My second attempt in a row at a bearish play on the market has failed and although both times I didn´t lose a dime it´s frustrating to see initial gains disapear. I asked myself if I did anything wrong with this latest trade and I don´t think I did. I didn´t see bears ¨"pressing" the downside that we have been seeing...in fact, I saw the opposite, I saw complacency on all of the trader indicators I follow. The only thing that was a bit worrysome from a bear´s perspective was that the VIX got a little bit too jumpy, but you know what...if you wait for every single indicator to line up perfectly you will never make a trade. I also made note that a bounce was possible but I believed that if the bears had control they wouldn´t let the market bounce as fiercly as it did today and I thought the bears for once were showing some game....looks like I might be wrong.
Could today just have been a day to shake out weak shorts (like me)? Mabey. But I´m not going to allow myself to go under water with my position and hope that this might be the case. We could also be setting up for a double top, but again, I´m not going to just allow myself to go in the red watching for a potential double top. What if the market goes to new highs? Better to either go short at the double top point or after the market has confirmed it than to sit there holding a position underwater.
I won´t have any regrets if the market takes a nose dive from this point after I got stopped out. I believe I gave my position plenty of wiggle room. If I see another good opportunity I will try again even if that means betting against the market at lower levels. I still have my long exposure via my microcap stocks which as I mentioned is 1 of the reasons why I am looking at short entry points.
Monday, September 28, 2009
Saturday, September 26, 2009
Downside has been different implying correction may be longer lasting
Quick post from Madrid. I´ve noticed that the downside we´ve seen so far has ocurred later in the day with the market weakening into the close as opposed to the morning gap down and flatline type action that has been the norm since mid March. Recall how I´ve said in the past that the latter type of action is bull market pullback behavior and the former is bear market behavior. Does this mean the bear is back? Not neccessarily. What it may suggest is that a more sustained correction will be seen. If the bear is back then giddy up, so long as there´s a trend which I can ride I´ll be happy.
The rydex jokers by the way have been buying the dip so far getting burned. The rydex ratio continues to suggest more downside is comming. We are ST oversold enough to see a bounce but there´s still room for another downside push of about 1.5-2% before getting completely ST oversold. I´m going to keep my QID position with my stop at 22.72. If we get a bounce it´s possible my stop could get hit and it does so be it. But, since I still see more room for downside I´m going to sit tight. If markets gap down signficantly on Monday I will likely close out the position.
The rydex jokers by the way have been buying the dip so far getting burned. The rydex ratio continues to suggest more downside is comming. We are ST oversold enough to see a bounce but there´s still room for another downside push of about 1.5-2% before getting completely ST oversold. I´m going to keep my QID position with my stop at 22.72. If we get a bounce it´s possible my stop could get hit and it does so be it. But, since I still see more room for downside I´m going to sit tight. If markets gap down signficantly on Monday I will likely close out the position.
Thursday, September 24, 2009
Quick update
moved stop on my QID position to 22.72. If bears have control, they should not allow the market to bounce high enough such that my stop gets hit. More importantly, I can relax and enjoy my honeymoon knowing the worst that can happen is that I break even.
Wednesday, September 23, 2009
Downside Reversal
I said in my last post that if you are going to go short in the face of a strong market you need to wait for signs that the market is ready to turn down. Today could have been that day. We've seen however many, many bear traps during this historic rally since March so I emphasize when I say that 1 day doesn't make a trend. Just before I went out for dinner I put in a stop buy order for QID the double short NASDAQ 100 to buy me in if the market did a reversal today which I suspected was a high probability event. Well, I came back to the hotel just now I noticed I got bought in. This position is not only a bet for short term weakness but also a hedge for my microcap positions which have done very well for me. My entry for this position is 22.67 and my stop is at 21.94 which would require the NASDAQ 100 to exceed today's high and thus render this reversal a false one. This is an example of setting a stop wherby I would be clearly wrong and yet a 3% loss is something I can live with. I will tighten the stop if see something serious I don't like but I won't widen it. 21.94 is my uncle point and if I get whipsawed, I get whipsawed.
Monday, September 21, 2009
A word from Barcelona
Hi all,
I´m writing this from Barcelona a little buzzed from drinking a little too much Sangria. Looking at the indicators and market action I haven´t changed my outlook. The market got maximum overbought and now it´s cooling off a bit here. Sooner or later we´re likely going to see a wack down to generate some fear. I´m guessing it happens either this week or next week.
One measure of sentiment that isn´t widely followed (therefore potentially more effective....shhh! don´t tell anyone!) is the blogger sentiment as measured by Birinyi Associates. It´s showing 63% Bulls and only 17% bears. This is the widest gap in the bull/bear ratio recording in the polls short history of 3 years. I should also note that this poll was showing stubborn bearishness all throught this rally untill now. Another thing that raised an eyebrow was when I read the Wallstreet journal over the weekend. There was a bullish article written by James Grant, a notorious permabear. He like me, was pointing out how economists and the fed had low expectations for this recovery which will probably turn out to be incorrect given how V shaped rebounds are the norm after a sharp drop in the economy. The average forecast for GDP growth for 2010 is about 2.5% which Grant feels will be easily exceeded.
Now here´s the rub. I think Grant has it right but from a ST perspective it seems that we may be seeing "Johnny come lately" bulls joining the party here. When permabears like Grant start talking bullish you know that it´´s getting late in the game with the rally which means the market may be vulnerable to a sharp correction or consolidation. Ya, I know, I´ve been saying this since SPX 1000 or so and I admit I was wrong but now we could actually see it happen. A push to around 1100 is not out of the question but more and more evidence supporting a immanent correction is appearing and so I´d keep a tight leash on any ST long side bets here. The only thing that is preventing me from making a short side bet is market action. Sentiment is giving the green light for a short side bet but market action itself is not and it´s latter than counts. You can have extreme bearishness/bullishness all you want but untill the market shows signs of acknowledging it, it is meaningless. Remember, in a bull market bullish sentiment is the norm and so you need to be carefull when claiming people are ¨too bullish¨ because being bullish is only natural in rising market.
Good luck everyone...I will try to make another post or 2 during the next 10 days or so while still in Spain
I´m writing this from Barcelona a little buzzed from drinking a little too much Sangria. Looking at the indicators and market action I haven´t changed my outlook. The market got maximum overbought and now it´s cooling off a bit here. Sooner or later we´re likely going to see a wack down to generate some fear. I´m guessing it happens either this week or next week.
One measure of sentiment that isn´t widely followed (therefore potentially more effective....shhh! don´t tell anyone!) is the blogger sentiment as measured by Birinyi Associates. It´s showing 63% Bulls and only 17% bears. This is the widest gap in the bull/bear ratio recording in the polls short history of 3 years. I should also note that this poll was showing stubborn bearishness all throught this rally untill now. Another thing that raised an eyebrow was when I read the Wallstreet journal over the weekend. There was a bullish article written by James Grant, a notorious permabear. He like me, was pointing out how economists and the fed had low expectations for this recovery which will probably turn out to be incorrect given how V shaped rebounds are the norm after a sharp drop in the economy. The average forecast for GDP growth for 2010 is about 2.5% which Grant feels will be easily exceeded.
Now here´s the rub. I think Grant has it right but from a ST perspective it seems that we may be seeing "Johnny come lately" bulls joining the party here. When permabears like Grant start talking bullish you know that it´´s getting late in the game with the rally which means the market may be vulnerable to a sharp correction or consolidation. Ya, I know, I´ve been saying this since SPX 1000 or so and I admit I was wrong but now we could actually see it happen. A push to around 1100 is not out of the question but more and more evidence supporting a immanent correction is appearing and so I´d keep a tight leash on any ST long side bets here. The only thing that is preventing me from making a short side bet is market action. Sentiment is giving the green light for a short side bet but market action itself is not and it´s latter than counts. You can have extreme bearishness/bullishness all you want but untill the market shows signs of acknowledging it, it is meaningless. Remember, in a bull market bullish sentiment is the norm and so you need to be carefull when claiming people are ¨too bullish¨ because being bullish is only natural in rising market.
Good luck everyone...I will try to make another post or 2 during the next 10 days or so while still in Spain
Friday, September 18, 2009
What goes around comes around
You know the saying "what goes around comes around". What we are seeing is the revenge of the bulls. They were unmercifully slaughtered last year and now the bears are getting the same treatment. I can only imagine the pain that bag holding bears are feeling right now. The market has had them in a tight choke hold not giving them a chance to breathe. This was the pain that the bottom fishing bulls felt last year.
We are now at a point where 91% of stocks in the SPX are trading above their 200 DMA and 94% are trading above their 50 DMA. This is therefore a very overbought market.
But you have to keep in mind 2 things here
1) The initial thrust of a new bull market tends to produce these extreme overbought conditions. Eventually there's a corrective phase of at least a couple of months to work off this condition. You can see that this occurred during the 2003 initial bull market thrust. That thrust ended in January 2004. We could see the same thing happen again this year. One thing I know is that YOU DO NOT SEE SUCH EXTREME AND STICKY OVERBOUGHT CONDITIONS IN BEAR MARKET RALLIES.
Nor do you see extremes in overbought conditions at bull market tops. What you tend to see at a major bull market top is a "top out parade" whereby one by one sectors top out and although the indices make new highs the number of participating stocks diminishes. For example, look at the October 2007 bull market high how only 70% of stocks in the SPX were trading above the 200DMA.
2) The damage that was done last fall was as extreme as you can get. Near the November lows 0% of stocks in the SPX were trading above their 200, 50 and even 20 DMA!!! I remember looking at these stats on that that day saying "holy shit!" I doubt in my lifetime I will see such an extreme like that again. And yet despite these extremes the market STILL made a significant lower low in March. This argues that we could see off the charts overbought readings before we see any meaningful correction of 10% +
In addition to the longer term overbought condition, I pointed out how the market is overbought on a ST basis as well but we've seen in the past how the market has tended to find a way to still go higher by simply going sideways/slightly down for a few day to work off the overbought reading then making a charge higher.
Aside from 1-3 days intervals the short side continues to be unappealing here and I've been saying this since I first started this blog in April and I will re-iterate that now especially with bonds still strong.
