(Note: I added a widget on my blog that allows you to receive email notification of any new posts. Enter your email in the box on the right and hit subscribe)
I see so many bag holders and top pickers getting excited over today's "reversal" day. Sorry, but tops don't get made when everyone seems to call for one. Last year when the market was trending strongly upwards as well as in March of this year, whenever we would get the first of these "reversal" days the bears would get all giddy thinking that finally the top had been put in. I was always skeptical and right every time. I think this time will be no different. I don't want to sound cocky here. Like I said yesterday, I think it's late in the rally but so long as there are so many over-eager bears out there picking tops, the odds of it happening are low.
Even if the market is down tomorrow I have my doubts the market is ready to roll over. As I implied with my previous post, it's not a time to be piggish on the long side...we've had a huge month but I gotta tell you, I aint going to touch the short side until I see more bag holding bears showing humility instead of boldness. I think Mr. Market is going to keep spanking them and that implies we still haven't seen the high of this rally.
Thursday, September 30, 2010
Wednesday, September 29, 2010
The purpose of the stock market is to make fools of as many men as possible
I hope by now you truley believe in this motto. This summer both bulls and bears have been chopped up into the meat grinder by the market but it's the permabears who have been taking the worst licking as they have been fighting this bull market market tooth and nail for over a year getting crushed as they religiously followed the advice of the popular gururs du jour, namely Roubini, Whitney and Pretcher. Mr. Market just loves to humilate gurus and their followers once the guru gains world wide noteriety for making a few good calls.
A couple weeks ago I hypothesised that it was likely that a convincing upside breakout of at least 20 points above the "trading range" would be needed before this rally would end because that's what it's going to take to suck in enough weak longs while capitulating enough weak shorts. I think we are getting there but we still aren't quite there yet. On BNN I'm noticing more and more guests wax bullishly talking about how the market looks good because of this breakout and the favorable seasonality comming up. A lot of these bullish folks are the technically inclined....the exact types that I said before who will chase this breakout. These clowns are weak and will bail when the market drops below 1130 in a convincing way. At the same time though, I'm noticing that a lot of trapped shorts from prior weeks are stubbornly not capitulating and some are still trying to pick tops. I can sense their patience and frustration level is starting to redline though. Also, rydex traders are STILL stubbornly not embracing the long side, however, it seems as if we are one rally away from that happening.
Therefore, based upon what I see I think the market can still go a bit higher here but we are getting close to the end of this...I'd guess within 1-2 weeks. I know I said I didn't like the action of this rally because it had a lot of the gaps early on but the relentlessness of the rally is indicative of bull market behavior similar to what we saw in 2009. So, I'm thinking we are eventually going to see a short but sharp drop in the market to about 1100 once this rally is done and not a full retracement. Chances are that if we see this retracement most of the damage would be done with a few big down days once again causing most battered bears to miss out on the most of the downside as they cover too soon (because they been conditoned over these past few weeks to expect a bounce after modest downside). Obviously this is just guesswork on my part. In no way am I married to this outlook...it will all depend on how conditions look as everything unfolds.
Should you press longs in hopes of another perhaps final pop to 1160-1170? No. The risk/reward isn't worth it. If my outlook turns out to be correct you're looking at 50 points downside risk vs 20 points upside potential. Therefore takes some off the table now. If we pop higher take more off. But hey, don't listen to me....wtf do I know lol!...seriously!
A couple weeks ago I hypothesised that it was likely that a convincing upside breakout of at least 20 points above the "trading range" would be needed before this rally would end because that's what it's going to take to suck in enough weak longs while capitulating enough weak shorts. I think we are getting there but we still aren't quite there yet. On BNN I'm noticing more and more guests wax bullishly talking about how the market looks good because of this breakout and the favorable seasonality comming up. A lot of these bullish folks are the technically inclined....the exact types that I said before who will chase this breakout. These clowns are weak and will bail when the market drops below 1130 in a convincing way. At the same time though, I'm noticing that a lot of trapped shorts from prior weeks are stubbornly not capitulating and some are still trying to pick tops. I can sense their patience and frustration level is starting to redline though. Also, rydex traders are STILL stubbornly not embracing the long side, however, it seems as if we are one rally away from that happening.
Therefore, based upon what I see I think the market can still go a bit higher here but we are getting close to the end of this...I'd guess within 1-2 weeks. I know I said I didn't like the action of this rally because it had a lot of the gaps early on but the relentlessness of the rally is indicative of bull market behavior similar to what we saw in 2009. So, I'm thinking we are eventually going to see a short but sharp drop in the market to about 1100 once this rally is done and not a full retracement. Chances are that if we see this retracement most of the damage would be done with a few big down days once again causing most battered bears to miss out on the most of the downside as they cover too soon (because they been conditoned over these past few weeks to expect a bounce after modest downside). Obviously this is just guesswork on my part. In no way am I married to this outlook...it will all depend on how conditions look as everything unfolds.
Should you press longs in hopes of another perhaps final pop to 1160-1170? No. The risk/reward isn't worth it. If my outlook turns out to be correct you're looking at 50 points downside risk vs 20 points upside potential. Therefore takes some off the table now. If we pop higher take more off. But hey, don't listen to me....wtf do I know lol!...seriously!
Monday, September 27, 2010
Natural gas powered veichles....the next frontier?
I've said before that big money is made riding big trends. You need to get on board those trends early and resist the temptation to take profits too soon. Secular growth stories often occur when there's either new ground breaking innovation on the verge of gaining critical mass, major government policy promoting a particular sector, a sector which has been depressed and neglected for years becoming in favor due to a change in fundamentals and/or investor attitudes, or some combination of the above.
