Talk about stating the obvious. This is also the same message I continue to hear in commercials and in TV sitcoms. I've said here before that whenever the general media makes mention of the economy or some trend in the market it's always a great contrary indicator because once these guys are made fully aware of what's going on the economy/trend that trend in place has likely been fully discounted and probably then some meaning a turnaround in the opposite direction is imminent or has already began. In early 2009 I remember my Italian grandmother asking me what were my thoughts about the depression. This literally captured the expression "everyone including my grandmother knows about this".
So, here we are with the stock market up huge year over year, credit spreads collapsing year over year and the yield curve extremely steeply sloped all sending a strong message that things are going to be getting better in the months ahead. Yet, Bernanke and the media are still telling you the economy is very weak and mom and pop investor (who are terrible market timers) are still nowhere to be found. To be bearish over the next 12-24 months means that Bernanke and the general public and going to get it right while the stock market along with credit markets and Mr. Yield curve with his impeccable record get it wrong. To me, this seems like an ice hockey matchup between Germany and Canada respectively. This is the way I see things and why I'm bullish longer term. I mentioned the other day how there's tons of ways to analyze the stock market but only few indicators are worth paying attention to which actually work. The above are my long term indicators. It's a known fact that the general public is the dumb money while the stock markets, credit markets and yield curve are the smart money. (Yes, I know the stock market can be subject to irrationality which is why the message of the credit markets and yield curve should corroborate). I have found that regardless of the issues and concerns of the day which can be sliced and diced in many different ways, at the end of the day the dumb money and smart money are what they are and end up living up to their reputations. That's my way of cutting through all the bullshit as I described the other day.
I realize it takes faith to look across the valley when the smart money is signaling something that can’t been seen today. Let's face it...it's easy to be bearish and difficult to be bullish longer term. Even though I've been longer term bullish since last year I'll admit that deep down I'm still worried that we're never going to get out of this mess, that perhaps this time it's going to be the "big one" where we see the collapse of civilization as we know it which will overwhelm any positive message given by the "smart money". Deep down I worry that something like a Greece default or what have you is going to be the trigger that sends the market back into the abyss. But I have found time and time again that the difficult path that is the right path when it comes to the market and in life as well. There's no guarantee following such a path will bring positive results but very few things are guaranteed...it's all about probabilities. In addition, skillful money management and market timing can help you avoid or limit damage if you are wrong about any conviction you have about the market but you have to be careful not to overtrade and go 100% cash just because you feel a ST counter trend move might take place otherwise you run the risk of getting left behind.
I speculated earlier this year that it's likely for the market to enter a multi-month consolidation phase given that this was the behavior of a bull market after about 10-12 months from its onset. This appears to be what's taking place and it's going to test the resolve of bulls like me. What would invalidate this thesis? A break below 1000 on the SPX would be a serious danger sign with 950 the ultimate line in the sand. I don't believe either will be challenged. At the beginning of the year most pundits believed the market would have a relatively strong first half and weak second half. I think the opposite is likely.
Thursday, February 25, 2010
Tuesday, February 23, 2010
Focus on what counts and ignore the rest
When I used to study for tests the first thing I would do was to identify and ignore what I believed was the "bullshit" material and focus only on the critical material. For example, with the CFA program for each of the 3 levels you are given 5 books to study and each book contains 430+ pages. There's a lot of bullshit in those pages let me tell you. By bullshit I mean material that may be nice to know but won't be on the exam. Instead of reading these texbooks I used Schweser study notes which condenses all the information of these 5 big books into 5 "smaller" books. From there I will make my own notes from these study notes which condenses the information even further. The end product is a notebook of about 100 pages. By focusing only on this critical information along with doing practice exams, I passed level 1 and 2 on the first attempt and level 3 on the second attempt (don't go there as to why I failed level 3 the first time!). And in doing this, I was committing less than 200 hours of study time for each level (the CFA program recommends at least 250 hours). My background in Finance and passion for markets no doubt helped but I was successful mainly because I focused my time on material that counts and ignored all the rest. For each level there were always a few questions I had to guess because I had skipped over the material thinking it was bullshit but the damage was minor. It's better to know 85-90% of the material really well then 100% of it half ass. The goal is to get a 70% on the exam not 100%. A pass is a pass - you get no extra accreditation for passing with a high mark so there's no sense in aiming for 100%.
With the market it's the same idea...you need to cut through he bullshit and focus on what really matters....what factors move markets in the short term and long term. Back in August I made a post titled Searching for market truth whereby I basically said the same thing. There's so many ways and things you can analyze to try and figure out where the market is headed but very few of these factors are actually worth paying attention to. Legions upon legions of analysts are hired by money management firms to pour over an endless number of variables and yet these firms can't beat the index in the long run. And why is it that the average economist armed with a PhD and complex economic models time and time again fail to predict recessions and then get caught off guard again by the onset and strength of the recovery? One reason is due to the psychological traps that these people fall into which I have discussed many times before, the other is because they don't focus on what really counts and often times it's the very simple things that count the most.
For example, here's a very simple long term market timing strategy that has worked like a charm for the past several decades. Sell equities 3-6 months after the spread between the 10 year bond and T-bill goes negative. Buy back equities 3-6 months after the spread widens to +3 or higher. What you are doing with this strategy is following the advice of the best economist in the world Mr. Yield Curve. History has shown time and time again that recessions and bear markets are triggered by tight monetary conditions (inverted yield curve) and the bull markets that follow are accompanied by very accommodative monetary conditions (very steep yield curve). The 3-6 month lag is attributed to the fact that it takes time for such extreme monetary conditions to gain traction in the economy. Sometimes it takes longer than 3-6 months and you could be early but if you follow this strategy 1-2 years later you will be well ahead.