Bears fail to admit that they are fighting an uphill battle. You have 0% interest rates, an economy gaining positive momentum and world wide simulative measures. When you start to hear rumblings by the governments mentioning about how they will start reducing these measures in some way that's when we could see a decent correction and perhaps that starts to happen soon. The government will try to "talk the market down" to avoid excessive market speculation but believe you me, they will be slow to remove the simulative policies as I explained before the other day.
As far as the market goes in the ST. I personally don't see a good edge here on either side of the market and so I've been focusing on individual microcap stocks which appear not to have a 1 for 1 correlation with the market. SPX 1100 and DOW 10K appear to be immanent but the easy money has been made on this move since Sept 2. The market is so overbought in the ST whereby it is vulnerable to a gap down and flat line type day on some sort of negative news. I'm thinking this has gotta happen sooner or later but I'll pull the trigger on a downside bet only if the setup is perfect...it's gotta be in this type of massively strong market because in a bull market, you often can get bailed out from a bad entry on the long side but not the short side...there's usually no mercy for shorts and so it's better to error on the side of caution.
We are now at a point where 91% of stocks in the SPX are trading above their 200 DMA and 94% are trading above their 50 DMA. This is therefore a very overbought market.
But you have to keep in mind 2 things here
1) The initial thrust of a new bull market tends to produce these extreme overbought conditions. Eventually there's a corrective phase of at least a couple of months to work off this condition. You can see that this occurred during the 2003 initial bull market thrust. That thrust ended in January 2004. We could see the same thing happen again this year. One thing I know is that YOU DO NOT SEE SUCH EXTREME AND STICKY OVERBOUGHT CONDITIONS IN BEAR MARKET RALLIES.
Nor do you see extremes in overbought conditions at bull market tops. What you tend to see at a major bull market top is a "top out parade" whereby one by one sectors top out and although the indices make new highs the number of participating stocks diminishes. For example, look at the October 2007 bull market high how only 70% of stocks in the SPX were trading above the 200DMA.
2) The damage that was done last fall was as extreme as you can get. Near the November lows 0% of stocks in the SPX were trading above their 200, 50 and even 20 DMA!!! I remember looking at these stats on that that day saying "holy shit!" I doubt in my lifetime I will see such an extreme like that again. And yet despite these extremes the market STILL made a significant lower low in March. This argues that we could see off the charts overbought readings before we see any meaningful correction of 10% +
In addition to the longer term overbought condition, I pointed out how the market is overbought on a ST basis as well but we've seen in the past how the market has tended to find a way to still go higher by simply going sideways/slightly down for a few day to work off the overbought reading then making a charge higher.
Aside from 1-3 days intervals the short side continues to be unappealing here and I've been saying this since I first started this blog in April and I will re-iterate that now especially with bonds still strong.
Bears fail to admit that they are fighting an uphill battle. You have 0% interest rates, an economy gaining positive momentum and world wide simulative measures. When you start to hear rumblings by the governments mentioning about how they will start reducing these measures in some way that's when we could see a decent correction and perhaps that starts to happen soon. The government will try to "talk the market down" to avoid excessive market speculation but believe you me, they will be slow to remove the simulative policies as I explained before the other day.
As far as the market goes in the ST. I personally don't see a good edge here on either side of the market and so I've been focusing on individual microcap stocks which appear not to have a 1 for 1 correlation with the market. SPX 1100 and DOW 10K appear to be immanent but the easy money has been made on this move since Sept 2. The market is so overbought in the ST whereby it is vulnerable to a gap down and flat line type day on some sort of negative news. I'm thinking this has gotta happen sooner or later but I'll pull the trigger on a downside bet only if the setup is perfect...it's gotta be in this type of massively strong market because in a bull market, you often can get bailed out from a bad entry on the long side but not the short side...there's usually no mercy for shorts and so it's better to error on the side of caution.
Thursday, September 17, 2009
AAII bull/bear ratio is 1
The small guy investors are 40% Bulls vs 40% Bears according to AAII. With the market making new YTD after new YTD you would think that some sort of optimism would be evident....but no. Once again skepticism reigns. This is quite unbelievable. I suppose only when investors start hearing about job gains and a drop in the unemployment rate will they finally start to show some excessive bullishness. The problem with that is, the markt isn't going to wait for you to see those sorts of things... it will be signficiantly higher by then.
This doesn't change the fact that the market is maximum overbought. I suppose its possible to make new records in the OB/OS indicator I posted last night but I ain't going to bet on that. The ST risk/reward is simply poor in my opinion. However, with bonds still fairly strong and skepticism from AAII, it doesn't appear that there is significant downside even though we are extreme overbought levels (I sound like a broken record, I know, but I've been right about it).
Bottom line: not worth it to chase the long side in the market but the downside danger appears limited for now. I'm going to be focusing on my microcap stock list which so far has been doing well.
This doesn't change the fact that the market is maximum overbought. I suppose its possible to make new records in the OB/OS indicator I posted last night but I ain't going to bet on that. The ST risk/reward is simply poor in my opinion. However, with bonds still fairly strong and skepticism from AAII, it doesn't appear that there is significant downside even though we are extreme overbought levels (I sound like a broken record, I know, but I've been right about it).
Bottom line: not worth it to chase the long side in the market but the downside danger appears limited for now. I'm going to be focusing on my microcap stock list which so far has been doing well.
Wednesday, September 16, 2009
Maximum Overbought
First off, let me say that I'll be the first to admit that I underestimated the strength we've seen in the market during these past 2 weeks. I was clearly wrong to think we'd go sideways. So now what? Well, the market making yet another YTD high and this time with authority, yet another cohort of stubborn bears have been wiped out today. But now I think we will finally get the sideways/down action I incorrectly called for. Why? Because the market is now maximum overbought. Take a look at the following chart.
This is just about as good as it gets for the bulls in the ST. I've never seen such an extreme in the OB/OS indictor as I do now except for early January which as you can see was a major IT peak which led to a nasty down leg. Now before any bears start salivating remember what I said before about bearish setups/omens in a bull market....they tend to have a lot less bite, so don't expect the market to fall apart like it did after early January.
To corroborate the extreme overbought market, the put/call ratio (pcr)came in today at very low 0.66 indicating extreme greed on the part of option players. Sure, it may be distorted due to options expiration this week but anytime the pcr gets this low a correction is usually just around the corner options expiration or not...I've seen it happen before. The last time I saw a reading this low was in late August. The market went sideways for a few days before dropping 2% on Sept 1.
So, we have a maximum overbought market with option speculators pilling into call options hand over fist...sounds like a recipe for a pullback. We may not see it happen instantly (although it could) but one thing's for sure is that I will not be touching the long side here. It seems now inevitable that SPX 1100 and DOW 10K will be hit. I think they will...but not after a rest in the market.
I will be looking to add back the POT put position I got stopped out on before if I see a good set up. I'm also looking at the November QQQQ 39 puts for an "all or nothing" type trade. I've advocating against picking tops or bottoms and I rarely to I attempt to do so. But if there's a solid edge, like I think there is now, I will
take a stab at it if I can get a good entry point.
This is just about as good as it gets for the bulls in the ST. I've never seen such an extreme in the OB/OS indictor as I do now except for early January which as you can see was a major IT peak which led to a nasty down leg. Now before any bears start salivating remember what I said before about bearish setups/omens in a bull market....they tend to have a lot less bite, so don't expect the market to fall apart like it did after early January.
To corroborate the extreme overbought market, the put/call ratio (pcr)came in today at very low 0.66 indicating extreme greed on the part of option players. Sure, it may be distorted due to options expiration this week but anytime the pcr gets this low a correction is usually just around the corner options expiration or not...I've seen it happen before. The last time I saw a reading this low was in late August. The market went sideways for a few days before dropping 2% on Sept 1.
So, we have a maximum overbought market with option speculators pilling into call options hand over fist...sounds like a recipe for a pullback. We may not see it happen instantly (although it could) but one thing's for sure is that I will not be touching the long side here. It seems now inevitable that SPX 1100 and DOW 10K will be hit. I think they will...but not after a rest in the market.
I will be looking to add back the POT put position I got stopped out on before if I see a good set up. I'm also looking at the November QQQQ 39 puts for an "all or nothing" type trade. I've advocating against picking tops or bottoms and I rarely to I attempt to do so. But if there's a solid edge, like I think there is now, I will
take a stab at it if I can get a good entry point.
Tuesday, September 15, 2009
Hope is not a viable strategy
Markets grinded higher again making yet another YTD high. So much for Doug Kass's high of the year call...but he said that when the SPX was at about 1035 so I'll cut him some slack here....if the market ends up printing the high of the year today, I'll give Kass his kudos.
The market's relentless march higher has made even the bulls surprised. But, I must warn, when you see the market make relentless marginal gains for a long time like this, a sharp (but usually short) correction lurks around the corner. Over the past 6 months, when we've seen such corrections occur they tend to happen in the morning (often via a gap down) with most of the damage done within the first 30-40 minutes. So, the only way to capture the downside is to try and pick tops and/or holding bearish positions overnight which for the most part has been a disastrous strategy. If you are going to pick a top, you gotta look for the gap up opens....such opens indicate emotional type buying which is prone to reversal.
I've tracked a few retail traders out there who have stubbornly shorted the market via bear etfs and kept adding to their positions as the market went up to the point where they were "all in". I've even posted the stories of some of these clowns. As the market moved further still against them creating massive paper losses, the only thing they could do was hope that the market turned down...eventually they capitulate for massive crippling losses. Please, please don't ever put yourself in a situation like this whereby you are hoping that things turn around to rescue you from massive losses.
HOPE IS NOT A VIABLE INVESTMENT STRATEGY. Actually, the only time you should hope is when you have a winning position...you should sit tight and hope that you make even more money. There is of course a fine line between letting winners ride like this and being a greedy pig (which end up getting slaughtered). But as the saying goes, manage your losers...the winners take care of themselves.
