Today's GDP report turned out to be anti-climatic given yesterday's breakout.
The psychology out there is fascinating. Despite many bears being blown out of the water, there's still plenty of top picking out there in addition to bears who are trapped at lower levels. They seem to be in a state of paralysis and denial. The more the market moves against them, the louder their complaints about manipulation while other bears seem to be quite calm despite being underwater given their belief that the market surely will drop soon as they expect. I have found that when I have a position, especially a losing position, and I'm not at least a little bit nervous it's a bad sign. If you ever find yourself underwater with a position and you are very calm about it that's a VERY bad sign. Chances are you made the wrong trade.
There's a gap to fill at about SPX 975 which I think will likely get filled next week. I will be watching to see if burned shorts will be using this dip to cover or just stick with their positions. Whatever they decide to do will likely be the wrong move.
I am very suspicious about the way the market has made this latest high. Notice how
The high is right at SPX 1000 (I know, it's 996.68 but close enough). That's quite a predictable level don't you think? At significant tops and bottoms it's rare to such nice neat numbers hold up ...it's needs to feel sloppy/desperate. Therefore, to me this looks more like a possible ST top similar to 875 back in April and 950 in June which were predictable resistance levels.
When the market is persistently weak or strong it becomes very tempting for novice traders to bet the other way anticipating a turnaround. This is the number one reason traders go bust. I mentioned back in April and May many times about the troika of death FAZ/SRS/SKF and how it was bankrupting traders who kept trying to pick the bottom. That trio of death is still making 52 week lows. The same sort of thing happened after the tech bubble burst. The lemmings would double, triple and quadruple down on their favorite tech stocks which were such huge winners in the past. I see today's rookies doing the same with bear ETFs. No wonder UBS banned leveraged ETF's recently. They said it had to do with their emphasis on LT investing. Bullshit. They did it because their clients were getting murdered by them which led them to probably hate investing and/or their advisors which obviously are no good for sales. If these clients were actually making money on these ETFs there is no chance in hell UBS would have banned them...none whatsoever. In the investment advisory business it’s all about sales. Period. Trust me, I've been there.
So what's next? I suspect that gap at 975 gets filled before any significant upside headway can possibly occur which if it does probably won't last long. The market is likely going to be in consolidation mode for the next several weeks because it is quite overbought.
The market is now up for 5 straight months and 50% up from the low. I'm wondering at what point many of the die hard bears I see out there are going to capitulate and at the very least admit to the possibility that this is cyclical bull market like the 2003-2007 bull. I suppose never or when they go broke.
Friday, July 31, 2009
Thursday, July 30, 2009
a couple of intraday warning signs
The put/call ratio is quite low and the NASDAQ, the leader of this market is lagging and looks a bit sloppy...still doing nothing here
5 points away from SPX 1000
Looks like the breakout is happening now instead of tommorow as I expected. The intitial jobless claims numbers didn't seem like anything very noteworthy...mabey I missed something. Regardless, the market just felt like it wanted to go up....as I had mentioned last night, the path of least resistance seemed to be higher.
Somebody is indeed getting hurt today, not only because of this surge but because of the large gap up which prevents shorts from cutting losses small. We'll see if the the bears can wrestle this market back by the end of the day. It's a little early to tell but I have my doubts....sorry bears.
But the good thing for bears here is that these types of gap up and run days after an already extended upside move is indicative of an immanent exhaustion of the move but I'm thinking that this move today is going to be too strong for it to fade by the close. Perhaps tommorow bears will have their way.
I'm pretty much going to be on the sidelines watching this move. I may decide to press for an speculative intraday long trade later on but only if conditions are perfect. I'm sure there's going to be a sell-off attempt as we approach 1000 +/- 3 points. Well see how the market handles it.
Somebody is indeed getting hurt today, not only because of this surge but because of the large gap up which prevents shorts from cutting losses small. We'll see if the the bears can wrestle this market back by the end of the day. It's a little early to tell but I have my doubts....sorry bears.
But the good thing for bears here is that these types of gap up and run days after an already extended upside move is indicative of an immanent exhaustion of the move but I'm thinking that this move today is going to be too strong for it to fade by the close. Perhaps tommorow bears will have their way.
I'm pretty much going to be on the sidelines watching this move. I may decide to press for an speculative intraday long trade later on but only if conditions are perfect. I'm sure there's going to be a sell-off attempt as we approach 1000 +/- 3 points. Well see how the market handles it.
Wednesday, July 29, 2009
Someone's going to get hurt
The market is so far acting as I expected it to this week just chopping around. Economic data for the most part continues to be better than expected pointing to economic recovery and retail traders for the most part continue to dismiss market action as manipulation and since April continue to call this a bullshit rally. There's no such a thing in my book. By shorting the rally did that mean that these people lost bullshit money? You tell me. A rally is a rally and whether it lasts or not, it's very real.
You want to argue with the market go right ahead and good luck to you. Bears argued the market was overpriced in 1996 when the P/E hit 20 and the Dow was at 6500. It went to hit close to 12000 4 years later. I'm sure they said the same thing - “bullshit rally!". How many of those bears do you think were left standing after 4 years? Here's a hint, it rhymes with "euro". That's why there's no such a thing as a bullshit rally or decline for the matter.
I'm amazed and also irritated by so many lemmings out there who continue to think that there is some grand conspiracy rigging the markets. I remember when after the dot com bubble burst any downdrafts would often be dismissed by the same group of people as "the big boys shaking the tree to scoop up cheap shares". I'll say this again, the sooner you stop blaming a higher power for rigging the market the better off you will be. And for any of the clowns who think the system is rigged, then why the fuck don't they just go long and make, according to this thesis, free money? I suppose it would be an insult to their intelligence to do so. I suppose they want to make money only if it’s “justified” according to their views. Give me a break. It's mind boggling how naive, biased and ridged people are.
Well, it's clear by the action that we are setting up for a big move one way or the other. Bears must be very concerned and I’m sure frustrated as hell that the poor bond auction this afternoon didn’t crack the market. The longer we keep chopping like this heading into Friday, the bigger the potential for a final blow off move to the upside before profit taking finally takes hold.
The latest Investor's Intelligence sentiment numbers came out today. With the market surging making a new YTD high since last week, you would expect to see a surge in bullishness from last week's numbers which showed a 1:1 ratio of bulls vs. bears....well, you would be mistaken. 42% are bulls and 31% are bears. As you can see, it seems that people can only turn bullish by being forcefully dragged kicking and screaming, yet when the market has a 5% dip bearish sentiment spikes sharply. That is wall of worry behavior folks and I'll say this again, until most market participants drop their guard low enough thinking the coast is clear and it's onwards and upwards, don't expect any downside to be greater than 10%.
Bottom line: Market action suggests a big move is comming one way or the other and so someone's going to get hurt. It could go either way but the bears so far have shown no game whatsoever. They had a catalyst to bring down the market today but they got stuffed. What this tells me is that the path of least resistance is still higher making the likelyhood of an upside breakout greater than a downside one (but not by a large margin). In my opinion any upside breakout will likely lead to an exhaustion point rather than a continuation of the rally to much higher levels.
You want to argue with the market go right ahead and good luck to you. Bears argued the market was overpriced in 1996 when the P/E hit 20 and the Dow was at 6500. It went to hit close to 12000 4 years later. I'm sure they said the same thing - “bullshit rally!". How many of those bears do you think were left standing after 4 years? Here's a hint, it rhymes with "euro". That's why there's no such a thing as a bullshit rally or decline for the matter.
I'm amazed and also irritated by so many lemmings out there who continue to think that there is some grand conspiracy rigging the markets. I remember when after the dot com bubble burst any downdrafts would often be dismissed by the same group of people as "the big boys shaking the tree to scoop up cheap shares". I'll say this again, the sooner you stop blaming a higher power for rigging the market the better off you will be. And for any of the clowns who think the system is rigged, then why the fuck don't they just go long and make, according to this thesis, free money? I suppose it would be an insult to their intelligence to do so. I suppose they want to make money only if it’s “justified” according to their views. Give me a break. It's mind boggling how naive, biased and ridged people are.
Well, it's clear by the action that we are setting up for a big move one way or the other. Bears must be very concerned and I’m sure frustrated as hell that the poor bond auction this afternoon didn’t crack the market. The longer we keep chopping like this heading into Friday, the bigger the potential for a final blow off move to the upside before profit taking finally takes hold.
The latest Investor's Intelligence sentiment numbers came out today. With the market surging making a new YTD high since last week, you would expect to see a surge in bullishness from last week's numbers which showed a 1:1 ratio of bulls vs. bears....well, you would be mistaken. 42% are bulls and 31% are bears. As you can see, it seems that people can only turn bullish by being forcefully dragged kicking and screaming, yet when the market has a 5% dip bearish sentiment spikes sharply. That is wall of worry behavior folks and I'll say this again, until most market participants drop their guard low enough thinking the coast is clear and it's onwards and upwards, don't expect any downside to be greater than 10%.
Bottom line: Market action suggests a big move is comming one way or the other and so someone's going to get hurt. It could go either way but the bears so far have shown no game whatsoever. They had a catalyst to bring down the market today but they got stuffed. What this tells me is that the path of least resistance is still higher making the likelyhood of an upside breakout greater than a downside one (but not by a large margin). In my opinion any upside breakout will likely lead to an exhaustion point rather than a continuation of the rally to much higher levels.
Monday, July 27, 2009
A few more thoughts while I twiddle my thumbs
I haven't done anything today. I was tempted to short that bounce at 10am after the housing data was released but it wasn't a big enough bounce and it fizzled too quickly. No worries though. I have no problem doing nothing. Often times the best trade is no trade. I find when I start forcing trades out of boredom or greed I typically regret it. I have gone weeks whereby I make no trades. Patience is one of my best strengths when entering a trade. I will wait as long as it takes to get the premium setups. Unlike in poker, you don't have to feel pressured to play a weak hand because of blinds going up. My biggest weakness however, is exiting trades. I often pull the trigger on a winning trade too soon but I'm pretty good at cutting lose a bad trade early too.
It seems to me that the breakout in the market has questioned the conviction of whatever permabears are remaining....at least the ones I have followed. A lot of these same bears who were pressing shorts going for the kill on the H&S pattern are now licking their wounds calling for 1000-1050 as the next place to put on shorts again....some even have higher targets. This may strike you are a contrarian sign that the market is set to go down now because so many bears have finally given up....it is, but it also isn't.
For the short/intermediate term, this capitulation is indeed indicative of an immanent top...my best guess would be that it happens after GDP numbers are released on Friday. It could happen sooner obviously but my best guess is that the market chops around from now until Friday.
But longer term, it seems still evident to me that there is plenty of skeptics in the market. The permabears think that once this rally is over we will collapse back to the lows in no time. Their conviction level is so high regarding this which to me shows that they haven't truly given the upside action we've seen since March any respect. The average retail fast money trader is still bearishly biased from what I see. I notice many of them quote articles from zerohedge.com and other bearish sources. The group think mentality that exists with them is uncanny. From the financial media and pundits in general, there has been a rise in bullishness but it's been only cautiously guarded optimism if you ask me. The average Wall Street firm SPX year end target is 1007 which is only a stone's throw away.
The general consensus in the financial community appears to be as follows:
1. The economy may have bottomed but expect a below average recovery (early last year the consensus was that any recession would be mild and contained within the housing sector).