The funny thing is that despite the stellar track record of Mr. Yield curve you always find plenty of economists and pundits dismissing the message of the yield curve when it is at an extreme. There are always excuses explaining why this time it will be different and the yield curve won't workd. Just prior to the most recent bear market a lot of people discounted the bearish message of the inverted yield curve saying that it was distorted due to the excess savings from Asia sloshing around looking for a home. When the curve was inverted in 2000 a lot of people dismissed it again saying it was due to the lack of supply of new long term bond issues. Then when the curves became very steep just prior to the end of the last 2recessions a lot of people dismissed the bullish message of the yield curve saying that the short tend was distorted due to the flight for safety into T-bills. lol!
Right now the yield curve is still very steeply sloped and has been so since the fall of 2008. Is it no surprise that the stock market and economy have rebounded sharply since? But yet there's still no shortage of pessimism and skepticism out there. People are still ignoring the LT message of the yield curve. With the yield curve this steeply sloped and with the market and economy having gained significant upside traction for well over 6 months it makes the likelihood of a "double dip" essentially nil. Such a thing has never happened under these monetary conditons. Yet it amazes me how so many smart economists and veteran market players are still worried about a double dip.
Now a days everyone is focusing on deficits. You should be asking yourself what is the predictive power of high deficits on the markets in the long run (2-3 years from now). The reality is that high deficits are more commonly associated with strong stock markets going forward! This doesn't necessarily mean deficits cause strong markets but simply that they occur when markets are strong. I'm sure government spending and tax cuts provide a short term boost in the market but I think it's the timing of such that are more important. Big deficits tend to occur (or get even larger) during the depths of a recession. During this time, monetary policy tends to be very accommodative which at the same that time the system has been naturally purging the excesses of the prior boom paving the way for the next recovery(during recessions weak companies go under, companies look for ways to be more efficient, people work harder). Since the stock market looks ahead about 6 months or so, it starts rising anticipating the recovery. But if you ask me, focusing on the level of deficits falls into the bullshit category and should be ignored.
So what should you pay attention to? 2 things...monetary conditions and earnings. That's all that counts folks plain and simple. The former tends to drive the latter. When money is tight profits get squeezed due to higher borrowing costs and narrower spreads for banks and a recession eventually results. When money is easy profit margins expand for the opposite reasons. Everything else is BULLSHIT! p/e ratios, debt levels, deficits, ect are all useless if you use them as long term timing tools and by long term I mean 3-5 years. If we ever get to the point where easy monetary can no long stimulate earnings in a significant way then that's when the shit will hit the fan and all the Pretchers of the world will finally get their day. But we aren't there yet given the recent surge in profits being reported.
The bottom line is this - find a way to make money on a consistent basis. That's the only thing that determines whether you are successful or not in the game. Everything else doesn't count. How smart you are, how much you know about the fed, economics, math, ect doesn't count for anything if you can't translate it to profits. I'll be the first to admit that some of the guys I have bashed like Hussman, Prechter, Roubini, Schiff and others are much more knowledge that I when it comes to the intricacies of the economy, the fed market history and other things but they have been quite inconsistent in calling the markets right over the years.
With the market it's the same idea...you need to cut through he bullshit and focus on what really matters....what factors move markets in the short term and long term. Back in August I made a post titled Searching for market truth whereby I basically said the same thing. There's so many ways and things you can analyze to try and figure out where the market is headed but very few of these factors are actually worth paying attention to. Legions upon legions of analysts are hired by money management firms to pour over an endless number of variables and yet these firms can't beat the index in the long run. And why is it that the average economist armed with a PhD and complex economic models time and time again fail to predict recessions and then get caught off guard again by the onset and strength of the recovery? One reason is due to the psychological traps that these people fall into which I have discussed many times before, the other is because they don't focus on what really counts and often times it's the very simple things that count the most.
For example, here's a very simple long term market timing strategy that has worked like a charm for the past several decades. Sell equities 3-6 months after the spread between the 10 year bond and T-bill goes negative. Buy back equities 3-6 months after the spread widens to +3 or higher. What you are doing with this strategy is following the advice of the best economist in the world Mr. Yield Curve. History has shown time and time again that recessions and bear markets are triggered by tight monetary conditions (inverted yield curve) and the bull markets that follow are accompanied by very accommodative monetary conditions (very steep yield curve). The 3-6 month lag is attributed to the fact that it takes time for such extreme monetary conditions to gain traction in the economy. Sometimes it takes longer than 3-6 months and you could be early but if you follow this strategy 1-2 years later you will be well ahead.
The funny thing is that despite the stellar track record of Mr. Yield curve you always find plenty of economists and pundits dismissing the message of the yield curve when it is at an extreme. There are always excuses explaining why this time it will be different and the yield curve won't workd. Just prior to the most recent bear market a lot of people discounted the bearish message of the inverted yield curve saying that it was distorted due to the excess savings from Asia sloshing around looking for a home. When the curve was inverted in 2000 a lot of people dismissed it again saying it was due to the lack of supply of new long term bond issues. Then when the curves became very steep just prior to the end of the last 2recessions a lot of people dismissed the bullish message of the yield curve saying that the short tend was distorted due to the flight for safety into T-bills. lol!
Right now the yield curve is still very steeply sloped and has been so since the fall of 2008. Is it no surprise that the stock market and economy have rebounded sharply since? But yet there's still no shortage of pessimism and skepticism out there. People are still ignoring the LT message of the yield curve. With the yield curve this steeply sloped and with the market and economy having gained significant upside traction for well over 6 months it makes the likelihood of a "double dip" essentially nil. Such a thing has never happened under these monetary conditons. Yet it amazes me how so many smart economists and veteran market players are still worried about a double dip.
Now a days everyone is focusing on deficits. You should be asking yourself what is the predictive power of high deficits on the markets in the long run (2-3 years from now). The reality is that high deficits are more commonly associated with strong stock markets going forward! This doesn't necessarily mean deficits cause strong markets but simply that they occur when markets are strong. I'm sure government spending and tax cuts provide a short term boost in the market but I think it's the timing of such that are more important. Big deficits tend to occur (or get even larger) during the depths of a recession. During this time, monetary policy tends to be very accommodative which at the same that time the system has been naturally purging the excesses of the prior boom paving the way for the next recovery(during recessions weak companies go under, companies look for ways to be more efficient, people work harder). Since the stock market looks ahead about 6 months or so, it starts rising anticipating the recovery. But if you ask me, focusing on the level of deficits falls into the bullshit category and should be ignored.