As an example, today I got chased out of my puts in POT. I was making a bit of money on them for a couple days but then today POT had a huge rally and I got stopped out (at about breakeven). It sucks to see gains evaporate but had I not used a stop those gains would have turned to losses equal to about the same amount. Had I hoped that POT would tank so that I'd be making money again I'd be loser. I was wrong but because I didn't stay wrong for long I didn't get hurt. In this case, I didn't take a loss but I would have if I had to.
When you are wrong don't hope that things will get better so that you will be right. Get the fuck out. When you are right, hope that you will continue to be right (but don't get too greedy). That's the beauty of this game. You can be wrong more times than right and still make money. You may have heard the above before but it's easier said than done to follow this line of thinking because you need to balance patience with discipline and add in a bit of finesse. For example, it's good to use stops to limit losses but if you set them too tight you can get stopped out due to random fluctuations only to see things reverse the other way leaving you on the sidelines.
If you are going to use stops, you have to set them at a point where you would CLEARLY be wrong (which will depend on the time horizon of your trade). You can still get whipsawed but that's OK...its part of the game..... Stops are there to make sure you survive to live another day. You also need to know when to move a stop and that's where the finesse comes in because it depends on the circumstances.
I don't always use stops. For instance, sometimes I will enter "all or nothing" type trades whereby I'm aiming to hit a home run i.e. a 100% + return. In this case my stop is at 0. I'm willing to lose it all but because I will only commit say 4-7% of my capital to such a trade, which in that in a sense, is like a stop.
Bottom line: Never expose yourself whereby if you are wrong you are wiped out or severely crippled. Live to see another day. This is the golden rule of trading. It's ok to be wrong...just try not to let it deflate you...this can be tough I know...but what I do is remind myself once in a while (especially when things are going well) that there's going to be times when I am ice cold...it's inevitable because this is a game of probabilities and just like in poker, even when you make the right move you can still lose due to bad luck (you can also lose due to due stupidity which I also accept is something I will do from time to time).
The market's relentless march higher has made even the bulls surprised. But, I must warn, when you see the market make relentless marginal gains for a long time like this, a sharp (but usually short) correction lurks around the corner. Over the past 6 months, when we've seen such corrections occur they tend to happen in the morning (often via a gap down) with most of the damage done within the first 30-40 minutes. So, the only way to capture the downside is to try and pick tops and/or holding bearish positions overnight which for the most part has been a disastrous strategy. If you are going to pick a top, you gotta look for the gap up opens....such opens indicate emotional type buying which is prone to reversal.
I've tracked a few retail traders out there who have stubbornly shorted the market via bear etfs and kept adding to their positions as the market went up to the point where they were "all in". I've even posted the stories of some of these clowns. As the market moved further still against them creating massive paper losses, the only thing they could do was hope that the market turned down...eventually they capitulate for massive crippling losses. Please, please don't ever put yourself in a situation like this whereby you are hoping that things turn around to rescue you from massive losses.
HOPE IS NOT A VIABLE INVESTMENT STRATEGY. Actually, the only time you should hope is when you have a winning position...you should sit tight and hope that you make even more money. There is of course a fine line between letting winners ride like this and being a greedy pig (which end up getting slaughtered). But as the saying goes, manage your losers...the winners take care of themselves.
As an example, today I got chased out of my puts in POT. I was making a bit of money on them for a couple days but then today POT had a huge rally and I got stopped out (at about breakeven). It sucks to see gains evaporate but had I not used a stop those gains would have turned to losses equal to about the same amount. Had I hoped that POT would tank so that I'd be making money again I'd be loser. I was wrong but because I didn't stay wrong for long I didn't get hurt. In this case, I didn't take a loss but I would have if I had to.
When you are wrong don't hope that things will get better so that you will be right. Get the fuck out. When you are right, hope that you will continue to be right (but don't get too greedy). That's the beauty of this game. You can be wrong more times than right and still make money. You may have heard the above before but it's easier said than done to follow this line of thinking because you need to balance patience with discipline and add in a bit of finesse. For example, it's good to use stops to limit losses but if you set them too tight you can get stopped out due to random fluctuations only to see things reverse the other way leaving you on the sidelines.
If you are going to use stops, you have to set them at a point where you would CLEARLY be wrong (which will depend on the time horizon of your trade). You can still get whipsawed but that's OK...its part of the game..... Stops are there to make sure you survive to live another day. You also need to know when to move a stop and that's where the finesse comes in because it depends on the circumstances.
I don't always use stops. For instance, sometimes I will enter "all or nothing" type trades whereby I'm aiming to hit a home run i.e. a 100% + return. In this case my stop is at 0. I'm willing to lose it all but because I will only commit say 4-7% of my capital to such a trade, which in that in a sense, is like a stop.
Bottom line: Never expose yourself whereby if you are wrong you are wiped out or severely crippled. Live to see another day. This is the golden rule of trading. It's ok to be wrong...just try not to let it deflate you...this can be tough I know...but what I do is remind myself once in a while (especially when things are going well) that there's going to be times when I am ice cold...it's inevitable because this is a game of probabilities and just like in poker, even when you make the right move you can still lose due to bad luck (you can also lose due to due stupidity which I also accept is something I will do from time to time).
Monday, September 14, 2009
New Begginings
I am now a married man....wow, it feels weird saying that. Everything went really well and I'll be going away to Spain on my honeymoon on the 19th for 12 days...I'm really looking forward to it but I'll be still trying to keep on eye on the market...for me, it's an obsession that I can't get away from.
My portfolio currently consists of a handful of Canadian microcap stocks, puts in POT and a big position in cash. As I stated late last week, I believe the market will likely catch it's breath for at least for a few days with sideways to slightly down action. Markets made yet another marginal new YTD high today but the action felt like a short lived short squeeze. One measure of ST trader sentiment I follow has just crossed into bearish territory and I sensed quite a bit of angst from the shorts today....so I wouldn't be surprised now to see the market throw the bears a bit of bone soon. But as I mentioned before, so long as bonds remain about where they are now, I believe downside should be limited unless I see extreme greed on the part of traders/investors which I don't see at this time.
We are in the sweet spot right from both a fundamental and sentiment perspective. Economic momentum is positive, interest rates are rock bottom and governments around the globe are simultaneously maintaining significant stimulative measures. Meanwhile, investors are only cautiously optimistic at best with plenty of them still skeptical/bearish. Anytime the bulls start feeling good about themselves they become quickly humbled and run for the hills when the market has only a mild pullback. This is all in regards to the longer term outlook by the way.
In Bloomberg I just read an article which mentions how the government is looking to sell its stake in citigroup which has a cost basis of $3.25 giving it a paper profit of close to $10 Billion! They've also made quite a bit of money in other TARP related programs. I know there's some arguments against just how much they have made or didn't make but the bottom line is that these bailouts turned out to be a huge positive surprise if you ask me. Everyone, including me didn't expect such successful results.
I believe that global stimulative measures are going to be in force for as long as possible because the governments around the world probably feel that a miracle took place whereby an economic collapse that would have resembled the 1930s was averted. Try putting yourself in the shoes of Geithner, Bernanke and any government authority last fall. Can you imagine the fear and stress they experienced when the financial system was literally imploding? After numerous failed attempts at arresting the collapse, we have seen over the past 6 months that these policies have finally got some traction and helped create a clear turnaround in economic momentum...sure, it's still not blue skies and apple pie but we have seen earnings rebound, credit market spreads collapse to pre-Lehman bankruptcy levels and job losses shrink dramatically to the point where job gains appear to be not too far away.
Although the fed doesn't want to exit its stimulative measures too soon to short circuit the "green shoots" they also don't want to repeat the same mistake they made by keeping rates too low in 2003-2004 which helped spawn the housing bubble. Therefore, I don't agree with the notion that rates aren't going to be raised until the latter half of 2010. Even if the fed wants to do this, I don't think they want the market to believe that this is a given otherwise it may encourage leveraged speculation leading to another bubble.
I think rates will be raised sooner but only to more "normal levels" such as 1-2% (if you want to call that normal lol!). At the very least, I believe the fed will soon jawbone the market giving a hint that it may want to remove the emergency 0% rate if the recent signs of recovery persist. Emergency 0% rates make no sense right now and will make absolutely no sense if the positive trend in economic momentum continues for another 3-5 months. 1-2% rates are still quite stimulative and such a rise in rates would help keep leveraged speculators at bay so that a new bubble won't be formed. But the fed won't do such a thing until they are more certain about the recovery. They will error on the side of being too accommodative than too restrictive.
I will be watching the bond markets a lot more closely. A short bond trade is beginning to look appealing based upon the above.
My portfolio currently consists of a handful of Canadian microcap stocks, puts in POT and a big position in cash. As I stated late last week, I believe the market will likely catch it's breath for at least for a few days with sideways to slightly down action. Markets made yet another marginal new YTD high today but the action felt like a short lived short squeeze. One measure of ST trader sentiment I follow has just crossed into bearish territory and I sensed quite a bit of angst from the shorts today....so I wouldn't be surprised now to see the market throw the bears a bit of bone soon. But as I mentioned before, so long as bonds remain about where they are now, I believe downside should be limited unless I see extreme greed on the part of traders/investors which I don't see at this time.
We are in the sweet spot right from both a fundamental and sentiment perspective. Economic momentum is positive, interest rates are rock bottom and governments around the globe are simultaneously maintaining significant stimulative measures. Meanwhile, investors are only cautiously optimistic at best with plenty of them still skeptical/bearish. Anytime the bulls start feeling good about themselves they become quickly humbled and run for the hills when the market has only a mild pullback. This is all in regards to the longer term outlook by the way.
In Bloomberg I just read an article which mentions how the government is looking to sell its stake in citigroup which has a cost basis of $3.25 giving it a paper profit of close to $10 Billion! They've also made quite a bit of money in other TARP related programs. I know there's some arguments against just how much they have made or didn't make but the bottom line is that these bailouts turned out to be a huge positive surprise if you ask me. Everyone, including me didn't expect such successful results.
