Friday, June 26, 2009
downside trade looks a bit crowded today
I did call for a down day today but the trade appears somewhat crowded given the high put/call ratio so far. The longer the market meanders at only marginal weakness, the greater the chance for a squeeze higher as bear traders get nervous in addition to not wanting to hold over the weekend. Once again the fickleness of traders is quite evident. They are like dogs who keep chasing their own tail.
Traders getting whipsawed.....downside likely tommorow
This market is chewing up traders and spitting them out. Today's surge caught a lot of people off guard. There was no real solid explanation for it...the most likely one is simply that too many people went short when the market broke 900 earlier this week on the SPX and they scrambled to cover when it went back above it. As I said before, you will get murdered if you chase breakouts/breakdowns. Buying dips, shorting rips is the way to go. The market is now overbought on a short term basis again and the fickleness of traders is evident as now the NASDAQ/NYSE volume ratio is back to 2 which is bearish again for the market. Keep in mind this is all short term stuff here. The VIX is now at 26 making a new low even though the market is at a lower high. This is a bearish divergence signaling complaceny.
I believe the market will pullback tommorow....in fact, bears have an opportunity to do some damage for the next couple of days. Be careful though because as I said, traders have been quite fickle....on a very short term basis they are going from exessive greed to fear and vice versa from one day to the next.
I believe the market will pullback tommorow....in fact, bears have an opportunity to do some damage for the next couple of days. Be careful though because as I said, traders have been quite fickle....on a very short term basis they are going from exessive greed to fear and vice versa from one day to the next.
Thursday, June 25, 2009
A split in sentiment....danger for Chinese stocks
Something quite unusual has happened. The most recent American Association of Individual Investors survey is showing 28% Bulls and 49% Bears which has solid bullish implications for the market. However Investor's Intelligence sentiment is showing 44% bulls and 27% bears which is almost the exact opposite and hence has bearish implications. So which message should you listen too? The answer could be both. AAII sentiment tends to be much more fickle than II sentiment and tends to be more useful for short term market timing whereas II is more for intermediate term timing. Therefore, the conclusions drawn here are that the market looks bullish in the shorter term (1-2 weeks) bearish in the intermediate term i.e. any gains from here will be limited. …SPX 940 is doable. This fits with a host of other indicators I track.
I believe that the damage done to the market last year and early this year has created a recalability trap in traders which is a fancy way of saying that they are being unduly influenced by their bad experiences in the market. Anytime the market has a dip they think that it's going to be the start of another 20-30% drop. Until enough people drop their guard I doubt the market is going to see such a drop. Traders behaved this way after the rebound from the 911 crash and it took a 3 month rally and 3 months of topping before the final downleg ensued. By then most bears were too crippled to take advantage or they covered shorts far too early after getting repeatidly punished going for the kill in the months prior.
Another warning sign I've noticed pertains to Chinese stocks. On BNN (the Canadian equivalent to CNBC) there's a commercial running for a website that researches Chinese stocks. Last year around this time they had commercials running for Potash companies with the catch phase "feed the world". A major top for potash and commodities stocks followed shortly. I'm not suggesting you bet your house on shorting Chinese stocks just because of this one commercial, however, when you combine this contrarian indicator with the more powerful contrarian indicator of massive inflows into emerging market funds which are at levels that match those seen at the major top in that sector that occurred in 2007 you get a much stonger confirmation that a top is immanent. I also find that the financial media and it's pundits all seem to be saying that if you want exposure to equities go with emerging markets because they offer the most growth potential and they should lead the recovery.
Therefore, as per the contrary indicators I mentioned and the motto of this site, I think the message is clear....emerging markets are dangerous right now at least for the medium term. In fact, they may have already peaked.
Bottom line....look for rising markets in the short term (1-2 week time frame) but I say this tentatively because danger lurks in the intermediate term. We could very well be forming another major top here but that top could be several months in the making and it could be as long as September-October before the top is complete. All in all, it looks as if the summer doldrums have arrived.
I believe that the damage done to the market last year and early this year has created a recalability trap in traders which is a fancy way of saying that they are being unduly influenced by their bad experiences in the market. Anytime the market has a dip they think that it's going to be the start of another 20-30% drop. Until enough people drop their guard I doubt the market is going to see such a drop. Traders behaved this way after the rebound from the 911 crash and it took a 3 month rally and 3 months of topping before the final downleg ensued. By then most bears were too crippled to take advantage or they covered shorts far too early after getting repeatidly punished going for the kill in the months prior.
Another warning sign I've noticed pertains to Chinese stocks. On BNN (the Canadian equivalent to CNBC) there's a commercial running for a website that researches Chinese stocks. Last year around this time they had commercials running for Potash companies with the catch phase "feed the world". A major top for potash and commodities stocks followed shortly. I'm not suggesting you bet your house on shorting Chinese stocks just because of this one commercial, however, when you combine this contrarian indicator with the more powerful contrarian indicator of massive inflows into emerging market funds which are at levels that match those seen at the major top in that sector that occurred in 2007 you get a much stonger confirmation that a top is immanent. I also find that the financial media and it's pundits all seem to be saying that if you want exposure to equities go with emerging markets because they offer the most growth potential and they should lead the recovery.
Therefore, as per the contrary indicators I mentioned and the motto of this site, I think the message is clear....emerging markets are dangerous right now at least for the medium term. In fact, they may have already peaked.
Bottom line....look for rising markets in the short term (1-2 week time frame) but I say this tentatively because danger lurks in the intermediate term. We could very well be forming another major top here but that top could be several months in the making and it could be as long as September-October before the top is complete. All in all, it looks as if the summer doldrums have arrived.
Monday, June 22, 2009
World Bank brings down markets
The catalyst for today's smackdown was World Bank's downgrade in their economic outlook. This was the excuse the market needed to go down....it was a weak excuse but it doesn't matter. I believe had they not came out with this announcement some other catalyst would have eventually caused the market to drop. I recall the day when the market bounced off the November bottom. The reason for the massive rally that day was the announcement that Geithner was going to be appointed by Obama....which wasn't really suprising news nor meaningful from an economic standpoint but it didn't matter because the market was heavily oversold and shorts had their finger nervously on the buy button waiting for any reason to cover and protect protect profits. Ultimatley that rally failed.
The market was showing signs that it wanted to correct as I had stated about 2 weeks ago. When a market wants to correct or rally...it often needs any flimsy excuse to do so.
I was unsure of the exact timing of this latest peak in the market and I felt there was still a possiblity of one last move higher but I did warn about a correction of at least 5-7% was comming. So now that we got it, now what? Notice how once again the downside action was acomplished via a big gap down and flatline type day. This is the second time we've seen this since the market made it's peak in early June. This is still indicative of nervous profit taking behavior similar to what the shorts quite often did last year (with the markets often showing the gap up and flatline type action).
Therefore, I believe we are not about to embark on a new bear market downleg at this time. This is simply a correction in IMO.
Recall how I warned about the NASDAQ/NYSE volume ratio which was showing signs of froth. That ratio plummeted today to 1.43 which is approaching the opposite extreme.
The VIX got a good pop today and the bears are dancing in the streets congratulating themselves.
After today's action I find that the wall of worry is being rebuilt very quickly. I don't believe we will blast off to new highs anytime soon however...there will probably be sideways action for a few weeks.