2. The risk of a double dip recession is significant.
3. The risk of run away inflation is significant.
4. Commercial real estate is the next shoe to drop.
5. We are in a "new normal" economy which will be characterized by below average growth for years due to de-leveraging (this one sounds like the opposite of the "new era" view of the late 1990's doesn't it?)
So, if you are bearish on stocks longer term i.e. 1-3 years, you will need to see negative surprises to the above consensus thinking to be proved right. With expectations this low, to me the surprises seem to be more likely on the upside rather than the downside. Keep in mind this is a longer term perspective. The shorter term is not as favorable given the consensus notion that SPX 1000-1050 is a lock.
2nd quarter GDP released on Friday is expected to be around negative 1%. If we get a positive number I think we could see some sort of ST or IT blow-off move to the upside and perhaps even a revision on consensus long term expectations. This would be the equivalent to March 2008 when the bear market started to get serious acknowledgment from the public as fundamentals showed serious deterioration. After that point however markets staged a very sharp 1.5 month counter trend rally to shake out the Johnny-come-lately bears. We could see the same type of behavior but this time on the bull side....stay tuned.
As a hedge clause, you should know that I can and will often change my outlook as new information presents itself...for anyone who gives a rat's ass (probably nobody). I'm not a dedicated bear or bull....one marriage is enough for me.
It seems to me that the breakout in the market has questioned the conviction of whatever permabears are remaining....at least the ones I have followed. A lot of these same bears who were pressing shorts going for the kill on the H&S pattern are now licking their wounds calling for 1000-1050 as the next place to put on shorts again....some even have higher targets. This may strike you are a contrarian sign that the market is set to go down now because so many bears have finally given up....it is, but it also isn't.
For the short/intermediate term, this capitulation is indeed indicative of an immanent top...my best guess would be that it happens after GDP numbers are released on Friday. It could happen sooner obviously but my best guess is that the market chops around from now until Friday.
But longer term, it seems still evident to me that there is plenty of skeptics in the market. The permabears think that once this rally is over we will collapse back to the lows in no time. Their conviction level is so high regarding this which to me shows that they haven't truly given the upside action we've seen since March any respect. The average retail fast money trader is still bearishly biased from what I see. I notice many of them quote articles from zerohedge.com and other bearish sources. The group think mentality that exists with them is uncanny. From the financial media and pundits in general, there has been a rise in bullishness but it's been only cautiously guarded optimism if you ask me. The average Wall Street firm SPX year end target is 1007 which is only a stone's throw away.
The general consensus in the financial community appears to be as follows:
1. The economy may have bottomed but expect a below average recovery (early last year the consensus was that any recession would be mild and contained within the housing sector).
2. The risk of a double dip recession is significant.
3. The risk of run away inflation is significant.
4. Commercial real estate is the next shoe to drop.
5. We are in a "new normal" economy which will be characterized by below average growth for years due to de-leveraging (this one sounds like the opposite of the "new era" view of the late 1990's doesn't it?)
So, if you are bearish on stocks longer term i.e. 1-3 years, you will need to see negative surprises to the above consensus thinking to be proved right. With expectations this low, to me the surprises seem to be more likely on the upside rather than the downside. Keep in mind this is a longer term perspective. The shorter term is not as favorable given the consensus notion that SPX 1000-1050 is a lock.
2nd quarter GDP released on Friday is expected to be around negative 1%. If we get a positive number I think we could see some sort of ST or IT blow-off move to the upside and perhaps even a revision on consensus long term expectations. This would be the equivalent to March 2008 when the bear market started to get serious acknowledgment from the public as fundamentals showed serious deterioration. After that point however markets staged a very sharp 1.5 month counter trend rally to shake out the Johnny-come-lately bears. We could see the same type of behavior but this time on the bull side....stay tuned.
As a hedge clause, you should know that I can and will often change my outlook as new information presents itself...for anyone who gives a rat's ass (probably nobody). I'm not a dedicated bear or bull....one marriage is enough for me.
Saturday, July 25, 2009
Weekend thoughts
The past 2 weeks has surprised pretty much everyone with it's strength and as I suspected, wiped out or crippled many people who got caught short anticipating the H&S breakdown and then doubled and tripled down on the way up.
I've noticed many of the wounded saying "I've learned my lesson" and vow never to let this happen to them again. We'll just see about that because last time I head this sort of confession was when the SPX broke 875 to the upside and it seems like these same people didn't learn a damn thing. This time though, I think they truly have. But can these burned bears truly be agnostic and play both sides of the market objectively? I doubt it. Their deep rooted biases along with their pride will hinder them.
So, what caused this huge run up? Please for the life me don't give me the group think excuse that it was all Goldman Sachs manipulation. If you truly believe this then stop playing the stock market right now. Close out your account and never make another trade again because you are a loser and you will no doubt be amongst the 90% of people who lose money trading. Sorry to sound brutally harsh but it's probably true. Losers blame other people for their misfortunes, losers don't accept responsibility. Look, I'm sure there's some sort of manipulative activity going on from the "big boys" but there always is to some degree. Last year there were complaints about naked short selling unjustifiably driving down stocks. But the bottom line is last year fundamentals were in free fall. Earnings collapsed by the most amount in history! THAT was why market crashed; the naked short selling may have accelerated things which were heading south regardless.
The bottom line is that the markets will move based upon the general direction of fundamentals or anticipation of them. Not once have I seen these permabears who blame GS ever mention that credit spreads have collapsed, housing prices have bottomed and earnings have began to rebound. Do they ever think that maybe, just maybe, these improvements in fundamentals are responsible for the rally? Or do they think GS manipulates them too?
Last week 4 prominent financial institutions have either raised their S&P 500 year end targets or EPS estimates this week. So, just like how I touched upon before, we are seeing an upward revision of expectations. That folks is what's driving the rally. So please, forget about this GS and PPT conspiracy and open your eyes to reality.
Now that expectations are higher the bears actually have a better chance at success because it could lead to disappointments later on but like I pointed out before analysts where constantly behind the curve all throughout the bear market last year, could they do the same with this bull run? They sure have in the past.
Even if this is a bonafide bull market with another 10-20% upside potential, at such overbought levels it wouldn't be wise at all to chase it. Even if the market grinds higher from here, history suggests a consolidation phase will occur to work off the overbought condition which means the market would likely drop back to current levels or lower at some point giving you another chance to get in.
But if it turns out that this is just one big giant bear market rally that had to use every trick in the book to shake out enough bears and convince enough sidelined money to jump back in before pulling the rug from underneath everyone, then buying at these levels would obviously be a very bad thing to do. That's the sort of rally that happened post 911.
Bottom line: Short term, the extreme overbought condition of the market and the fact that most bears have been blown out of the water suggests a Short term or perhaps even Intermediate Term high in immanent. This Friday 2nd quarter GDP will be released. If it turns out to be a positive number then the "recession is over" mantra which we are starting to hear is going to become quite loud. I'd be considering a bearish contrarian trade if that happens. That doesn't mean I won't pull the trigger on a short trade earlier....I will if I see a good set up.
I've noticed many of the wounded saying "I've learned my lesson" and vow never to let this happen to them again. We'll just see about that because last time I head this sort of confession was when the SPX broke 875 to the upside and it seems like these same people didn't learn a damn thing. This time though, I think they truly have. But can these burned bears truly be agnostic and play both sides of the market objectively? I doubt it. Their deep rooted biases along with their pride will hinder them.
So, what caused this huge run up? Please for the life me don't give me the group think excuse that it was all Goldman Sachs manipulation. If you truly believe this then stop playing the stock market right now. Close out your account and never make another trade again because you are a loser and you will no doubt be amongst the 90% of people who lose money trading. Sorry to sound brutally harsh but it's probably true. Losers blame other people for their misfortunes, losers don't accept responsibility. Look, I'm sure there's some sort of manipulative activity going on from the "big boys" but there always is to some degree. Last year there were complaints about naked short selling unjustifiably driving down stocks. But the bottom line is last year fundamentals were in free fall. Earnings collapsed by the most amount in history! THAT was why market crashed; the naked short selling may have accelerated things which were heading south regardless.
The bottom line is that the markets will move based upon the general direction of fundamentals or anticipation of them. Not once have I seen these permabears who blame GS ever mention that credit spreads have collapsed, housing prices have bottomed and earnings have began to rebound. Do they ever think that maybe, just maybe, these improvements in fundamentals are responsible for the rally? Or do they think GS manipulates them too?
Last week 4 prominent financial institutions have either raised their S&P 500 year end targets or EPS estimates this week. So, just like how I touched upon before, we are seeing an upward revision of expectations. That folks is what's driving the rally. So please, forget about this GS and PPT conspiracy and open your eyes to reality.
Now that expectations are higher the bears actually have a better chance at success because it could lead to disappointments later on but like I pointed out before analysts where constantly behind the curve all throughout the bear market last year, could they do the same with this bull run? They sure have in the past.
Even if this is a bonafide bull market with another 10-20% upside potential, at such overbought levels it wouldn't be wise at all to chase it. Even if the market grinds higher from here, history suggests a consolidation phase will occur to work off the overbought condition which means the market would likely drop back to current levels or lower at some point giving you another chance to get in.
But if it turns out that this is just one big giant bear market rally that had to use every trick in the book to shake out enough bears and convince enough sidelined money to jump back in before pulling the rug from underneath everyone, then buying at these levels would obviously be a very bad thing to do. That's the sort of rally that happened post 911.
Bottom line: Short term, the extreme overbought condition of the market and the fact that most bears have been blown out of the water suggests a Short term or perhaps even Intermediate Term high in immanent. This Friday 2nd quarter GDP will be released. If it turns out to be a positive number then the "recession is over" mantra which we are starting to hear is going to become quite loud. I'd be considering a bearish contrarian trade if that happens. That doesn't mean I won't pull the trigger on a short trade earlier....I will if I see a good set up.
Friday, July 24, 2009
Poor guy...
Check out this post I read on a message board just now.
Feel like dying
3 weeks ago when DOW was around 8100 everyone was saying that we are due for a 10-15% pullback so I bought SDS, SRS, FAZ with a small amount of money I was willing to risk for a quick profit. The market then kept going up and up. I assumed it would eventually come down and I doubled down 5 times now. I'm now down over 70k in only 3 weeks. After taxes it takes me over a year to earn this much money at my job. My wife wanted to go to a vacation in florida and I told her it was too expensive (cost $1k total). Instead I intended up losing 70k. I just feel like selling all the short stocks I have and then killing myself before I lose anymore of mine and my wife's hard earned money. I don't understand why gambling is illegal here, but not buying these stupid inverse ETFs?
This guy just proved to the t what I was talking about earlier. He made the classic mistake of going all in by doubling down over and over on a losing trade. Now he has been reduced to a crippled dear in the headlights. Please learn a lesson from this guy. He broke the golden rule of trading and paid dearly for it.
The funny thing is that these were the types of posts I saw in 2001 after the tech bubble burst. People doubled and trippled down on their favorite tech stocks and became stuck like this a guy. What do you think this suggests will happen next with the market?