I believe that global stimulative measures are going to be in force for as long as possible because the governments around the world probably feel that a miracle took place whereby an economic collapse that would have resembled the 1930s was averted. Try putting yourself in the shoes of Geithner, Bernanke and any government authority last fall. Can you imagine the fear and stress they experienced when the financial system was literally imploding? After numerous failed attempts at arresting the collapse, we have seen over the past 6 months that these policies have finally got some traction and helped create a clear turnaround in economic momentum...sure, it's still not blue skies and apple pie but we have seen earnings rebound, credit market spreads collapse to pre-Lehman bankruptcy levels and job losses shrink dramatically to the point where job gains appear to be not too far away.
Although the fed doesn't want to exit its stimulative measures too soon to short circuit the "green shoots" they also don't want to repeat the same mistake they made by keeping rates too low in 2003-2004 which helped spawn the housing bubble. Therefore, I don't agree with the notion that rates aren't going to be raised until the latter half of 2010. Even if the fed wants to do this, I don't think they want the market to believe that this is a given otherwise it may encourage leveraged speculation leading to another bubble.
I think rates will be raised sooner but only to more "normal levels" such as 1-2% (if you want to call that normal lol!). At the very least, I believe the fed will soon jawbone the market giving a hint that it may want to remove the emergency 0% rate if the recent signs of recovery persist. Emergency 0% rates make no sense right now and will make absolutely no sense if the positive trend in economic momentum continues for another 3-5 months. 1-2% rates are still quite stimulative and such a rise in rates would help keep leveraged speculators at bay so that a new bubble won't be formed. But the fed won't do such a thing until they are more certain about the recovery. They will error on the side of being too accommodative than too restrictive.
I will be watching the bond markets a lot more closely. A short bond trade is beginning to look appealing based upon the above.
Friday, September 11, 2009
If you're looking for a hedge consider smoking POT
no, I'm not talking about doing drugs silly I'm talking about Potash. This stock has shown quite a bit of relative weakness and it seems to me that it's poised to break down. I'm in no ways informed about the fundamentals of POT....I'm basing my opinion soley on market action so be warned.
And yes I do smoke pot...about a few times a year.
And yes I do smoke pot...about a few times a year.
Major downside will be difficult when bonds are this strong
Remember a couple weeks back I said keep an eye on bonds. Corrections in the market tend to happen after some sort of a bond sell-off. For example, take a look for example what happened in June.
When the market appeared to be forming a top in late August I noted how market action was similar to that of mid June with one major exception.....bonds. Bonds didn't sell-off very much and as I result I expected any correction to be less compared to the June correction. I gave two downside targets SPX 1000-1010 and SPX 965-975. I felt ultimately, the latter target would get hit but it looks like I will definately be wrong about that. But, I adjusted as the days went on....and its paramount that you adjust when the evidence suggests so even if you are a bit late....better late than never.
After yestereday's rally, the SPX and NASDAQ all made new marginal YTD highs, and the advance/decline line of these indicies also made new highs. Anyone still calling this a bear market rally is in denial if you ask me. On a ST basis, we could still see grinding higher prices but we are very close to the point where the market will likely catch it's breath and go sideways to slightly down for a few days....I'm thinking today will be kinda boring.
It's tempting to go short when you see the market this overbought but I've learned that untill market action shows bearish signs confirming any immanent reversal of overbought conditions more often than not you are better off standing aside because otherwise you would just be guessing and hoping for the turn and doing that in the face of a new YTD high is like standing in front of an oncomming Mach truck like I illustrated before.
I decided yesterday to dump my puts on UUP. I might end up regretting this but because I will be distracted for the next several days and the fact these puts are quite illiquid with poor bid ask spreads I decided to get out. I might end up replacing this position with calls on gold stocks such as NEM....I'm kind of being pulled in a hundred directions right now with my upcomming wedding on Sunday and visiting inlaws from Korea....it's a zoo in here...
When the market appeared to be forming a top in late August I noted how market action was similar to that of mid June with one major exception.....bonds. Bonds didn't sell-off very much and as I result I expected any correction to be less compared to the June correction. I gave two downside targets SPX 1000-1010 and SPX 965-975. I felt ultimately, the latter target would get hit but it looks like I will definately be wrong about that. But, I adjusted as the days went on....and its paramount that you adjust when the evidence suggests so even if you are a bit late....better late than never.
After yestereday's rally, the SPX and NASDAQ all made new marginal YTD highs, and the advance/decline line of these indicies also made new highs. Anyone still calling this a bear market rally is in denial if you ask me. On a ST basis, we could still see grinding higher prices but we are very close to the point where the market will likely catch it's breath and go sideways to slightly down for a few days....I'm thinking today will be kinda boring.
It's tempting to go short when you see the market this overbought but I've learned that untill market action shows bearish signs confirming any immanent reversal of overbought conditions more often than not you are better off standing aside because otherwise you would just be guessing and hoping for the turn and doing that in the face of a new YTD high is like standing in front of an oncomming Mach truck like I illustrated before.
I decided yesterday to dump my puts on UUP. I might end up regretting this but because I will be distracted for the next several days and the fact these puts are quite illiquid with poor bid ask spreads I decided to get out. I might end up replacing this position with calls on gold stocks such as NEM....I'm kind of being pulled in a hundred directions right now with my upcomming wedding on Sunday and visiting inlaws from Korea....it's a zoo in here...
Thursday, September 10, 2009
powder keg underneath this market
we're at an interesting junctior right here. On a ST basis the market is now extremely overbought but counteracting this is the rise in skepticism from ST traders who once again have sold into this rally or bet against it (as per the Rydex data). AAII sentiment shows 44% bears 31% bulls. Such relentless, stubborn bearishness I tell you. If it wasn't for the market being so overbought ST, I would be expecting a big move up in the market. But you know what... the last time I saw these conditions the market somehow found a way to go even higher despite the extreme overbought condition...what ended up happening was a sideways grind for a few days followed by a rise. With the NASDAQ 100 at new YTD highs it's not looking good for the bears here.
Will this happen again? I think so...and that means the idea of going back to 1000 is no longer looking feasable.
Will this happen again? I think so...and that means the idea of going back to 1000 is no longer looking feasable.
Wednesday, September 9, 2009
You are your greatest enemy to success in this game
After recently completing the CFA program I found that it offers only a handful of topics really useful for investment success. Ironically, the heaviest weighting of material is focused on financial statement analysis which in my opinion is the most useless. The good stuff is found in level 3 of the program...I'm talking about behavioral finance. Prior to reaching level 3 I was aware of most of these concepts but actually having to study them helped me to be aware of them even more. Practically every mistake I have made in the market was attributed to one or more of the "traps" that are discussed. I know I've touched upon this topic before at least once, but I gotta tell you, it’s such an important topic and I'm seeing it happen first hand with today's retail investors. Here's a few of the most prevalent traps out there.
Recalability trap - letting a past bad experience in the market (such as a crash) influence your behavior. (This may cause you to be overly cautious).
Loss aversion - refusing to accept a loss when you should and willing to take even bigger risks to try and make up for loss such as letting it ride or doubling down (this is a form of ego defense).
Anchoring - refusing to depart with an existing point of view when the evidence is piling against this view (again, a form of ego defense because to most people, change their view would mean to admit being wrong and therefore not intelligent)
Herding - blinding following a popular trend or market guru
Confirming evidence trap - selectively seeking out opinions and facts that confirm your existing point of view and scoffing at others who oppose your view.
Overconfidence - thinking you are better than you really are just because you had recent success in the market (this is my version of overconfidence not the CFA's).
Many times have any of your losing trades or missed opportunities were attributed to at least one of the above traps? I can tell you for me it's gotta be close to 90%. Anchoring and confirmation evidence traps is something I'm seeing so much these days.
Take for example the bearish/skeptical attitude for what I believe is the large segment of the retail investor community. You don't think so? Take a look then at the following 2 articles. The first one is bearish the second one bullish. Then look at the comments section to see how retail reacted to them.
http://www.marketwatch.com/story/stock-market-may-collapse-again-gundlach-says-2009-09-09?dist=bigcharts
http://seekingalpha.com/article/159494-the-recession-is-over
We've become a nation of permabears it seems and it's because of the recalability trap, anchoring and confirmation evidence trap. The other 2 traps are usually what you see near the top of bull markets although bearish herding also happens. Most of these retail bears I see out there likely did not start out as bears. When you first found out about the stock market and wanted to "play it" I bet you would look for stocks to buy am I right? Chances are you never heard of shorting or bear etfs. So, I hypothesize that a lot of the bears I see out there at one point were in essence bulls who got burned by the market and then turned to the "dark side". It seems
Do you hold a grudge against the market because you got burned before?
Let it go.
Do you think you are know more than the market and refuse to accept a loss because you think the market is "wrong"?
Most of the time you will learn the hard way that it is you who is wrong.
When you read an article that is contrary to your point of view how do you feel?
If you are skeptical even before you start reading, feel anger, resentment or scoff in anyway you are biased and you suffer from a form of confirmation evidence trap and will be prone to anchoring.
I'm not one to tell people what do to when it comes to the market...I rarely discuss the market with my soon to be wife or friends unless they ask me and I also know that there's more than 1 way to approach the market successfully but I believe the following 2 "philosophies" are paramount to success no matter what strategy you use.
1) Accept the market for what it is not what you want it to be.
2) Have no allegiance to any side of the market except for the side that is going to make you money. This seems like such a no brainer yet its mind boggling how very few people actually approach the market this way. Once you make this your goal you will seek out any and all types of opinions and information and not just the ones that confirm your view because in order to maximize your chances to make money you need to seek "the truth" and that means examining ALL points of view and deciding honestly who's right. Once you can just "let go" and be honest with yourself I'm telling you, you will be so much better off in this game. It's not going to guarantee success but it will put you in the right direction to get it. Once you look at the market this way, you won't look at is as an adversary or with resent but rather as as a place where there is an endless ammount of opportunities to make unlimited ammounts of money.
So why am I writing all this? Am I trying to be some sort of condescending know it all? Not at all. Writing this is very beneficial for me.
When it comes to investing I basically have a dual personality in me. One side is the cool, calm, calculating, intuitive and brutally honest part of me. The other side is the George Castanza which is neurotic, paranoid and impulsive. When I write I feel like I am releasing the former side of me and I find it useful to read these posts when at times the George Castanza side of me tries to take over. I've been doing a good job lately at keeping George at bay....but he's never totally gone.