If this market is going back to bear mode, I doubt it's going to occur so predictably like this. More than likely, we will see several false breakdowns and subsequent sharp rallies to shake off most of the traders who I believe still haven't capitulated from their perma bear mentality.
There will likely be a bounce attempt tommorow morning...be careful though playing bounces because the IT trend has now turned down and so they can fizzle quickly just like the last one did. Don't chase....buy/scale into weakness.
The market was showing signs that it wanted to correct as I had stated about 2 weeks ago. When a market wants to correct or rally...it often needs any flimsy excuse to do so.
I was unsure of the exact timing of this latest peak in the market and I felt there was still a possiblity of one last move higher but I did warn about a correction of at least 5-7% was comming. So now that we got it, now what? Notice how once again the downside action was acomplished via a big gap down and flatline type day. This is the second time we've seen this since the market made it's peak in early June. This is still indicative of nervous profit taking behavior similar to what the shorts quite often did last year (with the markets often showing the gap up and flatline type action).
Therefore, I believe we are not about to embark on a new bear market downleg at this time. This is simply a correction in IMO.
Recall how I warned about the NASDAQ/NYSE volume ratio which was showing signs of froth. That ratio plummeted today to 1.43 which is approaching the opposite extreme.
The VIX got a good pop today and the bears are dancing in the streets congratulating themselves.
After today's action I find that the wall of worry is being rebuilt very quickly. I don't believe we will blast off to new highs anytime soon however...there will probably be sideways action for a few weeks.
If this market is going back to bear mode, I doubt it's going to occur so predictably like this. More than likely, we will see several false breakdowns and subsequent sharp rallies to shake off most of the traders who I believe still haven't capitulated from their perma bear mentality.
There will likely be a bounce attempt tommorow morning...be careful though playing bounces because the IT trend has now turned down and so they can fizzle quickly just like the last one did. Don't chase....buy/scale into weakness.
Sunday, June 21, 2009
Short term it's a coin flip
I have no strong inclination as to where the market goes in the next couple of days but I do believe that any upside from here will be limited. There's an open gap to fill at about S&P 940 so a move to there would not suprise me but that would likely make for a good shorting opportunity.
Intermediate Term Bearish....Longer term Bullish
I've laid out the bear case here but this is an Intermediate term concern. Longer term, the conditions for the market from a sentiment perpective is pretty solid.
I read an article today in the National Post about how the recession has been widely recognized by pop culture and incorporated into TV shows and movies. For example, a Simpson's episode aired in March whereby Homer lost his home due to a foreclosure after he took a home equity line of credit to throw a mardi gras party. I also recall earlier in the year a CSI episode whereby they mentioned the "market meltdown” and an episode on the show House whereby one of the characters lost his shirt investing in a hedge fund. In addition to that, I also remember economic and stock market related jokes being used big time with the late night talk show hosts late last year. 2 months ago SNL did a skit which featured Roubini! Thus, without a doubt, the main street public and the non-financial media has become fully aware and fully embraced all of the negative news of the stock market and the economy last year.
History has shown that by the time the non-investment public i.e. the dumbest of the dumb money, realize a trend in the market that trend has very likely run it's course or is about to.
The movie "boiler room" came out in 2000. Near the beginning of the movie the main character mentioned his desire to get rich quick and mentioned how people did so with internet stocks. I also remember a line in the 2000 movie "meet the parents" whereby the character played by Owen Wilson mentioned how he made a fortune in internet IPOs. I also remember right near the July 2002 lows how Jay Leno was using stock market related jokes.
To further confirm positive long term sentiment foundations for the market consumer confidence levels are rising from historic low levels and the underlying tone of the market is one of cautiousness. Government authorities from around the world are saying that the economy may have bottomed but say don't expect a sharp rebound. Another popular notion is that the economy is now in a "new normal" due to the deleveraging that has and will continue to take place and in this "new normal" we can only expect modest growth at best for many years to come. This kind of sounds like the inverse of the "new era" argument that was popular in the late 1990's which claimed we would have above average levels of growth as far as the eye can see due to the internet and technology revolutions....we all know how that turned out.
Look, I'm not saying that none of the bear arguments hold water.....I'm a believer in many of them....but none of what the bears warn about has to necessarily play out in the near future....Rome did not fall over a period of 2 years. It could be years or even decades before we see the "end game" of what the bears warn about. Since the mid 1990's bears have been crying wolf and have lost their ass so far betting on their beliefs. Could you have withstood 15 years of losses waiting for the end of the world to come? No chance. Most would have gone broke or capitulated by now.
What I see now from the retail trading community is an underlying tone of chronic bearishness. Just look at the message boards and blogs. Sure, there's more bulls out there that in prior months and there's signs of froth out there as per my bearish IT outlook but there's still tons of bears out there and I find that so many traders and just waiting to profit from the next downleg in the bear market. This whole notion of "green shoots" is, I find, being scoffed at by most people. People are complaining that less bad isn't good enough and that the market rallying on this is bs. I ask these people this....do you expect us to go from depression to boom overnight? It only makes sense for things to go from terrible to less terrible to modest recovery and then boom.
But I ask myself, maybe the perma bears are right....maybe you can't look at this skepticism as a contrary indicator because it's just so obvious that this bounce in the economy is "bs" as they say it.... maybe this is just a stimulus induced sugar rush the economy is enjoying....I'm not dismissing that but I got to tell you, the underlying bearish/cautious sentiment I see out there puts the market in a position to rise longer term as people grow from skeptical to cautiously optimistic to optimistic and then euphoric. The late John Templeton said: "bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria"
And you know what? If I’m totally wrong about everything I said, I won’t give a rat’s ass. My ego will not be damaged in the least and hopefully I will be able to recognize it and adapt quickly. The sooner people learn to do this the better they will be at making money in the markets.
I read an article today in the National Post about how the recession has been widely recognized by pop culture and incorporated into TV shows and movies. For example, a Simpson's episode aired in March whereby Homer lost his home due to a foreclosure after he took a home equity line of credit to throw a mardi gras party. I also recall earlier in the year a CSI episode whereby they mentioned the "market meltdown” and an episode on the show House whereby one of the characters lost his shirt investing in a hedge fund. In addition to that, I also remember economic and stock market related jokes being used big time with the late night talk show hosts late last year. 2 months ago SNL did a skit which featured Roubini! Thus, without a doubt, the main street public and the non-financial media has become fully aware and fully embraced all of the negative news of the stock market and the economy last year.
History has shown that by the time the non-investment public i.e. the dumbest of the dumb money, realize a trend in the market that trend has very likely run it's course or is about to.
The movie "boiler room" came out in 2000. Near the beginning of the movie the main character mentioned his desire to get rich quick and mentioned how people did so with internet stocks. I also remember a line in the 2000 movie "meet the parents" whereby the character played by Owen Wilson mentioned how he made a fortune in internet IPOs. I also remember right near the July 2002 lows how Jay Leno was using stock market related jokes.
To further confirm positive long term sentiment foundations for the market consumer confidence levels are rising from historic low levels and the underlying tone of the market is one of cautiousness. Government authorities from around the world are saying that the economy may have bottomed but say don't expect a sharp rebound. Another popular notion is that the economy is now in a "new normal" due to the deleveraging that has and will continue to take place and in this "new normal" we can only expect modest growth at best for many years to come. This kind of sounds like the inverse of the "new era" argument that was popular in the late 1990's which claimed we would have above average levels of growth as far as the eye can see due to the internet and technology revolutions....we all know how that turned out.
