaps a move to 875-880 (maybe it has already started...who knows).
Seems ludicrous to expect scenario 2 panning out doesn't it?...The more logical choice would be 1...and this is why 2 could actually happen. The market does it's best to humiliate and surprise the majority which why I think 2 has a good chance of panning out.
I am probably the only person on the entire planet making the extreme bullish case like the one I described.... but it fits with all the anecdotal stuff I've been talking about for weeks i.e. the chronic skepticism/bearishness that I see out there amongst the herd. But don't get me wrong though....I ain't no permabull. I'm just fleshing out the unthinkable which the market tends to gravitate to. If evidence suggests other scenarios will pan out, then I will adjust accordingly.
Taking things one day a time...in fact, I think we could see 880-875 in the next 1-2 days and I might bet on this. If we hit that level, my outlandish thesis will be put to the test.
Therefore, I believe 1 of 2 things is going on here....
1) We are building an IT top before rolling over into another down leg to retest the lows or
2) We are going to start to make another leg higher to 1000-1100 in the not too distant future after perhaps a move to 875-880 (maybe it has already started...who knows).
Seems ludicrous to expect scenario 2 panning out doesn't it?...The more logical choice would be 1...and this is why 2 could actually happen. The market does it's best to humiliate and surprise the majority which why I think 2 has a good chance of panning out.
I am probably the only person on the entire planet making the extreme bullish case like the one I described.... but it fits with all the anecdotal stuff I've been talking about for weeks i.e. the chronic skepticism/bearishness that I see out there amongst the herd. But don't get me wrong though....I ain't no permabull. I'm just fleshing out the unthinkable which the market tends to gravitate to. If evidence suggests other scenarios will pan out, then I will adjust accordingly.
Taking things one day a time...in fact, I think we could see 880-875 in the next 1-2 days and I might bet on this. If we hit that level, my outlandish thesis will be put to the test.
Wednesday, May 13, 2009
Bears get thrown a bone
Worse than expected retail sales numbers caused the gap down today. Can bears run with this to 885? Well...they have their chance now. You can't take advantage of this move down unless you went short at the close yesterday. You could always short in the hole but I rarely do such thing given the possibility of a snap back to shake you out.
I have found that most of the downside moves in the market during the past several weeks have been right from the open....which is indicative of profit taking/wall of worry behavior. This doesn't mean things won't go lower in the weeks ahead but it tells you that there is underlying caution/skepticsm with investor psycology which is longer term positive.
I continue to do nothing here....sigh
Time to do some studying.
I have found that most of the downside moves in the market during the past several weeks have been right from the open....which is indicative of profit taking/wall of worry behavior. This doesn't mean things won't go lower in the weeks ahead but it tells you that there is underlying caution/skepticsm with investor psycology which is longer term positive.
I continue to do nothing here....sigh
Time to do some studying.
Tuesday, May 12, 2009
Some musings
There have been quite of few secondary offerings as of late in particular from financials. This has some good and bad implications. It's good because banks are repaying back TARP money (which everyone complained would be a waste of tax payer funds) and it shows confidence has returned to the financial markets. The idea of a financial company wanting to raising money on reasonable terms was unthinkable 2 months ago...they would have had the CEO committed to a funny farm. This about face is a huge, huge, turn around in investor confidence and takes off the government shackles from these companies.... but don't tell bears this.... they will just keep on harping about how bad the unemployment stats and other lagging indicators are.
Now the bad news...secondary offerings like this results in an increase in stock supply and as you know an increase in supply without an equal or greater increase in demand results in a lower price. Perhaps an increase in demand has in fact increased enough.... perhaps.... but history shows spikes in new offers and IPO's is an indicator of an immanent IT top. This definitely fits with the other warning signs I’ve mentioned. So, anyone playing the long side here better have 1 foot out the door. We can still scoot a bit higher in the next day or 2 as I mentioned but after that I think this market will begin to cool off.
The immanent top in the market I expect will be in my opinion nothing more than a 1-2month consolidation phase before the next move higher. This top I'm expecting will be a huge test for the market. Beware if we get a 10% pullback based upon lower high, lower low type action. That would be a warning sign that the bear has be returned.
Another comment on FAZ...I just can't resist. I've mentioned twitter's sister site stocktwits.com before. This site gives a very good sample of the what the fast money day trading community is trading. Day traders tend to gravitate to the "flavor of the month" sectors. No doubt tech stocks would have been the top tickers mentioned in 1999 and 2000. FAZ was a popular ticker since the begining of the year and for good reason at the time given it's meteoric rise. But, despite the fact that FAZ has fallen 95% from it's highs FAZ continues to be the number 1 ticker traded...by a landslide. In fact, it's popularity INCREASED as the stock started this sickening collapse. There is no way the bulk of this trading community on stocktwits hasn't lost a ton of money on FAZ given that it's still near it's all time low...its virtually impossible for this not to be true. Yet despite this, to this day, FAZ is by and large still the top ticker traded...and no, these traders are not shorting FAZ.
This just goes to show that the "unsophisticated" (to say it nicely) traders don't believe in this rally at all. They are convinced that that FAZ, the former ATM, will get back to it's glory days in very short order. But after a 95% drop and what's gotta be a massive destruction of capital you figure that these jokers would learn a lesson...no! And these guys are supposed to be trading the "hot" sectors!!!! This is delusion, denial, and stubborness on the grandest of scales.....
Now the bad news...secondary offerings like this results in an increase in stock supply and as you know an increase in supply without an equal or greater increase in demand results in a lower price. Perhaps an increase in demand has in fact increased enough.... perhaps.... but history shows spikes in new offers and IPO's is an indicator of an immanent IT top. This definitely fits with the other warning signs I’ve mentioned. So, anyone playing the long side here better have 1 foot out the door. We can still scoot a bit higher in the next day or 2 as I mentioned but after that I think this market will begin to cool off.