So what should you pay attention to? 2 things...monetary conditions and earnings. That's all that counts folks plain and simple. The former tends to drive the latter. When money is tight profits get squeezed due to higher borrowing costs and narrower spreads for banks and a recession eventually results. When money is easy profit margins expand for the opposite reasons. Everything else is BULLSHIT! p/e ratios, debt levels, deficits, ect are all useless if you use them as long term timing tools and by long term I mean 3-5 years. If we ever get to the point where easy monetary can no long stimulate earnings in a significant way then that's when the shit will hit the fan and all the Pretchers of the world will finally get their day. But we aren't there yet given the recent surge in profits being reported.
The bottom line is this - find a way to make money on a consistent basis. That's the only thing that determines whether you are successful or not in the game. Everything else doesn't count. How smart you are, how much you know about the fed, economics, math, ect doesn't count for anything if you can't translate it to profits. I'll be the first to admit that some of the guys I have bashed like Hussman, Prechter, Roubini, Schiff and others are much more knowledge that I when it comes to the intricacies of the economy, the fed market history and other things but they have been quite inconsistent in calling the markets right over the years.
Wednesday, February 17, 2010
Tough call here in the ST
I've been distracted from the markets lately due to a home purchase and condo sale my wife and I are conducting. I spent most of my life growing up in a little suburb called Woodbridge just north of Toronto and shortly after meeting my wife I moved in with her here in Toronto where I have been for the past 4 years. I love it here. We are located in a quiet little pocket just outside where all the hustle and bustle is. We have the best of both worlds here - all the restaurants, theaters, bars, clubs ect are close by and for peace and relaxation there's a huge park even closer by. I'm going to really miss living here. I am moving back to Woodbridge for a few reasons. First of all, my wife is expecting our first child this July and as a result, a 1 bedroom condo is no longer going to cut it. To raise a family it's ideal to own a home and a home in downtown Toronto is quite simply unaffordable for us. Unlike with most of the developed world real estate prices in Canada didn't crash. You pretty much need about $800,000 just to buy a very small detached home close to where we are now which would probably be 30+ years old. Woodridge is expensive as well but not nearly as much as Toronto. Other reasons we have decided to move back to Woodbridge is because it's a good, safe neighborhood for growing up kids and my parents and siblings will be close which I know will come in handy for babysitting. You don't see many kids living here in downtown Toronto....it's either young singles/couples or old people who live here. I want my kid to be in an environment where there are lots of other kids he/she can make friends with close by and a suburb environment is ideal for this. I don't want my kid to grow up isolated. I'm already finding out what it means to sacrifice for your kids even before I have them! But, my parents did it for me and for me not to do the same would be quite selfish. But I'd be lying if I said I won't miss this place dearly. I was born to be a "city slicker".
Anyhow, enough about me and on to the market. So, was Feb 5 actually the bottom of this correction? Well, there were indeed some elements that have marked bottoms in the past as I mentioned that day but a few things were missing. As the market worked higher one of those missing elements - the Rydex indicators - actually gave a strong buy signal but the 2 other main indicators I track, AAII and the 10DMA put/call ratio were close but not quite giving the same strong buy signal that was registered at the July and November lows (the signal was a buy but not a "strong buy"). This makes the market a tough call here in the ST especially now that we are ST overbought. I realize that you don't always get "everything" to line up the way you want it to and so it's quite possible that the level of pessimism we have now is enough for us to go upwards and onwards from here after perhaps working off this ST overbought condition but because of those holdouts I mentioned the market is susceptible for another run at the Feb 5th lows.
The bottom line for me personally is that I'm not going to chase the market here and add beta with an index long trade unless I see everything line up the way I want to see it. I already have exposure via my individual stocks and even though they have for the most part been fairly non-market correlated, I'm not going to "press" the long side here by adding an index position unless I have a very strong conviction. I have a decent cash position right now to take advantage of opportunities. The next 5-7 trading days should be interesting.
Anyhow, enough about me and on to the market. So, was Feb 5 actually the bottom of this correction? Well, there were indeed some elements that have marked bottoms in the past as I mentioned that day but a few things were missing. As the market worked higher one of those missing elements - the Rydex indicators - actually gave a strong buy signal but the 2 other main indicators I track, AAII and the 10DMA put/call ratio were close but not quite giving the same strong buy signal that was registered at the July and November lows (the signal was a buy but not a "strong buy"). This makes the market a tough call here in the ST especially now that we are ST overbought. I realize that you don't always get "everything" to line up the way you want it to and so it's quite possible that the level of pessimism we have now is enough for us to go upwards and onwards from here after perhaps working off this ST overbought condition but because of those holdouts I mentioned the market is susceptible for another run at the Feb 5th lows.
The bottom line for me personally is that I'm not going to chase the market here and add beta with an index long trade unless I see everything line up the way I want to see it. I already have exposure via my individual stocks and even though they have for the most part been fairly non-market correlated, I'm not going to "press" the long side here by adding an index position unless I have a very strong conviction. I have a decent cash position right now to take advantage of opportunities. The next 5-7 trading days should be interesting.
Wednesday, February 10, 2010
PIIGS situation approaching climax
As I suspected, it looks like a bailout of some sorts is coming for PIIGS. German authorities appear to have made statements that they are working on a proposal to backstop Greece and other troubled EU members. This news obviously caused the pop in the market Tuesday. There's a lot of moaning and groaning out there about how these bailouts are bad, about how you can't solve a debt crisis by going into more debt. I disagree with these statements. Yes, it can in fact be a bad idea to bail someone out and go deeper into debt but it's not always an inevitable losing situation. Have you ever seen the movie Rounders? Mat Damon’s character Mike McDermott is in a big hole. He's broke and owes $15K to some bad people the next morning. What does he do? He borrows $10K from a friendly source and gambles it playing poker (against the same person he owes the 15K to!) Due to some brilliant playing Mike ends up paying off all his debts and has $30K to keep for himself.