George is getting frustrated!
Recalability trap - letting a past bad experience in the market (such as a crash) influence your behavior. (This may cause you to be overly cautious).
Loss aversion - refusing to accept a loss when you should and willing to take even bigger risks to try and make up for loss such as letting it ride or doubling down (this is a form of ego defense).
Anchoring - refusing to depart with an existing point of view when the evidence is piling against this view (again, a form of ego defense because to most people, change their view would mean to admit being wrong and therefore not intelligent)
Herding - blinding following a popular trend or market guru
Confirming evidence trap - selectively seeking out opinions and facts that confirm your existing point of view and scoffing at others who oppose your view.
Overconfidence - thinking you are better than you really are just because you had recent success in the market (this is my version of overconfidence not the CFA's).
Many times have any of your losing trades or missed opportunities were attributed to at least one of the above traps? I can tell you for me it's gotta be close to 90%. Anchoring and confirmation evidence traps is something I'm seeing so much these days.
Take for example the bearish/skeptical attitude for what I believe is the large segment of the retail investor community. You don't think so? Take a look then at the following 2 articles. The first one is bearish the second one bullish. Then look at the comments section to see how retail reacted to them.
http://www.marketwatch.com/story/stock-market-may-collapse-again-gundlach-says-2009-09-09?dist=bigcharts
http://seekingalpha.com/article/159494-the-recession-is-over
We've become a nation of permabears it seems and it's because of the recalability trap, anchoring and confirmation evidence trap. The other 2 traps are usually what you see near the top of bull markets although bearish herding also happens. Most of these retail bears I see out there likely did not start out as bears. When you first found out about the stock market and wanted to "play it" I bet you would look for stocks to buy am I right? Chances are you never heard of shorting or bear etfs. So, I hypothesize that a lot of the bears I see out there at one point were in essence bulls who got burned by the market and then turned to the "dark side". It seems
Do you hold a grudge against the market because you got burned before?
Let it go.
Do you think you are know more than the market and refuse to accept a loss because you think the market is "wrong"?
Most of the time you will learn the hard way that it is you who is wrong.
When you read an article that is contrary to your point of view how do you feel?
If you are skeptical even before you start reading, feel anger, resentment or scoff in anyway you are biased and you suffer from a form of confirmation evidence trap and will be prone to anchoring.
I'm not one to tell people what do to when it comes to the market...I rarely discuss the market with my soon to be wife or friends unless they ask me and I also know that there's more than 1 way to approach the market successfully but I believe the following 2 "philosophies" are paramount to success no matter what strategy you use.
1) Accept the market for what it is not what you want it to be.
2) Have no allegiance to any side of the market except for the side that is going to make you money. This seems like such a no brainer yet its mind boggling how very few people actually approach the market this way. Once you make this your goal you will seek out any and all types of opinions and information and not just the ones that confirm your view because in order to maximize your chances to make money you need to seek "the truth" and that means examining ALL points of view and deciding honestly who's right. Once you can just "let go" and be honest with yourself I'm telling you, you will be so much better off in this game. It's not going to guarantee success but it will put you in the right direction to get it. Once you look at the market this way, you won't look at is as an adversary or with resent but rather as as a place where there is an endless ammount of opportunities to make unlimited ammounts of money.
So why am I writing all this? Am I trying to be some sort of condescending know it all? Not at all. Writing this is very beneficial for me.
When it comes to investing I basically have a dual personality in me. One side is the cool, calm, calculating, intuitive and brutally honest part of me. The other side is the George Castanza which is neurotic, paranoid and impulsive. When I write I feel like I am releasing the former side of me and I find it useful to read these posts when at times the George Castanza side of me tries to take over. I've been doing a good job lately at keeping George at bay....but he's never totally gone.
George is getting frustrated!
keep on eye on the leaders for tells
tech and emerging market have led the way most of the times when the market has a sustainable rally for the day. If they lag (especially tech), then be wary of any rally lasting. So far very early on tech is lagging....
edit: tech is no longer lagging...you see, things change quickly...so be on the ball
edit: tech is no longer lagging...you see, things change quickly...so be on the ball
We are ST overbought but there's still room to run...especially gold stocks
Rydex traders have stood pat again. The level of assets in bull funds and money market funds give room for further gains.
You would think that with all the hoopla surrounding gold these past few days that people are rushing into gold stocks....you'd be mistaken. Take a look at how rydex gold traders have behaved. The first chart show the price of the rydex precious metals fund, the second shows cash flows into the fund. Notice how in the past, spikes in cashflow coincided with ST tops in the gold fund. There is no such spike this time which means from a contrarian perspective there's still a lot of upside potential in the short term.
You would think that with all the hoopla surrounding gold these past few days that people are rushing into gold stocks....you'd be mistaken. Take a look at how rydex gold traders have behaved. The first chart show the price of the rydex precious metals fund, the second shows cash flows into the fund. Notice how in the past, spikes in cashflow coincided with ST tops in the gold fund. There is no such spike this time which means from a contrarian perspective there's still a lot of upside potential in the short term.
Tuesday, September 8, 2009
Dollar trashed
The dollar opened today with a massive gap down. Could it have been triggered due to the UN's plea for a replacement of the dollar as a reserve currency over the weekend? According to the UN, the US dollar should be replaced with a global currency that is overseen by a new bank of the world. A currency needs to be backed by something. In the case of fiat currencies, it's backed by the government. Who would back such a global currency given that there's no government behind it? In order for it to have some sort of credibility, how about gold? hmmmmmm.....
I'm just rambling here...I'm not a gold bug I'm just trying to make sense of this move in gold here. It's mainly being driven by the dollar dropping no doubt, but there's something else at work here because longer term gold has been trending upwards in the EURO and YEN as well.
This UN news is probably just an accelerator of a trend already in place. Is gold in a bubble? Who gives a fuck...I just want to make money. Do you? Or do you play the market to want to test out your intelligence? The important question is, does it have legs? As it stands now I think it does.
There was lots of talk here on BNN (Canadian version of CNBC) about gold. I would say it was about 50/50 regarding bullish sentiment vs. bearish sentiment. One guy said that gold going back to $950 would be a good entry point. I say fat chance to that. If this is a real breakout in gold, we will NOT see $950 reached again. If we do, gold is likely to head a lot lower. As I said before, true breakouts force you to chase them. No convenient pullbacks are permitted....and pullbacks will likely be intraday and/or shallow. It would be a gift for those who missed to boat for gold to back to $950. Remember what I said about the market giving you a gift...that gift is usually guilotine in disguise made for your head. I reiterate that $985 is a line in the sand...I'll even stretch it to $980.
I'll discuss the ST outlook for equities tomorrow morning.
I'm just rambling here...I'm not a gold bug I'm just trying to make sense of this move in gold here. It's mainly being driven by the dollar dropping no doubt, but there's something else at work here because longer term gold has been trending upwards in the EURO and YEN as well.
This UN news is probably just an accelerator of a trend already in place. Is gold in a bubble? Who gives a fuck...I just want to make money. Do you? Or do you play the market to want to test out your intelligence? The important question is, does it have legs? As it stands now I think it does.
There was lots of talk here on BNN (Canadian version of CNBC) about gold. I would say it was about 50/50 regarding bullish sentiment vs. bearish sentiment. One guy said that gold going back to $950 would be a good entry point. I say fat chance to that. If this is a real breakout in gold, we will NOT see $950 reached again. If we do, gold is likely to head a lot lower. As I said before, true breakouts force you to chase them. No convenient pullbacks are permitted....and pullbacks will likely be intraday and/or shallow. It would be a gift for those who missed to boat for gold to back to $950. Remember what I said about the market giving you a gift...that gift is usually guilotine in disguise made for your head. I reiterate that $985 is a line in the sand...I'll even stretch it to $980.
I'll discuss the ST outlook for equities tomorrow morning.
Monday, September 7, 2009
Still plenty of pessimism/skepticism/worry out there and that's long term bullish
Markets climb a wall of worry....that's how the saying goes. I'm noticing more and more news headlines with the word "recovery" in it but after scanning the web, I still find that the typical retail investor is skeptical and those who are more optimistic and are playing the long side are doing so only cautiously. They aren't going to fall for the "buy and hold" trap again they claim and so they are quick to take profits and quick to bolt at the first sign of trouble. This is the type of psychological environment that is perfect for a bull market. Last week there was quite a large redemption from mutual funds and ETFs by mom and pop investors. In fact, it was the largest redemption week since February! And for what? Because of a measly 2% drop last Monday (which got almost completely recovered by Friday)? The bad memory of last September and all of the hype about how September is historically the worst month of the year probably added to the fear. Either way, this behavior proves what I mean about how quick longs are to bolt. So long as so many people keep looking over their shoulder for that bear to come back.... the bear ain't going to come back.
I still believe markets are in consolidation mode here but I will be quick to abandon this notion if market action suggests otherwise. In the next few weeks I suspect the market is going to be tricky burning both bulls and bears alike so you better beware if you are trying to play the short term moves. If you are a longer term bull then you shouldn't be bothered with this minutia....selling longer dated OTM calls against your holdings is not a bad idea. Take comfort in that so many others are uncomfortable with buy and hold which means buy and hold is probably the correct strategy!
As I mentioned I have been compiling a list of Canadian mining stocks. In that search I also uncovered a few non-mining plays with interesting prospects and great charts. I have already started buying a couple of these stocks and I intend to buy more at opportune times...hopefully this week. These plays are going to be "all or nothing" type plays because they all have the potential to gain 200% or more. Therefore, I will be willing to lose 100%. These stocks will NOT however, represent a substantial ammount of my portfolio wherby I will be crippled if these stocks drop say 50% on average.
Never under any circumstances break the golden rule of investing/trading which is don't put yourself in a postion wherby if you are wrong you get wiped out. Either use stops or like in my case above, limited exposure.