The immanent top in the market I expect will be in my opinion nothing more than a 1-2month consolidation phase before the next move higher. This top I'm expecting will be a huge test for the market. Beware if we get a 10% pullback based upon lower high, lower low type action. That would be a warning sign that the bear has be returned.
Another comment on FAZ...I just can't resist. I've mentioned twitter's sister site stocktwits.com before. This site gives a very good sample of the what the fast money day trading community is trading. Day traders tend to gravitate to the "flavor of the month" sectors. No doubt tech stocks would have been the top tickers mentioned in 1999 and 2000. FAZ was a popular ticker since the begining of the year and for good reason at the time given it's meteoric rise. But, despite the fact that FAZ has fallen 95% from it's highs FAZ continues to be the number 1 ticker traded...by a landslide. In fact, it's popularity INCREASED as the stock started this sickening collapse. There is no way the bulk of this trading community on stocktwits hasn't lost a ton of money on FAZ given that it's still near it's all time low...its virtually impossible for this not to be true. Yet despite this, to this day, FAZ is by and large still the top ticker traded...and no, these traders are not shorting FAZ.
This just goes to show that the "unsophisticated" (to say it nicely) traders don't believe in this rally at all. They are convinced that that FAZ, the former ATM, will get back to it's glory days in very short order. But after a 95% drop and what's gotta be a massive destruction of capital you figure that these jokers would learn a lesson...no! And these guys are supposed to be trading the "hot" sectors!!!! This is delusion, denial, and stubborness on the grandest of scales.....
ST inflection point here
Short term indicators are back to neutral and so the bull might make a stand here like they have been doing for the past 2 months whenever getting ST neutral. We haven't seen a ST oversold reading ever during this rally! It's been that strong. I believe however any rally from here will not lead to a new leg up. We may just retest or marginally exceed the highs.
If the bulls can't hold here then 885 will be the next stop and the rally would be offically over in my book...no doubt there would be bounces but they probably would be contained.
Should be an interesting next couple of days...I will be looking to play whatever side I feel will prevail....I think the bulls will prevail because the sell off we seen so far this week smacks of normal profit taking due to how markets immediately went into the red from the open. We'll see.....be careful out there.
If the bulls can't hold here then 885 will be the next stop and the rally would be offically over in my book...no doubt there would be bounces but they probably would be contained.
Should be an interesting next couple of days...I will be looking to play whatever side I feel will prevail....I think the bulls will prevail because the sell off we seen so far this week smacks of normal profit taking due to how markets immediately went into the red from the open. We'll see.....be careful out there.
Monday, May 11, 2009
Anchoring and adjusting in action
The CFA level 3 program has a section on behavioral finance which is my favorite one. One of the concepts they discuss is "anchoring and adjusting" which is described as when a person is so entrenched in their forecast/point of view that he does not fully incorporate new information to his existing stance. Instead, he just marginally adusts it. As a result the person's forecast/point of view tends to continuously over or under estimate the actual results.
Analysts tend to do this with earnings forecasts. I just read the following on Bloomberg:
Analysts overestimated earnings by an average 13 percentage points in each period between the third quarter of 2007 and the end of 2008. Better-than-expected first-quarter results haven’t prompted them to boost forecasts for the rest of 2009. Instead, they’ve ratcheted down predictions as the first global recession since World War II weakened demand.
So, despite the fact that earnings were much better than expected analysts are LOWERING their forecasts. Is this yet again anchoring I see? And the strange thing is that the "adjusting" is going in the opposite direction! Thus, it looks like analysts are doing what I now call "anchoring and negative adjusting" or I suppose you can also call it "anchoring squared"
These lowered expectations in the face of better than expected data is actually a positive thing for the markets because now it will create a wall of worry and puts the market in a better position to get positive surprises going forward. Perhaps the analysts will be right...in that case then it's not a good thing for the market but given how analysts have a less than stellar track record in getting things right (especially at turning points) I wouldn't hold my breath.
Analysts tend to do this with earnings forecasts. I just read the following on Bloomberg:
Analysts overestimated earnings by an average 13 percentage points in each period between the third quarter of 2007 and the end of 2008. Better-than-expected first-quarter results haven’t prompted them to boost forecasts for the rest of 2009. Instead, they’ve ratcheted down predictions as the first global recession since World War II weakened demand.
So, despite the fact that earnings were much better than expected analysts are LOWERING their forecasts. Is this yet again anchoring I see? And the strange thing is that the "adjusting" is going in the opposite direction! Thus, it looks like analysts are doing what I now call "anchoring and negative adjusting" or I suppose you can also call it "anchoring squared"
These lowered expectations in the face of better than expected data is actually a positive thing for the markets because now it will create a wall of worry and puts the market in a better position to get positive surprises going forward. Perhaps the analysts will be right...in that case then it's not a good thing for the market but given how analysts have a less than stellar track record in getting things right (especially at turning points) I wouldn't hold my breath.
Sunday, May 10, 2009
Bears on their heals now....correction finally comming this week?
Emotions are definitely running high now with the trading community. Bears are running scared here and for once are backing off shorting this market however, a lot of them, and I'm assuming a lot of other traders as well, have the SPX 200DMA as a target to try for another short which now stands at 954. This is yet another example of group think and if the market is true to this form one of two things will occur
a) The market rolls over before 954 gets hit
b) The market breaks through 954 and heads up towards 1000. If b occurs, I suspect there would be a knee jerk pullback at around 954 first just like there was at the widely advertised 875 resistance level.
