Rydex traders get tricked....Bears get treated

I predicted Thursday's rally was going to fail shortly but I didn't think it would happen that quickly! I figured the bulls would be able to at least hold steady ground to close out the end of the month but obviously that wasn't the case.

Rydex traders have once again proven their worth as a timing indicator. I never rely on just one indicator but I pay more attention to the ones have been hot and the rydex traders have been on fire all year! I warned yesterday that these traders were being too complacent during this sell-off which argued for further losses down the road....after yesterday's drubbing it looks like they are still not fearful enough. These guys tend to be quite fickle and quite often they will change their behavior on a dime by flipping from bullish to bearish on the first of many rallies, but again, I need to see them do this first and I'm not going to try and anticipate the buy signal.

Prior to the market rolling over I warned option traders and the VIX were signaling complacency. This is rapidly becoming reversed but more work needs to be done. The VIX however has spiked to a high of 31.5 which is close to where it was at the July lows (it reached an intraday high of 33). This is a very good sign that what we are seeing is a correction and NOT the start of another bear market down leg because we are seeing about the same level of fear that we saw when the market was 15% lower. That's a positive divergence. You can think of it this way....the bears have exhausted a lot of their fuel just to get the market down 6%. Soon they will be tired just like the bulls got tired when the VIX hit 20.

Now, we have see last year the VIX go to stratospheric levels of 80+ but it only got that high 2 times in the past 80 years....the 1987 crash and the 1929 crash (a study shows it would have been this high if the VIX existed at the time). But, admitingly it’s also possible for it to go to 40 which is a more "normal extreme". However, like I said before, if a VIX spike of 33 halted a market slide a few months ago, it can certainly do so again especially when the market is at a higher low. If instead the market was at a lower low, it's more likely you would need an even higher spike in the VIX to mark a bottom. That's what happened a lot of the times during the 2000-2002 bear and the most recent bear.

Ok enough talk about the damn VIX. After Friday's sell-off the market is now once again in extreme ST oversold territory but since the market closed right at the lows of the day making a new low for this move down and rydex traders are still showing too much complacency it' doubtful we've seen the final low yet so I'd be careful trying to play for a bounce. If the market gaps down on Monday, then I would become interested but if instead we just rally right away like on Thursday I would again be skeptical of its LT sustainability.


Now, onto gold stocks as promised. I believe there's another down leg or 2 in store in gold stocks as per the behavior of Rydex gold traders. When I showed the following charts in August I argued that that gold stocks were poised to go higher because as per the cash flow chart, Rydex traders remained on the sidelines even as gold stocks were rising which showed skepticism in the face of a rising trend (bullish). Now, the situation is the opposite. Just prior to the drop in gold stocks cash flow into the gold stocks was near historic highs and despite the fact that gold stocks have rolled over significantly, Rydex cash flow levels have dipped only modestly and remain near the highs. This argues for downside potential in gold shares in the weeks to come.




The bottom line is this....we've probably seen the bulk of the decline in the markets since it rolled over from high at 1100 but it doesn't appear that a final low is in yet although encouraging signs of exhaustion are already there. Gold stocks appear especially vulnerable. I'm waiting for the dust to settle before making any significant moves although I may try some small short term trades along the way. I suspect the final low will be somewhere around 1010-1025 and it won't be until mid November at the earliest before the market makes a sustainable upward launch. In other words, we will likely see fits and starts to any rally attempt even if the low gets registered early this coming week.

Be patient and wait for your pitch. It's always tempting to bottom tick a decline or top tick a rally but more often than not it's a recipe for pain. I learned throughout the years it's better to have the wind at your back i.e. making a move when you have some sort of early confirmation that the tide has turned. Only if you see "the whites of their eyes" is it worth trying to bottom/top pick (but not betting the farm). I can be hard to tell sometimes when this happens....it's easier though to identify panic bottoms vs. tops and so I'm looking out for that....

Fear is in the air

Look at that VIX spike! It's now at 31.5 as I type this which is just about where it was at the July lows when the market was at much lower levels. The put/call ratio is also quite high at 1.20. This is the type of fear that you see near bottoms but we need to see the market find a floor first.

Rydex traders behaving badly

I've focused on this group of dumb money traders before and it's been uncanny how accuarte they've been as a contrary indicator. Throughout most of the rally they've been chasing their own tail doing the wrong thing at the wrong time. When they chase strength they get burned, they when ran for cover on weaknesss they got burned, when they tried to fade the market by buying weaknes and selling strength they got burned! Mind you, sometimes when they bought weakness it was the correct thing to do but then they sold and ran to cash (or when short) far too early.

Currently the message from the rydex traders is a bearish one. They've bought the dip when the market first rolled over and they've been holding the bag. They sold a little bit into yesterday's rally but by and large they continue to suggest this market is not ready to resume it's upward course (in a sustainable way) and the market is still vulnerable to more downside. The behavior of option traders suggest the same thing.

The fact that the market is not following through so far and has given up half of yesterdays gains suggests a retest of the lows at the very least is even more likely to be in the cards even if we see the market turnaround from here to squeeze the bears. Anytime you see a big move like yesterday, if there's going to be sustainable follow though, most of the time the market doesn't allow you much opportunity to get in...there will either be a brief dip in the morning or it will just take off immedidiately. Let's assume the market turns around from here...the fact that it is giving you every opportunity right now to get in on this "dip" suggests a bull trap in the making.

The action we've been seeing in the past couple of weeks is bear market like behavior. Not just because we've been going down but the way we've been going down and the way dumb money traders have been acting. Does this mean the bear is back and that all the bullish notions I've been harping on for months is wrong? Not neccessarily. This action could simply just be a short/ intermeidate term slide similar to the June-July slide to shake out the "Johnny come lately" bulls. If however, I continue to see this "bad beahvior" and the SPX get's the 10-15% correction that everyone seem to want then I believe the bear could in fact be back and I will no problems at all embracing it. No ego will be bruised here let me tell you....

I said I would talk about gold stocks this morning...I lied. I'll do so this weekend.

Still room to go higher but today's gap likely to get filled eventually

Ok, so we bounced quite nicely today without having to fill the gap. Tech and emerging markets were strong right off the bat which, among other reasons, made me believe we had a 50/50 shot of a gap and run type day. However, the fact that we gapped up big, never looked back and closed even higher after the market had been slammed in the days prior reminds me of what a bear market bounce looks like. I'm not saying this is a bear market bounce, but rather that these are the types of rallies that are very prone to failure....not necessarily the next day but shortly afterwards.

I asked myself if I could have intelligently participated in this rally knowing that a bounce was almost guaranteed today. I rarely chase gap days especially counter to the prevailing ST trend because it would force me to be weak long (because I would bail at any hint of the rally fizzling). The only time I would chase a gap is if I noticed good leadership, which there was, but also some signs of trader pessimism like a sticky VIX and/or high put/call ratio and that didn't occur. Because of these offsetting factors I assigned a 50/50 chance of the rally sticking....perhaps the odds were higher given the extreme oversold condition and end of the month window dressing...oh well, hindsight is 20/20. Perhaps I should have put on a trade with a smaller than normal position size given the cross currents I was observing. That certainly was feasible. Woulda, coulda, shoulda...it's all in the past. Learn from it and let it go. This game is a never ending learning curve. And if you ever miss an opportunity, get whipsawed or make some other kind of mistake don't fall into the trap of "doubling down" on the next trade or chasing poor risk/reward set ups just to make up for it. This is a very common mistake people make and I used to do this all the time. This is like a poker player "going on tilt". Relax, take a step back and come to realize that the market isn't going away. If you miss a boat another will come and if you miss that yet another one will come....they will come.

I've been playing a very tight game, sometimes too tight but it's been working well for me this year. There have been times where I've never made a trade for a month because I couldn't get a setup I was comfortable with. It was very frustrating but it kept me out of trouble and doing things I would have regreted. Anyhow, enough about me....

There's room for the markets to grind higher here to unwind more of the oversold condition but I suspect sometime in early to mid November we are going to head back down to at least fill today's gap and I will look for a set up to play the short side. Notice how the VIX once again collapsed and the put/call ratio dropped back to the low end of neutral readings...fear turned to greed quite easily. Usually we would see skepticism or guarded optimism on rallies like this during the past 9 months....further evidence which suggest today's rally will ultimately fail.

AAII sentiment came in today at 34% bulls 42% bears. At the July low bears out numbered bulls 2:1. We aren't there yet but we aren't that far away from that happening either.

Tomorrow morning I will discuss gold stocks and the bearish signs I'm seeing for them.

Mind the gap

Action looks OK so far but I just HATE going long for a trade on a gap up when the market has been in a downtrend even if the market is oversold the way it is.
I'd say the odds are 50/50 as to whether this rally holds today without having to fill the gap first....I'll pass. I have all the patience in the world and if I miss the rally boat so be it...there's always plenty of more boats to come going in many different directions.