Examples of these types of growth stories were the telecom boom of the mid 1990's which was sparked by the telecom act in 1996, the gold bull market of the 2000's, taser stocks and satellite radio stocks in the mid 2000's (these turned out to be fads but for 2 years they were growth stories and big money could have been made) and the Apple revolution. These types of secular growth stories attract investors not only because of the initial strong growth in revenues and/or earnings often seen initially but because of the "sex appeal" of the unlimited-like growth potential of a new sector or a beaten down sector rising from the ashes.
I believe there is potential for a secular growth story with natural gas. Not necessarily the commodity itself but the applications for it, specifically, for natural gas powered vehicles. We all know why or allegedly why, the price of natural gas has been depressed so no need to discuss that. The relationship in price between oil and gas has historically been about 6:1. The ratio has been at least 15:1 for 2 years now. They say when it comes to commodities price cures price. When the price for a commodity is low for a prolonged period it will result in supply destruction and potentially new forms of demand and so eventually the price will rise. When the price is high it will attract new supply and at same time result in demand destruction and so eventually the price will fall. Of course the key word here is eventually. Timing is everything but when prices are unsustainably low, time is on your side to be long and when prices are unsustainable high time is against you. It could take 1,2,3 years or more, but when the tide turns it tends to turn violently and the initial reversal into a new long term bull or bear market tends to erase the previous 1-3 year decline (or rise) in a matter of months.
Getting back to nat gas...as you probably know there has been a desire in the US to become less dependent on oil and more so with alternative, cleaner energy. Ideally it would nice to have everything run on solar, wind and geothermal power but that's not an economic reality just yet. Until it is, natural gas has the potential to be the "bridge" fuel that can replace at least some of the applications that require oil given how cheap, abundant and relatively clean it is. The longer the price stays low like this, the more likely it is that will become a reality. We may be soon at the tipping point where this indeed becomes a reality.
A couple of years ago billionaire energy player T. Boone Pickens aired commercials promoting the "Pickens Plan" as multi-step process to enable the US to become less dependent on foreign oil. The plan basically emphasizes the use of wind power and natural gas, specifically natural gas powered vehicles. Pickens has been pushing for a Natural gas policy from Washington that will encourage the use of such viechles and the building of infrastructure needed to service them (namely, nat gas fueling statations) through incentives like tax breaks. So far, nothing of significance has occurred on this front (as far as I know). Just last week however, Cramer mentioned that senator Harry Reid is once again trying to push a Bill that would provide huge subsidies for purchasers of nat gas powered transport trucks as well as subsidies for nat gas infrastructure and R&D. Cramer is skeptical it will be passed. I have no clue if it will. If it does 2 companies that would likely explode in value and become potential secular growth stories would be Westport Innovations (WPRT, WPT.TO), makers of nat gas powered engines and Clean Energy Fuels (CLNE) which own and operate nat gas fueling stations. I believe Pickens owns quite a bit of WPRT.
I'm keeping an eye on these 2 names and plan on doing more DD to determine just how likely it is for the natural gas growth story outlined above in becoming a reality one day. To be honest, I'm not all that informed just yet but if market action of these 2 stocks start suggesting an upside breakout I probably will jump on board with a starter position.
If anyone has any comments/feedback I welcome it.
Examples of these types of growth stories were the telecom boom of the mid 1990's which was sparked by the telecom act in 1996, the gold bull market of the 2000's, taser stocks and satellite radio stocks in the mid 2000's (these turned out to be fads but for 2 years they were growth stories and big money could have been made) and the Apple revolution. These types of secular growth stories attract investors not only because of the initial strong growth in revenues and/or earnings often seen initially but because of the "sex appeal" of the unlimited-like growth potential of a new sector or a beaten down sector rising from the ashes.
I believe there is potential for a secular growth story with natural gas. Not necessarily the commodity itself but the applications for it, specifically, for natural gas powered vehicles. We all know why or allegedly why, the price of natural gas has been depressed so no need to discuss that. The relationship in price between oil and gas has historically been about 6:1. The ratio has been at least 15:1 for 2 years now. They say when it comes to commodities price cures price. When the price for a commodity is low for a prolonged period it will result in supply destruction and potentially new forms of demand and so eventually the price will rise. When the price is high it will attract new supply and at same time result in demand destruction and so eventually the price will fall. Of course the key word here is eventually. Timing is everything but when prices are unsustainably low, time is on your side to be long and when prices are unsustainable high time is against you. It could take 1,2,3 years or more, but when the tide turns it tends to turn violently and the initial reversal into a new long term bull or bear market tends to erase the previous 1-3 year decline (or rise) in a matter of months.
Getting back to nat gas...as you probably know there has been a desire in the US to become less dependent on oil and more so with alternative, cleaner energy. Ideally it would nice to have everything run on solar, wind and geothermal power but that's not an economic reality just yet. Until it is, natural gas has the potential to be the "bridge" fuel that can replace at least some of the applications that require oil given how cheap, abundant and relatively clean it is. The longer the price stays low like this, the more likely it is that will become a reality. We may be soon at the tipping point where this indeed becomes a reality.
A couple of years ago billionaire energy player T. Boone Pickens aired commercials promoting the "Pickens Plan" as multi-step process to enable the US to become less dependent on foreign oil. The plan basically emphasizes the use of wind power and natural gas, specifically natural gas powered vehicles. Pickens has been pushing for a Natural gas policy from Washington that will encourage the use of such viechles and the building of infrastructure needed to service them (namely, nat gas fueling statations) through incentives like tax breaks. So far, nothing of significance has occurred on this front (as far as I know). Just last week however, Cramer mentioned that senator Harry Reid is once again trying to push a Bill that would provide huge subsidies for purchasers of nat gas powered transport trucks as well as subsidies for nat gas infrastructure and R&D. Cramer is skeptical it will be passed. I have no clue if it will. If it does 2 companies that would likely explode in value and become potential secular growth stories would be Westport Innovations (WPRT, WPT.TO), makers of nat gas powered engines and Clean Energy Fuels (CLNE) which own and operate nat gas fueling stations. I believe Pickens owns quite a bit of WPRT.
