I can't believe 2011 is already half over...where does the time go? Overall the market has acted pretty much in line with how I've been expecting it to this year. If not for this latest flurry this week, the market would have closed the first six months around flat YTD. Now, we all know the supposed reasons for the market's volatility since May and some of them are valid ones, but let's take a step back and look at the long term chart. Coming into the year we had a massive move from September and the market got quite overbought on several measures and even despite this, the market still climbed a bit more before finally stalling out. That's not unusual for a bull market but history shows that sooner or later such a strong move is followed by a drawn out consolidation phase and so it doesn't matter what the excuses are. A sprinter can't run at 100 miles/hr forever....sooner or later he's going to stop out of exhaustion but it doesn't necessarily mean that the sprinter can't run anymore...it could very well be that he just needs a break.
Although I expected to see a consolidation phase I didn't dare try to profit from it because I knew the timing would be tricky and man was it ever. Top pickers got steam rolled again and again this year. Until recently I maintained all of my core long positions which were almost entirely in energy services names. They did quite well for me this year largely outperforming the market. I have now scaled back these holdings overall by 50%. My sale of esn.to looks a bit hasty right now as the stock has popped 10% since I sold out. Isc.vn which I reduced, has climbed a few cents more from where I sold. But despite this, I've been having a decent year so far. I realize though that the half time score means nothing...only the score at the end of the game matters.
Mr. Market must have read my previous bearishly slanted post and decided to teach me a lesson because since then the market has taken a hefty dose of viagra and got one hell of a boner. An anonymous poster
may have been trying to rub it in too in the comment section. Hey, it won't be first time I get it wrong but in my defense, my bearish rant pertained to the IT as in 2-6 months not 2-6 days. The market was certainty oversold enough to warrant a bounce, but if you look at how this bounce has been playing out, it's been done almost exclusively via morning strength which to me is the hallmark of short squeeze/dead cat bounce behavior within a downtrend similar to what we saw last summer. Look back to the 2004 consolidation. The first move down in the market during that time was about 6% from the peak, then there was a snap back rally that recovered about 80% of that drop. Ultimately the market headed down again and dropped 10% from the high. I'm not saying I expect to see every wiggle to play out the same as it did in 2004, I'm just saying that in consolidation phases, it's normal to see volatility like this to make it tricky for the bears to capitalize and it's seldom a straight line down to the final destination. When the market dropped in March due to Japan I said that I didn't think this was the beginning of the "real correction". I feel the same about this latest rally....I don't think it's the beginning of the "real rally" that powers the market out of this corrective phase.
I think we need to see a bit of a "reset" here to fill up the bullish gas tank. We need to see oil back in the 80's, the VIX above 30 and the 10 year sub 3%. Near the recent lows in the market we were getting there but didn't make it. Now we already have oil back to $95, the VIX at 16 and the 10 year back to 3.2%. Now, I know I need to be careful not to be dogmatic about my thinking like the permabears out there who insist that they are right and that the market has to do what they tell it to do (and then get run over big time as the market doesn't listen to them). There's no law that says the market has to do what I want it to before it makes substantial new highs which is why I am going to pay close attention to market action. The market tends to act a certain way when it's in bull mode or corrective/bear mode. As I alluded to earlier, upside action in corrective/bear mode tends to be done via morning strength...not always but often.... whereas in bull mode the market tends to start off timid and then finishes strongly...again not always but often.
So, right now I'm sitting here with a hefty amount of cash like I did last summer. I suspect I'm going to be pretty much a spectator for while. I'm still holding some longs but I would be inclined to lighten up further on strength. I get very tempted to play ST trades when I'm in such a situation out of boredom or the desire to do something with the cash. This is a no- no. A lot of traders/investors out there feel they have to make a certain amount of gains every week/month. When you try to "force" the market like this it will usually backfire on you. Last summer I had the World Cup and the birth of my daughter to distract me. This time around I have no such distraction...perhaps I'll take up gardening. What I have been doing is scanning the smallcap/microcap universe for new candidates to add to my portfolio. I've some up with a few interesting plays so far...when I'm done I'll post them.