Maximum Oversold but after a bounce it may still not be quite over yet.

It was quite the nasty day in the market. I wrote last night that I was expecting a bounce because ST momentum indicators I track were already very oversold and only got more oversold in the past when there was a crash. Well, perhaps crash was too strong word....mini-crash/panic is more like it. We got that today. Take a look at what I mean...the following chart is the overbought/oversold indicator for the NASDAQ. Look at how rarely extremely oversold we are. It's only been this extreme a handful of times in the past several years (I know the chart below only goes back to 2007 but trust me on this one). The only time it got more extreme was during last year's Sept-Oct once in a lifetime crash.



There's good news and bad news to this extreme oversold reading. The good news is that we've likely seen the bulk of this decline since the market make it's most recent high. The bad news is that after a bounce (which now is almost certain to start either tomorrow or Friday) there will likely be a retest or lower low (I'm thinking the latter but we'll cross that bridge when we get there). At that point we should see the OB/OS oscillator make a higher low and thus a positive divergence.

Other good signs are that the VIX has spiked significantly and has now gone from oversold to just about overbought and the total put/call ratio came in at 1.11. The signs of froth in the option market that I warned about before is rapidly dissipating.
I'm also noticing a tremendous surge in courage from the bears out there....the same bears by the way who have shown no respect at all for this rally all the way up and got burned many, many times anticipating it's end. They are now fully prepared and willing to go short on any rallies. This is exactly the type of behavior that characterizes bull market corrections during the early stages of a new bull market.

Check out this excerpt from an article I just read from Bloomberg...

Oct. 29 (Bloomberg) -- An eight-month, 68 percent rally in global stocks failed to convince investors and analysts that it’s time to take on more risk or dispel their concerns about U.S. economic policies and its banking system.

Only 31 percent of respondents to a poll of investors and analysts who are Bloomberg subscribers in the U.S., Europe and Asia see investment opportunities, down from 35 percent in the previous survey in July. Almost 40 percent in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.

“The doubt and the pessimism just won’t go away,” says James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “They’re still so shell-shocked by what they went through despite the improvement in the market and the economy.”


This folks is a long term wall of worry....a 100 feet high, 15 feet thick solid concrete wall of worry. For the bear market to resume under these conditions would be quite difficult if you ask me. Bear markets happen when people drop their guards not when they acting like frightened turtles. Of course, nothing is impossible and I never deal in absolutes...it's always about probabilities...I just feel that it is highly improbable for the bear market to resume with this type of a sentiment backdrop.

Bottom line: It's likely we've seen the bulk of this correction. It's now almost a certainty that the market will see a ST rebound either tomorrow or Friday but it's likely that a retest of the low or lower low lies ahead before a final low is registered. I still haven't seen the "all clear" sign yet from the trusty dumb money trader indicators I follow which have been pretty accurate. But it should be said that confirmation can often happen after the low is put it.

What I plan on doing is putting some cash to work is some individual stock names that I've had my eye on which have shown great resiliance to this downdraft in the market thus showing relative strength. I have about 85% in cash and the longs that I've kept have actually gone up since this drop began this week including today! How lucky am I? Well, to credit myself, I only kept these longs because they appeared to be acting solely on company specific fundamentals showing near 0 correlation to the market which so far, they have been doing.

I'll pull the trigger on a long side index trade if again; I see the proper set up. I won't be as picky this time because the market is so extremely oversold now...but I will still be picky. When in doubt I will stay out...defense first offense second.

Here's the way I think before pulling the trigger on a trade...if I believe the market or a stock is going to go in certain direction I need some sort of evidence/sign/confirmation to indicate to me that the market may be agreeing with me otherwise I feel that I'm just guessing. And I never blindly trade on just indicators, trend lines, ect... for me there's an intuitive element to it which comes with experience and gut instincts. As a result of the above it often allows me to be wrong about a hunch I had and yet not lose a dime. And don't read this wrong....I DO in fact make losing trades and get whipsawed as I've shown here before.

Tomorrow’s GDP number could be a market mover....I hope everyone's been holding up well in this market.

Just watching for now

The bounce I expected is not materializing....obviously lol! I haven't pulled the trigger on a long trade yet because I noticed from the start the market leaders tech and emerging markets were showing relative weakness.

The put/call ratio however so far is at a fairly high 1.18 which is good news for the bulls. They need to see more of these high readings in the days ahead to rebuild that ST wall of worry.

Since I didn't get the "all clear" signal yet, it's really not that suprising to me that I turned out to be wrong about a bounce (so far) today. Like I said last night, since I didn't get the all clear signal, I would be very careful trying to play the bounce which to me means that the set up needs to be near perfect and with tech and emerging markets lagging badly right off the bat that to me said "stay out for now". Mind you, there's been times when staying out because of this turned out to be wrong thing to do but that's fine. In this game it's all about probabilities and even though the right decision may cause you to miss out or get whipsawed, in the long run you will come out on top.

I still may end up pulling the trigger before the day is over....

Bounce immanent but I think more work still needs to be done on the downside after it

A couple of short term indicators I track are just about as stretched as it gets with respect to being oversold except for rare cases of a crash. Today's action was much better with respect to rebuilding the ST wall of worry which I have been pointing out needs repairing (the LT wall of worry is still well in tact). Bonds were strong and the put/call ratio came in at 1 which is finally showing some pessimism but this is only a 1 day reading. But such a reading along with the extreme in some ST trading oscillators argues for a bounce here which should send the SPX back to about 1075-1080 making a potential lower high. I'm thinking it starts tomorrow. At the very least, I wouldn't want to be short right here.

I believe the market might play out in a similar way as it did from June to early July. By mid June the market rolled over from an IT peak right at the nice and neat 950 level similar to how we have rolled over from the nice and neat 1100 level. We then saw a bounce (like we probably will get now) which eventually failed as the market made a lower low and H&S formation which got the bears all jacked up going for the kill, then...KABOOM! the bear trap was sprung and market blasted off never looking back. I doubt we will see things play out exactly the same way but I do think there's a good chance we will see some lower high, lower low action to get the bears all excited. Bulls need to the bears to get all confident again building up shorts/puts so that they get squeezed yet again to trigger the next up leg.

I'm thinking a little too far ahead here. As always I'll let market action and the behavior of the indicators dictate the story. Who knows, perhaps the market action and indictors will suggest a bearish resolution to all of this....quite frankly I don't care and neither should you. If the bear's back (doubtful) then giddy up and let's make money on the downside. This is the way you should think. Who cares what you predicted before or told your friends at the coffee shop...if the story changes you change with it and don't let a 30-50% portfolio haircut be the instrument of your change either.

Thursday morning before the bell 3rd quarter GDP estimate gets released which has the potential to be a market mover. There are a lot of cross-currents out there so beware whatever side you play.

Even though I expect a bounce I still haven't received an "all clear" signal for the bulls to take back control of the market yet and because of this I will be very careful at trying to play this bounce. I'm sure a lot of traders are seeing the same things I do and so if too many try to put on the same trade we could end up seeing any bounce attempt fizzle out and postponed to Thursday or Friday.

Oversold enough for a bounce but downside likely not over

As I made mention in my quick morning posts, the market started the day whereby the potential for a short squeeze appeared to be in place at the open given the sticky VIX and a short squeeze appeared to have occurred as the SPX was up 11 points by 10:30 but then we saw a quick and vicious reversal to the downside which came out of nowhere. The explanations as far as I can tell were either 1) raising concerns about an earlier than expected fed exit strategy or 2) strength in the US $ (which could be a result of 1). Either way it happened and as I've been saying for about a couple weeks now, I think the market was vulnerable for an excuse to sell-off because it got overbought and nervous longs had itchy trigger fingers not wanted to let profits slip away. In addition to this, some measures of ST trader sentiment have become too frothy such as the put/call data.

ST momentum indicators are well oversold now which suggest a bounce could be in the offering. Also, the VIX has spiked quite nicely today which means the ST bullish froth is quickly being extinguished.

However, on the bearish side, the put/call ratio today was neutral therefore not showing any fear and one of the dumb money trader indicators I track which has been accurate all year pinpointing ST bottoms is still nowhere close to signaling a bottom. In fact, it’s in bearish territory signaling more downside because these traders were buying the dip today which is NOT a good sign. Mind you, sometimes this indicator is tricky because what sometimes happens is that these dumb money traders buy the dip correctly and then sell out and/or go short incorrectly on the first of many rallies flashing a buy signal on the way up from the bottom. That could very well happen again, but until it does I will NOT give these dumb money traders the benefit of the doubt.

Bottom line: Overall, I would have to say that there was too much complacency on today's dip which argues for more downside. Maybe we bounce tomorrow or Wednesday but unless I see more trader pessimism I will still be on guard for more downside. Bonds were also weak today which also suggests the worst hasn't been seen yet.