That's an example right there of how a debt crisis is solved by going into more debt.
Ya, I know, the situation is different in regards to the PIIGS but I hope I've made my point...it doesn't have to end badly....it is in fact possible for a happy ending. At the very least, by getting a lifeline it can buy the PIIGS time.....enough time to bankrupt yet another generation of bears who are trying to profit on the "end game" of continued debt creation. Bears like Pretcher have been calling for this end game for decades and he would have been broke several times over requiring multiple bailouts of his own if he actually bet on his bearish predictions.
Who knows what the limit is before debt becomes unmanageable...before the whole thing collapses. Another thing people need to realize is that due to low interest rates the debt "burden" is low for all these indebted countries and people for that matter. (Yes, that can change but it until it does this fact remains a fact).
The bottom line is this - don't get caught up in "debt end game". Authorities will use every means necessary to avoid this end game and prolong it a lot longer than you can remain solvent. It could take another 5,10,20 or more years for the "end game" and in the meantime you will miss out from profiting on what the permabears would call "fake prosperity". Don't think like these idiots. Everything is REAL nothing is fake. This attitude will destroy your account. The money anyone made during the 2003-2007 economic boom, which was based upon "fake prosperity" due to the housing bubble, was very REAL and the money bears lost during that time was equally as real. And just like with Mike McDermott, who is to say that all bailouts have to end badly? They can work and actually be profitable for person/entity providing the bailout. If you want more relevant examples take a look at the bailout in response to the panic of 1907, the bailout of Chrysler in 1980, the resolution trust bail out in response to the savings and loan crisis in 1990...even modern day TARP! What makes a bailout work? When you support a quality company/economy during a time of crisis when prices are low and few are willing to buy because that's the best time to buy. TARP was profitable because the government bought low...when panic was prevalent and nobody else wanted to step up to the plate. It's arguable whether PIIGS, or any other heavily indebted nation today are considered "quality" and we aren't in a panic right now but we are indeed in an enviornment of ingrained pessimism/skepticism which means that these bailouts could still in fact end up being at least temporarily successfull and profitable and by that I'm talking about a period of several years.
As far as the market goes in the ST, don’t be surprised if for some reason we see a sell off after an official bailout is announced now that the market has popped on the rumor. Something in my gut tells me that we could still see Friday's lows get probed before the market launches back towards 1150. I'm not really sure why I feel this way...maybe it's because I know that the market often doesn't make it easy to profit from the obvious. I realize I could be second guessing myself and when I do I always defer to the indicators and they just are just about ready to give the green light for a strong buy. I liked how the VIX didn't collapse on the strength today and how the put/call ratio was elevated showing skepticism. The "powder keg" of pessimism is in position...
Here's my favorite scence from Rounders. This is right after Mike defeats his foe and successfully regains his original bankroll.
That's an example right there of how a debt crisis is solved by going into more debt.
Ya, I know, the situation is different in regards to the PIIGS but I hope I've made my point...it doesn't have to end badly....it is in fact possible for a happy ending. At the very least, by getting a lifeline it can buy the PIIGS time.....enough time to bankrupt yet another generation of bears who are trying to profit on the "end game" of continued debt creation. Bears like Pretcher have been calling for this end game for decades and he would have been broke several times over requiring multiple bailouts of his own if he actually bet on his bearish predictions.
Who knows what the limit is before debt becomes unmanageable...before the whole thing collapses. Another thing people need to realize is that due to low interest rates the debt "burden" is low for all these indebted countries and people for that matter. (Yes, that can change but it until it does this fact remains a fact).
The bottom line is this - don't get caught up in "debt end game". Authorities will use every means necessary to avoid this end game and prolong it a lot longer than you can remain solvent. It could take another 5,10,20 or more years for the "end game" and in the meantime you will miss out from profiting on what the permabears would call "fake prosperity". Don't think like these idiots. Everything is REAL nothing is fake. This attitude will destroy your account. The money anyone made during the 2003-2007 economic boom, which was based upon "fake prosperity" due to the housing bubble, was very REAL and the money bears lost during that time was equally as real. And just like with Mike McDermott, who is to say that all bailouts have to end badly? They can work and actually be profitable for person/entity providing the bailout. If you want more relevant examples take a look at the bailout in response to the panic of 1907, the bailout of Chrysler in 1980, the resolution trust bail out in response to the savings and loan crisis in 1990...even modern day TARP! What makes a bailout work? When you support a quality company/economy during a time of crisis when prices are low and few are willing to buy because that's the best time to buy. TARP was profitable because the government bought low...when panic was prevalent and nobody else wanted to step up to the plate. It's arguable whether PIIGS, or any other heavily indebted nation today are considered "quality" and we aren't in a panic right now but we are indeed in an enviornment of ingrained pessimism/skepticism which means that these bailouts could still in fact end up being at least temporarily successfull and profitable and by that I'm talking about a period of several years.
As far as the market goes in the ST, don’t be surprised if for some reason we see a sell off after an official bailout is announced now that the market has popped on the rumor. Something in my gut tells me that we could still see Friday's lows get probed before the market launches back towards 1150. I'm not really sure why I feel this way...maybe it's because I know that the market often doesn't make it easy to profit from the obvious. I realize I could be second guessing myself and when I do I always defer to the indicators and they just are just about ready to give the green light for a strong buy. I liked how the VIX didn't collapse on the strength today and how the put/call ratio was elevated showing skepticism. The "powder keg" of pessimism is in position...
Here's my favorite scence from Rounders. This is right after Mike defeats his foe and successfully regains his original bankroll.
Saturday, February 6, 2010
Fear was in the air on Friday but was it enough?