I'm keeping an eye on these 2 names and plan on doing more DD to determine just how likely it is for the natural gas growth story outlined above in becoming a reality one day. To be honest, I'm not all that informed just yet but if market action of these 2 stocks start suggesting an upside breakout I probably will jump on board with a starter position.
If anyone has any comments/feedback I welcome it.
Tuesday, September 21, 2010
Pearls of wisdom from nearly a century ago
I've been re-reading my favorite stock market book Reminiscences of a Stock Operator for the 3rd time. Every time I have re-read it, it inspires me and I learn something new. It also makes me realize more and more how some things never change. Livermore described what he coined "the semi-sucker". According to him, the semi-sucker is one who is not totally green in the market and has an average life of about 3 years on Wall Street before he quits or goes broke. The semi-sucker has some experience and has read books about the market (from a group of higher level suckers). He won't make the pure rookie mistakes but he still ends up a loser nonetheless. Livermore said one of the things semi-suckers love to do is buy stocks that have had a big decline from their high (or on the flip side short stocks that have a good run). The semi-sucker thinks he's being smart buying stocks at such "bargains". But quite often he gets run over because the stock went down big for a good reason. I saw a perfect example of this when my friend told me how his father-in-law bought RIG at $75 this summer on the dip. Semi-suckers come in all forms. I see tons of them out there. Here's a perfect example
I am a small investor / short term trader in SPY and GDX. I mainly use hourly moving average, trading volume, chart patterns, and Elliott waves. I find I don't have time to read up on fundamentals so TA suits me just fine. I am retired military and trading is my second hobby - after photography
This guy's profile is just screaming " I'm a sucker take all my money now!" Elliot waves?....trading as a hobby?...no wait....a second hobby? lol! This guy needs to find a less expensive hobby. First of all Elliot waves is a big crock of shit. This is not debatable and I'm not going to waste any more internet space to explain why. Second of all if you trade as a hobby or even worse a second hobby you are very likely going to lose money in the long run. You have to treat trading as a business if you want any chance of being successful.
Livermore was a speculator not an investor. Many of his principles are the foundation of what I believe is a successful speculator. Aside from treating speculating as a business, an important foundation principle is to have no allegiance to either the bear or bull side. The only allegiance you should have is to the right side. You should be just as comfortable being a bull as being a bear. Another basic principle is that you must conquer your own worst enemy....yourself. This means emotions, in particular, fear, greed, hope, impulses and pride.
These are just foundation principles. The realities/tendencies of the market and strategies you should use are another story. The vast majority of "traders" and market pundits I see out there aren't even close to mastering these basic foundation principles. They are either miserable, biased, dogmatic, bitter, and emotional or a combination of the above. This makes them perpetual semi-suckers. I don't mean to sound like some sort of condescending jerk..I know I'm far from perfect and I paid my "tuition" but I know I'm better than most of the clowns and pundits out there but that's not really saying much...to be great requires one to be leaps and bounds above the rest for a long period of time and I haven't proven that yet.
As far as this breakout goes I still don't get the sense of complete capitulation from the bears and full embracement from the bulls. Hard evidence of this can be seen with rydex traders who continue to still stubbornly refuse to buy into this rally. I figured the breakout would have caused at least a little bit of chasing from these clowns but it did very little. After repeated whipsaws this summer it seems that potential longs may want to see this "breakout" hold for a while before having confidence in it and/or want to buy on dips. I said this before, the trap door will not be sprung until Mr. Market has shaken out most of the weak bears and sucked in most of the weak longs and he will do whatever it takes to do so.
The market got quite ST overbought after yesterday's move and so it won't be surprising to see some down/flat action for at least a day or 2. Keep in mind that a market that makes a new rally high closing near the HOD indicates that there's likely more upside ultimately to come even if a rest follows. Think about a boxer who is getting the crap beat out of him the whole round and then finally gets knocked down but is saved by the bell. If it wasn't for the bell things probably would have been worse. It's the same idea when it comes to a market making a fresh new low or high and closing near those levels. Top/bottom picking under such conditions is always a dangerous game. If you do so better be nimble.
I am a small investor / short term trader in SPY and GDX. I mainly use hourly moving average, trading volume, chart patterns, and Elliott waves. I find I don't have time to read up on fundamentals so TA suits me just fine. I am retired military and trading is my second hobby - after photography
This guy's profile is just screaming " I'm a sucker take all my money now!" Elliot waves?....trading as a hobby?...no wait....a second hobby? lol! This guy needs to find a less expensive hobby. First of all Elliot waves is a big crock of shit. This is not debatable and I'm not going to waste any more internet space to explain why. Second of all if you trade as a hobby or even worse a second hobby you are very likely going to lose money in the long run. You have to treat trading as a business if you want any chance of being successful.
Livermore was a speculator not an investor. Many of his principles are the foundation of what I believe is a successful speculator. Aside from treating speculating as a business, an important foundation principle is to have no allegiance to either the bear or bull side. The only allegiance you should have is to the right side. You should be just as comfortable being a bull as being a bear. Another basic principle is that you must conquer your own worst enemy....yourself. This means emotions, in particular, fear, greed, hope, impulses and pride.
These are just foundation principles. The realities/tendencies of the market and strategies you should use are another story. The vast majority of "traders" and market pundits I see out there aren't even close to mastering these basic foundation principles. They are either miserable, biased, dogmatic, bitter, and emotional or a combination of the above. This makes them perpetual semi-suckers. I don't mean to sound like some sort of condescending jerk..I know I'm far from perfect and I paid my "tuition" but I know I'm better than most of the clowns and pundits out there but that's not really saying much...to be great requires one to be leaps and bounds above the rest for a long period of time and I haven't proven that yet.