Look, I'm not saying that none of the bear arguments hold water.....I'm a believer in many of them....but none of what the bears warn about has to necessarily play out in the near future....Rome did not fall over a period of 2 years. It could be years or even decades before we see the "end game" of what the bears warn about. Since the mid 1990's bears have been crying wolf and have lost their ass so far betting on their beliefs. Could you have withstood 15 years of losses waiting for the end of the world to come? No chance. Most would have gone broke or capitulated by now.
What I see now from the retail trading community is an underlying tone of chronic bearishness. Just look at the message boards and blogs. Sure, there's more bulls out there that in prior months and there's signs of froth out there as per my bearish IT outlook but there's still tons of bears out there and I find that so many traders and just waiting to profit from the next downleg in the bear market. This whole notion of "green shoots" is, I find, being scoffed at by most people. People are complaining that less bad isn't good enough and that the market rallying on this is bs. I ask these people this....do you expect us to go from depression to boom overnight? It only makes sense for things to go from terrible to less terrible to modest recovery and then boom.
But I ask myself, maybe the perma bears are right....maybe you can't look at this skepticism as a contrary indicator because it's just so obvious that this bounce in the economy is "bs" as they say it.... maybe this is just a stimulus induced sugar rush the economy is enjoying....I'm not dismissing that but I got to tell you, the underlying bearish/cautious sentiment I see out there puts the market in a position to rise longer term as people grow from skeptical to cautiously optimistic to optimistic and then euphoric. The late John Templeton said: "bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria"
And you know what? If I’m totally wrong about everything I said, I won’t give a rat’s ass. My ego will not be damaged in the least and hopefully I will be able to recognize it and adapt quickly. The sooner people learn to do this the better they will be at making money in the markets.
Friday, June 19, 2009
Ridiculously high put/call ratio so far this morning
it's at 1.3! Usually you see these readings when the market is in a free fall. In the face of strength like today this is actually supportive for the market. Therefore, I'm backing off my 1 day bear spec trade for now because the trade appears far too crowded. Ya, I know it's tripple witching which may cause some distortions in any p/c ratios but I can only go by what I see not guess what "may be" the case.
I'll be watching for changes in this
I'll be watching for changes in this
Thursday, June 18, 2009
OK, we are getting the snapback but I don't think correction is done yet
Bears were celebrating again last night, once again acting as if market crashed back to the lows. Practically every time they do this Mr. Market slaps them across the face the next day. I've said this before and I'll say it again....don't count on sustainable downside (i.e. a new bear market down leg) until these burned bears show some humility. I noticed FAZ once again regained it’s number 1 spot on the top ticker list last night on stocktwits....it didn't take long to rekindle that abusive love affair did it?
Even if the market has in fact peaked it could very well be the case that a trading range top building process similar to December 2001 - mid March 2002 will occur. In this case, the market was coming off a 3 month rally and then during this period the market was building a major top but there was a ton of bear whipsawing which by the time it was over, had shaken out and demoralized most bears before that brutal April-July down leg ensued.
SPX from Sept 17/2001 - March 31 2002
Prior to this latest sell-off I had pointed out signs of bear demoralization. I said bears were getting weeded out, FAZ was no longer the top ticker on stocktwits and those bears that remained were at the point of maximum frustration. But you can see that all it took was for the market to drop 5% to give these guys some hope and trigger euphoria again and so it doesn't appear as if bears are demoralized enough IMO....but it's getting there. Like with torture, everyone has a breaking point.
Despite my bear bashing there are good reasons to expect further downside in the days ahead as I had pointed out last week in my IT top warning post. But I can't stress this enough....you must be very careful in picking your spots. Chasing breakouts and breakdowns will likely lead to pain...you must buy the dip or sell the rip. More than ever, this market is being driven by emotions and trigger happy traders. I believe the proliferations of these 2X and 3x leveraged ETFs are contributing to it. It's getting to the point where the tail wags the dog with these things and I've already heard rumblings about regulators possibly banning these things. I sure hope they don't.
If today's rally holds at around these levels. I'm considering playing a 1 day bearish option spec trade such as SRS calls. I had success last month doing this and market conditions were similar.
Even if the market has in fact peaked it could very well be the case that a trading range top building process similar to December 2001 - mid March 2002 will occur. In this case, the market was coming off a 3 month rally and then during this period the market was building a major top but there was a ton of bear whipsawing which by the time it was over, had shaken out and demoralized most bears before that brutal April-July down leg ensued.
SPX from Sept 17/2001 - March 31 2002
Prior to this latest sell-off I had pointed out signs of bear demoralization. I said bears were getting weeded out, FAZ was no longer the top ticker on stocktwits and those bears that remained were at the point of maximum frustration. But you can see that all it took was for the market to drop 5% to give these guys some hope and trigger euphoria again and so it doesn't appear as if bears are demoralized enough IMO....but it's getting there. Like with torture, everyone has a breaking point.
Despite my bear bashing there are good reasons to expect further downside in the days ahead as I had pointed out last week in my IT top warning post. But I can't stress this enough....you must be very careful in picking your spots. Chasing breakouts and breakdowns will likely lead to pain...you must buy the dip or sell the rip. More than ever, this market is being driven by emotions and trigger happy traders. I believe the proliferations of these 2X and 3x leveraged ETFs are contributing to it. It's getting to the point where the tail wags the dog with these things and I've already heard rumblings about regulators possibly banning these things. I sure hope they don't.
If today's rally holds at around these levels. I'm considering playing a 1 day bearish option spec trade such as SRS calls. I had success last month doing this and market conditions were similar.
Wednesday, June 17, 2009
Snapback comming?
Markets are well oversold in the ST now to see a snapback. There's an unfilled gap just below at about 1775 on the NASDAQ that could get filled first though so beware. If markets bounce before filling that gap I'd be skeptical of it lasting for more than a 1 day.
One postive thing I've noticed is that the VIX is still jumpy anytime the market drops. That indicates that traders are not getting complacent. At previous times the market rolled over from an IT top that led to severe downside, the VIX would not go up much on weakness but would drop rather easily on stength.
In these situations whereby the market is ST oversold but red-lining IT wise, its best to be very, very selective about playing any bounces because what often happens is that any ST oversold condition doesn't provide much traction for a bounce....it simply gets more oversold or after a brief bounce gets oversold again as new lows ensue. Therefore when in doubt, stay out and wait for the premium play. Going short at this point is too late unless obvioulsy you have a longer term horizon and believe the market will re-test its lows in the comming months.
One postive thing I've noticed is that the VIX is still jumpy anytime the market drops. That indicates that traders are not getting complacent. At previous times the market rolled over from an IT top that led to severe downside, the VIX would not go up much on weakness but would drop rather easily on stength.
In these situations whereby the market is ST oversold but red-lining IT wise, its best to be very, very selective about playing any bounces because what often happens is that any ST oversold condition doesn't provide much traction for a bounce....it simply gets more oversold or after a brief bounce gets oversold again as new lows ensue. Therefore when in doubt, stay out and wait for the premium play. Going short at this point is too late unless obvioulsy you have a longer term horizon and believe the market will re-test its lows in the comming months.