On a longer term positive note, I get the sense that a lot of people are bracing for a big correction i.e. the 10-15% type, while bears of course are still calling for Armageddon as they have been with every little dip since March. These are good signs from a contrarian point of view that the correction will be much shallower than people expect. To these people who are expecting a 10-15% drop I will say this....be careful what you wish for because if we do get a 10% correction I believe there will be a good chance for far greater downside and possibly an end to this bull run that began since March.

lol! the strength didn't last long

Markets got a good pop early on as I suspected but I'm quite suprised to see this sudden reversal. I'm not sure what caused the markets to get spooked...it might be because of increased chatter about the fed's "exit strategy". Whatever the reason, I'm sure a lot of day traders both bears and bulls got badly whipsawed today.

Keep an eye on the VIX

When you see it up when the market is trading up, that's actually a bullish sign in the ST....I'm still thinking markets end up making a lower low eventually...but as you can see so far, it's not going to be easy for the bears.

Still on guard for more downside..US dollar to get a pop?

Microsoft's and Amazon's blowout numbers couldn't prevent the market from reversing Thursday's gains. Seems like Thursday's pop was indeed a heakfake. What we are seeing now is a sell on the news reaction from the market which I was expecting to have occured last week. I've noticed the retail bears are getting quite excited again with the market only off about 2% from the latest high and I've seen this reaction every time since April....it's kind of like getting excited landing a jab on Mike Tyson after he has been beating you to pulp for an hour. I think what we will be seeing is a normal correction in a bull market.

I believe there's more downside in store for the following reasons

1) The 10 DMA of the put/call ratio got very low.
2) The VIX got quite oversold and hit the 20 level normally associated at IT tops.
3) Momentum indictors have rolled over and turned negative and not yet hit oversold levels
4) Rydex traders are not bearish....yet
5) Bonds have sold off here (this is an important one...remember how I've been saying before that corrections usually occur after some sort of sell-off in bonds...well, we got one now).

The US dollar also might see a vicious snapback which would be consistent with more downside in the market. As the chart below shows, it's forming a falling wedge technical pattern which normally resolves itself with an upside breakout.



So, in my view there is quite a bit of bearish evidence here that even as a longer term bull I cannot dismiss. It's likely however that any downside will be ST or IT in nature and NOT the end of the bull market. Trying to profit from any downside will be tricky as we've seen with Thursday's heakfake which is why I like to use OTM all or nothing put plays to avoid getting whipsawed.

Could I be wrong and the market simply reaches more extremes in the indicators such as the put/call ratio, VIX, ect? Of course...but it's all about risk/reward and probabilities and right now it suggests at the very least that longs should be cautious in the ST. The name of this site is called bulls, bears and pigs....don't be the latter.

I see a lot of bears getting excited about what they feel is the end of this rally that began in March. From a longer term sentiment perspective the wall of worry is still indeed quite strong. Lot's of people have their guard up....even bulls like me which is a bullish sign longer term. Lot's of people think there's going to be a correction, but they think it's going to be the 10%+ type....I doubt it. I believe that any correction will be about 3-6% from the recent high. If we get a 10% correction, better watch out because that would likley signal for even more downside.

If the rally since March is a true bull market it should not be giving people convenient entry points such as the 10% corrections people have been calling for everytime which never came to fruition. History has shown that you don't see 10% corrections within the first 12 months of the initial bull market thrust.

Also, do you notice how the SPX stopped right at 1100? That's a nice neat number, well known to everyone as a resistence level which makes me believe that it will not hold as a long term top...it's far too obvious..such a top has an "artificial" feel to it. I felt the same way when the SPX hit a ST top at 875.

So, if you want to play the short side go ahead, but just be warned that you are bucking the longer term trend and there's a lot of people who are going to be trying to do the same trade which can result in days like Thursday.

Rope a dope or head fake?

Well, so much for the downside follow though I predicted. Mr. Market pulled off the old "rope a dope" trick originally invented by Muhammed Ali. Or was this simply a head fake to rinse out the bears that piled in on yesterday's reversal? We'll know soon but what I do know is that the VIX collapsed once again and is close to the 20 level again which signals complacency. It's not so much the absolute level of the VIX that matters (although it does somewhat) it the way the VIX moves. When you see the VIX spike or collapse in a short period of time it usually signals too much fear or complacency respectivitily. But again, let's keep in mind where we are comming from. Last year at this time we saw the VIX explode to off the chart levels and so I'm mindful that it can very well implode the same way to a large extreme before turning around.

There's a saying that goes "better to be lucky than good" and I did get lucky today. This morning I was contemplating bear etfs for a trade as I mentioned last night but I changed my mind and decided to go with an "all or nothing" OTM put play because I figured if I went with bear etfs there's a chance I could get whipsawed if I was wrong about the downside follow through (which obviously happened)today. With and "all or nothing" OTM put play, I'm willing to buy and hold it and lose 100% if my entry sucked but conditions were such that a move in my favor would be immanent. I chose puts on Barrick gold because I noticed gold stocks have been showing relative weakness and I consider Barrick to be one of the weakest of the bunch that has good liquidity in the options market. Very fortunately for me, my put position is in the red only very slightly. But my luck might change tommorow however because Amazon reported blowout numbers sent the market up after hours and gold is up a few bucks as well.

We'll see how this goes. Although I'm willing to lose 100% of my captial on such a trade (because the capital at risk is very small) I will still cut and run if I think I'm beat and I might end up doing that if things seem that way. If it happens, ce la vie. I was overdue for one and the loss should end up being very modest.

Watch out for more downside follow through

We got the stab higher this morning as my gut suspected but it didn't last very long. While watching the action today I noticed the VIX had just about touched the 20 level when the market was in the green and at this point the VIX was hitting extreme oversold as per the RSI indicator. I was going to dedicate a post talking about this and how it signaled an immanent pullback for the market but Mr. Market was 1 step ahead me and we saw quite a reversal into the close. I had mentioned recently that the collapsing VIX along with the low put/call ratio readings observed recently was something the bears had in their favor and to be on guard for this. I also mentioned before that the 1100-1120 range was were I believe a ST inflection point could be as nervous longs and the technically inclined type traders had their finger on the trigger just waiting for an excuse to sell. Well, we got an excuse but it was a rather lame one. Apparently the reason for the big reversal into the close was because of the downgrade of Wells Fargo by famed bank analyst Dick Bove. Look, it doesn't matter what the excuse was...I believe traders were looking for any excuse to sell and we would have done so eventually. I remember at the low last November news came out late in the trading day that Tim Geithner was going to be appointed as the new Treasury Secretary and this sparked a massive upside reversal. This news wasn't even a surprise as most people expecting him to get appointed but it didn't matter what the news was because markets were massively oversold and shorts, like longs now, had itchy trigger fingers because they were sitting on gains.

If things play out like they have been playing out since the March lows, we should see fear rapidly make its way back into the market on just modest downside (2-3%). This would set up for a rally that powers us right to the end of the year. Look for a spiking VIX to confirm fear is rapidly returning. If instead we see the VIX remain subdued on any downside that would be a warning that the downside could be significant.

As a result of today's drop, ST momentum indicators have now clearly rolled over and are not yet oversold which makes room for further downside which I believe is likely. 1060-1070 on the SPX looks quite doable now.

This morning I got rid of any long positions I had which were dragging ass and no longer performing to my expectations. This also includes the position I had in GAS. GAS had made a nice breakout but failed to follow through which was a bit disappointing. As I had mentioned before, I had a tight leash on this puppy and my stop got hit. No regrets though...I caught a nice little pop there in a very short period of time. In addition natural gas inventories get released tomorrow morning at 10:30 which has the potential to be a big market mover one way or the other and I don't want be gambling on that...bad news could easily send GAS down big-time especially if there's a generally weak environment for equities and if I got round tripped as a result I would be very pissed at myself for not following my game plan and rolling the dice on some report I had no idea would reveal.

I'm eyeing some double short etfs here but I'm not going to be overzealous about the short side for more than a trade and I won't chase the market down either. ..and if something doesn’t feel right I’ll error on the side of caution and step aside. No fucking way I’m become one of the many bear bag holders out there.

I'll make a quick post tomorrow morning.

Stellar Earnings so far...Bank of Canada talks down the loonie

According to Bloomberg:

Profit has topped estimates at 79 percent of the 104 Standard & Poor’s 500 stock index companies posting results so far from the just-ended quarter, and if the trend holds it would be the most since at least 1993. The rate was a record 72 percent for all S&P 500 companies in the second quarter, Bloomberg data show.