I think this week will actually be the week we start to see the long awaited pullback occur given that now the shorts are backing off here. Remember, I said for weeks that the market would not stop going up untill the shorts stopped their top picking and people started embracing this rally. We are seeing both now.
With stress test results out of the way, people may start to believe it's safe to go back in the market....but that's where they could be wrong. The market needs a wall of worry to climb upon. Newbie investors don't seem to get this concept....and it applies to the downside as well. In an uptrend you need positive "surprises" to keep it going and in a downtrend you need negative surprises to sustain it.
I believe we are getting to the point where the "green shoots" concept is now well discounted into the market and now that we got stress test results out of the way with no negative surprises we are going to have to see more solid evidence of a recovery to push the market to the next level. Thus, the market may not care so much anymore about things getting "less worse"...it may want to see the real deal. I'm just speculating here as to how the market may start to react going forward...we will obviously have to see how that actually turns out.
I am going to be on the look out for any signs of buyer exhaustion this week because at the very least markets should get a mild pullback due to how ST overbought it is now...we may actually see a 5% drop start this week but it could start from slightly higher levels i.e. around SPX 945.
a) The market rolls over before 954 gets hit
b) The market breaks through 954 and heads up towards 1000. If b occurs, I suspect there would be a knee jerk pullback at around 954 first just like there was at the widely advertised 875 resistance level.
I think this week will actually be the week we start to see the long awaited pullback occur given that now the shorts are backing off here. Remember, I said for weeks that the market would not stop going up untill the shorts stopped their top picking and people started embracing this rally. We are seeing both now.
With stress test results out of the way, people may start to believe it's safe to go back in the market....but that's where they could be wrong. The market needs a wall of worry to climb upon. Newbie investors don't seem to get this concept....and it applies to the downside as well. In an uptrend you need positive "surprises" to keep it going and in a downtrend you need negative surprises to sustain it.
I believe we are getting to the point where the "green shoots" concept is now well discounted into the market and now that we got stress test results out of the way with no negative surprises we are going to have to see more solid evidence of a recovery to push the market to the next level. Thus, the market may not care so much anymore about things getting "less worse"...it may want to see the real deal. I'm just speculating here as to how the market may start to react going forward...we will obviously have to see how that actually turns out.
I am going to be on the look out for any signs of buyer exhaustion this week because at the very least markets should get a mild pullback due to how ST overbought it is now...we may actually see a 5% drop start this week but it could start from slightly higher levels i.e. around SPX 945.
Friday, May 8, 2009
Bonds hold the key to the market
Today's downside action really didn't do much damage to the uptrend. Further warning signs however are evident. The Nasdaq which has been one of the leaders of this advance is lagging significantly and more importantly, bond yields are spiking which could be a warning sign of an immanent IT top for equities (more on this below) A lot of bears are ranting about how there was a failed auction for bonds that caused this spike in yields. That may be true but I think it was just acceleration of a trend already in place which is being driven by a decrease in risk aversion from institutional investors and a higher expectation of inflation due to economic growth. For instance, CPI and PPI stats were signaling deflation earlier in the year and so I don't think it was a coincidence that bonds rallied fiercely several weeks prior to this data coming out. For the last several weeks whenever equity markets rallied bonds typically sold off and when markets tanked bonds rose. Thus, it seems evident to me that the driving force of bond prices are expectations of higher inflation due to economic growth and a decrease of risk aversion NOT the hyper inflation economic collapse scenario because if that was the case, the US dollar and the equity markets would have been in the toilet along with bonds. Perhaps bonds will start selling off due to this Armageddon scenario one day but I don't buy that at this time.
One thing I have noticed is that at previous IT tops during this bear market and the last, they coincided with a spike in bond yields. Thus, the spike had a tendency of choking off the equity rally (perhaps as a result of the negative impact of higher borrowing costs, better valuation vs. equities...whatever.... all I know is that this has been a pattern). It was also common to see equities begin to roll over and bonds still continue to sell off for a while (probably due to a further but unwarranted decline in risk aversion) but eventually bonds would begin to strengthen as risk aversion picked up and expectations for growth were ratcheted downward.
Thus the behavior of bonds and its impact on the markets can be quite interesting. A rise in yields from low levels can signal an unwinding of risk aversion and better prospects for economic growth which is good for equities but too much of a rise could signal undue optimism in the economy and choke off the very same economic growth that was being anticipated.... it depends on how strong the economy is to be able to handle higher interest rates. Given the fragility of the economy right now, if bonds continue to spike from these levels I suspect it will choke off the rally like it did with other rallies.
I have been comparing this rally to that of March 2003 however since this week the comparison is starting to fade because we are seeing panic type buying which did not occur in March 2003. That rally was orderly all the way up. The March 2003 rally lasted for about 3 months. During the first 2 months of that rally, bond yields spiked, as was the case in prior rallies. There was a correction in mid May, which I'm sure got a lot of bears salivating given the high overbought and bullish sentiment readings at the time... but something different happened. Bond yields collapsed very sharply during that market correction and as the market started to rebound bonds yields continued their collapse and hit new multi decade lows. Thus with such low yields it gave equities the "all clear" signal to make another surge higher.
Therefore, if the market experiences a sharp correction and bond yields tank like how they did in mid May 2003 it could recharge the equity markets for another surge higher but if yields continue to rise or only marginally drop at best, it will serve as a headwind and a warning sign that the equity rally is doomed to fail badly.