Tuesday, June 16, 2009
Yet another gap down and flatline day....burned bears acting differently now
I've mentioned ad nauseum that this type of action is corrective, not indicative of a trend change. Recall how we saw the opposite type of action occur last year whereby we would get these gap up and flat line days whenever there was some sort of bailout, emergency rate cut, ect.
But something potentially quite ominous occurred today. The Ratio of NASDAQ vs. NYSE volume actually spiked today from already high levels to 2.4. Recall how I mentioned that this is a contrary indicator signaling the ratio of speculation seeking behavior to safety seeking behavior. I mentioned last week this ratio was already quite high but now this ratio is right were it was when the bull market peaked in October 2007. Unfortunately I'm unable to copy and paste the chart. This ratio has been pretty good in identifying IT tops and bottoms when at extremes and there's no doubt about it now that it's at an extreme.
I've also noticed some of the burned FAZ bag holders on stocktwits used this opportunity today to sell off some of their FAZ for big losses (as they admitted to doing). FAZ is also dropping on the top tickers list like I mentioned before. From experience I've noticed that when people sell off a dog they've had for quite some time after it gets a decent pop, it usually ends up being the wrong decision....sometimes not initially but eventually. We saw this happen when investors sold into the initial rally in March (and now of course after the market rallies 35% we've seen mutual fund inflows come back in a big way). It's quite common to see retail investors dump a dog they've owned the first rally of a trend change. I suppose they don't feel as bad about themselves knowing that they sold into strength.
The economic news was disappointing today, in particular the NAHB housing index which came in at 15. It was at 16 last month and 14 the month before. These readings are still very low historically and although they may have bottomed in November they aren't bouncing in a meaningful way. I was actually expecting to see a further rise in this number but didn't which made me stay on the sidelines.
Are we just seeing an economic dead cat bounce here that has ran its course or is it too soon to tell? I really don't care. I'll take my cue from the market and the expectations of investors/traders (i.e. fading them).
Evidence that we are close to or already made an IT top continues to build but right now the market is oversold enough on a ST basis to bounce so beware. It's always tough to play the market when it's IT overbought but ST oversold. Pick your spots and be careful out there.....I’m not so sure what I’m going to do just yet. It’s likely today’s gap will get filled….I just don't have a good handle on whether if it will be lower prices first.
But something potentially quite ominous occurred today. The Ratio of NASDAQ vs. NYSE volume actually spiked today from already high levels to 2.4. Recall how I mentioned that this is a contrary indicator signaling the ratio of speculation seeking behavior to safety seeking behavior. I mentioned last week this ratio was already quite high but now this ratio is right were it was when the bull market peaked in October 2007. Unfortunately I'm unable to copy and paste the chart. This ratio has been pretty good in identifying IT tops and bottoms when at extremes and there's no doubt about it now that it's at an extreme.
I've also noticed some of the burned FAZ bag holders on stocktwits used this opportunity today to sell off some of their FAZ for big losses (as they admitted to doing). FAZ is also dropping on the top tickers list like I mentioned before. From experience I've noticed that when people sell off a dog they've had for quite some time after it gets a decent pop, it usually ends up being the wrong decision....sometimes not initially but eventually. We saw this happen when investors sold into the initial rally in March (and now of course after the market rallies 35% we've seen mutual fund inflows come back in a big way). It's quite common to see retail investors dump a dog they've owned the first rally of a trend change. I suppose they don't feel as bad about themselves knowing that they sold into strength.
The economic news was disappointing today, in particular the NAHB housing index which came in at 15. It was at 16 last month and 14 the month before. These readings are still very low historically and although they may have bottomed in November they aren't bouncing in a meaningful way. I was actually expecting to see a further rise in this number but didn't which made me stay on the sidelines.
Are we just seeing an economic dead cat bounce here that has ran its course or is it too soon to tell? I really don't care. I'll take my cue from the market and the expectations of investors/traders (i.e. fading them).
Evidence that we are close to or already made an IT top continues to build but right now the market is oversold enough on a ST basis to bounce so beware. It's always tough to play the market when it's IT overbought but ST oversold. Pick your spots and be careful out there.....I’m not so sure what I’m going to do just yet. It’s likely today’s gap will get filled….I just don't have a good handle on whether if it will be lower prices first.
Saturday, June 13, 2009
Speculation as a Fine Art
I read a little book online from Dickson G Watts titled "Speculation as a Fine Art"
In it he describes the successful traits of a speculator and rules to use. I agree with pretty much everything he says. He claims that speculation is a venture based upon calculation, gambling is without calculation or very little of it. Most traders I see out there are gamblers.
Essential Qualities of a Speculator
1) Self Reliance - you must think for yourself
2) Judgment - ability to assess conditions
3) Courage - confidence to act on the decisions of the mind
4) Prudence - ability to measure danger with a certain alertness/watchfulness.
(I would also add ability to be patient for premium opportunities)
5) Pliability - ability to change an opinion.
He notes that there must be a well balanced combination of the above traits to ensure success, for if you lack one trait or have too much in another it will impede it. I would also add that it takes time to develop these traits. Judgment for example can only be honed with experience and must be without bias. If you haven't traded throughout a complete bull and bear cycle your ability to judge conditions is limited. Courage, prudence and pliability require you to battle yourself not only your biases but your ego. For example, if you do everything right but still lose money on a trade, will your ego be damaged to the point where you lose courage? On the flip side, when you make a profitable trade will your ego be inflated such that you lose prudence? I think Spok or Data from Star Trek could have made for excellent traders due to their non-existent emotional states of mind.
I consider myself a speculator. Trying to obtain the perfect balance of the above 5 traits is something I wrestle with everyday. My weakness is that I have too much prudence and not enough courage.
I also strongly believe that markets are not always efficient which makes speculation very lucrative. At times the market will correctly anticipate the future...other times incorrectly so. The markets are composed of humans and humans by nature are flawed and even if they weren't there is no way the market can always be right about the future because the future is always uncertain...probabilities can be assigned to various outcomes but they are in end probabilities...not certainties.
If markets are efficient how can you explain all of the manias and panics that have occurred all throughout history? How can an efficient market ever have allowed the dot com mania to have happened? Herd behavior and anchoring are probably the two largest contributors to inefficient markets....and thank God for that because if markets were efficient they would be very boring and non-exploitive.
In it he describes the successful traits of a speculator and rules to use. I agree with pretty much everything he says. He claims that speculation is a venture based upon calculation, gambling is without calculation or very little of it. Most traders I see out there are gamblers.
Essential Qualities of a Speculator
1) Self Reliance - you must think for yourself
2) Judgment - ability to assess conditions
3) Courage - confidence to act on the decisions of the mind
4) Prudence - ability to measure danger with a certain alertness/watchfulness.
(I would also add ability to be patient for premium opportunities)
5) Pliability - ability to change an opinion.
He notes that there must be a well balanced combination of the above traits to ensure success, for if you lack one trait or have too much in another it will impede it. I would also add that it takes time to develop these traits. Judgment for example can only be honed with experience and must be without bias. If you haven't traded throughout a complete bull and bear cycle your ability to judge conditions is limited. Courage, prudence and pliability require you to battle yourself not only your biases but your ego. For example, if you do everything right but still lose money on a trade, will your ego be damaged to the point where you lose courage? On the flip side, when you make a profitable trade will your ego be inflated such that you lose prudence? I think Spok or Data from Star Trek could have made for excellent traders due to their non-existent emotional states of mind.