Feel like dying
3 weeks ago when DOW was around 8100 everyone was saying that we are due for a 10-15% pullback so I bought SDS, SRS, FAZ with a small amount of money I was willing to risk for a quick profit. The market then kept going up and up. I assumed it would eventually come down and I doubled down 5 times now. I'm now down over 70k in only 3 weeks. After taxes it takes me over a year to earn this much money at my job. My wife wanted to go to a vacation in florida and I told her it was too expensive (cost $1k total). Instead I intended up losing 70k. I just feel like selling all the short stocks I have and then killing myself before I lose anymore of mine and my wife's hard earned money. I don't understand why gambling is illegal here, but not buying these stupid inverse ETFs?
This guy just proved to the t what I was talking about earlier. He made the classic mistake of going all in by doubling down over and over on a losing trade. Now he has been reduced to a crippled dear in the headlights. Please learn a lesson from this guy. He broke the golden rule of trading and paid dearly for it.
The funny thing is that these were the types of posts I saw in 2001 after the tech bubble burst. People doubled and trippled down on their favorite tech stocks and became stuck like this a guy. What do you think this suggests will happen next with the market?
Conflicting indicators
Bears thought they would get a break today from the disappointments after hours from Microsoft and Amazon last night but futures are slightly green so far as I write this. You might be asking yourself "what the hell is going on here, how can this market be so strong?" Although I expected a vicious snapback a couple weeks ago I surely didn't expect the market to bust out to new highs. It's been my experience that anytime you see such confounding strength or weakness in the market there is a fundamental shift that is finally being acknowledged by investors. In this case that shift is that the economy/earnings has in fact bounced significantly. Whether it's sustainable or not is another issue.
I see so many retail investors talking about how Goldman Sachs and the "PPT" has been propping up the market. That's bullshit. Why then did the "PPT" allow the market to have one of it's biggest crashes ever last year. These conspiracy theories are an excuse to justify the money these people have lost shorting the market. The sooner you take responsibility for your losses the better off you will be.
I'm noticing some really strange conflicting signs with the indicators.
The bearish signs:
1) After yesterday's surge the market is just as overbought on a ST basis as it was in early January which was the largest ST overbought reading I have ever seen. As you may know early January turned out to be a major peak.
2) NASDAQ/NYSE volume ratio has spiked to 2.3 which I have warned in the past was a bearish sign. The last we saw such a spike was mid June and the time after that was July 1, both times coincided with ST tops.
3) The VIX is forming a compressed bullish wedge which suggests a spike is immanent.
Bullish signs:
1) Market action is exceptionally strong and is suggestive of long term money entering. Yes, I know everyone is talking about low volume, but this same complaint was mentioned in the summer of 2003.
2) The rydex ratio has flip flopped. Just when it looked like we were seeing capitulation from the rydex ratio as of this morning it popped showing an significant increase in bearishness. In the face of a strong market that just make new YTD highs that's actually a very strong contrarian bullish sign....but it just doesn't make sense at all with the other bearish indications I noted.
Conclusion: the market is far too overbought for it to make another run up from here without a least a day or 2 of rest. At the same time, any correction will likely be limited until the rydex ratio unwinds big time.
When conflicting situations like this occur I tend to play it very small or don't play at all until things line up. I'm thinking today will be a choppy, boring day but that's just a wild guess at this point.
I see so many retail investors talking about how Goldman Sachs and the "PPT" has been propping up the market. That's bullshit. Why then did the "PPT" allow the market to have one of it's biggest crashes ever last year. These conspiracy theories are an excuse to justify the money these people have lost shorting the market. The sooner you take responsibility for your losses the better off you will be.
I'm noticing some really strange conflicting signs with the indicators.
The bearish signs:
1) After yesterday's surge the market is just as overbought on a ST basis as it was in early January which was the largest ST overbought reading I have ever seen. As you may know early January turned out to be a major peak.
2) NASDAQ/NYSE volume ratio has spiked to 2.3 which I have warned in the past was a bearish sign. The last we saw such a spike was mid June and the time after that was July 1, both times coincided with ST tops.
3) The VIX is forming a compressed bullish wedge which suggests a spike is immanent.
Bullish signs:
1) Market action is exceptionally strong and is suggestive of long term money entering. Yes, I know everyone is talking about low volume, but this same complaint was mentioned in the summer of 2003.
2) The rydex ratio has flip flopped. Just when it looked like we were seeing capitulation from the rydex ratio as of this morning it popped showing an significant increase in bearishness. In the face of a strong market that just make new YTD highs that's actually a very strong contrarian bullish sign....but it just doesn't make sense at all with the other bearish indications I noted.
Conclusion: the market is far too overbought for it to make another run up from here without a least a day or 2 of rest. At the same time, any correction will likely be limited until the rydex ratio unwinds big time.
When conflicting situations like this occur I tend to play it very small or don't play at all until things line up. I'm thinking today will be a choppy, boring day but that's just a wild guess at this point.
Thursday, July 23, 2009
Most people shouldn't be a trader
I'm sure you may have heard the statistics that say 90% of traders end up losing money. There's a reason for that....trading is hard. If it was easy everyone would be doing it. At times trading seems easy. Typically this happens near the end of a bull or bear market when the news headlines and market trend have been persistantly in the same direction for quite some time. A lot of newbie traders will initially make money because they act according to what they read in the news. This gives them a false sense of confidence. As a result they end up betting bigger and being bolder....just prior to when Mr. Market pulls the rug from underneath them turning their profits to losses. The newbies get burned when a major trend change occurs. Their one way minds are very slow a foot in detecting the new trend change because they are so used to seeing the market only go in 1 direction and the news headlines (which are lagging/coincident indicators) don't "justify" the change in trend.
If you haven't experienced a full bull and bear market cycle you don't have the experience needed to trade seriously...and if you have, it doesn't give you a free pass either...because every cycle is unique although similarities do exist. Most traders are simply closet gamblers in my opinion and are hard wired to lose money.
I often visit bearish blog sites to get a perspective of sentiment of what the money losing traders are thinking. I've found that a lot of newbie traders became dedicated bears because they cut their teeth at a time when the market was doing nothing but going down and the headlines were nothing but black for months....the complete opposite of newbie traders who cut their teeth in 1999.
Here's an example of a poster on a bearish blog site that should NOT be a trader....I kind of feel sad for this guy
I am homely man, too! Downright repulsive and kind of startling to look at. The "pretty boys" used to date the cheerleaders who treated me like a brother. I helped most of the popular kids pass basic math class (I was a Calculus student), but they would just show their appreciation by giving me wedgies at lunch.
Trading in the stock market is just an extension of that childhood brutality...the Big Bully!
I have taken, what should be a fatal kick in the chest from life, but I'm still breathing...barely...by the grace of God.
I started trading last December, went long most of the tech companies (and lost half my money in the first part of this year). I closed all of my positions for a loss, but now most of those companies are up 200% (at least) from where I owned them.
I used the other half of the money to start trading the /ES since March. Of course, I am a bear by nature (and got burned before going long), so I tried shorting the entire move up from March...lost the other half of my money.
My account went from $20,000 in December to $400 last week! My wife has left me and I live in my sister's basement with three cats and a dog.
But you know what...I'm not done!! IT'S NOT OVER!! I have been in the clutches of defeat before and I have beautiful souls like you, Tim Knight, to help me lift my head and slay this Bull-horned Dragon!!
I borrowed the last $600 that I could get from my family and caught some of last week's G.S.B.S. move. With only $1000 to trade on I made that $600 in one day last week. I paid my family back and have $1000 of my own money to trade with now...I'm moving on up.
I thank you for being honest and knowing what we are going through. Hang in there...I'm here with you!
Peace,
Brad
If you haven't experienced a full bull and bear market cycle you don't have the experience needed to trade seriously...and if you have, it doesn't give you a free pass either...because every cycle is unique although similarities do exist. Most traders are simply closet gamblers in my opinion and are hard wired to lose money.
I often visit bearish blog sites to get a perspective of sentiment of what the money losing traders are thinking. I've found that a lot of newbie traders became dedicated bears because they cut their teeth at a time when the market was doing nothing but going down and the headlines were nothing but black for months....the complete opposite of newbie traders who cut their teeth in 1999.
Here's an example of a poster on a bearish blog site that should NOT be a trader....I kind of feel sad for this guy
I am homely man, too! Downright repulsive and kind of startling to look at. The "pretty boys" used to date the cheerleaders who treated me like a brother. I helped most of the popular kids pass basic math class (I was a Calculus student), but they would just show their appreciation by giving me wedgies at lunch.
Trading in the stock market is just an extension of that childhood brutality...the Big Bully!
I have taken, what should be a fatal kick in the chest from life, but I'm still breathing...barely...by the grace of God.
I started trading last December, went long most of the tech companies (and lost half my money in the first part of this year). I closed all of my positions for a loss, but now most of those companies are up 200% (at least) from where I owned them.
I used the other half of the money to start trading the /ES since March. Of course, I am a bear by nature (and got burned before going long), so I tried shorting the entire move up from March...lost the other half of my money.
My account went from $20,000 in December to $400 last week! My wife has left me and I live in my sister's basement with three cats and a dog.
But you know what...I'm not done!! IT'S NOT OVER!! I have been in the clutches of defeat before and I have beautiful souls like you, Tim Knight, to help me lift my head and slay this Bull-horned Dragon!!
I borrowed the last $600 that I could get from my family and caught some of last week's G.S.B.S. move. With only $1000 to trade on I made that $600 in one day last week. I paid my family back and have $1000 of my own money to trade with now...I'm moving on up.
I thank you for being honest and knowing what we are going through. Hang in there...I'm here with you!
Peace,
Brad
When you give the market no respect you will get run over
Well, I was definitely wrong when last week I said that the market wouldn't have the ability to break out to new highs just yet....but I knew better than to stubbornly short the market just because I felt this way. This move is making a lot of people I'm sure say "wow!” I remember saying that last year a lot of times as the market collapsed.
A lot of traders will probably be crippled or bankrupted by today's move because they shorted a market that they felt moved "too far too fast". One of the biggest money losing traps that traders fall into is buying a market they felt was oversold or shorting one they felt was overbought without any indication at all of a turnaround. Not only do they get it wrong but they end up making big bets on these types of trades, doubling and tripling down to the point where they are "all in" because they feel that a turnaround is all but guaranteed. The collapse of Long Term Capital Management is a perfect example of such a bad trade. The destruction of value funds who bought the likes of Citigroup and AIG last year on the way down is another. Why did these colossal mistakes happen? Because traders did not respect the market. Their ego’s were too big….they were telling the market “you’re wrong and I’m right”. The market can and WILL go to extremes and quite often when it does it is sending a loud message of a change in long term fundamentals. Yes, sometimes it's irrational exuberance or pessimism, but in either case its best you step aside and wait for the market to show signs of turning around in the direction you expect it to go, or if you really insist, only commit a portion of your capital and gradually add more ONLY when the market starts agreeing with you. If it doesn't you can just wait or cut and run....either way you shouldn't put yourself in the position of taking a big loss.
The golden rule of trading/investing is NEVER UNDER ANY CIRCUMSTANCES PUT YOURSELF IN THE POSITION OF TAKING A CRIPPLING LOSS. Because once you are wiped out...you are wiped out.
ALWAYS RESPECT WHAT THE MARKET IS SAYING WHETHER YOU AGREE OR NOT. If you don't you will learn to respect it the hard way.
As far as today's action goes, I doubt the bears are going to be let off the hook today. I suspect the market will close near the highs of the day. I might make a late day intraday trade to take advantage of this. If conditions aren't ideal then fuck it...I have no problems just watching the action today.