Once again, wallstreet is behind the curve this time on the way up. In May I made note of a Bloomberg article that said the following:

Analysts overestimated earnings by an average 13 percentage points in each period between the third quarter of 2007 and the end of 2008. Better-than-expected first-quarter results haven’t prompted them to boost forecasts for the rest of 2009. Instead, they’ve ratcheted down predictions as the first global recession since World War II weakened demand.

Is it really a suprise after reading the above that companies are smashing their estimates? I don't think so.

Bears will have a really hard time taking this market down in a meaningful way (i.e. greater than 10%) when you have a low interest rate environment, rising earnings from depressed levels, a postive trend in beating earnings expecations and a large overhang of skeptical investors.

Today's action seemed a like a token "sell on the news" type sell off. Noticed how the markets immediatley went into the red this morning....that smells of normal profit taking. The collapsing VIX however should be a concern for any ST bulls...so be on gaurd. I think though there's a decent chance at another stab higher this week but this is just gut feel. I'm not taking part of any ST trading of the indicies as I have been repeating ad nauseum.

Today the Canadian dollar fell sharply on comments from the Bank of Canada (BOC)that a strong Canadian dollar (the loonie) would harm projected growth prospects for Canada which traders took as a signal that the BOC wants the loonie lower and hence may intervene in the markets. This is highly unlikely to happen...they didn't do it last time the lonie was above parity vs the US $ and so I doubt they will do it now with the loonie still below parity. Only if the Canadian dollar was well above parity for a sustained period of time would they even consider such a notion. There's nothing much the BOC can do to lower the dollar except cut rates which they will not do given that they have already stated their intention of raising rates sometime in the middle of next year (which I doubt will happen....it's likely to be sonner than that IMO). Second of all the Canadian bank rate is only .25% so there's not much to cut but that doesn't even matter because cutting rates is absoulely out of the question.
So if you ask me, the Canadian authorities are pretty much helpless in influencing the currency other than trying to talk it down.

Anytime you see authorities jaw bone a particular market lower (or higher) like this and you get a reaction from the market in that direction, it's been my experience that such reactions are knee-jerk in nature and don't last for long (1-3 days) and the market will bounce back right back to were it was in short order. These types of situations are one of the rare times when the market gives you a gift.

FXC is a currency ETF that tracks the Canadian dollar vs the US. Today's comments by the BOC derailed the loonie from it's course of achieving parity with the US dollar (100 on FXC) but as per the above paragraph I suspect this is only a temporary thing and so a good ST buying opporunity has presented itself. The only thing that I am leary about however is the potential for ST weakness in the equity markets which may very well put additional pressure on the lonnie as it is seen as a "risk seeking" currency. I will be watching to see how the loonie reacts to any weakness in equities.


I am eyeing December call options on FCX

Apple keeps the party going

Traders are reacting quite positively to Apple's results after hours and once again the market has shown very little in the way of mercy towards the bears. I know I've been saying this for months but I still get the impression that many people are showing this market little respect. The reaction I've noted with these stubborn bears is akin to a poker player who is going on tilt. Unfortunately for such a player he ends up losing more.

I also get the feeling that there are a lot of weak longs out there with their finger on the sell button just waiting for an excuse to sell and I've highlighted the 1100-1120 zone as a likely ST inflection point and we are now essentially at the bottom range of this zone. Let me clear about something though...if the market rolls over from around these levels it will be much too convenient/predictable to have signified anything other that a ST top in my opinion. In addition, I'm not going to put any of my money on a downside trade unless I see "the whites of their eyes" and by that I mean capitulation by the bearish traders. I mentioned yesterday that the put/call ratio was the one of the things bears had in their favor but remember what I said about the "hooks" that keep you out from riding the trend correctly. Until price action confirms the bearish notion of the put/call ratio you stand to get run over if you play the short side especially when the market is making a fresh 52 week high like it is now.

Rookies often make the mistake of catching falling knifes or as we've seen this year, standing in front of oncoming Mack trucks. I know it is very, very tempting to lean the other way when the market has made a big move in one direction but until you see the whites of their eyes you stand to get run over. Conditions need to be near perfect to successfully execute a top or bottom pick, in other words, you need strong edges. Using the reason "the market is too high here" does not qualify as an edge. You can always scale into the position but that's not foolproof either because you could run out of ammo before the tide turns your way. Bulls learned that the hard way last year and bears are learning the same thing this year.


I mentioned last week about my interest in the Natural Gas sector and so I started getting exposure by taking a position in GAS on the Toronto Stock Exchange (TSX) last week. This is an ETF which holds front month Nat Gas futures. The problem with these types of products is the negative roll yield experienced when there's a contango in the commodity because the ETF will eventually have to roll over their holdings into the next month's contract which will be at a higher price. As a result of this, it's possible for you to be right about the change in spot price of the commodity but you don't get rewarded much due to the offsetting negative roll yield. As a result of this, I have put a tight leash on this position via a stop to protect the small gain I have thus far. I might end up getting whipsawed but I don't want to be in the position getting burned by a negative roll yield and negative price action. Defense first offense second. I'm looking at a couple of small cap stocks levered to nat gas as well but I haven't yet taken a position. One of them jumped 25% the same day I was doing DD on it...that really pissed me off!


On a lighter note please indulge yourself by watching this video. This is the funniest thing I've seen in a while.

2 highly regarded bears doubling down

I mentioned in my long winded rant the other day that 2 people that I read weekly, John Hussman and John Mauldin have failed to give a mea culpa about being wrong about the sustainability of the rally that we've seen thus far since March. Instead, they have been using the "is hasn't happened yet" defense with respect to their bearish predictions that have been wrong. This weekend I have noticed that they have both "doubled down" with their bearish convictions. Mauldin is calling for a recession within the next 18 months and he seems quite gun-ho about it. Hussman also appears to share this view although he didn't say it outright. In regards to Hussman here's what he said in his owns words:

"we can no longer find a single historical instance where stocks were more overbought on the combination of short- and intermediate-term measures we respond to most strongly. Indeed, only one instance comes close, which is November 28, 1980. The market hasn't been this overbought since 1980 on both"

He doesn't mention specifically which short and IT measures he is referring to but he did mention shortly after the following:

"As for the present, we have rarely seen nearly 90% of stocks suspended above their 50- and 200-day moving averages for as sustained a period as we have now observed"

Therefore, I think it's reasonable to assume that the above are the ST and IT measures he's referring to.

In response to these notions I will say this....


1) There was indeed a time after 1980 when the market got similarly overbought for such a sustained period and that was early 2004 which was the end of the initial bull market thrust from the March 2003 bottom. From the beginning of January to about the beginning of March over 90% of stocks in the SPX traded above the 200DMA the entire time. What happened afterwards was a correction and then sideways action for about 6 months whereby the maximum drawdown from the highest point to the lowest point was 10%. After that it was onwards and upwards as the market went on to make new highs by the end of the year.

We've seen the SPX hit the 90% mark a few times recently but we haven't seen it trade constantly above it for 2 months yet like in early 2004, instead, just recently, it's been hitting this level and backing off then hitting it again. I think before any meaningful correction occurs we will see the SPX trade above the 90% level for at least 2 months just like in early 2004....maybe even longer given how insanely oversold the market got last year which leads me to my next point...

2) Using the same measures, the % of stocks trading above the 50 and 200 DMA the market hit absolutely insane oversold levels for a very extended period of time last year and so my response to Hussman is "what goes around comes around". Hussman considers the current reading extreme overbought but he doesn't take into account that for about 5 months - early October 2008 to the March lows of 2009, the % of stocks trading above the 200DMA (and even the 50 DMA) was well under 10%...on average it was only 5%!!! It got so extreme that I remember one day in November 0% of stocks were trading above the 200DMA, 50DMA and even 20DMA!!!! I don't think in my lifetime I will ever see that happen again. The market literally had no pulse....and yet still the bear market still managed to make another significant lower low. That folks is what you call extreme and what we have seen this year is simply the unwinding of perhaps the greatest oversold market in history. Therefore in light of this context, the market isn't as dangerously overbought as Hussman makes it seem. What this also suggests is that it shouldn't be surprising to see the market hit even greater extremes in overbought conditions, thus ultimately making new highs, before finally getting a meaningful correction (i.e. 10% or more).

Hussman also noted that on November 28, 1980 the market made an important top just as signs that the economy was rebounding out of the recession in a similar way we see now with news being "less bad" and upticks in capacity utilization and new orders. The economy subsequently stalled in 1981 and the dreaded double dip recession was confirmed by 1982. Hussman therefore implies (he didn't say it outright) that we could see a similar outcome. My response to that is this...the best economist in the world strongly disagrees and by that I'm referring to Mr. Yield Curve. At the market top on November 28, 1980 the yield curve was well inverted and once again as always correctly forecasted a recession within the next 12-24 months. This time around the yield curve is steeply slopped saying "no dice" to the possibility of a double dip. Now mind you, with 0% short rates it's impossible to get an inverted yield curve but I'd say long rates would have be at least close to the 2% range for the yield curve to be inverted in essence. As of now it's steeply slopped. By the way, I remember the same calls for a double dip in late 2003 by many economists...Stephen Roach in particular.