As far as this breakout goes I still don't get the sense of complete capitulation from the bears and full embracement from the bulls. Hard evidence of this can be seen with rydex traders who continue to still stubbornly refuse to buy into this rally. I figured the breakout would have caused at least a little bit of chasing from these clowns but it did very little. After repeated whipsaws this summer it seems that potential longs may want to see this "breakout" hold for a while before having confidence in it and/or want to buy on dips. I said this before, the trap door will not be sprung until Mr. Market has shaken out most of the weak bears and sucked in most of the weak longs and he will do whatever it takes to do so.
The market got quite ST overbought after yesterday's move and so it won't be surprising to see some down/flat action for at least a day or 2. Keep in mind that a market that makes a new rally high closing near the HOD indicates that there's likely more upside ultimately to come even if a rest follows. Think about a boxer who is getting the crap beat out of him the whole round and then finally gets knocked down but is saved by the bell. If it wasn't for the bell things probably would have been worse. It's the same idea when it comes to a market making a fresh new low or high and closing near those levels. Top/bottom picking under such conditions is always a dangerous game. If you do so better be nimble.
Saturday, September 18, 2010
Weekend Ramblings
Well, I was dead wrong expecting some sort of a pullback this week. Looks like Mr. Market is going to create maximum angst for those who are trying to call the top of this move. I haven't bet on any downside move just yet. For now, I'm still sticking with my microcap/small cap plays which have done well so far as a group and have been behaving like I hoped they would - not moving 1 for 1 with the market. Mind you, I'm not "all in" with these plays just yet but so far so good.
I mentioned in my last post how AAII sentiment is 2:1 bulls vs. bears. The last time this happened was mid December 2009. The market still managed to go up for the next couple of weeks running over the top pickers but all gains and then some were given up come early February. It wouldn't surprise me to see something like that happen again. Despite the recent giddiness in AAII sentiment, sentiment as measured by Rydex traders is not confirming which means few market timing traders are embracing this rally and that suggests there's a good chance that still more upside is in store here....probably one last good push higher is still in the cards.
Browsing through the various trading (permabear) blogs recently I got a sense of tremendous frustration. I call the retail trading community permabears because that's what the typical retail trader is....a permabear. It's amazing how these clowns call themselves "traders" when they have such an unshakable bearish bias. I read just now about how one guy refuses to sell his long term puts because of his bias. What a sucker. I say this not because he's bearish but because he actually admits to being biasedly bearish. There's a big difference in that. By being biased in your trading you are attempting to profit on what you personally believe the market should do instead of what the market wants to do. That's a recipe for bankruptcy. The dual bear markets of the past 10 years has made most traders view the market through a dark tinted lens which causes them to stubbornly overplay the bear side and when they actually try to play the bull side their conviction level is paper thin...all it takes is a slight pullback to send them running for the hills back into their bear caves.
I can't find any popular retail trading/investing blogs that have a bullish slant to them. Every blog out there that is popular amongst the ilk has a bearish bias. It's just a sign of the times. Given history clearly shows that the typical retail investor/trader has an atrocious track record I can't help but think that somehow, someway there will be a long term bullish resolution to all of this and the permabears will once again be foiled for umpteenth time in the past 30+ years.
If the bears turn out to be right, then we will probably see the market collapse in a way whereby most of the retail permabear ilk doesn’t profit from it. That would probably entail a very sudden and steep collapse just prior to the point of maximum bear capitulation due to a grinding cyclical bull market. The flash crash in May is a good template. Very few bears survived that relentless move in March and April to profit from the flash crash and if they managed to be positioned short they likely covered far, far too early.
A lot of the retail ilk who for several months have been spewing bearish arguments such as high debt/GDP levels, a pending commercial real estate collapse (remember that one?), a PPT manipulated market and whatever else, have gone broke or just a bouts. At the end of the day it's all about whether you have made or lost money. Nothing else matters and from I can see most of these self righteous bears have lost a ton.
I mentioned in my last post how AAII sentiment is 2:1 bulls vs. bears. The last time this happened was mid December 2009. The market still managed to go up for the next couple of weeks running over the top pickers but all gains and then some were given up come early February. It wouldn't surprise me to see something like that happen again. Despite the recent giddiness in AAII sentiment, sentiment as measured by Rydex traders is not confirming which means few market timing traders are embracing this rally and that suggests there's a good chance that still more upside is in store here....probably one last good push higher is still in the cards.
If you go by the motto of this blog, the way to create maximum pain would be a breakout above1130. I'm not just talking about a 5 point breakout. I'm talking about a clean, solid 20 point breakout. That would without a doubt capitulate whatever bag holding permabears are out there who are no doubt praying that the top end of the trading range will hold. At the same time it will bring in technical buying from the butt sniffers who chase breakouts, breakdowns, head & shoulders patters ect. At that point, the market would be very vulnerable to a set back because it would likely be extremely overbought with giddy sentiment, weak longs and little short interest. Maybe I'm over analyzing this but I think this has a decent chance of playing out. Regardless, I'll be watching market action for clues as to how this thing will play out.
Browsing through the various trading (permabear) blogs recently I got a sense of tremendous frustration. I call the retail trading community permabears because that's what the typical retail trader is....a permabear. It's amazing how these clowns call themselves "traders" when they have such an unshakable bearish bias. I read just now about how one guy refuses to sell his long term puts because of his bias. What a sucker. I say this not because he's bearish but because he actually admits to being biasedly bearish. There's a big difference in that. By being biased in your trading you are attempting to profit on what you personally believe the market should do instead of what the market wants to do. That's a recipe for bankruptcy. The dual bear markets of the past 10 years has made most traders view the market through a dark tinted lens which causes them to stubbornly overplay the bear side and when they actually try to play the bull side their conviction level is paper thin...all it takes is a slight pullback to send them running for the hills back into their bear caves.