A lot of traders will probably be crippled or bankrupted by today's move because they shorted a market that they felt moved "too far too fast". One of the biggest money losing traps that traders fall into is buying a market they felt was oversold or shorting one they felt was overbought without any indication at all of a turnaround. Not only do they get it wrong but they end up making big bets on these types of trades, doubling and tripling down to the point where they are "all in" because they feel that a turnaround is all but guaranteed. The collapse of Long Term Capital Management is a perfect example of such a bad trade. The destruction of value funds who bought the likes of Citigroup and AIG last year on the way down is another. Why did these colossal mistakes happen? Because traders did not respect the market. Their ego’s were too big….they were telling the market “you’re wrong and I’m right”. The market can and WILL go to extremes and quite often when it does it is sending a loud message of a change in long term fundamentals. Yes, sometimes it's irrational exuberance or pessimism, but in either case its best you step aside and wait for the market to show signs of turning around in the direction you expect it to go, or if you really insist, only commit a portion of your capital and gradually add more ONLY when the market starts agreeing with you. If it doesn't you can just wait or cut and run....either way you shouldn't put yourself in the position of taking a big loss.
The golden rule of trading/investing is NEVER UNDER ANY CIRCUMSTANCES PUT YOURSELF IN THE POSITION OF TAKING A CRIPPLING LOSS. Because once you are wiped out...you are wiped out.
ALWAYS RESPECT WHAT THE MARKET IS SAYING WHETHER YOU AGREE OR NOT. If you don't you will learn to respect it the hard way.
As far as today's action goes, I doubt the bears are going to be let off the hook today. I suspect the market will close near the highs of the day. I might make a late day intraday trade to take advantage of this. If conditions aren't ideal then fuck it...I have no problems just watching the action today.
Retail investors slow to become bullish, quick to become bearish
The latest reading from the American Association of Individual Investors (AAII) which measures sentiment of retail investors shows 38% bulls, 42% bears. Recall 2 weeks ago when I warned about bearishness getting excessive signaling an immanent snapback rally. This was because AAII showed about a 2:1 ratio of bears over bulls.
So now, despite a massive rally back to the June highs, with some indices such as the NASDAQ breaking out to new highs bulls have risen and bears have fallen but only very slowly. We are still seeing bears outnumber bulls indicating the sticky skepticism that continues to exist ever since the March bottom. The same goes with the other sentiment measure I follow - Investor's Intelligence, which is a measure of newsletter sentiment. It too is showing sticky skepticism with a current bull/bear ratio of 1. Therefore, the way sentiment is behaving has longer term bullish implications or at the very least indicates that any downside in the market should be contained for now.
I said prior that we may be setting up for a situation similar to March 2002 if certain things fell into place. One of those pieces of the puzzle was sentiment and so far no dice there. The other pieces are the Rydex ratio which is getting there but not there yet and the VIX which is also getting there but no there yet.
Bottom line: Market is ST overbought, vulnerable to profit taking, but with the NASDAQ breaking out to YTD highs and SPX just about to join with no excessive bullish sentiment there is still upside potential that needs to be respected. Yes, I know we won't go up everyday forever, but for the market to have any meaningful downside potential (i.e. greater than 5%) we need to see sentiment get giddy again.
This is the type of market whereby it's too late to go long but too early to go short unless you day trade. I fucking hate when this happens!
So now, despite a massive rally back to the June highs, with some indices such as the NASDAQ breaking out to new highs bulls have risen and bears have fallen but only very slowly. We are still seeing bears outnumber bulls indicating the sticky skepticism that continues to exist ever since the March bottom. The same goes with the other sentiment measure I follow - Investor's Intelligence, which is a measure of newsletter sentiment. It too is showing sticky skepticism with a current bull/bear ratio of 1. Therefore, the way sentiment is behaving has longer term bullish implications or at the very least indicates that any downside in the market should be contained for now.
I said prior that we may be setting up for a situation similar to March 2002 if certain things fell into place. One of those pieces of the puzzle was sentiment and so far no dice there. The other pieces are the Rydex ratio which is getting there but not there yet and the VIX which is also getting there but no there yet.
Bottom line: Market is ST overbought, vulnerable to profit taking, but with the NASDAQ breaking out to YTD highs and SPX just about to join with no excessive bullish sentiment there is still upside potential that needs to be respected. Yes, I know we won't go up everyday forever, but for the market to have any meaningful downside potential (i.e. greater than 5%) we need to see sentiment get giddy again.
This is the type of market whereby it's too late to go long but too early to go short unless you day trade. I fucking hate when this happens!
Wednesday, July 22, 2009
massive put/call ratio so far
its at 1.32 which is showing ridiculous pessimism....which is bullish for the market today. I know this run up seems insane but just remember last year's action, did it not seem the same way on the downside? ALWAYS RESPECT THE MARKET no matter what you think.
I won't chase the market here long but with the put/call ratio so high, it's saying that too many traders are fading this rally expecting profit taking today like I was....therefore I want nothing to do with the short side either...at least for the morning.
I won't chase the market here long but with the put/call ratio so high, it's saying that too many traders are fading this rally expecting profit taking today like I was....therefore I want nothing to do with the short side either...at least for the morning.
Profit taking day today?
Probably, but I am still not seeing the rydex ratio and investor sentiment flip to the extremes in bullish sentiment that mirror the March 2002 top yet, so untill they do, I will only consider playing the bear side on a very short term basis i.e. intraday or 1-2 day holding periods because I don't think downside will get much traction until more people drop their guard.
Things I'm looking for to get IT bearish again:
1) bullish sentiment popping signficantly to about 2:1 bulls/bears
2) VIX dropping close to or below 20
3) Rydex ratio collapsing to the lows seen in mid June
Until these things happen any bearish trades I make like I said will be very short term. I strongly advise not chasing gap downs. If the market ends up going down back to about 910-915 without the above 3 conditions met, i.e. still a signficant ammount of bearish sentiment, then I believe odds are we will be setting up for an upleg to SPX 1000-1050. Let's see how this plays out...
Things I'm looking for to get IT bearish again:
1) bullish sentiment popping signficantly to about 2:1 bulls/bears
2) VIX dropping close to or below 20
3) Rydex ratio collapsing to the lows seen in mid June
Until these things happen any bearish trades I make like I said will be very short term. I strongly advise not chasing gap downs. If the market ends up going down back to about 910-915 without the above 3 conditions met, i.e. still a signficant ammount of bearish sentiment, then I believe odds are we will be setting up for an upleg to SPX 1000-1050. Let's see how this plays out...
Tuesday, July 21, 2009
my bad...
Apple's earnings comes out AFTER the bell not before. Blowout earnings again from CAT however which is yet another bellweather stock. Today's a coinflip day...I'm thinking chop.
Monday, July 20, 2009
It's all about expectations
So far about 80% of companies reporting earnings this quarter have exceeded analyst expectations. This is the second consecutive quarter now that this is occurring. Remember back in May how I said that analysts actually lowered expectations for future earnings even though earnings exceeded their 1st quarter expectations. I mentioned how this was a form of anchoring....a psychological trap that investors fall into which occurs when investors/analysts fail to adequately adjust their posture when new information conflicts with it....basically a form of denial. This is no longer occurring. Forward earnings estimates for the S&P have been rising since June but obviously not fast enough because so far earnings reports are blowing past expectations.
There's good and bad news to this. The good news is that even though expectations are now rising analysts may continue to be behind the curve constantly underestimating earnings. They did this on the way down for the entire year of 2008 whereby they constantly overestimated earnings again and again even as they lowered expectations. As expecations get adjusted so do stock prices.
The bad news is that the easy money has now been made on this trade. As a result of Intel and Goldman blowing out numbers, the surprise factor won't be as large and expectations I'm sure are going to be adjusted upward in a big way. This can set the stage for massive disappointment if this economic bounce we are seeing is just an inventory re-stocking blip i.e. a snap back from the standstill the economy was at back in the fall. But the burden of proof is on the bears because the economy has bounced and earnings are on the mend. Can you see now why it has been so difficult for the bears to gain traction on the short side? Yes, jobs are still being lost but that's a lagging indicator. I've read some comments from a few pundits who claim that job losses may now be a leading indicator. This is nonsense if you ask me and just another form of denial from wrong way bears that have egg on their faces.
The question I ask myself now is where will the new jobs be created? In the past this has always been asked by people whenever there was a recession. Nobody really knew but somehow they got created. You had to have faith and guess what...it worked....the jobs came. In the last downturn, housing construction and finance jobs were the source of growth...this time around they won't be....perhaps with infrastructure spending planned they will come from there but is that really a source of job creation that will power the US to regain it's former self of being the leader of innovation? I don't think so. Some other source better be there otherwise it's going to be tough slogging for several years a la Japan post 1990.
Right now we are seeing the tech sector take charge...so perhaps the market is signaling that tech is once again going to lead and so maybe the jobs will be created there again. One very bullish prominent theme that existed just prior to this debacle was the coming explosion of the consumerism from developing countries, China in particular, as the poor transition to the middle class. This was supposed to provide for tremendous growth opportunities for companies all over the world. The problem however, was that the poor was transitioning to middle class by way of providing goods and services to overindulging North American consumers....a trend which was unsustainable. They suffered as we suffered but now with China taking matters into their own hands with their stimulus efforts perhaps they are showing signs of a self-sustaining economy. It's far too early to determine if that's the case though. Anyhow, I digress.
I always take my cue from the market. If I believe a particular theme may play out, I want to see signs that the market is agreeing with me (basing or uptrend price action) and I want to find low risk entry points. I want to make sure that my thesis is not an overcrowded trade because that never works. An example of an overcrowded trade has been the constant failed bottom picking of the Natural Gas sector. Several people are making the argument that the price of Natural Gas is undervalued...it probably is but that hasn't stopped the sector from it's sickening slide and many people have been run over by it. Another example was shorting bonds in the fall last year. Bond bears got ran over big time before bonds topped out early this year.
With the market closing at 951 today it has cleaned out yet another cohort of bears. I don't think there are much left now to squeeze. The market is almost maximum ST overbought....don't get me wrong here....it's already extremely overbought ST and ripe for a pullback...I'm just saying that I have seen it get even more ST overbought...namely early January of this year.
The bottom line is that it would be foolish to be long here for the ST aside from possible intraday scalps. Sure, we can squeeze higher but the potential for profit taking on either a sell on the news reaction or any sliver of a negative surprise is very high and like I said, I don't think there are too many weak bears left to squeeze.
I suppose a break of 960 on the SPX would cause ultimate capitulation of whatever weak bears remain and whatever sidelined money itching to get back in is out there given that this would be a new YTD high for the SPX. The NASDAQ has already made a new YTD high and this has been the leading sector but the fact that is up 9 days in a row is silly...but silly or not, never show a lack of respect for the market because it can and will do the impossible. Anyone who thought 6 days in row was silly and shorted as a result is trapped with losses.
We probably will finally see a down day tomorrow on a "sell the news" reaction to Apple's earnings which will probably be quite good. Will I be suprised if this doesn't happen?...yes and no.
There's good and bad news to this. The good news is that even though expectations are now rising analysts may continue to be behind the curve constantly underestimating earnings. They did this on the way down for the entire year of 2008 whereby they constantly overestimated earnings again and again even as they lowered expectations. As expecations get adjusted so do stock prices.