I consider myself a speculator. Trying to obtain the perfect balance of the above 5 traits is something I wrestle with everyday. My weakness is that I have too much prudence and not enough courage.
I also strongly believe that markets are not always efficient which makes speculation very lucrative. At times the market will correctly anticipate the future...other times incorrectly so. The markets are composed of humans and humans by nature are flawed and even if they weren't there is no way the market can always be right about the future because the future is always uncertain...probabilities can be assigned to various outcomes but they are in end probabilities...not certainties.
If markets are efficient how can you explain all of the manias and panics that have occurred all throughout history? How can an efficient market ever have allowed the dot com mania to have happened? Herd behavior and anchoring are probably the two largest contributors to inefficient markets....and thank God for that because if markets were efficient they would be very boring and non-exploitive.
It's quite obvious the market is setting up for a break one way or the other
and despite all the warnings I mentioned I think it will be up. Why? Market action says so. I mentioned this before a few times. Take today for example. Notice how the market just simply gapped down and chopped around near the lows of the day and then recovered. This sort of action in the midst of a general market rise is indicative of wall of worry type behavior. For the most part, the market has behaved this way. The odd time when it didn't and signs of froth emerged, the market retreated shortly after nipping it at the bud.
I always pay attention to how the market moves thougout the day, not just the final result. Take for example 2 different days where the Dow closes up 150 points on each day. On one of the days the Dow gaped up 250 points and then fades throughout the day for 100 points. On the other day the Dow opened down 50 points and then reversed course climbing steadily but surely with a close near the highest point of the day. Those are two very different days but with the same end result. The former is an emotionally charged move that typically gets reversed in short time (which tend to occur in bear markets) and the latter is a healthy "climbing the wall of worry" type move that tend to occur in bull runs or extended bear rallies.
When I see market action like today, without any knowledge of sentiment, fundamentals, ect, I would classify it as healthy "wall of worry/profit taking behavior". But obviously context matters and for the reasons I pointed out before, although this action appears "healthy", medium term indicators are showing "unhealthy" signs. So, I'm more than open to the notion that the market yet again makes another push higher here (it seems like I've been saying this forever) but I have my guard up knowing that IT indicators are red-lined here and the end may be near for this rally. Next week provides an opportunity to use cheap options to speculate on an upside or downside breakout. Should be interesting.
What could give us full capitulation from both bears and under invested longs? How about a positive quarter of GDP? That might do it....perhaps that's what the market is sensing here....some sort of big headline bullish news that sends the message loud and clear that Armagedon is not comming. But then again, bears may just find some excuse to dismiss any type of positive news. I've seen perma-bear mentality manifest itself in the previous cycle....every positive data point was dismissed as "temporary" or "manipulation" and they fought the recovery all the way up for 5 years. That's ego for you folks.
I always pay attention to how the market moves thougout the day, not just the final result. Take for example 2 different days where the Dow closes up 150 points on each day. On one of the days the Dow gaped up 250 points and then fades throughout the day for 100 points. On the other day the Dow opened down 50 points and then reversed course climbing steadily but surely with a close near the highest point of the day. Those are two very different days but with the same end result. The former is an emotionally charged move that typically gets reversed in short time (which tend to occur in bear markets) and the latter is a healthy "climbing the wall of worry" type move that tend to occur in bull runs or extended bear rallies.
When I see market action like today, without any knowledge of sentiment, fundamentals, ect, I would classify it as healthy "wall of worry/profit taking behavior". But obviously context matters and for the reasons I pointed out before, although this action appears "healthy", medium term indicators are showing "unhealthy" signs. So, I'm more than open to the notion that the market yet again makes another push higher here (it seems like I've been saying this forever) but I have my guard up knowing that IT indicators are red-lined here and the end may be near for this rally. Next week provides an opportunity to use cheap options to speculate on an upside or downside breakout. Should be interesting.
What could give us full capitulation from both bears and under invested longs? How about a positive quarter of GDP? That might do it....perhaps that's what the market is sensing here....some sort of big headline bullish news that sends the message loud and clear that Armagedon is not comming. But then again, bears may just find some excuse to dismiss any type of positive news. I've seen perma-bear mentality manifest itself in the previous cycle....every positive data point was dismissed as "temporary" or "manipulation" and they fought the recovery all the way up for 5 years. That's ego for you folks.
Friday, June 12, 2009
What that the false break out today? hmmmm....I'm not sure
why not? Because although we broke 950 we did not close above it. I don't know what to think about this because I don't think today resutled in the bear capitulation I talked about. Anyhow, I don't a good feel for things right in the very ST after today....an upside spike is still on the table though. In a future post I will talking about sectors/plays that appear to be in interesting niches.
Thursday, June 11, 2009
Quick note
One of the other sentiment survey's I follow, the American Association of Individual Investors is still not showing excessive bullishness. Last week it was showing marginal bullishness but this week it's showing an even number of bulls and bears. Now of course, not EVERY indicator has to line up for a turning point to be at hand....rarely does that happen.
Market is now approaching the 950 level. Do we bust out? It definately has a good shot today. Be on guard
Market is now approaching the 950 level. Do we bust out? It definately has a good shot today. Be on guard
Wednesday, June 10, 2009
Warning! Warning! IT top now in sight!
Equities no longer have a solid wall of worry to climb upon....from an intermediate term standpoint. The following reasons are why
1) Massive surge in bond yields. If you look at every IT top in the past 2 years you will see they coincided with a surge in bond yields (I discussed this in a previous post)
2) Investor sentiment as measured by Investor's Intelligence is now showing bulls outnumbering bears by 2:1. This is the highest ratio since November 2007. One major caveat: it is natural to see a surge of extreme optimism during the first rally of a new bull market (like in 2003) without any ensuing significant market downside.
3) VIX approaching mid 20s. Prior to the debacle we saw last year a VIX in the mid-low 20's often coincided with a ST peak. Mind you, we saw the VIX go below 20 for several years in the middle of this decade with no bearish implications. The VIX is still not quite at mid 20's yet but its getting close.
4) Bears are being weeded out and those that remain are at the point of maximum frustration. A lot of bears have been wiped out or crippled by this recent advance and those that remain are furious by the lack of any downside follow through. I noticed that FAZ is no longer the top ticker on stocktwits and the number of traders posting there has dwindled significantly. Most of these traders were shorting the rally day in and day out via FAZ in particular, getting burned over and over again. We are overdue for the market to give these starving bears a little morsel of food.
5) A less talked about (and therefore more effective) contrarian indicator is the ratio of NASDAQ volume vs. NYSE volume. This provides a ratio of speculative seeking activity vs. safety seeking. The higher the ratio the more "greedy" investors are. It has just recently surged to 2.1, and is now at the same levels seen at the prior IT peak in May 2008 and close to levels seen at the bull market peak in 2007.
6) About 56% of stocks in the S&P are trading above their 200 DMA and about 90% are trading above their 50 DMA...similar readings reached at the peak of May of last year.