I said before that we needed to see "white knuckle fear" to mark a bottom. There was definitely some of that Friday afternoon at around 2 pm. We saw the VIX spike to 29 and the put/call ratio was a very high 1.28. Then the market made a huge U-turn at 2pm and closed marginally positive. These are the sort of washout and reversal days that signal a selling climax. However, I'm a bit suspicious about this reversal. It may have been fueled by rumors and/or fears (for those who are short) about some sort of PIIGS bailout over the weekend. If you recall, the "blanket guarantee" against major bank failures by governments around the world took place over the weekend in early October 2008 which resulted in a massive 2 day rally.
The put/call ratio ended up closing at 1.21 which is very high and showed high fear even though the market ended up closing green. That's a very good sign of an impending bottom. Rydex data however continues not to show the type of rush out of bullish funds that was evident at prior solid bottoms. They are still only grudgingly heading for the exits.
Bottom line: More pieces of the puzzle are in place for a bottom but not all. Friday's reversal although encouraging may have been just due to short covering ahead of the weekend. However, the intraday low of 1044 could very well be bottom that perhaps may get probed a couple of times. I suspect base building will be required here. I know there's a few reasons explaining the drop we have seen in the market but I believe the major one here to focus on is the PIIGS problem. I think this issue is affecting markets the most. Serious structural concerns of a big country or group of smaller countries have in the past rattled markets. The Asian Contagion of 1997 and the collapse of Russia in 1998 come to mind. Only when those crises were dealt with did the market recover in a sustainable way. When the market gains confidence that the PIIGS concerns will be contained or dealt with, then we will see a very sharp rally. I'm sure the leaders of the European Union are not going to be complacent here especially after the 2008 meltdown. I suspect a bailout or some sort of support for PIIGS will be coming.
I realize that I may be waiting for everything to be just perfect before making the move for a long index trade which might cause me to miss the boat and it may very well happen....it has in the past. But you know what? That's fine by me. If I can't get strong conviction for a trade it makes me a weak holder subject to getting whipsawed very easily on an adverse move. The market is still quite compressed here and again we could see a bounce on Monday but I'm still going to be patient here.
The put/call ratio ended up closing at 1.21 which is very high and showed high fear even though the market ended up closing green. That's a very good sign of an impending bottom. Rydex data however continues not to show the type of rush out of bullish funds that was evident at prior solid bottoms. They are still only grudgingly heading for the exits.
Bottom line: More pieces of the puzzle are in place for a bottom but not all. Friday's reversal although encouraging may have been just due to short covering ahead of the weekend. However, the intraday low of 1044 could very well be bottom that perhaps may get probed a couple of times. I suspect base building will be required here. I know there's a few reasons explaining the drop we have seen in the market but I believe the major one here to focus on is the PIIGS problem. I think this issue is affecting markets the most. Serious structural concerns of a big country or group of smaller countries have in the past rattled markets. The Asian Contagion of 1997 and the collapse of Russia in 1998 come to mind. Only when those crises were dealt with did the market recover in a sustainable way. When the market gains confidence that the PIIGS concerns will be contained or dealt with, then we will see a very sharp rally. I'm sure the leaders of the European Union are not going to be complacent here especially after the 2008 meltdown. I suspect a bailout or some sort of support for PIIGS will be coming.
I realize that I may be waiting for everything to be just perfect before making the move for a long index trade which might cause me to miss the boat and it may very well happen....it has in the past. But you know what? That's fine by me. If I can't get strong conviction for a trade it makes me a weak holder subject to getting whipsawed very easily on an adverse move. The market is still quite compressed here and again we could see a bounce on Monday but I'm still going to be patient here.
Friday, February 5, 2010
Bears getting comfortable again
I speculated in an earlier post that there was probably a good number of bears who covered far too early during this dip....probably at around 1100 or so expecting a bounce which didn't come. In fact, I would bet a lot of money that most bears DID NOT even come close to fully capitalizing on the crash of 2008 because of exiting positions too soon like this and then of course, they got burned badly in 2009 shorting what appeared to be "a gift". I've always said to beware of when the market gives you a gift. The easy trade is usually the wrong one.
After getting burned repeatedly for 10 months any bears who survived the rally became gun-shy and for good reason. At the same time Rydex traders, who after being humiliated time and time again whenever they ran for the hills at the first hint of weakness have been slowly dragging their feet towards capitulation this time around because they became too comfortable with dips. On the dip towards 1100 I bet Rydex longs were thinking "I'm not bailing this time. Every fucking time the market dips and I bail it rebounds the next day". Mr. Market tends to change his stripes once too many people think they have him figured out in order to satisfy the motto of this blog. I suspect Rydex traders will be giving up the ghost very soon.
One particular permabear I track said has had a resurgence in confidence and I suspect a lot of the other permabears are feeling the same way...here's what he said this morning:
Among the body of the trading populous, there is surely a subset of folks that are bearish and wanted to short the devil out of the market once a huge bounce took place, and now they are furious with themselves for having missed the boat.
I'm not in this camp, but I'm certainly partly angry with myself for not being even more aggressive.
The psychology that has caused would-be bears to hold back.........and caused your long-suffering narrator to not be as aggressive as he might have been.........has easy-to-identify origins. Let's face it, for the past ten months:
+ Every dip was a buying opportunity;
+ The government clearly was not going to let equities fall;
+ Goldman Sachs wasn't going to let equities fall;
+ Short positions were good for one day; two days, tops;
+ Just like in the movies and on television, we all knew that things were going to work out fine in the end.
Rallies are now selling/shorting opportunities. The kind of event we saw on Monday/Tuesday is a gift to bears.
I noticed the "rallies are now selling/shorting opportunities" type thinking from non-perma bear traders as well on the realmoney.com site. Here's a comment I found interesting "Assume the worst. The safest play here is to look for more downside". Really? This is the safest play? With 10% of stocks trading above the 20 day moving average and a market one downside move away from reaching maximum oversold? You don't see comments like this at the beginning of a bear market down leg. You see them near the end of corrections. Comments like this also suggest to me that deep down inside most traders, who claim to play both sides, are still bearish at heart and from a longer term perspective that's bullish. After the crash in 2000 it was the opposite. It took several repeated shovels to the head before traders shook off their permabull mentality to buy on dips. Being long term bearish back then was just as uncomfortable as being long term bullish now.