I can't find any popular retail trading/investing blogs that have a bullish slant to them. Every blog out there that is popular amongst the ilk has a bearish bias. It's just a sign of the times. Given history clearly shows that the typical retail investor/trader has an atrocious track record I can't help but think that somehow, someway there will be a long term bullish resolution to all of this and the permabears will once again be foiled for umpteenth time in the past 30+ years.
If the bears turn out to be right, then we will probably see the market collapse in a way whereby most of the retail permabear ilk doesn’t profit from it. That would probably entail a very sudden and steep collapse just prior to the point of maximum bear capitulation due to a grinding cyclical bull market. The flash crash in May is a good template. Very few bears survived that relentless move in March and April to profit from the flash crash and if they managed to be positioned short they likely covered far, far too early.
A lot of the retail ilk who for several months have been spewing bearish arguments such as high debt/GDP levels, a pending commercial real estate collapse (remember that one?), a PPT manipulated market and whatever else, have gone broke or just a bouts. At the end of the day it's all about whether you have made or lost money. Nothing else matters and from I can see most of these self righteous bears have lost a ton.
Thursday, September 16, 2010
AAII sentiment in position for the bears
A day or two before the low in August I mentioned how AAII sentiment was showing a 2:1 ratio of bears vs bulls which was contrarily bullish for the market. Now we are seeing the exact opposite. AAII sentiment came in today 2:1 bulls vs bears which suggests a market top is immanent.
As I said before, it's possible the market may do a headfake breakout above this trading range however AAII sentiment strongly confirms my suspicions about the sustainablilty of this rally that started a few weeks ago. It also suggests the market is ready to top out right here right now. The rydex ratio is not yet confirming though but the message is clear.....be on guard.
As I said before, it's possible the market may do a headfake breakout above this trading range however AAII sentiment strongly confirms my suspicions about the sustainablilty of this rally that started a few weeks ago. It also suggests the market is ready to top out right here right now. The rydex ratio is not yet confirming though but the message is clear.....be on guard.
Wednesday, September 15, 2010
Watched pot syndrome again
I've mentioned a few times in the past about the "a watched pot never boils" syndrome wherby the market gets overbought but because so many people were aware of this and were trying to fade the strength the market wouldn't budge much to the downside and instead, finds a way to grind higher still. This is what we've been seeing. Evidence of this can be found by the put/call ratio. I've been noticing some abnormally very high readings a couple of times these last 2 weeks in the face of market strength including today. At the same time rydex traders are dragging their feet in embracing the bull side. Thus, what this tells me is that the trap door is not ready to be sprung just yet.
I still believe this rally is of poor quality destined to fail but if too many people believe as I do Mr. Market is not going to oblige so easily. He will do whatever it takes to frustrate and shake out the top pickers while sucking in weak longs. Then and only then will the rally fail (if its indeed destined to fail as I think it is).
I'm noticing the retail permabear....er....trading community are trying to outguess and fade each other so that they don't end up being the sucker but in the end no matter what they do they still end up being the sucker. It kind of reminds me of this scence from the classic movie The Princess Bride
I still believe this rally is of poor quality destined to fail but if too many people believe as I do Mr. Market is not going to oblige so easily. He will do whatever it takes to frustrate and shake out the top pickers while sucking in weak longs. Then and only then will the rally fail (if its indeed destined to fail as I think it is).
I'm noticing the retail permabear....er....trading community are trying to outguess and fade each other so that they don't end up being the sucker but in the end no matter what they do they still end up being the sucker. It kind of reminds me of this scence from the classic movie The Princess Bride
Tuesday, September 14, 2010
There is no holy grail
This weekend I was talking to a buddy of mine who proudly proclaimed to have made money in this small cap stock. He told me he found out about the stock through his system of scanning for block trades. By his logic, heavy block trade activity is a signal that "something is brewing" with the company. This same friend by the way was trying to convince me about this "system" in 2006. I pointed out to him on Saturday, as I did 4 years ago, that it's far more likely he had success because of the bull market in stocks and not because he had discovered some holy grail...not to mention a pretty lame one in block trade activity. After he got crushed in 2008 I remember him clearly telling me in October of that year that was never going to touch another stock again. I figured he learned his lesson that his system is useless but I was wrong! It took about 2 years but he's back in the game and he's using the same flawed system of scanning for block trades! lol!
There is no Holy Grail folks. There’s no one indicator that works every time especially such a lame indicator as block trade activity.
What about this gap happy market? I don't recall seeing so many gap and run days in such a short span of time. How many is that now? 3 or 4 in the past 2 weeks? I realize not all gaps get filled. The ones that don't tend to be the ones that kick off a major rally or decline. For instance, the bull market run off the March 2009 lows began with a gap and run day. The rally off the July interim low in 2009 was kicked off with a gap and run day. Although this latest rally did kick off with a gap and run day multiple gap days in such a short period of time make it much more indicative of panic short covering as opposed to sustainable buying. What I think we are seeing now are multiple layers of short squeezes. The first group of shorts who pressing near the lows of 1040 got trapped by the first big gap and run day. Then a second group of bears tried shorting that gap figuring it would get filled and they too go caught fueling the fire and it goes on and on! Eventually we are going to run out of weak shorts and at the same time convince weak bulls (the technical types who buy on breakouts) to come join the party and then that's when the trap door is sprung and the house of cards collapses.
As I said in the comment section of my previous post. These kinds of rallies are what you see in bear markets and should have also said sideways markets. They will do whatever it takes to shake out enough bears and convince enough people to hop on before the trap door is sprung. So, that means, there's the potential for a temporary breakout of this trading range to the upside. That would certainly do the trick to punish the most amounts of people. As of now though the market is extremely ST overbought. One more rally like today would push it to maximum overbought on the oscillators however I believe the odds of 1-2 day pullback are very high right now. Today’s gap seems very, very likely to get filled in the near future regardless if this rally is the real deal or not.