7) Mutual fund inflows are surging....a bearish contrarian sign. I read an article the other day which said that inflows to emerging market funds recorded a massive surge (over a span of weeks) which rivaled the surge seen just before they made a major bull market top in 2007. It's not just emerging market funds that are showing strong inflows...equities in general are too.
So, does this mean the big bad bear is coming back? Maybe, but my gut says we will just see a tease to the downside for now. I think for now what we could see is decent correction of 5-7% at least. But I think there's a good chance it could begin somewhere above the 950 level. Whatever remaining bears are out there are hanging by their finger nails. I'm quite sure if we break 950 it would cause them to capitulate and retreat to the SPX 1000 level to try and short it again. A break out above 950 would also likely cause capitulation from underperforming long managers who have until the end of the month to show quarterly results.
The bottom line is be very careful now with your long positions. One final surge is still possible here but it would likely result in a false breakout. This rally is now 3 months old and even if this is a new bull market, the initial bull rally off the bottom tends to last for about 3-4 months before a consolidation/correction ensues. More importantly, the favorable sentiment conditions for a further advance have largely deteriorated, in particular, the surge in bond yields and mutual fund inflows which have always been reliable rally stoppers in the past.
I will be on the looking to play the bear side on an IT basis in the coming days/weeks. The next couple of days are tricky because the market is at about neutral levels in the ST, hence, givining it room to make that one last surge.
By the way, I found out the name of that speculator I was talking about the other day. His name is Bernard Baruch and here's that famous quote I mentioned:
"The main purpose of the stock market is to make fools of as many men as possible"
Ain't that the truth? In fact, I am putting this line on my blog header as a constant reminder.
Here's a link to all of Baruch's quotes
1) Massive surge in bond yields. If you look at every IT top in the past 2 years you will see they coincided with a surge in bond yields (I discussed this in a previous post)
2) Investor sentiment as measured by Investor's Intelligence is now showing bulls outnumbering bears by 2:1. This is the highest ratio since November 2007. One major caveat: it is natural to see a surge of extreme optimism during the first rally of a new bull market (like in 2003) without any ensuing significant market downside.
3) VIX approaching mid 20s. Prior to the debacle we saw last year a VIX in the mid-low 20's often coincided with a ST peak. Mind you, we saw the VIX go below 20 for several years in the middle of this decade with no bearish implications. The VIX is still not quite at mid 20's yet but its getting close.
4) Bears are being weeded out and those that remain are at the point of maximum frustration. A lot of bears have been wiped out or crippled by this recent advance and those that remain are furious by the lack of any downside follow through. I noticed that FAZ is no longer the top ticker on stocktwits and the number of traders posting there has dwindled significantly. Most of these traders were shorting the rally day in and day out via FAZ in particular, getting burned over and over again. We are overdue for the market to give these starving bears a little morsel of food.
5) A less talked about (and therefore more effective) contrarian indicator is the ratio of NASDAQ volume vs. NYSE volume. This provides a ratio of speculative seeking activity vs. safety seeking. The higher the ratio the more "greedy" investors are. It has just recently surged to 2.1, and is now at the same levels seen at the prior IT peak in May 2008 and close to levels seen at the bull market peak in 2007.
6) About 56% of stocks in the S&P are trading above their 200 DMA and about 90% are trading above their 50 DMA...similar readings reached at the peak of May of last year.
7) Mutual fund inflows are surging....a bearish contrarian sign. I read an article the other day which said that inflows to emerging market funds recorded a massive surge (over a span of weeks) which rivaled the surge seen just before they made a major bull market top in 2007. It's not just emerging market funds that are showing strong inflows...equities in general are too.
So, does this mean the big bad bear is coming back? Maybe, but my gut says we will just see a tease to the downside for now. I think for now what we could see is decent correction of 5-7% at least. But I think there's a good chance it could begin somewhere above the 950 level. Whatever remaining bears are out there are hanging by their finger nails. I'm quite sure if we break 950 it would cause them to capitulate and retreat to the SPX 1000 level to try and short it again. A break out above 950 would also likely cause capitulation from underperforming long managers who have until the end of the month to show quarterly results.
The bottom line is be very careful now with your long positions. One final surge is still possible here but it would likely result in a false breakout. This rally is now 3 months old and even if this is a new bull market, the initial bull rally off the bottom tends to last for about 3-4 months before a consolidation/correction ensues. More importantly, the favorable sentiment conditions for a further advance have largely deteriorated, in particular, the surge in bond yields and mutual fund inflows which have always been reliable rally stoppers in the past.
I will be on the looking to play the bear side on an IT basis in the coming days/weeks. The next couple of days are tricky because the market is at about neutral levels in the ST, hence, givining it room to make that one last surge.
By the way, I found out the name of that speculator I was talking about the other day. His name is Bernard Baruch and here's that famous quote I mentioned:
"The main purpose of the stock market is to make fools of as many men as possible"
Ain't that the truth? In fact, I am putting this line on my blog header as a constant reminder.
Here's a link to all of Baruch's quotes
Tuesday, June 9, 2009
The next big thing....gold (shorting it)
I was a fan of gold back in late 2000. I was fresh out of university and I was just at the beginnings of my contrarian way of thinking. At the time I was working as an assistant to an advisor and one of my jobs was to scour all of the mutual funds available for his clients to invest in and come up with a short list of the funds I liked. I was very keen on the gold sector for a few reasons:
1) At $285 gold was trading under the cost of production which I believed was about $340 or so making it fundamentally cheap.
2) Absolutely nobody except for the die hard gold bugs wanted to touch gold. The 10 year avg return of the gold funds I was monitoring was about -10%. When gold had its first bull market run in 2001 it was scoffed at. I vividly remembered Cramer and other so called pros doing this.
3) And this is the most important point; in early 2001 gold stocks were quietly outperforming other sectors forming a nice multi-month base. Whenever you see an out of favor sector outperform the market like this, it's a huge buy signal.
When I mentioned to my boss at the time that we should be putting 10% of client’s assets in gold sector mutual funds he resisted initially and of course, like a typical retail investor, he pointed out the previous poor long term returns. I managed to convince him to do this and it paid off big time for his clients.
The mistake I made personally is that I got off the gold train way too early....I've been agnostic about gold ever since it hit about $600 a few years ago but now I'm bearish and I'll tell u why.
Basically, gold is in a bubble right now. Actual physical use of gold has dropped significantly over the past year while investment demand has soared...in 2008 it was nearly double the amount of the 2007. That's a bubble folks. These people were buying gold fearing the end of global financial system was at hand. All commodities except for gold collapsed last year because people don't buy oil and copper when they feel Armageddon is nigh.
So, now that it appears as though we may actually avoid Armageddon we could very well see gold prices collapse quite quickly...weak dollar or not. The "fear premium" in gold is at least $250 if not more. Once that investment demand begins to falter, we will likely see a massive drop in gold.
From a sentiment perspective we've basically come full circle. If 10 years ago you said gold was going to $1000 people would have laughed. Now if you say gold is going to $2000 you would get several nods agreeing with you. Institutional investors wouldn't touch gold with a 10 foot pool 10 years ago...now they all love it. When both retail and institutional investors are fully on board....watch out....who will be the next group of buyers? Aliens?