On Christmas eve I said this: if we do see a break out I suspect it will get retraced eventually because we don't have the "powder keg" type build up of ST pessimism in the market . With the market quite oversold and so many trader types both the permabear and agnostic type now eager to short bounces bracing for the worst I believe there is quite a large "powder keg" building beneath the market which will fuel a explosive advance shortly although I'm still looking for a bit more capitulation from bag holding longs and more fear in the VIX and put/call ratios.
The job numbers were disappointing but yet futures have popped higher and the markets look like they will open up flat. It's going to be a game of chicken today between traders which I want no part of. I'm still waiting for the "all in" buy signal. It's almost there but not quite. This situation reminds me of the Battle of Sterling Bridge Scene in the movie Braveheart. Bears (the English) are confidently making a charge while the Bulls (the Scotts) are just sitting there waiting on William Wallace's command to spring a deadly trap. "Steady....hold....hold....."
After getting burned repeatedly for 10 months any bears who survived the rally became gun-shy and for good reason. At the same time Rydex traders, who after being humiliated time and time again whenever they ran for the hills at the first hint of weakness have been slowly dragging their feet towards capitulation this time around because they became too comfortable with dips. On the dip towards 1100 I bet Rydex longs were thinking "I'm not bailing this time. Every fucking time the market dips and I bail it rebounds the next day". Mr. Market tends to change his stripes once too many people think they have him figured out in order to satisfy the motto of this blog. I suspect Rydex traders will be giving up the ghost very soon.
One particular permabear I track said has had a resurgence in confidence and I suspect a lot of the other permabears are feeling the same way...here's what he said this morning:
Among the body of the trading populous, there is surely a subset of folks that are bearish and wanted to short the devil out of the market once a huge bounce took place, and now they are furious with themselves for having missed the boat.
I'm not in this camp, but I'm certainly partly angry with myself for not being even more aggressive.
The psychology that has caused would-be bears to hold back.........and caused your long-suffering narrator to not be as aggressive as he might have been.........has easy-to-identify origins. Let's face it, for the past ten months:
+ Every dip was a buying opportunity;
+ The government clearly was not going to let equities fall;
+ Goldman Sachs wasn't going to let equities fall;
+ Short positions were good for one day; two days, tops;
+ Just like in the movies and on television, we all knew that things were going to work out fine in the end.
Rallies are now selling/shorting opportunities. The kind of event we saw on Monday/Tuesday is a gift to bears.
I noticed the "rallies are now selling/shorting opportunities" type thinking from non-perma bear traders as well on the realmoney.com site. Here's a comment I found interesting "Assume the worst. The safest play here is to look for more downside". Really? This is the safest play? With 10% of stocks trading above the 20 day moving average and a market one downside move away from reaching maximum oversold? You don't see comments like this at the beginning of a bear market down leg. You see them near the end of corrections. Comments like this also suggest to me that deep down inside most traders, who claim to play both sides, are still bearish at heart and from a longer term perspective that's bullish. After the crash in 2000 it was the opposite. It took several repeated shovels to the head before traders shook off their permabull mentality to buy on dips. Being long term bearish back then was just as uncomfortable as being long term bullish now.
On Christmas eve I said this: if we do see a break out I suspect it will get retraced eventually because we don't have the "powder keg" type build up of ST pessimism in the market . With the market quite oversold and so many trader types both the permabear and agnostic type now eager to short bounces bracing for the worst I believe there is quite a large "powder keg" building beneath the market which will fuel a explosive advance shortly although I'm still looking for a bit more capitulation from bag holding longs and more fear in the VIX and put/call ratios.
The job numbers were disappointing but yet futures have popped higher and the markets look like they will open up flat. It's going to be a game of chicken today between traders which I want no part of. I'm still waiting for the "all in" buy signal. It's almost there but not quite. This situation reminds me of the Battle of Sterling Bridge Scene in the movie Braveheart. Bears (the English) are confidently making a charge while the Bulls (the Scotts) are just sitting there waiting on William Wallace's command to spring a deadly trap. "Steady....hold....hold....."
Thursday, February 4, 2010
Market takes a parabolic pounding
Can’t sugar coat today....it was downright ugly.
The good
1) The VIX found some religion
2) Big down days via gap down tend to have a high chance of getting filled in the not too distant future.
3) Another 2%+ drop like today and we will reach maximum oversold levels (not including the once in the lifetime oversold reading recorded in the October 2008 crash)
4) In about 1 weeks time sentiment indicators such as AAII will likely give strong buy signals if the market stays around current levels or is lower.
5) The market is oversold enough on an IT basis to stage a big rebound and downside should be limited from here.
The bad
1) A market that gets pounded like today, breaking to a new low and closes at the low of the day signals there's more work to be done on the downside. At the very least it suggests a few days of base building would be required before any bottom would be in.
2) The put/call ratio although high today at 1.06 didn't get as high as 1.15+ which is what we saw at the July and November lows.
3) Rydex traders are dragging their feet somewhat towards the exits. They are reducing their bullish exposure and increasing bearish exposure but they aren't rushing to do so as they usually did right near the bottom.
4) The VIX likely needs to go even higher i.e. high twenties to low 30s. VIX 26 March options are showing a 15% premium for puts. A 40% premium or higher is likely what's needed to mark a top in the VIX and hence bottom in the market.
The bottom line is that although fear took a big jump today it still may not be high enough to mark the bottom but the bottom is likely not too far away from here. I would guess 2.5% maximum downside remains. The market is quite compressed here with only 10% of stocks in the SPX trading above their 20 DMA. That makes it very dangerous to be short. In addition, only 22% of stocks in the SPX are trading above their 50 DMA which suggests we are in position to make an IT low. Even during both of the brutal bear markets of the prior decade; such readings often indicated an IT bottom was imminent. Everything seems to be lining up for a bottom to made sometime very soon....I'm thinking next week. I'll take it one day at a time though.