The bad news is that the easy money has now been made on this trade. As a result of Intel and Goldman blowing out numbers, the surprise factor won't be as large and expectations I'm sure are going to be adjusted upward in a big way. This can set the stage for massive disappointment if this economic bounce we are seeing is just an inventory re-stocking blip i.e. a snap back from the standstill the economy was at back in the fall. But the burden of proof is on the bears because the economy has bounced and earnings are on the mend. Can you see now why it has been so difficult for the bears to gain traction on the short side? Yes, jobs are still being lost but that's a lagging indicator. I've read some comments from a few pundits who claim that job losses may now be a leading indicator. This is nonsense if you ask me and just another form of denial from wrong way bears that have egg on their faces.
The question I ask myself now is where will the new jobs be created? In the past this has always been asked by people whenever there was a recession. Nobody really knew but somehow they got created. You had to have faith and guess what...it worked....the jobs came. In the last downturn, housing construction and finance jobs were the source of growth...this time around they won't be....perhaps with infrastructure spending planned they will come from there but is that really a source of job creation that will power the US to regain it's former self of being the leader of innovation? I don't think so. Some other source better be there otherwise it's going to be tough slogging for several years a la Japan post 1990.
Right now we are seeing the tech sector take charge...so perhaps the market is signaling that tech is once again going to lead and so maybe the jobs will be created there again. One very bullish prominent theme that existed just prior to this debacle was the coming explosion of the consumerism from developing countries, China in particular, as the poor transition to the middle class. This was supposed to provide for tremendous growth opportunities for companies all over the world. The problem however, was that the poor was transitioning to middle class by way of providing goods and services to overindulging North American consumers....a trend which was unsustainable. They suffered as we suffered but now with China taking matters into their own hands with their stimulus efforts perhaps they are showing signs of a self-sustaining economy. It's far too early to determine if that's the case though. Anyhow, I digress.
I always take my cue from the market. If I believe a particular theme may play out, I want to see signs that the market is agreeing with me (basing or uptrend price action) and I want to find low risk entry points. I want to make sure that my thesis is not an overcrowded trade because that never works. An example of an overcrowded trade has been the constant failed bottom picking of the Natural Gas sector. Several people are making the argument that the price of Natural Gas is undervalued...it probably is but that hasn't stopped the sector from it's sickening slide and many people have been run over by it. Another example was shorting bonds in the fall last year. Bond bears got ran over big time before bonds topped out early this year.
With the market closing at 951 today it has cleaned out yet another cohort of bears. I don't think there are much left now to squeeze. The market is almost maximum ST overbought....don't get me wrong here....it's already extremely overbought ST and ripe for a pullback...I'm just saying that I have seen it get even more ST overbought...namely early January of this year.
The bottom line is that it would be foolish to be long here for the ST aside from possible intraday scalps. Sure, we can squeeze higher but the potential for profit taking on either a sell on the news reaction or any sliver of a negative surprise is very high and like I said, I don't think there are too many weak bears left to squeeze.
I suppose a break of 960 on the SPX would cause ultimate capitulation of whatever weak bears remain and whatever sidelined money itching to get back in is out there given that this would be a new YTD high for the SPX. The NASDAQ has already made a new YTD high and this has been the leading sector but the fact that is up 9 days in a row is silly...but silly or not, never show a lack of respect for the market because it can and will do the impossible. Anyone who thought 6 days in row was silly and shorted as a result is trapped with losses.
We probably will finally see a down day tomorrow on a "sell the news" reaction to Apple's earnings which will probably be quite good. Will I be suprised if this doesn't happen?...yes and no.
How NOT to trade
Here's a post I just read from a bearish blog site
it broke.1050spx tired of this bearish crap. im LONG from here to 1050. gl
This was a post from a bearish trader who for weeks was short and now threw in the towel and is even going long! He's doing this at a time when the market is extremely ST overbought and at major resistance. You see, in the end so many of these bears that cite fundamentals, p/e ratios and other "logic" to back up their bearish positions end up covering at the worst of times because they can't take the pain and by covering they just add to the "insanity" that they complain about!
I think the market has been very resiliant today because of Apple's earnings slated earnings release tommorow morning. It looks like a lot of burnt bears like the above trader have had enough and can't bear the thought of the market gapping and running tommorow morning like what happened after Intel reported and so they are packing it in.
This is the sort of capitulation that occurs near tops. Obviously this is only 1 trader but I've been seeing similar capituation elsewhere. When enough of these guys are out of the market then you can expect to see at least a ST top, if not an IT top.
it broke.1050spx tired of this bearish crap. im LONG from here to 1050. gl
This was a post from a bearish trader who for weeks was short and now threw in the towel and is even going long! He's doing this at a time when the market is extremely ST overbought and at major resistance. You see, in the end so many of these bears that cite fundamentals, p/e ratios and other "logic" to back up their bearish positions end up covering at the worst of times because they can't take the pain and by covering they just add to the "insanity" that they complain about!
I think the market has been very resiliant today because of Apple's earnings slated earnings release tommorow morning. It looks like a lot of burnt bears like the above trader have had enough and can't bear the thought of the market gapping and running tommorow morning like what happened after Intel reported and so they are packing it in.
This is the sort of capitulation that occurs near tops. Obviously this is only 1 trader but I've been seeing similar capituation elsewhere. When enough of these guys are out of the market then you can expect to see at least a ST top, if not an IT top.
Sunday, July 19, 2009
Keep in mind a few things...
I mentioned how the market reminds me of March 2002 which afterwards led to a big multi-month decline. Let me be clear that conditions are still NOT ALL yet in place for this notion to be confirmed. Certain things are unfolding the same way but what we also need to see happen is the rydex ratio continue it's collapse, the VIX continue it's decent and bullish sentiment as per AAII show a significant spike to about 2:1 bulls vs. bears. Until these things occur it would be premature to make the comparison complete. If things unfold differently then I will toss this March 2002 replay idea into the garbage. No sweat off my back and no ego damage either. Rather than defend a wrong notion I had to "save face" like so many other blog writers do, I will just try to adapt to the conditions at hand. I have frequently revised my outlooks during the past few months…sometimes significantly so and so far I have been fortunate enough to be right more times than wrong.
It is very important to be flexible and keep and open mind about what the market is going to do. I find way too many traders are biased to one side of the market. Learn to let go. Understand and believe in the motto of this blog. No matter what your convictions are for the end game in the economy you have to realize that it could takes several months, years or even decades for it to come to fruition. The collapse of Rome didn't happen in 2 years....it took about a century.
If you trade according to your personal beliefs of what the economy should or will end up doing, you will get crushed unless you can find the patience and the means to buy and hold the position for a long, long time. And what if you end up being wrong? What a colossal waste of time and money that would be. Ask Robert Prechter who after 1987 crash called for the 2nd depression. This is why I focus more on shorter term time frames....not necessarily day trading mind you.....IMO, most people shouldn't be day trading because it can often be just like gambling on a roulette wheel.
Understand and believe in the motto of this blog. Save your personal opinions and biases to coffee shop conversations. Find out what other people are thinking. If you realize that a lot of market participants share the same view as you that means that either a) the trend is old, is well priced in to the market already and a long term reversal is immanent or b) the market will likely begin a significant move in the opposite direction to shake out the weak holders and johnny-come-latelys before resuming course.
Once you don't care which way the market goes so long as you are on the right side of it then you are in much better frame of mind to make money. You will be able to assess conditions more objectively and realize much quicker when you are wrong. A lot of traders vow to act on this notion but they can't because they can't completely ignore their deep rooted biases.
I can almost guarantee you that over 90% of any bearish retail investor who posts on message boards or blogs have lost money over the past 12 months even though the market is still significantly down from 12 months ago. They likely closed out bearish bets too soon during the collapse and entered them too early since the rally started in March...and probably entered large bets too given the false sense of confidence they gained when they made money during the collapse.
It is very important to be flexible and keep and open mind about what the market is going to do. I find way too many traders are biased to one side of the market. Learn to let go. Understand and believe in the motto of this blog. No matter what your convictions are for the end game in the economy you have to realize that it could takes several months, years or even decades for it to come to fruition. The collapse of Rome didn't happen in 2 years....it took about a century.
If you trade according to your personal beliefs of what the economy should or will end up doing, you will get crushed unless you can find the patience and the means to buy and hold the position for a long, long time. And what if you end up being wrong? What a colossal waste of time and money that would be. Ask Robert Prechter who after 1987 crash called for the 2nd depression. This is why I focus more on shorter term time frames....not necessarily day trading mind you.....IMO, most people shouldn't be day trading because it can often be just like gambling on a roulette wheel.
Understand and believe in the motto of this blog. Save your personal opinions and biases to coffee shop conversations. Find out what other people are thinking. If you realize that a lot of market participants share the same view as you that means that either a) the trend is old, is well priced in to the market already and a long term reversal is immanent or b) the market will likely begin a significant move in the opposite direction to shake out the weak holders and johnny-come-latelys before resuming course.
Once you don't care which way the market goes so long as you are on the right side of it then you are in much better frame of mind to make money. You will be able to assess conditions more objectively and realize much quicker when you are wrong. A lot of traders vow to act on this notion but they can't because they can't completely ignore their deep rooted biases.
I can almost guarantee you that over 90% of any bearish retail investor who posts on message boards or blogs have lost money over the past 12 months even though the market is still significantly down from 12 months ago. They likely closed out bearish bets too soon during the collapse and entered them too early since the rally started in March...and probably entered large bets too given the false sense of confidence they gained when they made money during the collapse.
This is starting to look like March 2002
I've said here in the past that the action we've seen in the market since the low in March reminded me of a combination of both the post 911 rally and the March 2003 bear market bottom rally. It's now looking more and more like the post 911 rally which played out as followes...a 3 month rally followed by a 3 month topping process followed by a serious multi-month decline. So far, we’ve had a 3 month rally and 2 months of consolidation.
The 911 debacle was very similar to the debacle we saw last fall in the sense that it was a black swan event....i.e. extremely improbable. In both periods the economy was already weak but the black swan events accelerated the downturn causing the economy to grind to a halt... literally. But an economic recovery and big stock market rally ensued. In fact, the recession was actually over in 2001....but that didn't prevent the last and most brutal down leg of the bear market to occur in the months ahead of 2002.
Right now we are seeing the economy bounce from a very depressed state late last year just like after 911. We've had a big 3 month rally just like after 911 and now we've been going sideways for a couple of months. Before the market rolled over in 2002 there was a massive head fake that occurred in February 2002. Traders went for the kill and aggressively shorted the market in February when it appeared like it was rolling over. How do I know traders were aggressively shorting? Take a look at how the Rydex ratio (adjusted for cash flows) below was behaving along with how the market was behaving. Without going into painful details, basically, the rydex ratio is a measure of trader sentiment. The higher it is the more traders are betting against the market than for it. It is useful as a contrary indicator.
Notice how the Rydex ratio exploded upwards in February 2002 to levels that exceed bearishness seen at the 911 lows. This was unjustified bearish sentiment given that the market had only pulled back moderately. The surge in bearishness created the fuel for a sharp rally back to the highs by early March 2002. That rally really sent the bears packing as sentiment completed reversed. Think about what they just went though...they basically shorted the entire post 911 rally with nothing to show for but losses and then, just like when it seemed like the market was rolling over for good, traders aggresiviely shorted thinking that finally they would be vindicated. But when they go burned again, that was the last straw. They gave up for good this time or if they did decide to go short again, they vowed not to get greedy and take profits quickly. This of course set the stage for the final bear market down leg.