Earlier this year a cousin of mine who knows absolutely nothing about investing said to me "I heard investing in gold is the way to go". Whenever I hear main street people talk about an investment they feel is good especially after having had a massive run up my contrarian radar goes off the charts. But as with all bubbles, they can get bigger before bursting. Gold has tested the $1000 mark twice and has gotten rejected. Now it's trying for a third time. A technical analyst came on TV the other day saying that gold is forming an inverse head and shoulders and looks poised to break out if it breaks $1000 this time. I've heard several other traders notice this too.
So I'm asking myself....will this break out happen and then eventually reverse to the downside or has gold already made it's peak and it's just starting to tank right now? I'm not so sure....As per the axiom I stated yesterday "the purpose of the market is to make the most amount of people look foolish". If that's the case then gold could very well break out past $1000 in a convincing way to suck in every last person before the rug gets pulled. It's a tough call right now....I'll be watching gold carefully.
1) At $285 gold was trading under the cost of production which I believed was about $340 or so making it fundamentally cheap.
2) Absolutely nobody except for the die hard gold bugs wanted to touch gold. The 10 year avg return of the gold funds I was monitoring was about -10%. When gold had its first bull market run in 2001 it was scoffed at. I vividly remembered Cramer and other so called pros doing this.
3) And this is the most important point; in early 2001 gold stocks were quietly outperforming other sectors forming a nice multi-month base. Whenever you see an out of favor sector outperform the market like this, it's a huge buy signal.
When I mentioned to my boss at the time that we should be putting 10% of client’s assets in gold sector mutual funds he resisted initially and of course, like a typical retail investor, he pointed out the previous poor long term returns. I managed to convince him to do this and it paid off big time for his clients.
The mistake I made personally is that I got off the gold train way too early....I've been agnostic about gold ever since it hit about $600 a few years ago but now I'm bearish and I'll tell u why.
Basically, gold is in a bubble right now. Actual physical use of gold has dropped significantly over the past year while investment demand has soared...in 2008 it was nearly double the amount of the 2007. That's a bubble folks. These people were buying gold fearing the end of global financial system was at hand. All commodities except for gold collapsed last year because people don't buy oil and copper when they feel Armageddon is nigh.
So, now that it appears as though we may actually avoid Armageddon we could very well see gold prices collapse quite quickly...weak dollar or not. The "fear premium" in gold is at least $250 if not more. Once that investment demand begins to falter, we will likely see a massive drop in gold.
From a sentiment perspective we've basically come full circle. If 10 years ago you said gold was going to $1000 people would have laughed. Now if you say gold is going to $2000 you would get several nods agreeing with you. Institutional investors wouldn't touch gold with a 10 foot pool 10 years ago...now they all love it. When both retail and institutional investors are fully on board....watch out....who will be the next group of buyers? Aliens?
Earlier this year a cousin of mine who knows absolutely nothing about investing said to me "I heard investing in gold is the way to go". Whenever I hear main street people talk about an investment they feel is good especially after having had a massive run up my contrarian radar goes off the charts. But as with all bubbles, they can get bigger before bursting. Gold has tested the $1000 mark twice and has gotten rejected. Now it's trying for a third time. A technical analyst came on TV the other day saying that gold is forming an inverse head and shoulders and looks poised to break out if it breaks $1000 this time. I've heard several other traders notice this too.
So I'm asking myself....will this break out happen and then eventually reverse to the downside or has gold already made it's peak and it's just starting to tank right now? I'm not so sure....As per the axiom I stated yesterday "the purpose of the market is to make the most amount of people look foolish". If that's the case then gold could very well break out past $1000 in a convincing way to suck in every last person before the rug gets pulled. It's a tough call right now....I'll be watching gold carefully.
Monday, June 8, 2009
Back to business
Due to CFA studies and other personal stuff I've been somewhat detached from the markets. I'm quite relieved that the CFA studying is over and done with. I hope this is the last exam I ever write. I'm 32 years old now and I feel like I never finished school. When I finished university I would often have dreams that I forgot to do a major assignment or forgot that I had signed up for a class that I did not attend to for the entire year....I still get these dreams!....although less frequently.
I've read the latest weekly piece from John Hussman who I think is a fantastic financial thinker. He’s an economist and money manager who often provides intriguing analysis, although he can be quite technical. I could never be even 25% as knowledgeable about finance and the economy as he is even if I tried my hardest. But he, like everyone else, is not immune from suffering the behavioral finance biases that are mentioned in the CFA level 3 program.
When Hussman takes a stance i.e. bearish/bullish he will defend his stance with confirming evidence even when the market moves significantly in the opposite direction. This is known as confirming evidence trap which is a form of anchoring.
I don't think I've ever heard him say "I was wrong" but rather he uses the "I was early" defense or the "if only" defense. An example of the latter is how Hussman defended his decision of removing hedges from his fund too early last year by claiming that had the government acted in a way that he felt was the right course of action, the market would not have collapsed as much as it did last year.
A famous speculator in the early 1900s (forgot his name) said something like this
"The purpose of the market is to make fools out of the most amounts of people"
I am a true believer in this statement which is why I always look for what would be the most surprising thing the market could do to make most people look foolish.
I haven't looked at enough charts/indicators yet to make a full assessment however I will say this....conditions for this rally had deteriorated significantly, namely, the spike in bonds yields and other factors such as bullish sentiment. However, I STILL don't think the burned bears from the past 3 months have truly given the market respect. They have done so from time to time but they are quick to get negative the moment the market shows any signs of weakness.
Until I see most people FULLY embrace this market instead of looking over their shoulder ever second for the big bear to come back I don't think there is substantial downside risk. It will be like the boy who cried wolf. Only when the people don't believe in the boy anymore will the wolf truly come....in this case it means only when most people don't believe the bear will come back will it come back.
I've read the latest weekly piece from John Hussman who I think is a fantastic financial thinker. He’s an economist and money manager who often provides intriguing analysis, although he can be quite technical. I could never be even 25% as knowledgeable about finance and the economy as he is even if I tried my hardest. But he, like everyone else, is not immune from suffering the behavioral finance biases that are mentioned in the CFA level 3 program.
When Hussman takes a stance i.e. bearish/bullish he will defend his stance with confirming evidence even when the market moves significantly in the opposite direction. This is known as confirming evidence trap which is a form of anchoring.
I don't think I've ever heard him say "I was wrong" but rather he uses the "I was early" defense or the "if only" defense. An example of the latter is how Hussman defended his decision of removing hedges from his fund too early last year by claiming that had the government acted in a way that he felt was the right course of action, the market would not have collapsed as much as it did last year.
A famous speculator in the early 1900s (forgot his name) said something like this
"The purpose of the market is to make fools out of the most amounts of people"
I am a true believer in this statement which is why I always look for what would be the most surprising thing the market could do to make most people look foolish.
I haven't looked at enough charts/indicators yet to make a full assessment however I will say this....conditions for this rally had deteriorated significantly, namely, the spike in bonds yields and other factors such as bullish sentiment. However, I STILL don't think the burned bears from the past 3 months have truly given the market respect. They have done so from time to time but they are quick to get negative the moment the market shows any signs of weakness.
Until I see most people FULLY embrace this market instead of looking over their shoulder ever second for the big bear to come back I don't think there is substantial downside risk. It will be like the boy who cried wolf. Only when the people don't believe in the boy anymore will the wolf truly come....in this case it means only when most people don't believe the bear will come back will it come back.