Having said all this, there are indeed short term dangers in the market. We are seeing the VIX collapse here and the 10DMA of the put/call ratio is very low. We are also approaching 1100-1120 level whereby there's a well known resistance level whereby I'm sure the technically inclined are going to attempt to short. Markets didn't sell on the news last week very much as I thought could happen but be on guard here.

I've been staying away for ST trading because of the gappy nature of this tape and lack of good edges. That's fine by me...I'll just keep doing what I've been doing...looking at charts of individual stocks and building positions accordingly. If the markets bounce and reach the 1100-1110 level and I see other certain things give me the green light I may hedge my long stock positions via cheep OTM December index puts. Thus far my longs haven't been correlating very much with the market day to day even though they've been in an uptrend. This is a bonus but I know this can change and so I won't get complacent… a hedge would be prudent if I see things line up.

hooks and proper mind set

During a bull or bear market there's always "hooks" that keep people from riding the trend correctly or fully. By hooks I means excuses, facts, indicators, ect., which mislead you into thinking the trend in place is not sustainable and is due to end immanently. In the 1990's the biggest hook was the p/e ratio. By the start of 1996 the p/e ratio of the market hit 20 which was a level that in the past stopped prior bull markets in it's tracks. During this time, optimism was also fairly high as measured by consumer confidence and mutual fund flows into equities was high as well and so it may have been very tempting to make the contrarian case as many market experts at the time did that a bear market was immanent. In 1996 Greenspan came out with his "irrational exuberance speech" indirectly suggesting markets were too frothy. At that time the SPX was about 650. It took another 4 years and about another 130% additional gain in the SPX before the bear market that people expected to come arrived. Sure, things got bubbly but the fact is that the market went where it went and that's all that matters when it comes to the bottom line i.e. whether you made or lost money. At the end of the day it's all about making or losing money.

During the rally since March there have been a countless number of hooks that have kept people from embracing it and I've mentioned them here. It is very, very difficult to ride a bull or bear trend correctly from start to finish because somewhere down the road you tend to get caught on one of these hooks. Famous speculator Jesse Livermore once said that he knew of people who were correctly bearish at the start of a bear market or correctly bullish at the start of bull market but never 1 who stuck along with it to it's end. My lofty goal is to ride this bull trend right to it's very end. This doesn't mean I won't attempt a ST counter trend trade or arrogantly never take a profit along the way but as the saying goes, ride your winners cut your losses short.

And please, please, please, if you had success lately don't get a swell head. The moment this happens you can be assured that an ass whipping is comming your way. I've been on a hot streak with my stock picks lately as many of them have surged almost immediately after I have bought and I've been able to get away with very little or no losses on trades I've been wrong about. No doubt my confidence level is high now and I've been getting urges to make some rather bold and reckless trades but then I find myself saying to myself "hey asshole, you aren't as good as you think, keep a tight game". And let me tell you something....you too aren't as good as you think. You think you are humble enough? I doubt it. Let me repeat this....you aren't as good as you think. If you got stinking rich from the market and have done so by CONSISTENTLY making money for over a stretch of several years in both bull and bear markets (not just 1 year of success which could be just luck), then fine, you probably are pretty good. And when you are on a hot streak, by all means get more aggresive by betting bigger but don't get reckless. Wait for your setups, have your gameplan, ect.

I once heard about a study conducted wherby several hundred people were polled and were asked if they felt they were an above average driver and well over 50% said yes which obviously can't be true. The same results occured when asked to rate their looks. People have a tendency to think more highly of themselves then justified. Look, it's good to be confident in yourself...you need to be in this game. And when you are really down about yourself after going through a bad losing streak, you are probably not as bad as you think either...find that middle ground....the best place to be from a attitude/self worth perspective is cautiously optimistic.

Thoughts on gold

I'm noting an interesting situation with gold right here. First of all, there are signs that gold could be making an IT top shortly (perhaps it's already in). It's overbought and trader sentiment is getting extreme as you can see with the chart below. Cash flows into the sector are near the same levels as when gold stocks made an IT peak in July.




Anecdotally, the talk about gold is reaching fever pitch levels as well which from a contrarian point of view suggests prices should at the very least pullback soon. I've also noticed many people are providing lofty targets. I've often heard $1300 as an immediate target and $2000 as a longer term one...this should be somewhat concerning if you are a long term "gold bug".

Yesterday I heard Dennis Gartman say that he's been getting a surge in requests to do interviews to discuss gold and he's mentioned in the past that every time this happens gold has made an interim top shortly after and he believes gold should pullback to $1000. But what really caught my attention is the complacency in which he said that the pullback will be a buying opportunity and that the bull market in gold would surely continue. Another guy on Bloomberg showed similar complacency. He was saying buy any dips in gold. It's amazing how the sentiment towards gold has changed over the past 10 years. 10 years ago when gold was at $250 institutional investors wouldn't touch it with a 10 foot poll...now at $1000 it's a must have in the portfolio.

The sentiment towards gold reminds me of that seen towards oil last year at its peak. When oil was around $130 most people were saying it was overheated but after a correction to about $100 it would be a buy again because oil was on it's way to $200 eventually....we all know what happened afterwards.

I mentioned several weeks back I expected gold to break out above $1000 and 1 of 2 things would happen.

1)It would make a marginal new all time high to suck in the technical buyers before getting the rug pulled from underneath them dropping back below $1000 or

2) It would go straight to $1100.

It's too early to tell which scenario is going to be played out. Thus far, gold broke above the previous all time high of $1025 to about $1067 and has so far pulled back to $1050. It can still easily make a charge to new highs. I think there's a good chance of 1) playing out here. What I will be watching for is some sort of double top formation. It's too early to jump in short because this could just be a pullback that leads to higher highs. If I ever attempt to pick a top or bottom I always look for some sort of confirmation. If I miss the top/bottom so be it...there's still going to be plenty of "meat on the bone" to feed on as the new trend continues. A lot of people have an obsession with picking tops and bottoms right to the last tick in an attempt to get the best "value for their money". More often then not, this leads to losses as they get run over and it's probably the most popular way people lose money. As per the rule I mentioned yesterday....a stock that makes a fresh 52 week high (especially an all time high) is likely to make another one shortly after.

So, it Gold tops (and thus the dollar rallies) does this mean equities will top too given how the dollar and equities have been so strongly negatively correlated? Not necessarily because this relationship between the dollar and equities can always change and it has before in the past such as in the 1990's whereby the dollar and US equities often trended together. But in all honestly, to think that this relationship will just suddenly stop on a dime is the same as trying to pick a top or bottom so, yes, equities may be threatened if the dollar pops...at least temporarily.

Bottom line: I'm keeping a close eye on gold for a short trade. I want to see some more evidence of a top first before pulling the trigger.

put/call ratio very low so far again today

ya I know, it could be option exipration related but as I noted this seems to be the only one important indicator that's in favor of the bears right now.

IMO, this is not a time to be bold on either side of the market for ST traders which is why I continue to be a spectator. Too much of a mixed bag here and gap risk is high.

Once again, I'll be spending most of my time today researching individual stocks.

Like so many others, rydex traders refuse to believe

Once again, rydex traders have sold into rally and the cash flow measures are at levels that suggest distrust of the rally. In fact the cash flow adjusted rydex ratio is at about the same level as when the market dipped to 1020 in early October.
Although the put/call ratio was quite low yesterday, all in all, the ST indictors I track aren't showing excessive bullishness which means the benefit of the doubt continues to go to the bulls and any pullbacks are likely to be light.
AAII sentiment came in today at 47% bulls 34% bears which is only moderate bullishness. These guys continue to only show bullishness kicking and screaming. When we see the ratio hit 2:1 bulls vs bears, then I'd start to get concerned shorter term.

Bottom line: with the market making a fresh new 52 week high without extremes in bullish sentiment it's going to be tough for the bears to see any significant downside traction and markets still have room for another push higher.

Bears need a negative catalyst like a miss from Apple or Google.

Proving the point I made yesterday about the skepticism surrounding DOW 10K check out these news headlines


Dow Breaks 10,000: Don't Get Caught Up in "Euphoria"...

An Equity Bubble in the Making?

Concerns About the Tone of the Market's Current Advance

Does the Good News Point to a Market Top?

U.S. Stock Markets Are Disconnected from Reality

Dow Theory: Party While It Lasts

Dow 10k: The Higher They Rise, The Harder They Fall

Dow achieves 10K but where's the celebration???

Buckle up this is going to be a long rant...