My best guess for tomorrow is that markets close either up or flattish no matter what the news is regarding the payroll numbers simply due to the compressed oversold condition.
Obviously the market is worried about something whether it's China tightening, PIGS problems, Obama's restrictions on banks you name it. There has always been something to worry about in the past 11 months; however, you tend to see the market respond to such worries in a meaningful way when there is a lack of a ST "wall of worry". I believe the long term wall of worry is still solid as granite but the ST wall of worry had been shaky since late November. By ST wall of worry I'm referring to traders. i.e. option traders, rydex traders and such. The ST wall of worry is now getting repaired quite quickly although I don't think it's completely solid just yet. But in about 1 weeks time I think it will be....we'll see
The good
1) The VIX found some religion
2) Big down days via gap down tend to have a high chance of getting filled in the not too distant future.
3) Another 2%+ drop like today and we will reach maximum oversold levels (not including the once in the lifetime oversold reading recorded in the October 2008 crash)
4) In about 1 weeks time sentiment indicators such as AAII will likely give strong buy signals if the market stays around current levels or is lower.
5) The market is oversold enough on an IT basis to stage a big rebound and downside should be limited from here.
The bad
1) A market that gets pounded like today, breaking to a new low and closes at the low of the day signals there's more work to be done on the downside. At the very least it suggests a few days of base building would be required before any bottom would be in.
2) The put/call ratio although high today at 1.06 didn't get as high as 1.15+ which is what we saw at the July and November lows.
3) Rydex traders are dragging their feet somewhat towards the exits. They are reducing their bullish exposure and increasing bearish exposure but they aren't rushing to do so as they usually did right near the bottom.
4) The VIX likely needs to go even higher i.e. high twenties to low 30s. VIX 26 March options are showing a 15% premium for puts. A 40% premium or higher is likely what's needed to mark a top in the VIX and hence bottom in the market.
The bottom line is that although fear took a big jump today it still may not be high enough to mark the bottom but the bottom is likely not too far away from here. I would guess 2.5% maximum downside remains. The market is quite compressed here with only 10% of stocks in the SPX trading above their 20 DMA. That makes it very dangerous to be short. In addition, only 22% of stocks in the SPX are trading above their 50 DMA which suggests we are in position to make an IT low. Even during both of the brutal bear markets of the prior decade; such readings often indicated an IT bottom was imminent. Everything seems to be lining up for a bottom to made sometime very soon....I'm thinking next week. I'll take it one day at a time though.
My best guess for tomorrow is that markets close either up or flattish no matter what the news is regarding the payroll numbers simply due to the compressed oversold condition.
Obviously the market is worried about something whether it's China tightening, PIGS problems, Obama's restrictions on banks you name it. There has always been something to worry about in the past 11 months; however, you tend to see the market respond to such worries in a meaningful way when there is a lack of a ST "wall of worry". I believe the long term wall of worry is still solid as granite but the ST wall of worry had been shaky since late November. By ST wall of worry I'm referring to traders. i.e. option traders, rydex traders and such. The ST wall of worry is now getting repaired quite quickly although I don't think it's completely solid just yet. But in about 1 weeks time I think it will be....we'll see
Market taking the tough medicine
Well, here's the selloff that I wanted to see happen and so far we are getting quite a spike in the VIX and the put/call ratio which I was looking for. This gap down and tank is the tough medicine the market needs to work it's way towards a sustainable bottom. AAII sentiment came in this morning at about a 1.5 ratio of bears to bulls. It's not at the 2:1 ratio that marked solid bottoms in July and November but it's getting there and if by Wednesday the market is near or below current levels we will indeed see the 2:1 ratio.
I'm already seeing the t/a monkies talk about how if 1070 is broken the downtrend we have seen will be firmly in place. That's the sort of fear of the downside we need to see. A break of 1070 in addition to a break of 10K in the Dow would probably set up for another massive bear trap similiar to the one seen in early July. I wonder if we will see such a break. I remain patient here.
In the spirit of the today's action check out this tune. If the song sounds familiar it's because it's a spoof of one of Bruce Springsteen's songs
I'm already seeing the t/a monkies talk about how if 1070 is broken the downtrend we have seen will be firmly in place. That's the sort of fear of the downside we need to see. A break of 1070 in addition to a break of 10K in the Dow would probably set up for another massive bear trap similiar to the one seen in early July. I wonder if we will see such a break. I remain patient here.
In the spirit of the today's action check out this tune. If the song sounds familiar it's because it's a spoof of one of Bruce Springsteen's songs
FYI..
For anyone who actually cares, I mentioned a stock ggc.to about a week or 2 ago. I bailed on it for a modest loss the other day. After further research and also a result of poor action in the stock I decided to pull the plug. The prospects weren't as good as I had originally thought.
Wednesday, February 3, 2010
Resolution one way or the other is immanent
Markets got the bounce that I felt was a strong possibility but the bulls haven't done much damage to the bears so far. We are slightly higher than where we stood about 10 days ago. The difference however is that 10 days go the VIX had surged to about 28 whereas now it’s just under 22. That's bearish because it shows there is less fear now compared to 10 days ago when the market was at around current levels. The lack of "jump" in the VIX when the market is showing weakness has tended to be a reliable contrarian bearish signal in the past signaling a lack of worry.
With the market just about working off the ST oversold condition to neutral with this bounce; the bears have their chance here to do some damage in the coming days. Will they show some game or will the bulls bring the market back all the way to full overbought like they have been doing most of the time since last March? We have a couple of big economic reports coming out on Thursday and Friday and so there could be some fireworks.
Now here's the way I see things... A sharp drop lower in the coming days would likely light a fire underneath the ass the of VIX and push the main indicators I look at into giving the "all in" buy signal. If we just simply keep going higher back towards 1150 then it's very likely we will revisit the lows sometime in the weeks or months ahead because we didn't see the typical "market action" that you see at bottoms i.e. there wasn't enough fear. For instance, the bounce which began on Monday started with a gap up and never looked back after the market had been hammered quite a bit in the days prior. That very much smells like a reflexive dead cat bounce...there was no "white knuckle fear" at the most recent low in my opinion. On the flip side, look at how badly the bears had to suffer before they could profit from the latest drop. "Chinese water torture" was how I described it. Bulls need to be squirming in a similar fashion IMO.