Tuesday, June 2, 2009
still watching....
something this morning just didn't feel right for me to pull the trigger on the trades I mentioned....my gut is telling me I could be premature in my thesis. Although NEM is down right now the gold index is up solidly and because I'm using NEM as a proxy for the index it would have been luck to have made money on NEM puts and so I'm not regreting anything.
I think my underlying hesistation is due to the fact that although the market is quite overbought it has broken out and the 950 level is line in the sand that could usher in a wave of bear capitulation if breached. Banks are weak today and have been lagging the market as of late.....a warning sign no doubt but the market action is resistant thus far and in the face of fresh rally highs....it's better to err on the side of caution if you want to fade it when something doesn't feel right.
Mabey things will change later on in the day....
I think my underlying hesistation is due to the fact that although the market is quite overbought it has broken out and the 950 level is line in the sand that could usher in a wave of bear capitulation if breached. Banks are weak today and have been lagging the market as of late.....a warning sign no doubt but the market action is resistant thus far and in the face of fresh rally highs....it's better to err on the side of caution if you want to fade it when something doesn't feel right.
Mabey things will change later on in the day....
Monday, June 1, 2009
Big breakout but now overbought....commercial real estate next shoe to drop? Don't hold your breath just yet...
Markets broke out as I expected....but much quicker than I thought and not with good market action i.e. it broke out with a gap up and run. Markets are now very ST overbought and will likely cool off in the next 1-3 days. It wouldn't suprise me to see the bulk of this move get retraced in short order.
So have the bears finally given up? Nope. One by one their ranks are dropping but this is only happening by brute force i.e. accounts blowing up. I still see plenty of the wrong way bears still stubbornly clinging onto their bearish views mostly supported by rear view mirror data.
The next shoe to drop according to bears is commercial real-estate. I even heard one of the BNN anchors mention this worry the other day. Maybe it happens but if you've been in SRS betting on this you have been absolutely crushed like a bug. That's why when it comes to the market timing is EVERYTHING. Being right but early is often just as the same as being wrong depending on how you bet. I have been calling FAZ/SKF/SRS the troika of death not only because these are the bear ETF which obviously do terribly during rising markets but also because they have a "decay" factor when the underlying index is volatile. For example if you buy one of these "investments" and 6 months from now the underlying index it tracks is unchanged but had quite a bit of volatile swings in the interim, it's quite possible for you to be down 30-50% on your eft due to this "decay" factor.
The greater the leverage the more the decay. On the flip side, when the underlying index is in a solid uptrend you get the added benefits of compounding which amplify returns.....it's all in the math of how the returns are calculated....anyhow I digress.
The so called next shoe to drop in the form of commercial real-estate appears to be a widely advertised worry and so if you are bearish you should be concerned that perhaps the market knows this already and doesn't care. Perhaps the economy will revive in time making these worries overblown. Who knows for sure....its quite possible as I've seen before that the market is late in recognizing what appears to be something obvious (because of herd behavior dominating the market) but it could also be the case, as I've also seen before, that by ignoring a well know worry the market was correctly sending the message "you're wrong assholes" like with Y2k fears. This is why it's better to wait for signs the market is agreeing with you rather than being early trying to catch the turnaround because you could very well end up being flat out wrong and lose everything. In my opinion, it's better to miss the first 10-25% of a move and jump in with the wind at your back. But I am a hipocrite because I myself attempt to catch tops/bottoms but I will only do so with a)limited capital b)when I believe the set up is near perfect (extremes in indicators and some confirmation of a reversal or panick). This allows me to get out with limited damage if I'm wrong.
I'm sure quite a few people can provide me with convincing statistics, charts and arguments as to why commercial real estate is the next shoe to drop but until the market gives the thumbs up and shows signs of it paying attention to this potential problem I won't bet on it aside from a short term trade. Those who have bet on it have been taking horrific losses. Maybe they will be vindicated....maybe not. I'd rather wait for some sign of confirmation first. So you miss the bottom, big deal. Those who have been anxious not to miss the bottom are regretting big time now.
I am once again looking to buy puts on NEM. Gold and gold stocks did a nice downside reversal today in the face of a very strong market. The sector is quite overbought and talks of the dollar and commodities are at fever pitch levels. At the very least a nice pullback appears immanent. Hopefully I will be able to get a decent entry point.
I am also considering a long position on the yen via calls on FXY. More on this later....
So have the bears finally given up? Nope. One by one their ranks are dropping but this is only happening by brute force i.e. accounts blowing up. I still see plenty of the wrong way bears still stubbornly clinging onto their bearish views mostly supported by rear view mirror data.
The next shoe to drop according to bears is commercial real-estate. I even heard one of the BNN anchors mention this worry the other day. Maybe it happens but if you've been in SRS betting on this you have been absolutely crushed like a bug. That's why when it comes to the market timing is EVERYTHING. Being right but early is often just as the same as being wrong depending on how you bet. I have been calling FAZ/SKF/SRS the troika of death not only because these are the bear ETF which obviously do terribly during rising markets but also because they have a "decay" factor when the underlying index is volatile. For example if you buy one of these "investments" and 6 months from now the underlying index it tracks is unchanged but had quite a bit of volatile swings in the interim, it's quite possible for you to be down 30-50% on your eft due to this "decay" factor.
The greater the leverage the more the decay. On the flip side, when the underlying index is in a solid uptrend you get the added benefits of compounding which amplify returns.....it's all in the math of how the returns are calculated....anyhow I digress.
The so called next shoe to drop in the form of commercial real-estate appears to be a widely advertised worry and so if you are bearish you should be concerned that perhaps the market knows this already and doesn't care. Perhaps the economy will revive in time making these worries overblown. Who knows for sure....its quite possible as I've seen before that the market is late in recognizing what appears to be something obvious (because of herd behavior dominating the market) but it could also be the case, as I've also seen before, that by ignoring a well know worry the market was correctly sending the message "you're wrong assholes" like with Y2k fears. This is why it's better to wait for signs the market is agreeing with you rather than being early trying to catch the turnaround because you could very well end up being flat out wrong and lose everything. In my opinion, it's better to miss the first 10-25% of a move and jump in with the wind at your back. But I am a hipocrite because I myself attempt to catch tops/bottoms but I will only do so with a)limited capital b)when I believe the set up is near perfect (extremes in indicators and some confirmation of a reversal or panick). This allows me to get out with limited damage if I'm wrong.
I'm sure quite a few people can provide me with convincing statistics, charts and arguments as to why commercial real estate is the next shoe to drop but until the market gives the thumbs up and shows signs of it paying attention to this potential problem I won't bet on it aside from a short term trade. Those who have bet on it have been taking horrific losses. Maybe they will be vindicated....maybe not. I'd rather wait for some sign of confirmation first. So you miss the bottom, big deal. Those who have been anxious not to miss the bottom are regretting big time now.
I am once again looking to buy puts on NEM. Gold and gold stocks did a nice downside reversal today in the face of a very strong market. The sector is quite overbought and talks of the dollar and commodities are at fever pitch levels. At the very least a nice pullback appears immanent. Hopefully I will be able to get a decent entry point.
I am also considering a long position on the yen via calls on FXY. More on this later....
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