You see, in order for a bear market down leg to occur, markets have to get to the point whereby investors drop their guard thinking that the coast is clear and the bearishly inclined folks have to be humbled to the point where they are too afraid to short or if they did, went small and took profits quickly fearing another upside spike could bushwhack them again at anytime. Regardless of the fundamentals, when the shorts get bold the market spanks them good just like last week.
Now take a look below at the rydex ratio over the past few months. Notice, how just like in February 2002, traders aggressively piled into the short side as the market appeared to have rolled over from a high, in this case the June 2009 high. Now you can see how the rydex ratio is quickly becoming unwound after the big rally we've had. It’s not at the opposite extreme yet, but if we continue to see the rydex ratio collapse from here with the market only making marginal gains then I believe we may have a situation similar to March 2002 which was a major top leading to serious downside.
I'll be keeping a close eye on the rydex ratio and the VIX in the coming days. Next week will probably be choppy. With the NASDAQ up 8 days in a row, it's likely a bit of colling off at the very least is in order.
The 911 debacle was very similar to the debacle we saw last fall in the sense that it was a black swan event....i.e. extremely improbable. In both periods the economy was already weak but the black swan events accelerated the downturn causing the economy to grind to a halt... literally. But an economic recovery and big stock market rally ensued. In fact, the recession was actually over in 2001....but that didn't prevent the last and most brutal down leg of the bear market to occur in the months ahead of 2002.
Right now we are seeing the economy bounce from a very depressed state late last year just like after 911. We've had a big 3 month rally just like after 911 and now we've been going sideways for a couple of months. Before the market rolled over in 2002 there was a massive head fake that occurred in February 2002. Traders went for the kill and aggressively shorted the market in February when it appeared like it was rolling over. How do I know traders were aggressively shorting? Take a look at how the Rydex ratio (adjusted for cash flows) below was behaving along with how the market was behaving. Without going into painful details, basically, the rydex ratio is a measure of trader sentiment. The higher it is the more traders are betting against the market than for it. It is useful as a contrary indicator.
Notice how the Rydex ratio exploded upwards in February 2002 to levels that exceed bearishness seen at the 911 lows. This was unjustified bearish sentiment given that the market had only pulled back moderately. The surge in bearishness created the fuel for a sharp rally back to the highs by early March 2002. That rally really sent the bears packing as sentiment completed reversed. Think about what they just went though...they basically shorted the entire post 911 rally with nothing to show for but losses and then, just like when it seemed like the market was rolling over for good, traders aggresiviely shorted thinking that finally they would be vindicated. But when they go burned again, that was the last straw. They gave up for good this time or if they did decide to go short again, they vowed not to get greedy and take profits quickly. This of course set the stage for the final bear market down leg.
You see, in order for a bear market down leg to occur, markets have to get to the point whereby investors drop their guard thinking that the coast is clear and the bearishly inclined folks have to be humbled to the point where they are too afraid to short or if they did, went small and took profits quickly fearing another upside spike could bushwhack them again at anytime. Regardless of the fundamentals, when the shorts get bold the market spanks them good just like last week.
Now take a look below at the rydex ratio over the past few months. Notice, how just like in February 2002, traders aggressively piled into the short side as the market appeared to have rolled over from a high, in this case the June 2009 high. Now you can see how the rydex ratio is quickly becoming unwound after the big rally we've had. It’s not at the opposite extreme yet, but if we continue to see the rydex ratio collapse from here with the market only making marginal gains then I believe we may have a situation similar to March 2002 which was a major top leading to serious downside.
I'll be keeping a close eye on the rydex ratio and the VIX in the coming days. Next week will probably be choppy. With the NASDAQ up 8 days in a row, it's likely a bit of colling off at the very least is in order.
Thursday, July 16, 2009
The Roubini rally?
The boring, choppy action I called for today occured as expected....until about 2pm when suddenly the market got a dose of viagra. Apperently, it was sparked by a comment made by Roubini who claimed the reccession would be over by the end of the year which I suppose people took as a form of capituation from this perma bear. Obviously there is no way to anticipate these sorts of catalysts.
Today's action really stuck it hard to the bears. Capitulation yet again was evident by how the market spiked after it took out 935. That one must of really put the dagger into the heart of all those dogmatic bears out there. In 2 days, the've seen 3 weeks worth of gains get wiped out and then some.
Here's a comment from the SPY message board on yahoo
Do you all think the HYPE machine is finally in full gear? Is this rally going to spx 1000 + ? I was wiped out with my puts ....
When enough bears believe that SPX 1000 is inevidable that's when the bottom of this market may fall out....but then again, like I said yestersday, it seems like anytime we get capituation like the above comment all it takes is a marginal decline to give these lemmings back their convictions....untill they get slapped around again. Eventually, these weak bears will give up permanently and that's when the market will have potential to see serious downside.
The ST outlook is still the same....it just made things even more overbought in the ST. The market will have a very tough time advancing signficiantly from here in the ST. A downside correction or at the very least a tight sideways chop is in store. If we get the latter with a surge in bullishness and collapse in the VIX then look out below.
I'm also prepared for the possibility of a retest of the highs or even break of them after a small dip next week. I seriously doubt the market would have any gas to make it to 1000 if it breaks 950 at this point. It would likely be a serious headfake.
I'm not sure about tommorow....I'm thinking mild pullback or sideways chop again...I'll be playing this by ear and looking to take advantage of cheap option opportunities.
Bottom line: I'm keeping an open mind to possibilities but odds suggest that in due time this rally will fail back to about 915 at the very least even if it means markets go sideways or higher first.
The market is NOT in the position to make a run for 1000 at this point in time.....mabey later on in the year but not now....in my opinion of course.
Today's action really stuck it hard to the bears. Capitulation yet again was evident by how the market spiked after it took out 935. That one must of really put the dagger into the heart of all those dogmatic bears out there. In 2 days, the've seen 3 weeks worth of gains get wiped out and then some.
Here's a comment from the SPY message board on yahoo
Do you all think the HYPE machine is finally in full gear? Is this rally going to spx 1000 + ? I was wiped out with my puts ....
When enough bears believe that SPX 1000 is inevidable that's when the bottom of this market may fall out....but then again, like I said yestersday, it seems like anytime we get capituation like the above comment all it takes is a marginal decline to give these lemmings back their convictions....untill they get slapped around again. Eventually, these weak bears will give up permanently and that's when the market will have potential to see serious downside.
The ST outlook is still the same....it just made things even more overbought in the ST. The market will have a very tough time advancing signficiantly from here in the ST. A downside correction or at the very least a tight sideways chop is in store. If we get the latter with a surge in bullishness and collapse in the VIX then look out below.
I'm also prepared for the possibility of a retest of the highs or even break of them after a small dip next week. I seriously doubt the market would have any gas to make it to 1000 if it breaks 950 at this point. It would likely be a serious headfake.
I'm not sure about tommorow....I'm thinking mild pullback or sideways chop again...I'll be playing this by ear and looking to take advantage of cheap option opportunities.
Bottom line: I'm keeping an open mind to possibilities but odds suggest that in due time this rally will fail back to about 915 at the very least even if it means markets go sideways or higher first.
The market is NOT in the position to make a run for 1000 at this point in time.....mabey later on in the year but not now....in my opinion of course.
Wednesday, July 15, 2009
ST buying climax likely today
As you can see by the chart below, we almost most certaintly hit a ST buying climax today which means tommorow is very likely going to be a flat or down day. Any gap up open will be gift to short but I doubt that's going to happen.
After big rallies like this, it is common to see the market have a boring, choppy day the next day but with a downward bias. I expect this to be the case unless there is some significant bearish surprise in the morning news.
I pointed out just prior to this surge that bearishness was building quite rapidly and to watch out for a snapback rally. We got that big time and I believe we will need to see this bearishness fade away before any sustainable downtrend reasserts itself. That doesn't means there won't be any sharp drops in the market, but rather that untill this bearish sentiment diminishes, any downside will be contained from a longer term picture perspective just like how it has been so far since the rally peaked in June.
There was quite a bit of bear capitulation today, but it seems like anytime the bears capitulate all it takes is a 2% drop in the market to give them back their courage and the moment they get aggressive on the short side they pull a Charlie Brown and fall flat on their backs and the cycle repeats.
I believe strongly that this rally will be retraced completely in due time but before it does I expect to see at least a day or 2 of choppiness. After that I will evaluate again.
The key to successfully trading these markets has been buying the dips and selling the rips...we just got one hell of a rip. But don't be stupid enough to go "all in" on any trade.
After big rallies like this, it is common to see the market have a boring, choppy day the next day but with a downward bias. I expect this to be the case unless there is some significant bearish surprise in the morning news.
I pointed out just prior to this surge that bearishness was building quite rapidly and to watch out for a snapback rally. We got that big time and I believe we will need to see this bearishness fade away before any sustainable downtrend reasserts itself. That doesn't means there won't be any sharp drops in the market, but rather that untill this bearish sentiment diminishes, any downside will be contained from a longer term picture perspective just like how it has been so far since the rally peaked in June.
There was quite a bit of bear capitulation today, but it seems like anytime the bears capitulate all it takes is a 2% drop in the market to give them back their courage and the moment they get aggressive on the short side they pull a Charlie Brown and fall flat on their backs and the cycle repeats.
I believe strongly that this rally will be retraced completely in due time but before it does I expect to see at least a day or 2 of choppiness. After that I will evaluate again.
The key to successfully trading these markets has been buying the dips and selling the rips...we just got one hell of a rip. But don't be stupid enough to go "all in" on any trade.
Bulls off to the races?....not so fast
I mentioned yesterday that although I expected upside I did not believe the market was ready to blast off to new highs just yet. The nature of today's advance i.e. an emotional gap up and run suggests this be the case. If anyone has been reading this blog from when I first started it, I have stressed a few times before that the way the market moves up or down is just as important as the closing price of the market itself.
Sustainable advances or declines tend to be orderly affairs. In the case of an uptrend for example, a healthy, sustainable advance is characterized by the market starting off the day weak or flat and then gradually rising making a series of higher highs and higher lows closing near the high of the day. This signifies "wall of worry" behavior which all bull markets must climb. Of course, not everyday has to be like this for a healthy advance to continue but certainly these types of gap up and run days are indicative of emotional trading which are NOT sustainable. Think of days like today like a boost of energy you get from a sugar rush.
Simply looking at a chart and concluding such and such a pattern exists without taking into account the nature of the advance/decline is folly. Here's a good example of what I'm talking about. Take for instance 2 supermodels. Both are equally gorgeous in appearance but one of them got that way by starving herself and taking drugs while the other got there by healthy dieting and exercise. Which girl would you rather date? Obviously the latter but unless you knew about these "internal" differences you would be indifferent about either girl judging both on appearance alone.
For the past several months the market has been characterized by emotional gap and run days like today both on the upside and downside which is why we have gone essentially nowhere on a net basis due to the unsustainably of such moves. This is a symptom of a market that is being dominated by short term traders getting whipsawed left, right and center. After the collapse of last year the concept of buy and hold is dead and even the so called "professionals" on TV who always preached investing for the long term are now frequently advocating that investors become active with their investing. The problem with this is that day to day volatility will increase significantly as the herd of buffalos stampede from one edge of the cliff to the other. The proliferation of all these 2x and 3x ETFs simply adds fuel to the fire. There needs to be enough long term investors to buy and hold for the market to start acting "normal" again.