There is no Holy Grail folks. There’s no one indicator that works every time especially such a lame indicator as block trade activity.
What about this gap happy market? I don't recall seeing so many gap and run days in such a short span of time. How many is that now? 3 or 4 in the past 2 weeks? I realize not all gaps get filled. The ones that don't tend to be the ones that kick off a major rally or decline. For instance, the bull market run off the March 2009 lows began with a gap and run day. The rally off the July interim low in 2009 was kicked off with a gap and run day. Although this latest rally did kick off with a gap and run day multiple gap days in such a short period of time make it much more indicative of panic short covering as opposed to sustainable buying. What I think we are seeing now are multiple layers of short squeezes. The first group of shorts who pressing near the lows of 1040 got trapped by the first big gap and run day. Then a second group of bears tried shorting that gap figuring it would get filled and they too go caught fueling the fire and it goes on and on! Eventually we are going to run out of weak shorts and at the same time convince weak bulls (the technical types who buy on breakouts) to come join the party and then that's when the trap door is sprung and the house of cards collapses.
As I said in the comment section of my previous post. These kinds of rallies are what you see in bear markets and should have also said sideways markets. They will do whatever it takes to shake out enough bears and convince enough people to hop on before the trap door is sprung. So, that means, there's the potential for a temporary breakout of this trading range to the upside. That would certainly do the trick to punish the most amounts of people. As of now though the market is extremely ST overbought. One more rally like today would push it to maximum overbought on the oscillators however I believe the odds of 1-2 day pullback are very high right now. Today’s gap seems very, very likely to get filled in the near future regardless if this rally is the real deal or not.
Friday, September 10, 2010
fugettabout it
That's pretty much my philosophy right now regarding the general markets. It's far too neurotic and headline driven to contemplate trading it for my liking. A landmine field is a good way to describe it. I've been quite skeptical about the sustainability of this latest rally but I'm respectful of it and namely, the potential for another stab higher to 1115-1130 to really squash whatever remains of the trapped bears from last week and at the same time suck in more bulls before the trap door is sprung again.
The negative bearish sentiment I pointed out last week has unwound somewhat but admitedly it can still unwind more before hitting extreme levels which is why I'm respectful of another stab higher. However, given what I said in my previous post along with the gap up nature of this advance I doubt this rally is the start of something sustainable even if we go higher. Ultimately I expect full retracement. In the meantime the market will probably frustrate most bears into submission before dropping in a meaningful way and that suggests more choppiness.
By the way, Lester is now 25% short via puts as of yesterday.
The negative bearish sentiment I pointed out last week has unwound somewhat but admitedly it can still unwind more before hitting extreme levels which is why I'm respectful of another stab higher. However, given what I said in my previous post along with the gap up nature of this advance I doubt this rally is the start of something sustainable even if we go higher. Ultimately I expect full retracement. In the meantime the market will probably frustrate most bears into submission before dropping in a meaningful way and that suggests more choppiness.
By the way, Lester is now 25% short via puts as of yesterday.
Thursday, September 9, 2010
Beware...butt sniffers turning bullish
Lester alert: Lester (aka the worst trader in the world) threw in the towel on his puts except for 1 and actually bought a call to hedge his remaining position. What a buffoon.
Meanwhile the "rev shark" over at realmoney.com who has been nothing but atrocious this year is bullish after being confidently bearish when the market was 50+ points lower. Last time he was bullish like this was early August. You watch though, as soon as the market drops 10 points he'll go back to "protect your capital, don't fight the downward tape" mode. Like the typical trader these days, it doesn't take much for them to turn bearish on the first hint of weakness but they only turn bullish kicking and screaming i.e. after the market has had a strong move.
Cramer's also feeling a little giddy now. Just a week ago he was so depressed I thought he was going to slit his wrists.
This is all happening at a time when the market has been gap happy and ST overbought. Not a good combination folks. Yet another gap and run day today. This rally is built on sand.
Meanwhile the "rev shark" over at realmoney.com who has been nothing but atrocious this year is bullish after being confidently bearish when the market was 50+ points lower. Last time he was bullish like this was early August. You watch though, as soon as the market drops 10 points he'll go back to "protect your capital, don't fight the downward tape" mode. Like the typical trader these days, it doesn't take much for them to turn bearish on the first hint of weakness but they only turn bullish kicking and screaming i.e. after the market has had a strong move.
Cramer's also feeling a little giddy now. Just a week ago he was so depressed I thought he was going to slit his wrists.
This is all happening at a time when the market has been gap happy and ST overbought. Not a good combination folks. Yet another gap and run day today. This rally is built on sand.
Monday, September 6, 2010
Trying to make sense of it all
Ok so what happened last week? As I suspected it was fueled by massive covering. Too many bears pressed going for the kill when it looked as if the market was going to break down only to get blindsided by surprisingly better than expected economic data. How can I be so sure of this? Here's a few of excerpts from the permabear retail trader types I follow
I'm glad you covered. I waited and had one of the worst trading days ever. I got really hurt.
Yesterday was full of distractions too which compounded the problem. I'll have to take my losses and re-enter when I'm at a lower risk point
Today was my worst trading day ever, measured in dollar terms.
I picked the wrong week to make my first Put buy. So much for Sept being a downer (this comment is from Lester aka the worst trader in the world).
Two of these guys happened to have the worst trading days of their lives. Coincidence? What does that tell you? They were pressing going for jugular and they got caught like a lot of people I'm sure. You might be thinking "well this is only a few people who got burned...how you can be so sure it represents the majority?" Fair enough....to back up my thesis I defer to "market action". Most of this bounce has been done via gap and go action which is the classic signature of panic short covering. I have seen and documented this action time and time again.