Back in 1999 when the Dow hit 10K, there was a party-like atmosphere on the NYSE as floor traders celebrated. Many sported "Dow 10,000" hats. Of course about 1 year later the market made a major bull market peak after the tech bubble popped. This time around I see very little in the way of celebrations. Instead, I see plenty of cynicism, doubt and even more anger and denial from the stubborn wrong way perma bear novices I track who have still been getting their asses handed to them with their puts and bear etfs.

BNN has a segment called squeeze play whereby the anchors discuss the day's events/news and when discussing DOW 10K you could see the smug disbelief in their faces and in the sound of thier voices almost like resentment...very similar to how someone reacts when they encounter a door to door salesman. "we aren't out the woods by any means" was one comment that stuck in my mind and there was a discussion about how the improved bank earnings we've seen from the big US players were likely a 1 time phenomenon due to pent up demand.

Later on when watching the news, I heard the anchor say "in these tough economic times". When I heard her say this it simply reinforced my LT bullish outlook. The stock markets around the world are soaring making new 52 week highs and yet main street media still says "tough economic times". This is such a powerful contrarian indicator. I've said this before...main street media are always late to the party when it comes to recognizing what the stock market recognizes and the fact that people are still calling this "tough economic times" while the stark market is yelling and screaming that tough times are going to be over tells me we are still early in this bull market. Who are you going to believe main street media or the market? Yes, we've seen a massive rally but it's likely got a lot further to go.

If there's one thing I've learned over the years is this: markets will go up or down a lot further than you think possible so when in doubt stick with the trend in place. Coming into 2008 it was unthinkable, even to the bears, that we would get the collapse that we saw. I noticed most bears covered shorts at around SPX 1000 and yet markets still tanked another 35% from there.

Never in my life have I seen a rally so hated and so despised yet there's bears out there who think there's so much optimism right now...bears like Doug Kass who just like I predicted would be proven wrong in calling for the top of the year back when the SPX was at 1030. He says optimism is high right now. I strongly disagree except for perhaps some measures of ST trader sentiment...but Kass is not referring to that...he's talking about the longer term. For every optimist you find out there I'll show you 2 pessimists at least. Joe six-pack investor has been cashing out of equity mutual funds since May while pouring into bond funds. Bears like Roubini, Schiff, and Whitney are still being given the spotlight (although not as much as before). AAII sentiment show bears outnumbering bulls on a frequent basis all throughout this historical rally since March. I don't get to watch CNBC anymore but I understand guys like Kudlow have been giddy. You can't read much into that because there's always going to be permabulls and permabears....what you should be looking at from a sentiment point of view is what the average person thinks of these people and let me tell you, there's nothing but contempt for guys like Cramer, Kudlow and other bulls while guys like Roubini, Schiff and Whitney are still held in high regard. I'm sure the permabulls have some supporters, but on the message boards and blogs there's nothing but ridicule towards these guys.

I won't mention the name of this bearishly biased blog, but I discovered today that the blog will be included as a part of seekingalpha.com's lineup. No offense to this blog writer...he seems like a nice guy, but he's been nothing but wrong for months on end about where the markets were headed and got his ass kicked badly with his puts and his position in SRS which he bought in spring (to his credit, he did buy some gold and silver when gold was at about $950 or so). He as well as others has been in complete denial about this rally and people would have lost their ass if they followed him and yet seekingalpha.com is willing to include his material??? What does this tell you? It tells you people are still seeking information to confirm their wrong-way beliefs and an excuse to stick with their losing positions.

I'll be the first here to admit that I get it wrong at times and I've done so. I'm not afraid to do so. It just amazes me however that most of these bearish guys I pick on never have once said "boy did I ever get this wrong". Instead, they get angrier and bolder in their convictions while wringing their fist claiming another crash is just around the corner. How these guys have any credibility at all is beyond belief. Even pros like John Hussman and John Mauldin whom I read regularly, have refused to give a mea culpa for being so wrong about this market. Doug Kass might be in the same boat if he doesn't fess up soon. These guys all use the "it hasn't happened yet" excuse with respect to their botched calls. Why don't they capitulate? It's all about ego. The above guys are all really intelligent guys and they have large followings. Like I've said before, the sooner you keep your ego out of this, the better you will be at this game. I don't care if you are Jesus H. Christ, you are going to get it wrong at times and you will get hurt big-time by staying wrong if your ego gets in the way. You are NOT God even if you have been making money hand over fist for a long stretch of time. Also regarding the above “pros”, not once have I heard any of them say a thing about the steeply sloped yield curve which as far as I can tell, has forecasted good economic conditions correctly every time. The yield curve is such a basic yet accurate predictor of the economy and yet these pros and so many others don’t ever mention it.

The chronic cynicism/anger/skepticism I see out there is not only by market participants but from people in general and it's depressing. I suppose it's understandable to a degree given that in this decade alone we've seen 2 big bear markets riddled with scandal and greed. Boy I miss the 1990's....I know the late 90's were "bubble years" but man did they feel good. Maybe it was because I was in my youth, but I just got the general sense of "feel good" optimism in the air around me. Then ever since the dot com collapse things never did get back to that type of optimism even after the recovery in 2003. Then of course we saw the collapse last year and sentiment got pitch black. There was a feeling of hopelessness and dread mixed with anger and cynicism. Although the hopelessness and dread are abating the anger and cynicism remain strong. I'm hopeful however, that time will heal these wounds. I'm hopeful that the green movement we are seeing will gather steam and that we will continue to address things such as obesity and other symptoms of excess and moral decay that have threatened civilization as we know it.
I'm hopeful that the crisis we went through will be a wake up call for people to be more responsible with their finances and for regulators to take the actions necessary to prevent it from happening again (at least for several decades to come).
And I'm hopeful that my future children will not be born in a world of misery and hopelessness. I'm glad we have a world leader like Obama at the helm to help us get through this. Although his policies are debatable, I believe he has heart. I get the impression he truly cares about the people and wants the world to be a better place for all. Just my honest opinion......

I'll be back with the usual commentary tomorrow morning.

The whites of their eyes

As I suspected a few days ago, Dow 1OK looks like it's going to touched and perhaps any minute now. Mr. Market is showing no mercy to the bears which is something I warned about a few week ago when I said that in bull markets you often get bailed out from bad long entry points but much less so with bad entry points on the short side. I've done no ST trading today so far and I don't think I will.

With the market making new 52 week highs it invokes a rule I abide by which is a market that makes a new 52 week high is likely to keep making them. A lot of people hesitate buying or like to sell long positions when a stock (or market) hits at a 52 week high thinking that it's too high. Most like to buy instead at 52 week lows. Although this may seem smart i.e. buying low and selling high, it's usually the wrong thing to do because a stock making a fresh 52 week high or low is usually indicative of a trend that is gathering steam....not exhausting (on a longer term basis).

Once again we are seeing an up day starting via a gap up which I've mentioned ad nauseum I don't view as sustainable on a multi-week basis. Of course, there have been occasions where it has and I'm respectful of that in addition to the other bullish forces I've touched upon before.

You wanna go short at least for a trade? wait untill you see the whites of eyes of the bears....I don't think we're quite there yet.

I'm watching nat gas here to see if can hold near current levels on this dip. UNG at around $11 is a critical support that is being tested right now.

Futures on fire after Intel's report.....time to buy nat gas?

Intel soundly beat expectations and futures are on fire again tonight. Browsing the boards it seems to me like there's some interest out there to fade the morning strength which makes me not want to do so. I might try for a quick intraday trade because the attempt at a fade could cause the market to drop for a moment only to reverse course later on....but if I have any doubts whatsoever I'll just stand aside and watch the action.

Natural gas has caught my eye lately. During the summer I noticed fruitless attempts by investors trying to catch the bottom of that sector and a lot of people got hurt doing so. Gas made what looks to be a blow-off bottom in early September and after a nice snap back rally has traded sideways for about a month. This action looks bullish and I believe there's a good chance the tide has turned at least on a cyclical basis.

The bearish argument against gas is the new drilling technology which has allowed for drillers to economically tap into the apparent enormous supply of gas in Shale rocks. Although I'm no expert I'm sure there is legitimacy to this argument just like there was legitimacy to the argument that emerging market economies would have a long term growing demand for oil 2 years ago, but that didn't stop oil from dropping 80%. Whenever there is a compelling long term fundamental argument or story, it often leads to speculative bubbles or irrational pessimism. I believe we have seen the latter because according to my DD, a gas price ranging from $4.50-$7.50is needed for these shale rock wells to break even (each well will have its own economics). With the price now at $4.60 just about all of these shale wells are uneconomic.

Another compelling argument in favor of gas is the steep contango in the futures market which was very similar to that seen with oil late last year. Contango means that futures prices are higher than present day spot prices signaling that the market expects spot prices to be higher in the future. This isn't a guarantee of higher prices, but it's certainly a nice feather in the bullish cap.