But there's no sense in hoping for things to get normal. You have to play the cards you are dealt. I believe this entire move today will get retraced in the not so distant future. If the market closes at about current levels (SPX 925) it will be fully ST overbought. I also believe that the H&S pattern isn’t necessarily invalidated just yet…sometimes a second right shoulder is formed to shake out weak bears.
Sustainable advances or declines tend to be orderly affairs. In the case of an uptrend for example, a healthy, sustainable advance is characterized by the market starting off the day weak or flat and then gradually rising making a series of higher highs and higher lows closing near the high of the day. This signifies "wall of worry" behavior which all bull markets must climb. Of course, not everyday has to be like this for a healthy advance to continue but certainly these types of gap up and run days are indicative of emotional trading which are NOT sustainable. Think of days like today like a boost of energy you get from a sugar rush.
Simply looking at a chart and concluding such and such a pattern exists without taking into account the nature of the advance/decline is folly. Here's a good example of what I'm talking about. Take for instance 2 supermodels. Both are equally gorgeous in appearance but one of them got that way by starving herself and taking drugs while the other got there by healthy dieting and exercise. Which girl would you rather date? Obviously the latter but unless you knew about these "internal" differences you would be indifferent about either girl judging both on appearance alone.
For the past several months the market has been characterized by emotional gap and run days like today both on the upside and downside which is why we have gone essentially nowhere on a net basis due to the unsustainably of such moves. This is a symptom of a market that is being dominated by short term traders getting whipsawed left, right and center. After the collapse of last year the concept of buy and hold is dead and even the so called "professionals" on TV who always preached investing for the long term are now frequently advocating that investors become active with their investing. The problem with this is that day to day volatility will increase significantly as the herd of buffalos stampede from one edge of the cliff to the other. The proliferation of all these 2x and 3x ETFs simply adds fuel to the fire. There needs to be enough long term investors to buy and hold for the market to start acting "normal" again.
But there's no sense in hoping for things to get normal. You have to play the cards you are dealt. I believe this entire move today will get retraced in the not so distant future. If the market closes at about current levels (SPX 925) it will be fully ST overbought. I also believe that the H&S pattern isn’t necessarily invalidated just yet…sometimes a second right shoulder is formed to shake out weak bears.
Don't say I didn't warn you
Late Thursday I said look for a retest of the lows i.e. 870ish either Friday or Monday before a surge higher. We got that and now with Intel blowing out their numbers tonight, the market is poised for a large gap up on Wednesday. The head and shoulders pattern bears were salivating over has led to one of those Charlie Brown moments when he runs to kick the football that is being held by Lucy only for her to yank it away at the last moment leaving poor Charlie Brown flattened on his back. The funny thing about it is that Charlie Brown seems to fall for the same trick over and over again. On each attempt he is somehow convinced that this time he will be successful but never once did he ever kick that ball.
I warned right here well in advance that if the market had made an important top in June, don't expect it to be easy to capitalize on the downside because traders and investors have been very quick to turn bearish on only marginal declines. Mr. Market will continue to punish this type of behavior untill enough people give up on the notion that the market is going to crash and restest the lows. Only when enough people fully embrace the notion that the worst is over and there will be no retest or double dip reccession will the market have the potential to drop significantly.
I still believe the market is not in a position to make a run for new highs just yet either, but the longer the market maintains this sideways holding pattern, the more likely it will make a signficant upleg higher latter on because in another few weeks or so, the market will have fully worked off it's IT overbought condition and actually become slightly IT oversold.
After the Goldman Sachs report, this Intel news is now the second bell weather stock in a row to have blown past its expectations. Should you be suprised? I'm not. Here's what I said on May 11th
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"
I warned right here well in advance that if the market had made an important top in June, don't expect it to be easy to capitalize on the downside because traders and investors have been very quick to turn bearish on only marginal declines. Mr. Market will continue to punish this type of behavior untill enough people give up on the notion that the market is going to crash and restest the lows. Only when enough people fully embrace the notion that the worst is over and there will be no retest or double dip reccession will the market have the potential to drop significantly.
I still believe the market is not in a position to make a run for new highs just yet either, but the longer the market maintains this sideways holding pattern, the more likely it will make a signficant upleg higher latter on because in another few weeks or so, the market will have fully worked off it's IT overbought condition and actually become slightly IT oversold.
After the Goldman Sachs report, this Intel news is now the second bell weather stock in a row to have blown past its expectations. Should you be suprised? I'm not. Here's what I said on May 11th
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"
Friday, July 10, 2009
Some encouraging signs
The market has been acting pretty much exactly how I expected....so now what? I believe another retest of the lows at 870ish is in store but I gotta warn you bears out there....the bear side is getting pretty crowded yet again. Take for instance the latest AAII sentiment poll. 55% of respondants are bearish while only 28% are bullish. That's about a 2:1 ratio of bears over bulls. The last time these guys were this bearish was just after the market low in March...thus, the wall of worry is being rebuilt quite rapidily it seems.
Despite the fact that the market had a 40% rally off the March lows, not once did bulls ever outnumber bears by 2:1. The highest it ever got was about 1.3:1 in mid June which shows that people only turned more bullish begrudgingly kicking and screaming...but all it took was about an 8% decline to see these same people embrace the bear camp with open arms. This folks is the classic snake bite psycology in effect. Memories of catastrophic losses are still very fresh and so investors have their gaurds up at the first sign of weakness.
Take a look at the financial headlines and opinions out there from the typcial pundit. The unanimous consensus right now is that any recovery will be slow and quite possibly has already stalled. Even if this is the case, it will difficult for the market to drop sustantially when expectations are low like this. The suprise factor actually favors the bulls here unless we see the economy fall off a cliff big time.
Everyone seems to be talking about this head and shoulders pattern in the market. The question amongst traders out there is when it breaks and picking the right spot to go short. Not a soul out there it seems, thinks that this correction may be just about over. I don't care how good of technical analyst you think you are or if such and such momentum indicators is giving a buy/sell signal, the market tends to go in the direction that causes the most ammount of pain for traders as per the motto of this blog. I've seen it happen time and time again.
So, if everyone has the same trade on who's the sucker that is going to have to lose for you to win? As the old saying goes, if you can't find the sucker at the poker table that sucker is you.
Despite all this, there is still the potential for at least a retest of the lows we saw Wednesday in the comming day(s)....quite possibly tommorow or Monday....but be very carefull if you play the short side because the short side is crowded enough for the market to see a vicious snap back rally at anytime. Next week I belive will be a bullish week if we can see the market retest those lows.
For now I continue to play things 1 day at a time keeping an open mind to both sides of the market.
Despite the fact that the market had a 40% rally off the March lows, not once did bulls ever outnumber bears by 2:1. The highest it ever got was about 1.3:1 in mid June which shows that people only turned more bullish begrudgingly kicking and screaming...but all it took was about an 8% decline to see these same people embrace the bear camp with open arms. This folks is the classic snake bite psycology in effect. Memories of catastrophic losses are still very fresh and so investors have their gaurds up at the first sign of weakness.
Take a look at the financial headlines and opinions out there from the typcial pundit. The unanimous consensus right now is that any recovery will be slow and quite possibly has already stalled. Even if this is the case, it will difficult for the market to drop sustantially when expectations are low like this. The suprise factor actually favors the bulls here unless we see the economy fall off a cliff big time.
Everyone seems to be talking about this head and shoulders pattern in the market. The question amongst traders out there is when it breaks and picking the right spot to go short. Not a soul out there it seems, thinks that this correction may be just about over. I don't care how good of technical analyst you think you are or if such and such momentum indicators is giving a buy/sell signal, the market tends to go in the direction that causes the most ammount of pain for traders as per the motto of this blog. I've seen it happen time and time again.
So, if everyone has the same trade on who's the sucker that is going to have to lose for you to win? As the old saying goes, if you can't find the sucker at the poker table that sucker is you.
Despite all this, there is still the potential for at least a retest of the lows we saw Wednesday in the comming day(s)....quite possibly tommorow or Monday....but be very carefull if you play the short side because the short side is crowded enough for the market to see a vicious snap back rally at anytime. Next week I belive will be a bullish week if we can see the market retest those lows.
For now I continue to play things 1 day at a time keeping an open mind to both sides of the market.
Thursday, July 9, 2009
Bulls looking weak today
Earnings released so far have been better than expected but so far the market is yawning. Bonds are down and the Nasdaq 100 (leading sector) is relativley weak which aren't good signs for sustained advance. No significant follow through from the reversal yesterday so far suggests more weakness later on either later on in the day or tommorow. I said yesterday that I had the feeling too many traders were looking to play an oversold bounce and so these guys and gals will likely start getting nervous cutting and running if we don't get any upside traction soon.
Wednesday, July 8, 2009
False Breakdown #1
I warned about the potential for a false breakdown from the widely advertised H&S pattern on the SPX. The market is ST oversold and still has a chance to make a little bounce but the NASDAQ/NYSE ratio is still at a high 1.88 indicating that any rally attempt here likey will be limited for now unless of course traders do an about face. However, there's plenty of ST fuel for a move back to 900. There's also an unfilled gap at 920. Like I said before, if this is the begining of another major downleg, don't expect it to be easy to profit from.
One thing the bulls got going for them is the VIX. I made a post about a week ago claiming how the behavior in the VIX was signalling complacency by making lower lows as the market made lower highs. This behavior is no longer the case. Today we saw a bit of the opposite behavior whereby the VIX popped signficantly even though the marke was only showing moderate weakness at best and it remained in the green even though the market closed essentially flat.
Bottom line: look for the market to make a rally attempt in the comming days to about 900...but be very careful. I think a lot of people now are expecting a bounce tommorow so it may end up being a weak one followed by a another retest of the lows on Friday. Again, this is guesswork here because obviously headline risk will have an impact and one must adapt accordingly. I always keep an eye on the intraday put/call ratio to fine tune my intraday outlook as well.
I continue to stress that the key to success in this type of market is buying on weakness selling on strength especially at those points when it seems difficult to do so. The tough trade is usually the right trade. I tend to either wait for some sort of confirmation of a turning point or capitulatory type behavior when making my entries. For example, today I bought calls on CYOU at about 12pm on the double bottom. I sold them shortly after for a quick gain anticipating a turnaround in the market. Part of the reason I sold so soon was that it didn't pop as much as I thought it would given it's strong relative strength since it IPOed a few months ago. The other reason was that given how these were OTM calls with 8 trading days untill expiry the theta burn is quite high and so if the pop in the stock ended up fizzling by EOD, any moderate gap down the next day would result in the call getting crushed without giving me a chance to cut losses effectivily thereby putting me in the a "dear in the headlights" position. I REFUSE to be in such a position and with earnings season kicking off, it makes the market more prone to significant gaps.
Regarding yesterday's mystery chart for anyone who cares (seems like nobody) here's what ended up happening...
Where you suprised? This was the market in 2003 by the way....
One thing the bulls got going for them is the VIX. I made a post about a week ago claiming how the behavior in the VIX was signalling complacency by making lower lows as the market made lower highs. This behavior is no longer the case. Today we saw a bit of the opposite behavior whereby the VIX popped signficantly even though the marke was only showing moderate weakness at best and it remained in the green even though the market closed essentially flat.