One thing I have noticed is that at previous IT tops during this bear market and the last, they coincided with a spike in bond yields. Thus, the spike had a tendency of choking off the equity rally (perhaps as a result of the negative impact of higher borrowing costs, better valuation vs. equities...whatever.... all I know is that this has been a pattern). It was also common to see equities begin to roll over and bonds still continue to sell off for a while (probably due to a further but unwarranted decline in risk aversion) but eventually bonds would begin to strengthen as risk aversion picked up and expectations for growth were ratcheted downward.
Thus the behavior of bonds and its impact on the markets can be quite interesting. A rise in yields from low levels can signal an unwinding of risk aversion and better prospects for economic growth which is good for equities but too much of a rise could signal undue optimism in the economy and choke off the very same economic growth that was being anticipated.... it depends on how strong the economy is to be able to handle higher interest rates. Given the fragility of the economy right now, if bonds continue to spike from these levels I suspect it will choke off the rally like it did with other rallies.
I have been comparing this rally to that of March 2003 however since this week the comparison is starting to fade because we are seeing panic type buying which did not occur in March 2003. That rally was orderly all the way up. The March 2003 rally lasted for about 3 months. During the first 2 months of that rally, bond yields spiked, as was the case in prior rallies. There was a correction in mid May, which I'm sure got a lot of bears salivating given the high overbought and bullish sentiment readings at the time... but something different happened. Bond yields collapsed very sharply during that market correction and as the market started to rebound bonds yields continued their collapse and hit new multi decade lows. Thus with such low yields it gave equities the "all clear" signal to make another surge higher.
Therefore, if the market experiences a sharp correction and bond yields tank like how they did in mid May 2003 it could recharge the equity markets for another surge higher but if yields continue to rise or only marginally drop at best, it will serve as a headwind and a warning sign that the equity rally is doomed to fail badly.
Thursday, May 7, 2009
Bears are quick to celebrate any marginal downside
Was this morning's "reversal" it? Is the top in? Could be but I have my doubts. First of all...true reversals tend to happen later in the day not this quickly and I've already seen quite a few "the top is in" posts from the wrong way bears who seem to be celebrating on just any marginal signs of weakness. I noted this behavior before. I remember a similar type of sentiment from a bullish strategist who got humiliated badly as the market kept falling in the fall while he was pounding the table that the market was a screaming buy. There was a day when the market had a decent 1 day pop and he got so excited that you would have thought the market just make a new 52 week high. After that day the market cratered to make new lows and he was silenced and humiliated once again. This is what the market will do to you from time to time especially when you go against it trying to call a turn.
At this point however, both sides of the market look dangerous. If you go long you could easy get stopped out due to how overbought the market is only to see things turn higher quickly after and if you go short you are fighting a strong trend that only a few moments ago made a new high.
At this point however, both sides of the market look dangerous. If you go long you could easy get stopped out due to how overbought the market is only to see things turn higher quickly after and if you go short you are fighting a strong trend that only a few moments ago made a new high.
Wednesday, May 6, 2009
SPX 920-945....the danger zone
Like I suspected, buyer exhaustion has not been completed. Despite the continued horendous destruction of capital caused by the FAZ/SRS/SKF troika of death I still see plenty of bottom fishing there...this is amazing.....behavioral finance in action I tell you.
If anyone were looking for a spot where the market could stall it would be in the 920-945 zone. Is seems like the majority of the wrong way trading community (which are primarily bears) have their sites set on 950-1000 as a target to start their top picking again...therefore given how the market rarely likes to accommodate the consensus I would say that 920-945 area would be an area to watch for a turning point. If we hit the 950-1000 mark..watch out....because we could end up blowing past those levels too.
So what happens after the rally runs out of gas? Do we crash like so many of the bears expect? Don't count on it. The more likely scenario would be a consolidation after an initial sharp pullback. Why? Because there's still plenty of skeptics out there. Bears claim everyone is bullish now. There is absolutely no evidence of that whatsoever. Latest figures from the Investor's Intelligence Survey show that bulls have risen to 40% and bears have dropped to 32%. I don't call that excessive especially after such an epic rally. And lets keep in mind that since July bears have outnumbered bulls for the vast majority of the time and when bulls did outnumber bears it was only marginally so and didn't last very long.
During the last bull market when the bull/bear ratio got to current levels it would quite often signal an IT bottom. When using market indicators you need to realize that extremes have different thresholds in bull markets vs bear markets. In bull markets optimism and "overbought" are natural conditions and therefore can be tolerated much more than in bear markets where pessimism and "oversold" are natural conditions. Thus, if this is a bull market, we can go a lot higher before reaching an extreme in optimism. But let's not get ahead of ourselves here....
The surge in the market this week smacks of unsustainable panic type buying. Any time the chart starts to look parabolic it's a good sign the end of the move is immanent. I still haven't seen enough signs of buyer exhaustion but I think it's immanent. But judging by the attitude of the battered bears I think it's very likely the market will just go sideways for a while after pulling back initially. The same people who have been nothing but wrong in the past several weeks seem quite sure that a crash back to the lows will occur before the year is over...they act as if it's a given.
And let's face it, the vast majority still doesn't believe in this rally and those who are bulls are only cautiously optimistic always looking over their shoulder. Those are not conditions for a crash.
Unless I see the majority fully embrace this rally as the real deal and drop their guard, downside will probably be limited. I will be watching very closely to see how this market and its participants behave once this rally runs out of gas.
If anyone were looking for a spot where the market could stall it would be in the 920-945 zone. Is seems like the majority of the wrong way trading community (which are primarily bears) have their sites set on 950-1000 as a target to start their top picking again...therefore given how the market rarely likes to accommodate the consensus I would say that 920-945 area would be an area to watch for a turning point. If we hit the 950-1000 mark..watch out....because we could end up blowing past those levels too.