I still believe markets are in consolidation mode here but I will be quick to abandon this notion if market action suggests otherwise. In the next few weeks I suspect the market is going to be tricky burning both bulls and bears alike so you better beware if you are trying to play the short term moves. If you are a longer term bull then you shouldn't be bothered with this minutia....selling longer dated OTM calls against your holdings is not a bad idea. Take comfort in that so many others are uncomfortable with buy and hold which means buy and hold is probably the correct strategy!
As I mentioned I have been compiling a list of Canadian mining stocks. In that search I also uncovered a few non-mining plays with interesting prospects and great charts. I have already started buying a couple of these stocks and I intend to buy more at opportune times...hopefully this week. These plays are going to be "all or nothing" type plays because they all have the potential to gain 200% or more. Therefore, I will be willing to lose 100%. These stocks will NOT however, represent a substantial ammount of my portfolio wherby I will be crippled if these stocks drop say 50% on average.
Never under any circumstances break the golden rule of investing/trading which is don't put yourself in a postion wherby if you are wrong you get wiped out. Either use stops or like in my case above, limited exposure.
Sunday, September 6, 2009
flip flopping continues
Friday's action was very good. The market leaders were leading and ST momentum has now turned in favor of the bulls. Is a run for the highs now comming? Bulls have their chance right here but I reiterate that I don't believe the market is ready to break out in a big way just yet and I still think a lower low lies ahead somewhere or at the least, a retest of the 995 level.
I sensed that that a lot of dumb money bears loaded up on shorts/puts to hold over the weekned in the hopes of some post labour day sell-off so we could very well see a continuation of gains for at least the early part of the comming week. I'm still waiting for that time when bears are so affraid to go short that they wouldn't even dare trying to hold over the weekend. We are not at that point whatsoever.
A large factor in determining my outlook depends on the actions of other traders/investors both in the short and long term, and then acting in a contrary manner. The short term has been quite frustating at times because lately they have been flip floping like crazy which causes me in turn to flip flop as well. Never before have I seen the market so ruthlessly whipsaw traders into an oblivion like the way it's beeing doing it this year. Many traders got wiped out this year....just destroyed.
The flip floping from traders continues. I mentioned recently how rydex bull traders didn't get scared on the dip we saw on Monday, which had bearish implications but for once they were right! Now, the rydex bulls have sold into the bounce on Friday.
Will they be right again? If so the market will drop, if not the market will continue to rally. If these rydex guys get it right again mabey I should look at them as smart money instead of dumb money! Nahh..I don't think so. Every dog has it day.....losers sometimes win, winners sometime lose.
The bottom line is that this is a rather edgeless tape right now in the short term. It wouldn't suprise me to see the markets squeeze the bears early on in the week before falling back later in the week....keep on eye on tech and emerging markets for tells.
I've been preparing a list of speculative Canadian junior mining stocks to take advantage of what could be a break out in the price of gold and commodoties in general. I dipped my toes already in some of them and plan to add more this comming week.
Here's the way I see the price of gold playing out. Either we blow right past $1000 and go straight to $1100-1150 or we see a marginal breakout to about $1030-1040 and then shoot back down below $1000 briefy to rinse out the technical buyers who are automatically going to buy when gold breaks out above $1000. Either way I think a sustained breakout is immanent before the end of the year. I know I panned gold about a couple months ago but it was mainly due to the "armagedon premium" in the price that I felt was no longer justified. I now believe gold is rising due to the dollar devaluation thesis I pointed out and another reason could be the declining role that the US $ is having as the world's reserve currency and perhaps gold's assending role in this respect. We've heard rumblings for the past couple of years about how foreign nations, especially China, want to diversify out of their US dollar reserve holdings in favor of a basket of currencies and hard assets.
Again, I don't really care about the why, I'm just concerned about the where as in where is the price going to head. My main reason for warming up to gold here is the market action. It just feels like the price wants to break out and the chart pattern supports this and although there's been a lot of talk about gold, I don't see a lot of people jumping in with both feet just yet. I'll be watching the $985 level as a line in the sand as I mentioned before. It touched exactly that level on Friday intraday before closing at about $995.
I sensed that that a lot of dumb money bears loaded up on shorts/puts to hold over the weekned in the hopes of some post labour day sell-off so we could very well see a continuation of gains for at least the early part of the comming week. I'm still waiting for that time when bears are so affraid to go short that they wouldn't even dare trying to hold over the weekend. We are not at that point whatsoever.
A large factor in determining my outlook depends on the actions of other traders/investors both in the short and long term, and then acting in a contrary manner. The short term has been quite frustating at times because lately they have been flip floping like crazy which causes me in turn to flip flop as well. Never before have I seen the market so ruthlessly whipsaw traders into an oblivion like the way it's beeing doing it this year. Many traders got wiped out this year....just destroyed.
The flip floping from traders continues. I mentioned recently how rydex bull traders didn't get scared on the dip we saw on Monday, which had bearish implications but for once they were right! Now, the rydex bulls have sold into the bounce on Friday.
Will they be right again? If so the market will drop, if not the market will continue to rally. If these rydex guys get it right again mabey I should look at them as smart money instead of dumb money! Nahh..I don't think so. Every dog has it day.....losers sometimes win, winners sometime lose.
The bottom line is that this is a rather edgeless tape right now in the short term. It wouldn't suprise me to see the markets squeeze the bears early on in the week before falling back later in the week....keep on eye on tech and emerging markets for tells.
I've been preparing a list of speculative Canadian junior mining stocks to take advantage of what could be a break out in the price of gold and commodoties in general. I dipped my toes already in some of them and plan to add more this comming week.
Here's the way I see the price of gold playing out. Either we blow right past $1000 and go straight to $1100-1150 or we see a marginal breakout to about $1030-1040 and then shoot back down below $1000 briefy to rinse out the technical buyers who are automatically going to buy when gold breaks out above $1000. Either way I think a sustained breakout is immanent before the end of the year. I know I panned gold about a couple months ago but it was mainly due to the "armagedon premium" in the price that I felt was no longer justified. I now believe gold is rising due to the dollar devaluation thesis I pointed out and another reason could be the declining role that the US $ is having as the world's reserve currency and perhaps gold's assending role in this respect. We've heard rumblings for the past couple of years about how foreign nations, especially China, want to diversify out of their US dollar reserve holdings in favor of a basket of currencies and hard assets.
Again, I don't really care about the why, I'm just concerned about the where as in where is the price going to head. My main reason for warming up to gold here is the market action. It just feels like the price wants to break out and the chart pattern supports this and although there's been a lot of talk about gold, I don't see a lot of people jumping in with both feet just yet. I'll be watching the $985 level as a line in the sand as I mentioned before. It touched exactly that level on Friday intraday before closing at about $995.
Friday, September 4, 2009
Bears got caught with pants down this morning
Comming into today, I think a lot of the fast money folks, especially the bearishly inclinded ones were thinking the same way as me i.e. they felt good news would be sold by the market and so they shorted what looked to be a weak rally early in the morning. I almost did the same, but what held me back was the fact that the market leaders tech and emerging markets were showing relative strength, in addition, the put/call ratio was a bit on the high side.
So now, these trapped bears are hoping and praying for an end of week sell off to get them out of their bad trades....I'm seeing this happen first hand from a couple of the "dumb money" bear traders I keep tabs on.
So do we get some sort of an end of the week fade in this stength? hmmmm....tough call but I wouldn't hold my breath....
I've been enjoying a fanstastic day today outdoors here in Toronto. I'm taking full advantage because there won't be many day like this left. Summer arrived quite late here....
So now, these trapped bears are hoping and praying for an end of week sell off to get them out of their bad trades....I'm seeing this happen first hand from a couple of the "dumb money" bear traders I keep tabs on.
So do we get some sort of an end of the week fade in this stength? hmmmm....tough call but I wouldn't hold my breath....
I've been enjoying a fanstastic day today outdoors here in Toronto. I'm taking full advantage because there won't be many day like this left. Summer arrived quite late here....
A few thoughts on gold
OK, I know, everyone has their 2 cents on gold. What's driving it? Is a sustained break above $1000 immanent? To answer the first question...I have no idea...well Ok, I have some idea. To answer the second...I think it has a good shot.
In the past I have seen gold move due to at least one of the following factors 4 factors 1) a one for one drop in the US $ 2) an increase in physical demand due to industrial/jewelry needs 3) a spike in gold lease rates 4) investment/speculation demand as an alternative currency due to either fears of Armagedon or to offset a long term decline in dollar. None of these reasons appear to be responsible. The US dollar has been essentially traded flat during this latest gold spike. Industrial/jewelry demand doesn't appear to have changed significantly, nor its future outlook, lease rates haven't budged and the economy has stabilized showing signs of recovery while the equity markets have rise substantially and have only modestly dipped recently. So WTF is going on???? I think it could be due to the anticipation of the second part of reason 4 - a longer term decline in the dollar.
Whatever the reason, I don't think this move happened out of manipulation or randomness....something must be up. When you see the market do something significant that doesn't appear to make sense quite often it's sending a message which will eventually be known only after the fact and by then you will have missed a substantial part of the move, if not all of it.
The fed has signaled that it will keep monetary policy extremely accommodative until it is absolutely clear that the US has recovered and this will only be known when there's a clear uptrend in job GROWTH. During the last recovery, the fed didn't start raising rates from rock bottom levels until June 30, 2004 which was about 1 year after the first month of monthly job gains were recorded.
Think about what must be going in the minds of the Fed and the government for a second. They just went through the scariest series of financial disasters since the 1930's with the US and the rest of the world on the brink of total collapse and they were able to avoid it by extremely accommodative and experimental policies. Do you think for a second they are going threaten the beginnings of the recovery that is underway by executing an "exit strategy" that you see people rambling about. Exit strategy??? lol! You won't see a damn thing from the fed and the US authorities until it is painfully clear the worst is over. So what's the cost to all this? A drop in the US dollar. At 0% rates, the US dollar can now be used by speculators/investors for carry trades which will exert pressure on it, in addition to the unattractiveness of it vs. euro and other currencies w with respect to interest rate differentials and the increases in supply due to increased government spending.