A third compelling argument is the ratio of oil vs. natural gas. Historically oil trades 6 times more than natural gas. Currently the ratio is 16 and got as high of about 25 in early September! This ratio suggests oil is "overvalued" vs gas and energy needs will be switched to the use of gas vs oil (I know there's arguments against this notion) I should mention that I don't give such historical ratios when they become extreme any importance until they show a clear sign of a turnaround because as natural gas bulls learned the hard way, extremes can get to even greater extremes before reverting to the mean.

A fourth bullish argument for gas prices are rig counts. They have bottomed at historically low levels and have turned up over the past couple of months. This is usually a good sign of improving prospects in the sector.

Finally, and most importantly, price action is looking good for gas here. After the panic low and snapback, the sideways action is a good sign that the next move will be higher. If this was just a dead cat bounce it's likely that the price would have rolled over by now.

As a hedge clause, let me state that I'm by no means a natural gas "expert" (what the fuck am I an expert in?) and the DD I've conducted is fairly recent which means, I'm sure there's a lot more for me to uncover and learn about gas.

I'm looking at T.GAS which is a natural gas commodity play on the Toronto Stock Exchange (TSX) very similar to UNG in the US. I haven't decided whether to play the ETF itself or by calls on it.

Traders await Intel

Looks like we are going to get a flattish day as the market await's Intel's release. Last time Intel's postive report sparked a big rally in July. This time with market in moderate overbought territory a postive report may not provide as big a kick unless it's super positive. But I ain't going to be making bets here either way....not enough edge either way and too much risk getting caught on the wrong side of a big gap to start the day tommorow. This is fine by me...I'm just plugging away scanning charts of individual stocks and doing good old fashioned DD. Buying individual stocks that don't have a very strong correlation to the market can be a much more peacefull and less stressfull way of making money because you don't have to worry about the day to day ticks of the market.

But let's be clear here....your chances for success when buying individual stocks is much, much, higher if you do so during a favorable economic climate (or in this case an improving one) than an unfavorable AND deteriorating economic climate. Good things happen in a good economy, bad things happen in a bad economy and so your so called stock picking "skills" aren't as good as you think.

I'm trying to identify interesting sectors and sub sectors that are underneath the radar. If you guys have any good ideas...please enlighten me.

Market seems fatigued

It's basically been a straight line up from 1020 and as I mentioned before, a lot of the move was done via what I call poor market action. Although I was respectful of the rally and didn't stand in it's way (i.e. shorted it) I have been suspicious of it's sustainability...keep in mind here this is all ST stuff. A few of the ST trader indicators are no longer favorable for the bulls such as investment blogger sentiment as measured by tickersense which is now showing 50% bulls and 29% bears, almost the opposite of last week. I will be interested in seeing what the rydex data looks like when it's updated tommorow morning.

I also just get the feeling the market is looking for an excuse to sell off here. Perhaps Dow 10K might be that excuse or a sell on the news reaction to earnings releases from bellweathers Intel, GOOG or GS which report after the bell on Tuesday night and Thursday morning and Thursday night respectively.

Whatever the case may be, I think it's now wise to keep your guard up for some weakness this week....my best guess would be as early as Wednesday. Keep in mind this is all ST stuff I'm talking about. I'm still noticing plenty of scoffing and disbelief from the "not so smart money" as to the longer term sustainability of this bull run.

Not much to say at this point

The short term picture isn't really clear to me now but anytime I find this is the case whatever the prevailing trend which is in place usually continues. Therefore, this suggests we will continue to go higher in the weeks ahead despite potential 1-3 day pullbacks.

My strategy continues to be to focus more on small/micro cap plays with a longer term emphasis and less time on ST trading. In bull markets you buy and hold, in bear markets you trade. I will look for hedging opportunities at times I feel the market is overbought/vulnerable but for the most part I will error on the side of not being overly exposed on the short side.

Do you feel at least a bit uncomfortable buying and holding? If you do that's a good sign that buy and hold is the right thing to do. Why do you think most people fail at investing/trading? It's because they do the comfortable thing....the obvious thing. I know I feel uncomfortable...why do you think I keep looking for hedging opportunities? Why then don't I just stop waisting my time and go all in long riding this bull to the max that I keep preaching about? It's because this is a game of probabilies and uncertainty and I won't make the mistake of ever thinking I got this game figured out for good.

For example, this spring and summer has no doubt crippled or wiped out many traders/investors because they thought they had the market all figured out as they bought into the bearish dogma of Roubini, Schiff, Whitney, Prechter and the other mega bears who gained sage status during 2008. These people were convinced without a doubt that the rally off the March low was a bear market rally destined to fail and they bet against it heavily with the notion that within a couple of months the market would be at new lows....most of those people probably can't rub 2 dimes together anymore given their account balance.

I vowed to myself never, ever to make this fatal mistake...to think that I got it all figured out and put myself in a position to take a massive loss if my convictions turn out to be incorrect.

More bullish fuel

The latest readings from AAII sentiment show once again bears outnumbering bulls. 41%are bears and only 35% are bulls. Also, there was a spike in cash flow into the rydex bear funds meaning rydex traders shorted the rally yesterday. As a result of this, I have to give the bulls the benefit of the doubt here. Every time I've seen the above happen markets found a way to grind higher in time. Not everything is lining up bullishly here (I mentioned the very low put call ratio before) but one thing that I won't be doing is playing the short side because time and time again anytime I've noted the above behavior the market ended up being higher in the days and weeks again...it wasn't always a straight line up but it was up nonetheless so bears beware...At the very least this behavior suggests any downside in the market will be limited.

Only perfect set ups have worked on the short side and even they don't last long as per my last attempt which I got round tripped.

Finally, someone else gets it!

Today while watching BNN a guy by the name of Barry Rithholz came on the air. Some of you market junkies may be familiar with this guy. Anyhow, when I heard him speak I could have sworn he was reading my blog! Lol! He mentioned how this rally since March has been so hated and disrespected by so many people given their beliefs of Goldman Sachs manipulation, the PPT and what have you. He said that even the hedge fund guys he knows who are long are what he called "cynic longs" that truly don't believe in the rally and will bail at the first sign of trouble.

Bulls markets typically go through 3 stages: skepticism, optimism and euphoria.
In my view we are still in stage 1 with traces of stage 2.

Regardless of my view, I will not for a second drop my guard and be married to this view. But the fact that I feel this way also adds to the wall of worry doesn't it? I have to admit, I have lingering doubts about the bull thesis I'm proposing in the back of my mind....and you know what? I find that this is a good sign that I might actually be on the right track. Anytime I have felt very comfortable with a particular thesis or trade with no doubts more often than not I turn out to be wrong...or at the very least, my timing was quite off. Has this ever happened to you? The best trades I make often involve a little bit of sweating and hesitation and gritting of teeth but I'm becoming somewhat desensitized by it now so I suppose that's one of the downfalls of experience!

As far as the market goes in the ST...I don't see a good edge either way. The low hanging fruit was when the market got extremely oversold and now we've worked off that condition. The gap and run action isn't what I like if betting on multi-week move up but the market doesn't have to act according to the will of nodice. Remember the rule I once mentioned....accept the market for what it is not what you want it to be. If something about the action doesn't feel right, fine, don't play... but don't bet the other way just because of this.

Tomorrow is likely going to be a boring choppy day given there is no major economic news or earnings reports and that it's Friday.

On an off topic note, today I attended a funeral. It was my Aunt's brother (who is not my uncle because this is an Aunt through marriage). He died of a stroke but he was in his early 50's. I've known a few people who died suddenly in their late 40's or early 50's due to stroke or heart attack. Is it genetics, stress, lack of exercise, bad diet? Probably a bit of each but I gotta tell you...stress is a killer and if it doesn't kill you it will age you. Just look at the huge differences in the appearance of any president who takes office from the time they start to the time they leave office.

Trading/investing can be very stressful and so I urge all of you to shut down your computers after the bell and hit the gym, grab a beer with buddies (but don't go doing this every day now!), go for a walk or even just lie down and relax on the couch for a while.

Today was a boring day but tommorow probably won't be

I did jack squat today with respect to short term trading. I still have my positions of small/micro cap stocks which I consider longer term holds. Alcoa had positive results after the bell and management is saying good things about it's customers and hence the economy going forward which has sparked quite a fire in the futures markets setting us up for yet another big gap up open.

I mentioned that I don't view gap and run days as favorable action. I equate those types of days to a sugar rush....it's nice while it lasts but then there's a crash afterwards...I'm not saying we crash but I'm saying that it wouldn't suprise me to see sometime in the near future that these "gap and run" gains get reversed. Perhaps they won't because the hallmark of this rally has been one wherby people have continually underestimated it...myself included and there are a few unfilled gaps in the charts at much lower levels and so I won't be a dogmatist and insist that all gaps get filled before it's onwards and upwards....I'm just simply playing the odds.