The market has been frustrating for me because I've been waiting for the market to give the green light for a LT bottom to this consolidation phase that I believe we have been in for the past few months. At that point I would feel confident to buy and hold positions instead of having to play the game of chicken with other traders watching the tape tick by tick. Anytime the market was close to giving the green light, i.e. when sentiment was overly bearish and the market was much oversold, instead of getting that final washout/capitulation we get this gap and run short covering rallies that end up ultimately fizzling out putting the market back in the same situation a month or 2 later.
Maybe one of these short covering gap and go rallies will be the spark to "real buying" and maybe I'm making too much out of this "market action" fixation. Perhaps, but it has served me very well over the years.
ST we are well overbought now which argues for at least a decent pullback coming. But when bears get trapped badly like this, most times such a pullback doesn't come instantly which argues for choppy action for a least a few days. But hey, your guess is at good as mine.
This broad market is too casino-like for me right now which is why I've been sticking with the micro/small caps that are trading in their own little world. I realize however that it's still important to pay attention to the broad market because in the event of a massive meltdown such as in 2008 very few stocks trade in their own little world anymore....it becomes one big world...of hell. Since I believe the market may be vulnerable to another decline sometime down the road but not another meltdown, I'm confident enough to play these fairly non-market correlated micro/small caps.
I'm waiting for the opportunity to play some aggressive LT call options on the major indicies and names that have high beta when I believe we have seen the final bottom. In the meantime I will stick to non-correlated micro/small caps and ST trading positions (only if there's near perfect set ups for the latter).
I'm glad you covered. I waited and had one of the worst trading days ever. I got really hurt.
Yesterday was full of distractions too which compounded the problem. I'll have to take my losses and re-enter when I'm at a lower risk point
Today was my worst trading day ever, measured in dollar terms.
I picked the wrong week to make my first Put buy. So much for Sept being a downer (this comment is from Lester aka the worst trader in the world).
Two of these guys happened to have the worst trading days of their lives. Coincidence? What does that tell you? They were pressing going for jugular and they got caught like a lot of people I'm sure. You might be thinking "well this is only a few people who got burned...how you can be so sure it represents the majority?" Fair enough....to back up my thesis I defer to "market action". Most of this bounce has been done via gap and go action which is the classic signature of panic short covering. I have seen and documented this action time and time again.
The market has been frustrating for me because I've been waiting for the market to give the green light for a LT bottom to this consolidation phase that I believe we have been in for the past few months. At that point I would feel confident to buy and hold positions instead of having to play the game of chicken with other traders watching the tape tick by tick. Anytime the market was close to giving the green light, i.e. when sentiment was overly bearish and the market was much oversold, instead of getting that final washout/capitulation we get this gap and run short covering rallies that end up ultimately fizzling out putting the market back in the same situation a month or 2 later.
Maybe one of these short covering gap and go rallies will be the spark to "real buying" and maybe I'm making too much out of this "market action" fixation. Perhaps, but it has served me very well over the years.
ST we are well overbought now which argues for at least a decent pullback coming. But when bears get trapped badly like this, most times such a pullback doesn't come instantly which argues for choppy action for a least a few days. But hey, your guess is at good as mine.
This broad market is too casino-like for me right now which is why I've been sticking with the micro/small caps that are trading in their own little world. I realize however that it's still important to pay attention to the broad market because in the event of a massive meltdown such as in 2008 very few stocks trade in their own little world anymore....it becomes one big world...of hell. Since I believe the market may be vulnerable to another decline sometime down the road but not another meltdown, I'm confident enough to play these fairly non-market correlated micro/small caps.
I'm waiting for the opportunity to play some aggressive LT call options on the major indicies and names that have high beta when I believe we have seen the final bottom. In the meantime I will stick to non-correlated micro/small caps and ST trading positions (only if there's near perfect set ups for the latter).
Friday, September 3, 2010
Worst trader in the world back in the game!
He's back! Remember I told you about this guy a few months ago and how practically every move he makes is wrong? Well, after blowing out his entire $300K account and swearing off trading forever he scraped together a a couple thousand to trade again. He bought SPY puts yesterday....no wonder the market gapped up huge lol! I'm watching him and the market for signs of reversing.
Thursday, September 2, 2010
Once again poor upside action
The title of this post is an oxymoron isn't it? I mean, how can an up day be considered poor action? Well, I'm not going to explain again in detail but in a nutshell any major upside that is done primarily via upside gap action is not sustainable because it smacks of emotional panic buying from short sellers as opposed to “legitimate" buying from strong holding longs. Such action is typically what you see in bear markets. Once the panic buying is exhausted from the weak shorts more often than not, back down she goes. Sometimes it could take a few weeks for this pan out sometimes a few days or less...it's very tricky.
Let's take a look at what the reasons for this latest pop is....quite frankly they are weak. Wednesday's gap up was apparently due to strength in economic figures out of Asia....ummm what does that have to do with the US? It's the US that drives Asia not the other way around. When we got that gap up, it was tempting to fade but something was telling me "this is almost too easy to fade". Good thing I stepped aside. Then we saw something that I don't think I've ever seen....a gap up within a gap up! The ISM number was "better than expected". How much better than expected? Not much, but I'm quite sure a lot of traders were bracing for a bad number and shorted the morning gap ahead of the ISM release at 10 am anticipating a gap fill and once this "better than expected" number came out they got torn a new one as they everyone hit the panic buy button at the same time.
So, what's today's excuse for the rally? I'm not really sure I know. I suppose it's because the data came in at around expectations which is like an upside surprise because traders were probably bracing again for bad news. Now the market is back to ST overbought on some measures. Man, I gotta tell you, this is the most traitorous tape I've seen in a long time and unless I see a really good ST risk/reward sets up I'm sticking with my small/micro cap plays on the TSX and TSXV which aren't moving in lockstep with the market.