Thus, inflation, in the sense of a depreciating dollar, is the price to be paid for avoiding a depression/economic collapse....and that's the price the US authorities would gladly pay because the alternative is far worse. What they are hoping for however, is a gradually declining dollar. This is what happened during the last recovery from 2003-2007. If the dollar collapses quickly then it's a whole new ball game....then that's when it could get really ugly in the markets and the economy.
Therefore, I speculate that the move in gold may be due to above thinking....the anticipation of a longer term drop in the dollar because of an extremely accommodative fed in the face of an economic recovery. A gradually declining dollar would be OK because everyone affected by it would have time to adjust and wouldn't notice it as much....it would be tolerated.
But here's the reality of the situation...it doesn't matter what the reason is. I'm no damn economist or dogmatist and I could be totally out to lunch with my thoughts. What does count though....and the ONLY THING THAT COUNTS is if you are on the right side of the trade. Going back to what I said a couple of day ago....the market rarely gives you gifts and on a true bull run you don't get the ideal pullbacks. So, if this breakout is for real gold should either keep rising or if it pulls back...it goes no lower than about 985... If it goes lower than that, then I'd become inclined to think that this is a false breakout.
In the past I have seen gold move due to at least one of the following factors 4 factors 1) a one for one drop in the US $ 2) an increase in physical demand due to industrial/jewelry needs 3) a spike in gold lease rates 4) investment/speculation demand as an alternative currency due to either fears of Armagedon or to offset a long term decline in dollar. None of these reasons appear to be responsible. The US dollar has been essentially traded flat during this latest gold spike. Industrial/jewelry demand doesn't appear to have changed significantly, nor its future outlook, lease rates haven't budged and the economy has stabilized showing signs of recovery while the equity markets have rise substantially and have only modestly dipped recently. So WTF is going on???? I think it could be due to the anticipation of the second part of reason 4 - a longer term decline in the dollar.
Whatever the reason, I don't think this move happened out of manipulation or randomness....something must be up. When you see the market do something significant that doesn't appear to make sense quite often it's sending a message which will eventually be known only after the fact and by then you will have missed a substantial part of the move, if not all of it.
The fed has signaled that it will keep monetary policy extremely accommodative until it is absolutely clear that the US has recovered and this will only be known when there's a clear uptrend in job GROWTH. During the last recovery, the fed didn't start raising rates from rock bottom levels until June 30, 2004 which was about 1 year after the first month of monthly job gains were recorded.
Think about what must be going in the minds of the Fed and the government for a second. They just went through the scariest series of financial disasters since the 1930's with the US and the rest of the world on the brink of total collapse and they were able to avoid it by extremely accommodative and experimental policies. Do you think for a second they are going threaten the beginnings of the recovery that is underway by executing an "exit strategy" that you see people rambling about. Exit strategy??? lol! You won't see a damn thing from the fed and the US authorities until it is painfully clear the worst is over. So what's the cost to all this? A drop in the US dollar. At 0% rates, the US dollar can now be used by speculators/investors for carry trades which will exert pressure on it, in addition to the unattractiveness of it vs. euro and other currencies w with respect to interest rate differentials and the increases in supply due to increased government spending.
Thus, inflation, in the sense of a depreciating dollar, is the price to be paid for avoiding a depression/economic collapse....and that's the price the US authorities would gladly pay because the alternative is far worse. What they are hoping for however, is a gradually declining dollar. This is what happened during the last recovery from 2003-2007. If the dollar collapses quickly then it's a whole new ball game....then that's when it could get really ugly in the markets and the economy.
Therefore, I speculate that the move in gold may be due to above thinking....the anticipation of a longer term drop in the dollar because of an extremely accommodative fed in the face of an economic recovery. A gradually declining dollar would be OK because everyone affected by it would have time to adjust and wouldn't notice it as much....it would be tolerated.
But here's the reality of the situation...it doesn't matter what the reason is. I'm no damn economist or dogmatist and I could be totally out to lunch with my thoughts. What does count though....and the ONLY THING THAT COUNTS is if you are on the right side of the trade. Going back to what I said a couple of day ago....the market rarely gives you gifts and on a true bull run you don't get the ideal pullbacks. So, if this breakout is for real gold should either keep rising or if it pulls back...it goes no lower than about 985... If it goes lower than that, then I'd become inclined to think that this is a false breakout.
Thursday, September 3, 2009
Not oversold enough
Ok, the market is acting just like I expected... we got the 1-3 day bounce/sideways action...next I called for a downside move to make lower lows. I think this is exactly what happens either tomorrow or Tuesday (Monday is a holiday) If I'm wrong and the market charges ahead to challenge the highs that move is likely to fail and markets will drop back quickly. That's the way I see it right now.
Bottom line: I don't think the bulls are ready to make another charge to new highs. I still believe lower lows lie ahead. We need to see more fear in the market; we need to see shorts press. Right now the shorts, although quite sure a major downdraft is immanent, aren't being so bold with their bets just yet. I suppose after getting violated repeatedly by an angry bull they are a bit cautious right now.
I will be watching the action tomorrow morning quite carefully and I will consider buying puts on any morning strength depending on the action for a trade. The market has been shrugging off good news and has rolled over from a high and not too many bears appear to be pressing... those are the kind of ideal conditions you need to play the short side....it's not foolproof but it's gives you a lot more of an edge than going short just because the market has "gone up a lot" like a lot of retail bears learned the hard way. When you short just because the market has gone up a lot it can be the equivalent of standing in the path of a speeding Mach truck with you hand out saying "stop! You’re going too fast!". I'd rather wait to see that truck blow a couple of tires before attempting such a bold feat.
On a completely off topic note, I'm relieved that I'm just about done all of my wedding planning. I've also learned to dance a decent tango...my mom will be impressed I'm sure!
And now here's a cool song from Metric...a band up here in Canada.
Bottom line: I don't think the bulls are ready to make another charge to new highs. I still believe lower lows lie ahead. We need to see more fear in the market; we need to see shorts press. Right now the shorts, although quite sure a major downdraft is immanent, aren't being so bold with their bets just yet. I suppose after getting violated repeatedly by an angry bull they are a bit cautious right now.
I will be watching the action tomorrow morning quite carefully and I will consider buying puts on any morning strength depending on the action for a trade. The market has been shrugging off good news and has rolled over from a high and not too many bears appear to be pressing... those are the kind of ideal conditions you need to play the short side....it's not foolproof but it's gives you a lot more of an edge than going short just because the market has "gone up a lot" like a lot of retail bears learned the hard way. When you short just because the market has gone up a lot it can be the equivalent of standing in the path of a speeding Mach truck with you hand out saying "stop! You’re going too fast!". I'd rather wait to see that truck blow a couple of tires before attempting such a bold feat.
On a completely off topic note, I'm relieved that I'm just about done all of my wedding planning. I've also learned to dance a decent tango...my mom will be impressed I'm sure!
And now here's a cool song from Metric...a band up here in Canada.
Wednesday, September 2, 2009
Rydex bulls stayed put
No fear from the rydex bulls yesterday which tells me the downside move isn't over yet. Again, a reflexive bounce is certaintly possible for 1-3 days but keep one foot out the door if you try to play it.
I'm going to be quite busy doing wedding stuff for the next week or so....oh joy!
I'm going to be quite busy doing wedding stuff for the next week or so....oh joy!
Tuesday, September 1, 2009
1st downside target hit...now what?
Well, we hit the 1000-1010 downside target I was calling for. Market is now extremely ST oversold but based on experience, such extreme ST oversold readings registered on the first downside move off a top are often false signals. Quite often, what you see is either an immediate lower low the next day or a reflexive bounce/sideways action for 1-3 days followed by a lower low. Either one of those senarios is probably what's going to happen here. The fact that the market stopped at 1000 it too convenient/predictable...it needs to feel sloppy/desperate...i.e. bulls need to be sweating more.
I'll tell you one thing though; bears are once again dancing in the streets as if the market crashed 15%. Every time we've had a minor correction since March they've been doing this and every time they've turned out to be chumps. And look at that VIX spike up today to 29! Fear is in the air....there's no complacency with today' action that's for sure. Apparently there were rumors of an immanent major bank failure which may have helped to trigger the drop. I don't know if that's true but what I do know is that the market was vulnerable to a drop like today and although I wasn't gun-ho about the short side I did warn about the dangers of the long side and that the best thing to do was nothing....well, I suppose the best thing to do would have been to go short but not losing money on a day like today isn't so bad.
This latest top looks a lot like the top in June if you look at the charts however there's 1 big difference...the behavior of bonds. Unlike in June, we didn't see a significant run up or spike in bond yields leading to this top. I pointed sometime before that a run up in bond yields (sell off in bond prices) is one of the things I look for to confirm an IT top. The larger the run up in bond yields the bigger the correction. Since this time bond yields were actually in a falling trend for the past couple of weeks it suggests that the downside potential of this correction will be less then that of June's. Keep a close eye on bond yields. If we see bond yield drop sharply that could provide the fuel for another big leg up in equities. If yields rise while markets drop that's a bad sign.
When I was watching BNN (The Canadian equivalent to CNBC) this afternoon they had on a couple of fund managers who were asked how big of a correction they expected. One guy said 25% the other was calling for 900 which is about a 15% correction from the high. Based upon this and other sources, the consensus it seams is for at least a 10% correction. Remember what I said about the "ideal pullbacks" and a 10% correction at this phase of the bull run. Thus, I'd be very concerned about a lot more downside if we got the 10% correction everyone wants. But it's looking like to me that this correction will be shallower than people expect.
I'm thinking 970ish is as low as it will go. The current 50DMA of the SPX is at 965 and rising and so a test of that fits with my target.
Bottom line: So long as the SPX doesn't close below 940 I still believe markets are in a consolidation phase. The big spike in the VIX, celebration by loser traders on marginal downside and low bond yields suggest the correction we are seeing will be milder than the June correction which was about an 8% drop from the peak. So far we are down 3.5% from the peak. A drop to say 975 would be about a 6% correction which to me seems about right. I'll be taking this 1 day at a time as always.