The current situation of the market reminds me a lot of that in late June. The market had bounced for about 1 week after rolling over from an IT peak. The VIX was acting bearishly as it was now i.e. it collapsed very easily on just marginal strength. Then in July we got the final stab lower in the market which made everyone brace for the H&S top breakdown which turned out to be one hell of a bear trap. So, if we follow that script then we could still see the market grind a bit higher for couple more days before we see a retest or break of 1072. Now, keep in mind that rarely do markets play out the exact same way as they did in the past...history rhymes but seldom repeats. So, we could very well see such a downside move happen as early as tomorrow (Thursday) because the market has worked off the oversold condition close to neutral such that it now has "room" to go lower again.
The bottom line is that I feel the most recent low will be revisited again or broken whether it's in the immediate future or sometime later on in the year. It's not a slam dunk for the bears by any means because many of the IT indicators I look at are oversold enough to give the bulls the green light and we could power back to 1150 no problem. However doing so from present levels would be done with what I term "poor market action" and therefore a retest or break of 1072 would likely be deferred to later on the year. That scenario would fit in very well with the multi-month consolidation phase I’m expecting.
With the market just about working off the ST oversold condition to neutral with this bounce; the bears have their chance here to do some damage in the coming days. Will they show some game or will the bulls bring the market back all the way to full overbought like they have been doing most of the time since last March? We have a couple of big economic reports coming out on Thursday and Friday and so there could be some fireworks.
Now here's the way I see things... A sharp drop lower in the coming days would likely light a fire underneath the ass the of VIX and push the main indicators I look at into giving the "all in" buy signal. If we just simply keep going higher back towards 1150 then it's very likely we will revisit the lows sometime in the weeks or months ahead because we didn't see the typical "market action" that you see at bottoms i.e. there wasn't enough fear. For instance, the bounce which began on Monday started with a gap up and never looked back after the market had been hammered quite a bit in the days prior. That very much smells like a reflexive dead cat bounce...there was no "white knuckle fear" at the most recent low in my opinion. On the flip side, look at how badly the bears had to suffer before they could profit from the latest drop. "Chinese water torture" was how I described it. Bulls need to be squirming in a similar fashion IMO.
The current situation of the market reminds me a lot of that in late June. The market had bounced for about 1 week after rolling over from an IT peak. The VIX was acting bearishly as it was now i.e. it collapsed very easily on just marginal strength. Then in July we got the final stab lower in the market which made everyone brace for the H&S top breakdown which turned out to be one hell of a bear trap. So, if we follow that script then we could still see the market grind a bit higher for couple more days before we see a retest or break of 1072. Now, keep in mind that rarely do markets play out the exact same way as they did in the past...history rhymes but seldom repeats. So, we could very well see such a downside move happen as early as tomorrow (Thursday) because the market has worked off the oversold condition close to neutral such that it now has "room" to go lower again.
The bottom line is that I feel the most recent low will be revisited again or broken whether it's in the immediate future or sometime later on in the year. It's not a slam dunk for the bears by any means because many of the IT indicators I look at are oversold enough to give the bulls the green light and we could power back to 1150 no problem. However doing so from present levels would be done with what I term "poor market action" and therefore a retest or break of 1072 would likely be deferred to later on the year. That scenario would fit in very well with the multi-month consolidation phase I’m expecting.
Monday, February 1, 2010
Be patient
On Friday the market continued to act weak. I have to admit, the action is reminiscent of bear market behavior because in bear markets oversold conditions often get ignored like they have been doing. However, this sort of action can also happen during multi-week corrections in a bull market just like with the June-July slide we saw last summer which turned out only to be a multi-week correction and not a new bear market. According to Cramer there's liquidations from big mutual funds causing this slide. In addition I believe there may be a lack of shorts to squeeze. A lot of them who finally caught a top correctly likely covered after that quick drop to 1115-1100 expecting a bounce. Rydex traders continue to show lack of capitulation which confirms that a lot of traders got caught a bit flat footed here by either covering shorts too early or going long too early expecting a bounce and now they are holding the bag.
I suspect we see a similar type of capitulation observed at July lows. Remember when everyone was bracing for a downside break due to that head and shoulders pattern? There probably needs to be that sort of white knuckle fear this time around as well to mark the bottom.
Things I'm looking for to mark the bottom:
1)Rydex traders running for the hills exiting bull funds and piling into MM funds (so far they are only walking casually towards the hills).
2)AAII sentiment shows 2:1 bears vs bulls (So far it's 1:1).
3)A spike in the VIX towards 30 and the 10DMA put/call ratio hitting the high .90s or higher (VIX currently about 25, 10MA put/call ratio currently .91)
All of the above can occur as early as this week. I'll be watching carefully and patiently. We can certainly see a dead cat bounce here but until I see the above 3 I'd be careful chasing strength and be patient unless your holding period is very short term (1 day or less).
I suspect we see a similar type of capitulation observed at July lows. Remember when everyone was bracing for a downside break due to that head and shoulders pattern? There probably needs to be that sort of white knuckle fear this time around as well to mark the bottom.
Things I'm looking for to mark the bottom:
1)Rydex traders running for the hills exiting bull funds and piling into MM funds (so far they are only walking casually towards the hills).
2)AAII sentiment shows 2:1 bears vs bulls (So far it's 1:1).
3)A spike in the VIX towards 30 and the 10DMA put/call ratio hitting the high .90s or higher (VIX currently about 25, 10MA put/call ratio currently .91)
All of the above can occur as early as this week. I'll be watching carefully and patiently. We can certainly see a dead cat bounce here but until I see the above 3 I'd be careful chasing strength and be patient unless your holding period is very short term (1 day or less).
Subscribe to:
Posts (Atom)