So, all in all, the strength we've seen these past 2 days is because the data wasn't as bad as everyone feared and shorts were caught pressing with their pants down.
I will not trust this gap up action as being sustainable even with the sentiment indicators as favorable to the bulls as they are. Like July, you can still get good multi-week rallies with "poor market action" to clean out weak bears when sentiment gets highly bearish but you have to keep one foot out the door because such rallies are likely to be retraced once this artificial buying is exhausted. Again, sometimes these rallies last for weeks sometimes just a few days. Tough to tell which.
Nobody said this game was easy...
If we see a gap up tommorow, that would probably be the one to fade
Let's take a look at what the reasons for this latest pop is....quite frankly they are weak. Wednesday's gap up was apparently due to strength in economic figures out of Asia....ummm what does that have to do with the US? It's the US that drives Asia not the other way around. When we got that gap up, it was tempting to fade but something was telling me "this is almost too easy to fade". Good thing I stepped aside. Then we saw something that I don't think I've ever seen....a gap up within a gap up! The ISM number was "better than expected". How much better than expected? Not much, but I'm quite sure a lot of traders were bracing for a bad number and shorted the morning gap ahead of the ISM release at 10 am anticipating a gap fill and once this "better than expected" number came out they got torn a new one as they everyone hit the panic buy button at the same time.
So, what's today's excuse for the rally? I'm not really sure I know. I suppose it's because the data came in at around expectations which is like an upside surprise because traders were probably bracing again for bad news. Now the market is back to ST overbought on some measures. Man, I gotta tell you, this is the most traitorous tape I've seen in a long time and unless I see a really good ST risk/reward sets up I'm sticking with my small/micro cap plays on the TSX and TSXV which aren't moving in lockstep with the market.
So, all in all, the strength we've seen these past 2 days is because the data wasn't as bad as everyone feared and shorts were caught pressing with their pants down.
I will not trust this gap up action as being sustainable even with the sentiment indicators as favorable to the bulls as they are. Like July, you can still get good multi-week rallies with "poor market action" to clean out weak bears when sentiment gets highly bearish but you have to keep one foot out the door because such rallies are likely to be retraced once this artificial buying is exhausted. Again, sometimes these rallies last for weeks sometimes just a few days. Tough to tell which.
Nobody said this game was easy...
If we see a gap up tommorow, that would probably be the one to fade
Wednesday, September 1, 2010
Things are lining up but we aren't quite there yet
The market has acted rather poorly following Friday's ramp. Despite all the bullish contrary indicators it trades heavy and has the feel that it wants to go lower still. I mentioned in my prior post some of the nagging doubts I had about the final bottom being in. Again, I respect the notion that we can make a bottom right here and now because we are seeing some rare extremes in sentiment indictors but the market isn't confirming the bullish case right now.
Based upon what I see out there, bulls out there like Cramer are feeling very frustrated and hopeless. Trader types are shrinking their holding periods more and more as headlines are dominating the action. These 2 notions are telling me that the buy and hold strategy is going to come back into favor soon and we are close to hitting a LT bottom. Yup you heard me buy and hold is going to be the right way to go soon! Does it make you sick to your stomach to consider buying and holding right now? If the answer is yes then it means that odds are high it's the right thing to do! I find that the queasier I feel when taking a position the higher the odds of me being right. Anytime I've made a trade or comment about the market and felt completely comfortable it tends to be wrong! Does this not happen to you?
This atmosphere of hopelessness and gloom right now reminds me a lot of early 2009 whereby the market was making its final sell-off of the bear market. If you bought stocks starting in February of 2009 you would have felt pain for about a month but it ended up working very well if you held. That's kind of where I see us right now. If you put a gun to my head I think we will get one last push lower to the July lows or even lower, then at that point I think the market is going to make a solid bottom. Do we do this now or after a big bounce? That's tough to answer. This is a very, very tricky tape with so much noise action in both direction but I think we will indeed see a flush towards the July low.
My plan of action is to selectively build long positions with minimally market correlated equities as an "out" in case the market does make a final cathartic sell-off. I will also attempt to play this downside flush that I think is going to happen. I stress the word attempt because I'm mindful of the upside potential and the noise of the tape. If in doubt I will stand aside.
No matter what the market does, my number one investment of all time that I will never sell is this
Based upon what I see out there, bulls out there like Cramer are feeling very frustrated and hopeless. Trader types are shrinking their holding periods more and more as headlines are dominating the action. These 2 notions are telling me that the buy and hold strategy is going to come back into favor soon and we are close to hitting a LT bottom. Yup you heard me buy and hold is going to be the right way to go soon! Does it make you sick to your stomach to consider buying and holding right now? If the answer is yes then it means that odds are high it's the right thing to do! I find that the queasier I feel when taking a position the higher the odds of me being right. Anytime I've made a trade or comment about the market and felt completely comfortable it tends to be wrong! Does this not happen to you?
This atmosphere of hopelessness and gloom right now reminds me a lot of early 2009 whereby the market was making its final sell-off of the bear market. If you bought stocks starting in February of 2009 you would have felt pain for about a month but it ended up working very well if you held. That's kind of where I see us right now. If you put a gun to my head I think we will get one last push lower to the July lows or even lower, then at that point I think the market is going to make a solid bottom. Do we do this now or after a big bounce? That's tough to answer. This is a very, very tricky tape with so much noise action in both direction but I think we will indeed see a flush towards the July low.
My plan of action is to selectively build long positions with minimally market correlated equities as an "out" in case the market does make a final cathartic sell-off. I will also attempt to play this downside flush that I think is going to happen. I stress the word attempt because I'm mindful of the upside potential and the noise of the tape. If in doubt I will stand aside.
No matter what the market does, my number one investment of all time that I will never sell is this
Subscribe to:
Posts (Atom)