Although I may have underestimated the strength of the market at times never once during these past 6 months have I disrespected the strength and got ran over on the short side. I've learned the hard way years ago that if you don't show the market respect it will beat it into you.

Tommorow could actually set up for an emotional ST buying climax but again I must stress, be very, very careful if you play the short side here. Pick you spots wisely and have one foot out the door.

I'll be watching very carefull how the markets and indicators look like after the first hour of trading.

I believe what's helping to keep a lid on the downside is the strength in bonds. It may seem counter intutive...after all, shouldn't the rally in bonds signal a weak economy? It could or it could simply reflect mutued inflation, an inapropiate flight to safety or too much money sloshing around in the system looking for yield. Whatever the case may be, what lower bond yields does is stimulate the economy via lower mortgage rates and also makes stocks more attractive on a valuation basis (the fed model). I've mentioned many times before that major corrections in the market are often preceeded by weak action in bonds and the opposite is true for major rallies in the market. We have thus far seen a major rally in bonds over the past few weeks which suggests there's plenty of fuel to launch the market quite higher from here in due time.

Lower high or launch to new high?

Well, here we are...if the market drops here we will be have a potential lower high and the bears are going to be licking their chops. Yesterday's action was not good in the sense that once again we just rocketed out of the gate, this time with a large gap up making the action even more unfavorable. Those types of days tend to get retraced in due time. In addition, the equity put call ratio was a very low 0.47. The last 2 times the equity put/call ratio was less than .50 was mid September and late August and in those cases, the market ended up making a short term top shortly after.

Countering the bearish implications of the put/call ratio is the rydex ratio which continues to be in bullish territory despite the big gain yesterday i.e. rydex traders didn't buy into that rally yesterday.

Bottom line: if we could get another whack down in the days ahead it would probably set up for ideal conditions to see the markets make a bullish run right through to the end of the year...but markets don't often do what you feel would be ideal and therefore we could start such a run right now but I don't believe the upside action we've seen is the sustainable type....in fact, the past 2 days on the upside look like the bear market rally type days we saw last year. I will not however, be disrespectful of this upside and so any short side trades I might make will be done carefully and prudently however, due to the mentioned cross-currents I probably won't be doing much trading and/or keeping it on the light side.

Pieces falling into place

We got the bounce I expected. I mentioned yesterday that I wanted to see signs that the dumb money traders i.e. rydex and option traders, are showing pessimism before declaring the "all clear" signal for the market to charge to new highs. Well, after yesterday's rally we're one big step closer to that point.

Typically, traders/investors become more bullish when the market rises and more bearish when the market drops but since this rally that began in March, I have often seen the opposite, especially when the market rises, i.e. people becoming more bearish as the market rises. I'm a contrarian at heart and one of the most effective contrarian signs is when you see traders/investors fading the current trend. Remember, it's only natural for people to be bullish in a bull market and bearish in a bear market and so you shouldn't be too haste when making the contrarian case against such observations, but when you see behavior that is showing signficant resistance to the current trend that's when being contrarian to such notions is much more effective. Do you follow me?

When the market started dipping in late September, rydex traders where buying the dip and as I noted, this was a sign of complacency. Now, after getting burned, they used yesterday's rally to dump their bullish positions en masse. And so as of now, the ammount that these traders have in bull funds and money market funds are equivalent to the levels seen in early September when the market was at a ST low.

Now, before you hock the house and go long, we still are not seeing tech leading and yesterday's action was a bit suspicious in that we basically went straight up right out of the gates without going in the red at least once with tech lagging...that's not really great market action. The chart is now setting up for a potential lower high, lower low pattern which I think will end up being yet another bear trap.

Last night Austraia raised rates by .25%. I believe this is now the second central bank to do so (Isreal being the first). This is a bullish sign longer term. Do you remember how markets fared in the months that followed after the first interest rate cut a couple years ago?

Bottom line: The pieces are falling into place for the bulls to take back control of the market but I'd like to see better market action (i.e. tech leading and morning weakness followed by afternoon strength). Be on guard for a potential lower high, lower low headfake or a retest of 1020 on the SPX. I'd be very, very careful if you try to bet on this senario though.

ST outlook

Markets are very ST oversold here and so a bounce is certaintly warrented but I want to see more signs of dumb money traders i.e. rydex and option traders pressing the downside. There's too much complaceny still with these guys. Also, we need to see market leadership via the tech sector re-establish itself and better market action i.e. strong action in the last half hour of the day, not weak action which is what we have been seeing. Weak market action suggests smart money selling and therefore is bearish.

Bottom line: go ahead and try to play the bounce if you wish but keep a tight leash on positions. It's likely either some sort of base building or lower lows will be required before the bulls make another charge for new YTD highs.

If however, we continue to see the action that we've been seeing i.e. relative tech weakness and the market selling off into the close that would be bearish and would argue for a larger downside move.

Right now I continue to focus my time on scanning for individual small/micro cap stocks that are showing great chart patterns and minimal correlation to the broad markets. During the meltdown last year a lot of good companies were slaughtered along with the bad ones and so I think now if you can identify these good companies and sectors you will come out on top regardless of the wiggles in the markets and so long as there no systematic meltdown type scares like we saw last year at this time.

I will also be trying some intraday trading but I'm keeping it small untill I see a better edge.

I mentioned before in the past that short candidates to consider were RIMM, POT and CYOU. It took a while but all 3 have been shot down with the first 2 missing earnings expectations. The latter, CYOU, hasn't as of yet but the lock up period ended Sept 30 and so now insiders can dump their cheap shares at will.

Home sweet home

I got back home a few days ago.... it was a great trip topped off by watching Real Madrid vs. Marseille 13 rows from center field....but this blog is not about me it's about the markets and so let's get down to it...

Unfortunately for me I got stopped out of my bearish position only to see the market tank without me. There were a couple of times after I got stopped in the 2 days afterwards whereby I could have re-entered the trade at about the same price but I didn't. Not to make excuses but if I was to have re-entered the trade I would have needed to monitor the position very closely on an intraday basis (which I couldn't do) given that I didn't believe I had as good an edge as I did when I originally entered the position, which in that case, I was comfortable enough to simply put in a stop and not pay attention to what the market and indicators were doing.

Anyhow, what's done is done and I'm not going to beat up myself too much given that I was on vacation with very limited time and access to play the market. I've been fortunate enough thus far that my long positions as a whole have stayed flat during this drop in the market but I know that can change if the downside accelerates.

Just prior to this decline I made note of how I felt a correction was immanent due to the Johnny come lately bulls that appeared to have jumped on the bullish bandwagon. After the greater than expected job losses data and drop in the market we have seen thus far, the mutterings of a V shaped recovery by a few prognosticators has likely been nipped right at the bud. Let me clear by saying that most people DO NOT expect a V shaped recovery but just prior to the correction I started to hear more and more talk about it's possibility as I pointed out with permabear James Grant.

On Friday I was watching BNN (the CNBC of Canada) and the sentiment by any of the guest commentators such as fund managers and analysts was overwhelmingly bearish. Given their tone, I would have thought that we were in early March...but all we've seen thus far is a little blip down of about 5% from the intraday high of 1080 on the SPX. The tone of these folks were of "see, I told you so" about the rally but I laugh at these guys because they have been the same people who have scoffed at the rally since April missing out on a huge part of it (which many of these guys had admitted to doing). One of the guests on BNN said "this rally has not felt right intuitively". When he said that I immediately said "no shit" because guess what?....a lot of the times the market is not easy/obvious.

Most people fail at this game because they do what their so called "intuition" tells them to and by intuition I'm referring to is what common sense suggests and for most people common sense is the conditions they perceive today - news headlines and popular statistics like the unemployment rate, GDP and job losses all of which are lagging or coincident indicators which are useless. Most people don't realize that the market doesn't care about today it cares about tomorrow. Yes, sometimes the market gets it wrong and sometimes it overshoots a bit (and thus corrects) but most of the times when you see the market persistently going in a direction that you think is wrong...its YOU that will likely be proven wrong.

Bear market rallies and bull market corrections don't last for 6 months. Sure, anything is possible and there's a first time for everything and believe me, I'll keep an open mind, but history strongly suggests we are in a bull market and this is not a bear market rally that perhaps has now exhausted itself. The sentiment backdrop also supports this notion because I still see plenty of skepticism and doubt out there. Sure, there have been pockets of bullishness but that's to be expected after a 60% rise but by in large, this historic rally has been the least respected and most hated rally I've seen.

While in Spain I had access to CNN Europe and I can tell you, the tone from there as well is still one of doubt/skepticism. They are still using the words "recession", "economic crisis" and "not out of the woods" even before this latest drop.

A little later on tonight or early tomorrow morning I'll take about the ST outlook and my strategy going forward.