So what happens after the rally runs out of gas? Do we crash like so many of the bears expect? Don't count on it. The more likely scenario would be a consolidation after an initial sharp pullback. Why? Because there's still plenty of skeptics out there. Bears claim everyone is bullish now. There is absolutely no evidence of that whatsoever. Latest figures from the Investor's Intelligence Survey show that bulls have risen to 40% and bears have dropped to 32%. I don't call that excessive especially after such an epic rally. And lets keep in mind that since July bears have outnumbered bulls for the vast majority of the time and when bulls did outnumber bears it was only marginally so and didn't last very long.
During the last bull market when the bull/bear ratio got to current levels it would quite often signal an IT bottom. When using market indicators you need to realize that extremes have different thresholds in bull markets vs bear markets. In bull markets optimism and "overbought" are natural conditions and therefore can be tolerated much more than in bear markets where pessimism and "oversold" are natural conditions. Thus, if this is a bull market, we can go a lot higher before reaching an extreme in optimism. But let's not get ahead of ourselves here....
The surge in the market this week smacks of unsustainable panic type buying. Any time the chart starts to look parabolic it's a good sign the end of the move is immanent. I still haven't seen enough signs of buyer exhaustion but I think it's immanent. But judging by the attitude of the battered bears I think it's very likely the market will just go sideways for a while after pulling back initially. The same people who have been nothing but wrong in the past several weeks seem quite sure that a crash back to the lows will occur before the year is over...they act as if it's a given.
And let's face it, the vast majority still doesn't believe in this rally and those who are bulls are only cautiously optimistic always looking over their shoulder. Those are not conditions for a crash.
Unless I see the majority fully embrace this rally as the real deal and drop their guard, downside will probably be limited. I will be watching very closely to see how this market and its participants behave once this rally runs out of gas.
Still not over
I was away most of the day and missed the action until the last half hour. Looking at the intra day chart, market action suggests today was a profit taking type day. The market was basically in the red from the get go and never saw green. Does that indicate a buying exhaustion? Nope. Rather it indicates nervous longs booking profits. Tonight the futures are down 1% on stress test news that BOA will need to raise about $35 Billion in capital. I don't know how much of this can be done by converting their government issued preferred shares to common, nor do I care because I believe the market already has discounted the stress test results. The methodologies in determining the results were released last week and so the market had plenty of time to digest this and we have climbed higher since then.
Although I have seen bear capitulation I still honestly don't think it has been complete. If I was a trapped bear I would be hoping that the stress test results would bail me out. If the market can shrug off the stress test results without much damage then any remaining bears will just throw up their hands and say "that's it.... there’s nothing that can stop this market now.... I’m atta here". At the same time anyone who has been waiting on the sideline in agony for that big pullback that never comes will also do the same and say "I've been waiting and waiting and waiting and every little dip gets bought. But now that the stress test results are out of the way, the coast is clear and so I'm going to jump in on the next little dip before I miss the next big move".
And that folks is how a top gets made.... when the last marginal buyer is exhausted. Bears who have been banging their heads against the wall wondering how this market can be so strong don't get this. They didn't realize that because the problems of the economy became so well advertised, those who wanted to sell/short already did so and so there was an exhaustion of sellers. The only way the market would have tanked further is if there was an outright collapse, which forced even the strongest of longs to capitulate. Because that didn't happen we got the mother of all short squeezes when the newsflow started to indicate that the end of world wasn't nigh.
Bear dogma blinded skeptics to the notion that in the short run the stock market is a voting machine and by short run that can mean up to several months...even years. I find that bears in general think too highly of their own intelligence. Guys like Schiff talk in a mannerism that suggests the market should do what he thinks it should do because he's knows he's right and so when the market goes the other way I'm quite sure these bears throw fits of rage like I've seen a lot these days.
Anyhow...back to markets...Don't get me wrong here...I know the market is quite overbought and I there has been quite a bit of bear capituation to warrent the end of the rally...but my gut says "not yet" even if that means further declines first. If I'm wrong and the market rolls over into hell.... fine by me. I'll just try my best to ride that train even if that means missing the top. The obsession for traders trying to catch this top is an ego thing and it has cost them dearly. People tend to feel "smarter" when they buy/short on a counter trend move because they feel like they are getting a "bargain". That strategy only works well when the wind is at your back i.e. the trend is in your favor and when the trend is not fully embraced by everyone. I often try to catch tops and bottoms myself, but I don't attempt to do so unless the market is giving me signs to do so. It's typical for traders/investors to make decisions with the following line of thinking "I'm going to go short/long right here because the market shouldn't be this level". Thinking like this can lead you into a world of hurt like so many have already experienced. BEWARE TELLING THE MARKET WHAT TO DO. If you do, be prepared for the market to slam you in the head with a shovel.
A comment regarding the bearish agruments out there....I agree with a lot about what they say the main one being that throwing more debt at a problem that began due to too much debt is not the right solution....but as history has shown, it can (and I stress the word can) alleviate the problem at least temporary and by that I mean up to several years...yes the problems will be worse later on but in the meantime the "false prosperity" that is created can be quite enduring and lucrative....or destructive if you bet against it. Any bear that overstayed his welcome from the 2000-2002 bear got crushed by the 5-year bull market that followed.
Although I have seen bear capitulation I still honestly don't think it has been complete. If I was a trapped bear I would be hoping that the stress test results would bail me out. If the market can shrug off the stress test results without much damage then any remaining bears will just throw up their hands and say "that's it.... there’s nothing that can stop this market now.... I’m atta here". At the same time anyone who has been waiting on the sideline in agony for that big pullback that never comes will also do the same and say "I've been waiting and waiting and waiting and every little dip gets bought. But now that the stress test results are out of the way, the coast is clear and so I'm going to jump in on the next little dip before I miss the next big move".