Bottom line: look for the market to make a rally attempt in the comming days to about 900...but be very careful. I think a lot of people now are expecting a bounce tommorow so it may end up being a weak one followed by a another retest of the lows on Friday. Again, this is guesswork here because obviously headline risk will have an impact and one must adapt accordingly. I always keep an eye on the intraday put/call ratio to fine tune my intraday outlook as well.
I continue to stress that the key to success in this type of market is buying on weakness selling on strength especially at those points when it seems difficult to do so. The tough trade is usually the right trade. I tend to either wait for some sort of confirmation of a turning point or capitulatory type behavior when making my entries. For example, today I bought calls on CYOU at about 12pm on the double bottom. I sold them shortly after for a quick gain anticipating a turnaround in the market. Part of the reason I sold so soon was that it didn't pop as much as I thought it would given it's strong relative strength since it IPOed a few months ago. The other reason was that given how these were OTM calls with 8 trading days untill expiry the theta burn is quite high and so if the pop in the stock ended up fizzling by EOD, any moderate gap down the next day would result in the call getting crushed without giving me a chance to cut losses effectivily thereby putting me in the a "dear in the headlights" position. I REFUSE to be in such a position and with earnings season kicking off, it makes the market more prone to significant gaps.
Regarding yesterday's mystery chart for anyone who cares (seems like nobody) here's what ended up happening...
Where you suprised? This was the market in 2003 by the way....
Riddle me this....
Not suprised by today's action at all as per my previous comment.
Take a look at the chart below. Looks pretty familar doesn't it (no, this is NOT a chart of the current market)? If anyone is actually reading this blog (LOL!) tell me what do you think the next major move would be in this chart a)up b)down c) sideways?
Here's a piece of info that may be of help...the VIX was at 24 at the time.
Take a look at the chart below. Looks pretty familar doesn't it (no, this is NOT a chart of the current market)? If anyone is actually reading this blog (LOL!) tell me what do you think the next major move would be in this chart a)up b)down c) sideways?
Here's a piece of info that may be of help...the VIX was at 24 at the time.
Monday, July 6, 2009
Warning! NASDAQ/NYSE volume ratio has poped to extreme level again!
At 2.69 I don't think I recall this ratio ever being higher. I first made mention of this indicator right near the peak of the rally in mid June when it hit a day reading that was almost as high as the level reached at the peak of the bull market in October 2007. Now...gulp...the ratio is HIGHER than it was in mid October 2007! And the fact that this indicator is hitting record highs in the face of market weakness makes it even more of a bad omen. I am now seeing a cluster of spikes of this ratio reaching 1.9 or above during the past 3 weeks. Prior to now, during the past 2 years these "cluster spikes" occured 4 times: most of October 2007, early-mid May 2008, most of August 2008, mid-late Oct 2008. During all of these periods the market was forming notable tops which were ALL followed by nasty drops in the market. Keep in mind, the market didn't fall apart right away at the first sign of froth but after 2-4 weeks of the initial froth, it did. We are now in that same danger zone.
Does this mean we are going to see massive drops like we did following the periods I just mentioned? Quite possibly yes, but not neccessarily. In bear markets, greed/froth, such as what this indicator measures, gets punished severely because the natural evironment in a bear market is fear not greed given that fundamentals are deteriorating. In bull markets, investors don't get punished as much for being greedy (until the very end of it) because optimism is the natural emotion. Therefore, it could very well be the case that the market has a much milder decline this time around compared to the prior 4 periods I highlighted. That's of course we are assuming we are in a bull market. Only hindsight will allow us to know for sure.
Thus, for now it is safe to assume in my opinion that any rallies from here will be quite limited, i.e. won't exceed the high put in June. It also safe to assume that we haven't seen the low point yet of this decline. Be advised like I said before that the market isn't going to make things easy for the bears to captialize because bears by nature are weak handed. Expect to see plenty of headfake rallies and declines to create maximum frustration.
The topping process could very well last another week or 2. I suspect we could see break down of this widely followed head and shoulder's patter to about 880-875 or so followed by a vicious snap back to 900 but that's just a guess. I'm taking things 1 day at a time.
I should also mention that this is only 1 indicator (although quite a reliable one) that is screaming bearish....it's a mixed bag with the host of other indicators I follow which is why I'm taking things 1 day a time for now.
Does this mean we are going to see massive drops like we did following the periods I just mentioned? Quite possibly yes, but not neccessarily. In bear markets, greed/froth, such as what this indicator measures, gets punished severely because the natural evironment in a bear market is fear not greed given that fundamentals are deteriorating. In bull markets, investors don't get punished as much for being greedy (until the very end of it) because optimism is the natural emotion. Therefore, it could very well be the case that the market has a much milder decline this time around compared to the prior 4 periods I highlighted. That's of course we are assuming we are in a bull market. Only hindsight will allow us to know for sure.
Thus, for now it is safe to assume in my opinion that any rallies from here will be quite limited, i.e. won't exceed the high put in June. It also safe to assume that we haven't seen the low point yet of this decline. Be advised like I said before that the market isn't going to make things easy for the bears to captialize because bears by nature are weak handed. Expect to see plenty of headfake rallies and declines to create maximum frustration.
The topping process could very well last another week or 2. I suspect we could see break down of this widely followed head and shoulder's patter to about 880-875 or so followed by a vicious snap back to 900 but that's just a guess. I'm taking things 1 day at a time.
I should also mention that this is only 1 indicator (although quite a reliable one) that is screaming bearish....it's a mixed bag with the host of other indicators I follow which is why I'm taking things 1 day a time for now.
Doesn't look good for a turnaround today
the put/call ratio is too low here and bonds are dropping. SPX is now at 887 which is the low point hit about a week ago thus providing temporary support. There could be a weak attempt at a bounce here but I don't expect it to hold today unless we see a major shift in the put/call ratio today which could very well happen given the fickleness of traders these days.
Friday, July 3, 2009
Green shoots withering? too early to tell yet....bears have the edge for time being
Friday's payroll data turned out to be a disapointment with greater than expected losses. This was the obvious reason markets tanked. Prior to this release the number of jobs lost was decreasing each month as you can see in the graph on the right.
One counter trend data point doesn't confirm a change the trend has occured. Think about the whether for example. When it transitions from winter to spring the days get warmer and warmer on average but you still get the occasional cold spell and sometimes even a signficant snowfall. Notice how this is the 3rd time now since the peak of the market in mid June that we have seen a heavy gap down and flat line day.
In fact, practically all of the downside since the peak was accomplished by 2 of these sharp gap down and flatline days alone. This is not how bear markets typcially act. Bear market declines tend to consist of relentless down days interupted by brief, sharp rallies. It's possible that the market will start acting this way going forward but untill we see that, it would be premature to think the bear has returned. However, as I had pointed out before, an IT top is likely put in and so the bears have control for now. I'll say this again....if we get a 10% pullback you better watch out because a lot of people are hoping for this to happen and if the market gives the herd what they want it almost always results in the herd regreting that they got what they wanted.
I warned about the risks of emerging markets before. Here's what I was talking about.
July 3 (Bloomberg)
Inflows into developing-nation equity funds last quarter topped the previous record of $22.4 billion set in the fourth quarter of 2007, the research firm said. The MSCI Emerging Markets Index reached a peak on Oct. 29, 2007, and subsequently dropped as much as 66 percent.
I also read an article which talked about how extremely correlated sectors and even asset classes overall have become and how it has reached a 5 decade high. This is not a healthy sign. It also diminishes the benefits of divesification. It appears as if a herd mentality is dominating the market. Perhaps it is due to the proliferation of all these ETFs out there which I believe is turning the market into a giant casino wherby everyone is now a short term trader. I've also noticed that turning points in the market tend to come in the way of V bottoms and tops with many gap and run type days. This has been frustrating for me at times because it forces you to have to pick tops and bottoms as opposed to getting a confirmation via a retest of some sorts which prior to the last 12 months would often occur. I believe this action is a symptom of the casino like nature of the market. As a result, I belive now more than ever, investor psyocology is a dominating factor. If you think that your stock picking abilities make you money in the past 3-4 months think again. Practically every stock had massive rebounds. Did they all deserve to? Probably not, but then again not all of them deserved to get crushed like they did last year and early this year. Perhaps the market will sort out the winners from the losers in the months ahead and begin to normalize.
Ok, on to the short term prospects of the market. Everyone including my grandmother is talking about the head and shoulders pattern seen on the S&P.
Therefore, there's a good chance we see a false breakdown from this pattern. I think there is going to be a weak bounce on Monday followed by more downside later in the week. If the bear is in fact back, it's not going to make it easy for people to profit from it mark my words. Traders will either get whipsawed to death or take profits way too soon....whatever happens, I just hope the markets get exciting and don't go back to summer doldrum mode.
One counter trend data point doesn't confirm a change the trend has occured. Think about the whether for example. When it transitions from winter to spring the days get warmer and warmer on average but you still get the occasional cold spell and sometimes even a signficant snowfall. Notice how this is the 3rd time now since the peak of the market in mid June that we have seen a heavy gap down and flat line day.
In fact, practically all of the downside since the peak was accomplished by 2 of these sharp gap down and flatline days alone. This is not how bear markets typcially act. Bear market declines tend to consist of relentless down days interupted by brief, sharp rallies. It's possible that the market will start acting this way going forward but untill we see that, it would be premature to think the bear has returned. However, as I had pointed out before, an IT top is likely put in and so the bears have control for now. I'll say this again....if we get a 10% pullback you better watch out because a lot of people are hoping for this to happen and if the market gives the herd what they want it almost always results in the herd regreting that they got what they wanted.
I warned about the risks of emerging markets before. Here's what I was talking about.
July 3 (Bloomberg)
Inflows into developing-nation equity funds last quarter topped the previous record of $22.4 billion set in the fourth quarter of 2007, the research firm said. The MSCI Emerging Markets Index reached a peak on Oct. 29, 2007, and subsequently dropped as much as 66 percent.
I also read an article which talked about how extremely correlated sectors and even asset classes overall have become and how it has reached a 5 decade high. This is not a healthy sign. It also diminishes the benefits of divesification. It appears as if a herd mentality is dominating the market. Perhaps it is due to the proliferation of all these ETFs out there which I believe is turning the market into a giant casino wherby everyone is now a short term trader. I've also noticed that turning points in the market tend to come in the way of V bottoms and tops with many gap and run type days. This has been frustrating for me at times because it forces you to have to pick tops and bottoms as opposed to getting a confirmation via a retest of some sorts which prior to the last 12 months would often occur. I believe this action is a symptom of the casino like nature of the market. As a result, I belive now more than ever, investor psyocology is a dominating factor. If you think that your stock picking abilities make you money in the past 3-4 months think again. Practically every stock had massive rebounds. Did they all deserve to? Probably not, but then again not all of them deserved to get crushed like they did last year and early this year. Perhaps the market will sort out the winners from the losers in the months ahead and begin to normalize.
Ok, on to the short term prospects of the market. Everyone including my grandmother is talking about the head and shoulders pattern seen on the S&P.
Therefore, there's a good chance we see a false breakdown from this pattern. I think there is going to be a weak bounce on Monday followed by more downside later in the week. If the bear is in fact back, it's not going to make it easy for people to profit from it mark my words. Traders will either get whipsawed to death or take profits way too soon....whatever happens, I just hope the markets get exciting and don't go back to summer doldrum mode.
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