I'll tell you one thing though; bears are once again dancing in the streets as if the market crashed 15%. Every time we've had a minor correction since March they've been doing this and every time they've turned out to be chumps. And look at that VIX spike up today to 29! Fear is in the air....there's no complacency with today' action that's for sure. Apparently there were rumors of an immanent major bank failure which may have helped to trigger the drop. I don't know if that's true but what I do know is that the market was vulnerable to a drop like today and although I wasn't gun-ho about the short side I did warn about the dangers of the long side and that the best thing to do was nothing....well, I suppose the best thing to do would have been to go short but not losing money on a day like today isn't so bad.
This latest top looks a lot like the top in June if you look at the charts however there's 1 big difference...the behavior of bonds. Unlike in June, we didn't see a significant run up or spike in bond yields leading to this top. I pointed sometime before that a run up in bond yields (sell off in bond prices) is one of the things I look for to confirm an IT top. The larger the run up in bond yields the bigger the correction. Since this time bond yields were actually in a falling trend for the past couple of weeks it suggests that the downside potential of this correction will be less then that of June's. Keep a close eye on bond yields. If we see bond yield drop sharply that could provide the fuel for another big leg up in equities. If yields rise while markets drop that's a bad sign.
When I was watching BNN (The Canadian equivalent to CNBC) this afternoon they had on a couple of fund managers who were asked how big of a correction they expected. One guy said 25% the other was calling for 900 which is about a 15% correction from the high. Based upon this and other sources, the consensus it seams is for at least a 10% correction. Remember what I said about the "ideal pullbacks" and a 10% correction at this phase of the bull run. Thus, I'd be very concerned about a lot more downside if we got the 10% correction everyone wants. But it's looking like to me that this correction will be shallower than people expect.
I'm thinking 970ish is as low as it will go. The current 50DMA of the SPX is at 965 and rising and so a test of that fits with my target.
Bottom line: So long as the SPX doesn't close below 940 I still believe markets are in a consolidation phase. The big spike in the VIX, celebration by loser traders on marginal downside and low bond yields suggest the correction we are seeing will be milder than the June correction which was about an 8% drop from the peak. So far we are down 3.5% from the peak. A drop to say 975 would be about a 6% correction which to me seems about right. I'll be taking this 1 day at a time as always.
Market shrugging off good news?
ISM data for the first time in 18 months showed expansionary economic activity with the reading of 53 but markets are now selling off. Seems the market has been doing this for the past couple of weeks hasn't it? Bears I'm sure are saying "see, the market is ignorning good news, it's gonna tank now". Well, I've seen this sort of thing happen before and it's not neccessarily true although this sort of behavior is in fact what you see at major turning points.
How many times did we see the market ignore bad news in the bear market and rally strongly only to give back those gains and hit new lows a few weeks later? I can remember plenty of times. The same thing occured during the last bull market. For the first 2/3 of 2004 even though the economy was clearly on the rebound the markets were drifting downwards which gave bears hope that the run was over and frustrated the hell out of the bulls, but then come the fall the market rocketed upwards. So why does this happen? It's simply a matter of market fatigue. Quite often after the market has had a big move one way or the other it will often go through a digestion period to work off the extreme overbought/oversold condition and shake off the Johnny come lately's. Quite often people will mistaken a consolidation phase with a major topping/bottoming process...it can be difficult to distinguish them from each other.
I've mentioned for a couple weeks now that I believe we are in a consolidation phase. The line in the sand to make me think otherwise would be if the market gets about a 10% correction from the most recent peak. I'm going to use a close below 940 as the threshold. ST sentiment still isn't favorable enough to warrent a long position aside from intraday scalps. I don't like trading those moves because there's not much difference between scalping and gambling. I find it is far too random...but to each his own.
I'm going to give credit where credit is due to the bears today. They defended the good news very well and if the market can close down towards the low of the day it would be quite a victory. Bravo bears bravo!
And now here's a song appropiate for what I'm feeling
How many times did we see the market ignore bad news in the bear market and rally strongly only to give back those gains and hit new lows a few weeks later? I can remember plenty of times. The same thing occured during the last bull market. For the first 2/3 of 2004 even though the economy was clearly on the rebound the markets were drifting downwards which gave bears hope that the run was over and frustrated the hell out of the bulls, but then come the fall the market rocketed upwards. So why does this happen? It's simply a matter of market fatigue. Quite often after the market has had a big move one way or the other it will often go through a digestion period to work off the extreme overbought/oversold condition and shake off the Johnny come lately's. Quite often people will mistaken a consolidation phase with a major topping/bottoming process...it can be difficult to distinguish them from each other.
I've mentioned for a couple weeks now that I believe we are in a consolidation phase. The line in the sand to make me think otherwise would be if the market gets about a 10% correction from the most recent peak. I'm going to use a close below 940 as the threshold. ST sentiment still isn't favorable enough to warrent a long position aside from intraday scalps. I don't like trading those moves because there's not much difference between scalping and gambling. I find it is far too random...but to each his own.
I'm going to give credit where credit is due to the bears today. They defended the good news very well and if the market can close down towards the low of the day it would be quite a victory. Bravo bears bravo!
And now here's a song appropiate for what I'm feeling
and another thing....
Regarding the euro....although I mentioned that it's looking like an upside breakout is immanent, it would not suprise me at all to see a knee jerk selloff to as low as the 1.40 area first due to any weakness in the equity markets or other factors. My put position in UUP (which is largely dependant on the movement of the euro) expires in December and I'm giving it up untill that time to achieve my target. This position is an "all or nothing" type trade. Either I make 100% (or more) or risk loosing 100%. I would be willing to pull the plug early only if the reasons for making the trade are no longer there. In other words, if the uptrend is seriously violated AND sentiment turns unfavorable.
I haven't added the Euro call position just yet given my concern for ST equity market weakness. Yes, yesterday the euro actually went up as markets went down, but 1 day doesn't make a trend. For now I'm content with my put position in UUP which is fairly modest in size.
I haven't added the Euro call position just yet given my concern for ST equity market weakness. Yes, yesterday the euro actually went up as markets went down, but 1 day doesn't make a trend. For now I'm content with my put position in UUP which is fairly modest in size.
Ramblings about seasonality
Today's selloff didn't really do much to change the sideways action we've been seeing. I still think 1000-1010 lies ahead but it's certainly possible to see 1030-1040 first. It’s an edgeless tape for me and I still haven't done a damn thing and that's fine by me.
Notice again how any meaningful downside action occurs within the first hour of trading not allowing anyone except overnight holding shorts to take advantage. This is bull market correction action. And it seems anytime I get ST bearish on the market it gaps down the next trading day without allowing me to take advantage. It seams Mr. Market is teasing me. That's fine. I know better than to chase a gap down out of frustration of missing it only to get whipsawed shortly after. It's usually a poor risk/reward trade to chase a gap down when the market is in a bull trend. The only times I would consider it worthwhile is if the market was extremely ST overbought with favorable intraday put/call readings and preferably a good catalyst. Wait for the right pitch, play only premium hands.
There's a lot of talk about the dreaded month of September...and there usually is. Historically it's the worst performing month of the year and last year's performance reinforced this notion big time. I'm not a big believer in seasonality because there's little fundamental arguments behind it and if there was, lots of people would be making tons of money doing it which I don't see happening. Do you see any seasonality specialty hedge funds out there?
Seasonality doesn't jive with the core principle of my market religion (the motto of this blog) because it doesn't take into account how people are positioning themselves. If too many people are playing a seasonality trend the market will do what it does best which is punish that crowd even if the seasonality trend actually has sound fundamental backing.
If seasonality confirms what I believe market action and indicators are pointing towards anyways, then it will add a bit more to my conviction level but by in large, I will ignore seasonality if market action and indicators oppose it. Seasonality trends in the market are in my view, mostly due to coincidences. For example I read once that someone did a study to find out what was the most highly correlated variable with the S&P 500 using historical data. Guess what it was? Butter production in Bangladesh. Data mining will produce these sorts of relationships which such as this example has no fundamental basis and was the result of coincidence.
So, will September be a bad month? Well, if it is, it's going to be because of the arguments I presented in the previous few posts, NOT because September is historically such a bad month.
Seasonality trends may result in a knee jerk reaction as investors/traders try to take advantage. But, as I said, if the market is poised to go the opposite way, it's going to go that way and any knee jerk reaction will likely get quickly undone.
Notice again how any meaningful downside action occurs within the first hour of trading not allowing anyone except overnight holding shorts to take advantage. This is bull market correction action. And it seems anytime I get ST bearish on the market it gaps down the next trading day without allowing me to take advantage. It seams Mr. Market is teasing me. That's fine. I know better than to chase a gap down out of frustration of missing it only to get whipsawed shortly after. It's usually a poor risk/reward trade to chase a gap down when the market is in a bull trend. The only times I would consider it worthwhile is if the market was extremely ST overbought with favorable intraday put/call readings and preferably a good catalyst. Wait for the right pitch, play only premium hands.
There's a lot of talk about the dreaded month of September...and there usually is. Historically it's the worst performing month of the year and last year's performance reinforced this notion big time. I'm not a big believer in seasonality because there's little fundamental arguments behind it and if there was, lots of people would be making tons of money doing it which I don't see happening. Do you see any seasonality specialty hedge funds out there?
Seasonality doesn't jive with the core principle of my market religion (the motto of this blog) because it doesn't take into account how people are positioning themselves. If too many people are playing a seasonality trend the market will do what it does best which is punish that crowd even if the seasonality trend actually has sound fundamental backing.
If seasonality confirms what I believe market action and indicators are pointing towards anyways, then it will add a bit more to my conviction level but by in large, I will ignore seasonality if market action and indicators oppose it. Seasonality trends in the market are in my view, mostly due to coincidences. For example I read once that someone did a study to find out what was the most highly correlated variable with the S&P 500 using historical data. Guess what it was? Butter production in Bangladesh. Data mining will produce these sorts of relationships which such as this example has no fundamental basis and was the result of coincidence.
So, will September be a bad month? Well, if it is, it's going to be because of the arguments I presented in the previous few posts, NOT because September is historically such a bad month.
Seasonality trends may result in a knee jerk reaction as investors/traders try to take advantage. But, as I said, if the market is poised to go the opposite way, it's going to go that way and any knee jerk reaction will likely get quickly undone.
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