And that folks is how a top gets made.... when the last marginal buyer is exhausted. Bears who have been banging their heads against the wall wondering how this market can be so strong don't get this. They didn't realize that because the problems of the economy became so well advertised, those who wanted to sell/short already did so and so there was an exhaustion of sellers. The only way the market would have tanked further is if there was an outright collapse, which forced even the strongest of longs to capitulate. Because that didn't happen we got the mother of all short squeezes when the newsflow started to indicate that the end of world wasn't nigh.
Bear dogma blinded skeptics to the notion that in the short run the stock market is a voting machine and by short run that can mean up to several months...even years. I find that bears in general think too highly of their own intelligence. Guys like Schiff talk in a mannerism that suggests the market should do what he thinks it should do because he's knows he's right and so when the market goes the other way I'm quite sure these bears throw fits of rage like I've seen a lot these days.
Anyhow...back to markets...Don't get me wrong here...I know the market is quite overbought and I there has been quite a bit of bear capituation to warrent the end of the rally...but my gut says "not yet" even if that means further declines first. If I'm wrong and the market rolls over into hell.... fine by me. I'll just try my best to ride that train even if that means missing the top. The obsession for traders trying to catch this top is an ego thing and it has cost them dearly. People tend to feel "smarter" when they buy/short on a counter trend move because they feel like they are getting a "bargain". That strategy only works well when the wind is at your back i.e. the trend is in your favor and when the trend is not fully embraced by everyone. I often try to catch tops and bottoms myself, but I don't attempt to do so unless the market is giving me signs to do so. It's typical for traders/investors to make decisions with the following line of thinking "I'm going to go short/long right here because the market shouldn't be this level". Thinking like this can lead you into a world of hurt like so many have already experienced. BEWARE TELLING THE MARKET WHAT TO DO. If you do, be prepared for the market to slam you in the head with a shovel.
A comment regarding the bearish agruments out there....I agree with a lot about what they say the main one being that throwing more debt at a problem that began due to too much debt is not the right solution....but as history has shown, it can (and I stress the word can) alleviate the problem at least temporary and by that I mean up to several years...yes the problems will be worse later on but in the meantime the "false prosperity" that is created can be quite enduring and lucrative....or destructive if you bet against it. Any bear that overstayed his welcome from the 2000-2002 bear got crushed by the 5-year bull market that followed.
Monday, May 4, 2009
The panick stage has began....bear capituation evident
I said here once that a rally has 3 stages. 1)Denial 2)Migration and 3)Panick. We are now officially in stage 3.
The move towards 900 as I eventually expected happened. I'm a bit disappointed in myself for not taking advantage of this prediction as much as I would have liked but better to have made a few dollars than lost a boatload like the typical trader has in the past 7 weeks or so.
The change in sentiment on the stock boards is quite dramatic. Bears have been silenced and humbled. No more "I'm 100% short here" type posts. It's also becoming clear that the "rally to the 200 DMA" trade is growing in popularity by the hour. After todays break of 900, I saw quite a bit of bear capituation from traders who were hanging on but couldn't take the pain anymore. The bears are now afraid to short the market at these levels...instead, they are going to wait until the market hits the 950-1000 range....they finally gave the market some respect....after getting their brains bashed in repeatidly of course.
I've also seen a great deal of cockiness from the bulls over on the SPY board. I've haven't seen this sort of cockiness from the bulls in a long time. Thus, I strongly suspect that an Intermediate term top will be put in anywhere from current levels to about the 920-935 level. A push to that level this week would render the market fully overbought on all time frames. However, I'm not going to dogmatically assume the market will top at that level exactly. If I see a clear sign of exhaustion at whatever price, I will pull the trigger. I am never the type to say "if the price drops (rises) to $X I will buy (short)". That to me is being dogmatic and telling what the market to do. The question I ask myself is: "How exactly did the price get to that level?" "Was it is emotional or orderly? If you are picking tops or bottoms you better be careful if your price target is hit by an orderly type move because at tops or bottoms emotions climax and so you need to look for market action that conveys an emotional climax not an orderly move because an orderly move suggests a continuation of the trend. Sometimes you don't get that crescendo wave of panic buying or selling to mark a top or bottom and instead you get the apathetic type tops or bottoms. Those types of turning points can be identified by repeated failed attempts to make headway in the prevailing direction followed by a reversal day. There's no guarantee of course that turning points are made in the way I described...sometimes the starting point comes out of nowhere like how his rally began. It began with a gap up due to Citigroup saying it was "profitable" for the first 2 months of the year. The day prior to that there was no sign at all of a reversal. However, in my experience turning points are often made in the way I described above.
So, was today's action emotional? Yes...because it began with a gap up (emotional buying) in an already extended rally and ended with a panic flurry to the upside right near the end. However, given the market closed right at the highest point of the rally to date, there is no proof that the buyers have exhausted themselves. Thus any immediate pullback via a gap down tomorrow that doesn't get filled would indicate to me that the rally is not over yet.
The ST indicators I track are almost at maximum full overbought levels. Could we get a serious pullback here via a gap down? You bet your ass we could...just don't expect it to signal the end of the rally.
I will be looking to pull the trigger on some puts/bear etfs very shortly....I just need for Mr. Market to tip his hand.
The move towards 900 as I eventually expected happened. I'm a bit disappointed in myself for not taking advantage of this prediction as much as I would have liked but better to have made a few dollars than lost a boatload like the typical trader has in the past 7 weeks or so.
The change in sentiment on the stock boards is quite dramatic. Bears have been silenced and humbled. No more "I'm 100% short here" type posts. It's also becoming clear that the "rally to the 200 DMA" trade is growing in popularity by the hour. After todays break of 900, I saw quite a bit of bear capituation from traders who were hanging on but couldn't take the pain anymore. The bears are now afraid to short the market at these levels...instead, they are going to wait until the market hits the 950-1000 range....they finally gave the market some respect....after getting their brains bashed in repeatidly of course.
I've also seen a great deal of cockiness from the bulls over on the SPY board. I've haven't seen this sort of cockiness from the bulls in a long time. Thus, I strongly suspect that an Intermediate term top will be put in anywhere from current levels to about the 920-935 level. A push to that level this week would render the market fully overbought on all time frames. However, I'm not going to dogmatically assume the market will top at that level exactly. If I see a clear sign of exhaustion at whatever price, I will pull the trigger. I am never the type to say "if the price drops (rises) to $X I will buy (short)". That to me is being dogmatic and telling what the market to do. The question I ask myself is: "How exactly did the price get to that level?" "Was it is emotional or orderly? If you are picking tops or bottoms you better be careful if your price target is hit by an orderly type move because at tops or bottoms emotions climax and so you need to look for market action that conveys an emotional climax not an orderly move because an orderly move suggests a continuation of the trend. Sometimes you don't get that crescendo wave of panic buying or selling to mark a top or bottom and instead you get the apathetic type tops or bottoms. Those types of turning points can be identified by repeated failed attempts to make headway in the prevailing direction followed by a reversal day. There's no guarantee of course that turning points are made in the way I described...sometimes the starting point comes out of nowhere like how his rally began. It began with a gap up due to Citigroup saying it was "profitable" for the first 2 months of the year. The day prior to that there was no sign at all of a reversal. However, in my experience turning points are often made in the way I described above.
So, was today's action emotional? Yes...because it began with a gap up (emotional buying) in an already extended rally and ended with a panic flurry to the upside right near the end. However, given the market closed right at the highest point of the rally to date, there is no proof that the buyers have exhausted themselves. Thus any immediate pullback via a gap down tomorrow that doesn't get filled would indicate to me that the rally is not over yet.
The ST indicators I track are almost at maximum full overbought levels. Could we get a serious pullback here via a gap down? You bet your ass we could...just don't expect it to signal the end of the rally.
I will be looking to pull the trigger on some puts/bear etfs very shortly....I just need for Mr. Market to tip his hand.
Sunday, May 3, 2009
Quick update
I just took a look at a bunch of short term indicators and it's a wash for the most part....actually there's a slight edge in favor of the bears, but again, ultimately I believe we will see a bear capituation before we see this rally run out of steam for good.
I will continue to be patiently waiting for opportunities.
I will continue to be patiently waiting for opportunities.
Bears finally giving rally some respect....
Bears finally giving rally some respect....
I've been saying for a while that this rally won't end until the wrong way top picking bears become afraid to short fearing that the upside potential of the market is significant. Browsing the message boards over the weekend it looks like this is happening. These bears along with others are now warming up to the idea of the SPX making a run to the 200DMA, which is at about 963. I've also seen many mentions of SPX 1000 as a target. This is by no means a broad consensus yet but it's definitely a thesis that I see gaining a lot of momentum.
I've also seen some capitulation from shorts now that the SPX closed above the much watched 875 resistance level.
One particular short that has been posting for weeks how "bs" this rally is and who claims to have been loading up on shorts via FAZ calls all the way up said this on Friday:
Closed all my shorts today. In cash now. And day trading only. No projections until I see a clean break.
Given this change of heart combined with the signs of froth I mentioned, it would be wise now to be on the look out for an IT top within the next week or 2. Also, given that the close above 875 is only marginal there's still quite a few bag holding bears I'm sure who are on the bring on capitulation but haven't done so and therefore I think there will be one final push higher to about 890-900 to solidly convince any remaining hold out bears to give up and joining the "rally to the 200 DMA" camp. Once that happens we could very well see a swift sell off to 855 to shake out these weak bull converts. That would create maximum pain and frustration which I always believe the market seeks out to accomplish.
I've been saying for a while that this rally won't end until the wrong way top picking bears become afraid to short fearing that the upside potential of the market is significant. Browsing the message boards over the weekend it looks like this is happening. These bears along with others are now warming up to the idea of the SPX making a run to the 200DMA, which is at about 963. I've also seen many mentions of SPX 1000 as a target. This is by no means a broad consensus yet but it's definitely a thesis that I see gaining a lot of momentum.
I've also seen some capitulation from shorts now that the SPX closed above the much watched 875 resistance level.
One particular short that has been posting for weeks how "bs" this rally is and who claims to have been loading up on shorts via FAZ calls all the way up said this on Friday:
Closed all my shorts today. In cash now. And day trading only. No projections until I see a clean break.
Given this change of heart combined with the signs of froth I mentioned, it would be wise now to be on the look out for an IT top within the next week or 2. Also, given that the close above 875 is only marginal there's still quite a few bag holding bears I'm sure who are on the bring on capitulation but haven't done so and therefore I think there will be one final push higher to about 890-900 to solidly convince any remaining hold out bears to give up and joining the "rally to the 200 DMA" camp. Once that happens we could very well see a swift sell off to 855 to shake out these weak bull converts. That would create maximum pain and frustration which I always believe the market seeks out to accomplish.
Friday, May 1, 2009
Downshifting
OK I've said this before but this time I'm going to be true to my word...I will not be posting as much or as long in the comming weeks because I need to bare down on my CFA studies...it's crunch time. Blogging can be quite addictive but I find my true objective self is better discovered by posting my thoughts for all to see....although I think it's impossible to be 100% objective.
Chronic bearishness still exists
Today started what looked to have the makings for a bear capitulation but instead gains were wiped out and the market closed essentially flat for the day. The last time we got a reversal day I mentioned how bears got so euphoric...as if the market had crashed. I speculated it would end up being a bear trap and I was right. This time around I noticed a similar sense of euphoria...and anger. I noticed a post on the yahoo SPY message board that went something like "take that you f$%king bastard PPT". Egos and wallets have been badly damaged and these frustrations are manifesting themselves with rage. This is a losing battle and such a waste of energy not to mention a sure way to financial ruin. The 5 stages of grief are 1) denial 2) anger 3) bargaining 4) depression and 5) acceptance. I suspect for the bulk of the retail herd who has been bearish, they are at the anger stage. Some are at the bargaining stage whereby they promise to "better listen" to the market but I suspect their bearish bias will lead them into stage 4 eventually and then stage 5. A lot of traders/investors skip stage 3 all together and go right to 4 and 5. And a lot of traders remain is stage 2 permanently.
Arguing with the market, swearing at your screen, blaming the PPT or whoever for your losses isn’t going to solve anything. If the market is so "rigged" or "manipulated" and if people are so convinced the "PPT" is going to do whatever it takes to keep the market rising, why for the life of me, don't these conspiracy believers act on this by going long the market and make money? Nope. They only want to make money on their bearish beliefs because to join the long side would mean to admit that they had it wrong and/or it would be "unintelligent" to do such a thing.
The sooner you check your ego at the door the better. The market will humble you very quickly if you equate your intelligence with your ability to make money in the market. Sometimes the lunatics run the asylm like they did in 1999 and early 2000 and throughout the many bear market rallies afterwards. In fact, you can call 2003-2007 one huge bear market rally. There were several bears who were correct about the shakey foundaations of the economy during that run and presented several well researched and logical arguements. They were dead right....and they were dead broke before they had a chance to profit from it because they started shorting the market in 2004 and 2005 which was too early. They didn't listen to the market which was saying "not yet".
This doesn't mean you shouldn't have an opinion and just blindly follow the direction of the market, but it does mean that you aren't as good as you think you are and even if your opinion is right, the market may not just realize it yet and it's better for you to either step aside and wait for signs that the market is starting to confirm your belief or better yet, go with the flow and hop along for the ride. What's so bad about making money on a "bs rally"? There is no bullshit about the money you lose betting against it. This is going to be hard lesson many of the newbie bears will learn or I should say are learning already.
Anyhow, back to the markets...I mentioned the tendency for a post-fed day hangover, which typically erases any gains made on fed day very shortly afterwards. That means it's likely that we could see the market drop by at least 1.5% from current levels by the end of tomorrow or Monday. But I gotta say, there is just as good a chance that the market makes that capitulatory upside surge to about 890-900 cleaning out all of the bag holding bears still in the market. The fact that the market did not punch through the 875 resistance level and hold is giving comfort to the bears. The next assault might very well stick though.
Sentiment as measured by II and AAII shows once again bears outnumbering bulls. There is certainly chronic bearishness out there amongst investors. I guess this is what you can expect after going through such a brutal series of declines for several months. Thus, given the chronic bearishness out there, no matter how much of a pullback we get it is likely that the rally has not seen it's highest point yet.
I continue to just watch from the sidelines for the moment...
Arguing with the market, swearing at your screen, blaming the PPT or whoever for your losses isn’t going to solve anything. If the market is so "rigged" or "manipulated" and if people are so convinced the "PPT" is going to do whatever it takes to keep the market rising, why for the life of me, don't these conspiracy believers act on this by going long the market and make money? Nope. They only want to make money on their bearish beliefs because to join the long side would mean to admit that they had it wrong and/or it would be "unintelligent" to do such a thing.
The sooner you check your ego at the door the better. The market will humble you very quickly if you equate your intelligence with your ability to make money in the market. Sometimes the lunatics run the asylm like they did in 1999 and early 2000 and throughout the many bear market rallies afterwards. In fact, you can call 2003-2007 one huge bear market rally. There were several bears who were correct about the shakey foundaations of the economy during that run and presented several well researched and logical arguements. They were dead right....and they were dead broke before they had a chance to profit from it because they started shorting the market in 2004 and 2005 which was too early. They didn't listen to the market which was saying "not yet".
This doesn't mean you shouldn't have an opinion and just blindly follow the direction of the market, but it does mean that you aren't as good as you think you are and even if your opinion is right, the market may not just realize it yet and it's better for you to either step aside and wait for signs that the market is starting to confirm your belief or better yet, go with the flow and hop along for the ride. What's so bad about making money on a "bs rally"? There is no bullshit about the money you lose betting against it. This is going to be hard lesson many of the newbie bears will learn or I should say are learning already.
Anyhow, back to the markets...I mentioned the tendency for a post-fed day hangover, which typically erases any gains made on fed day very shortly afterwards. That means it's likely that we could see the market drop by at least 1.5% from current levels by the end of tomorrow or Monday. But I gotta say, there is just as good a chance that the market makes that capitulatory upside surge to about 890-900 cleaning out all of the bag holding bears still in the market. The fact that the market did not punch through the 875 resistance level and hold is giving comfort to the bears. The next assault might very well stick though.
Sentiment as measured by II and AAII shows once again bears outnumbering bulls. There is certainly chronic bearishness out there amongst investors. I guess this is what you can expect after going through such a brutal series of declines for several months. Thus, given the chronic bearishness out there, no matter how much of a pullback we get it is likely that the rally has not seen it's highest point yet.
I continue to just watch from the sidelines for the moment...
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