I've had a sweet ride since September and so if it turns out I was too hasty scaling back my long exposure to over 2/3 cash then so be it. If I still felt I had the wind at my back I would have continued to hang in there but I just don't feel that way anymore and so I can't be a strong holder nor do I want to end up a pig that gets slaughtered....I was sitting on some hefty gains. I also don't want to stay bearish/neutral too long either because it feels mighty crowded in that room. Perhaps Mr. Market will punish me for my lack of courage to stay long....it won't be the first time that's for sure.
Thursday, June 30, 2011
Monday, June 27, 2011
Deep thoughts
There's a lot on my mind so buckle up...this is going to be a long post. Readers of this blog know my LT bullish stance on the market and by LT I'm talking about the up cycle that began in March 2009 which I believe has yet to run it's course. Coming into the year I said to expect to see a consolidation phase and so far this is what looks to be playing out here. The US markets are pretty much flat for the year while the TSX is actually down 4%. But could this be more than a consolidation? Now, let me call a spade a spade. There's clearly a change in character in the market. The downside we've been seeing since the market peaked in May feels a lot different than the dips before that. It's been gradual, yet relentless. Anytime the market hits ST overbought readings it handles them poorly by falling apart quickly. This is not like the action we saw from September to May whereby any downside was sharp but rather quickly recovered and ST overbought readings were often handled well by the market by going sideways for a few days as opposed to falling apart like it has been doing lately. So, what does this mean? It means that the market is either in full blown correction mode or bear mode. Last summer we saw similar action. Even as a bull you must respect this change in character. It means that you have to be on the defensive now and only cherry pick the best of any long opportunity that you see out there while keeping a heft cash reserve until you see the "whites of their eyes" type of despair and a fully sold out market that would mark a bottom. We are seeing lots of doom and gloom out there no doubt, but we haven't seen panic and I think that's what's missing here. Just look at the VIX....it's still too low to indicate we've seen some sort of crescendo in fear.
I said it before, I think the market is going to break well known support levels and moving averages, in particular, the 200 DMA to flush out the last remaining weak holders and truly convince a lot of people the LT trend has changed to bull to bear. Remember, most people out there are traders now....they no longer believe in buy and hold (which ironically has been the best strategy to go by) so therefore, in order to make fools out of as many men as possible, Mr. Market is probably going to target the traders and their indicators. He's been doing it all throughout this bull run so far.
Now on to crude. I've been thinking a lot about it lately. The IEA's release of oil into the market is a drop in the bucket but the fact that it caused such a large drop in crude could mean 1 of 2 things. Either it's just a knee jerk reaction or there is large underlying weakness in the oil price i.e. it was heading down anyway and so any kind of bearish news like this simply accelerated the inevitable downside. It could be a bit of both but I think the latter has more to do with it. There was a ton of hot money in the form of long futures positions that chased oil earlier this year when it broke above $90. This net long position in crude is unwinding putting pressure on the price and it's still quite large. With the IT trend now decisively down for oil coupled with soft economic data we've been seeing, these liquidations are likely to continue. It's seems quite unlikely to me that this downdraft in crude will end for good until this large net long position substantially shrinks. You argue peak oil all you want...the motto of this blog takes precedent every time in my book.
There's been rumblings out there for Washington to restrict speculation in key commodities like oil for quite some time but the rumblings seem to be getting louder after oil spiked to over $100. Now that the economy is in need of further stimulus and there seems to be no other options left, what better way to do so than to try to bring down the price of oil by chasing out the speculators which would drive down the price.... and dong so wouldn't cost the government anything. Now, some people might be thinking "great, more government intervention" but to this I would say who's really intervening here? Do you think that crude oil futures speculators are adding value to the economy? Some of them are indeed needed to take the other side of the trade from hedgers such as oil producers, but thanks to the proliferation of CTA pools and hedge funds there's a lot of money flowing into commodities speculation..oh sorry I guess the proper term is "investment demand. These hot money flows are probably distorting what the price would be under more "normal" circumstances. I say probably because I know there's arguments for and against this distortion in commodities actually being true. Well, it just seems logical to me that if you have a billions of dollars worth of net long positions in any asset class, the price has to be higher then what it would be if that money wasn't there. Anyhow, the bottom line is that if the government would enact higher margin requirements for oil or some other method to choke off speculators, the price would likely drop sharply. When we see the hot money get chased out of the oil (through government action or just on it's own) the price of oil will drop further and we will see what the "real" price is. I think this would be a benefit to all. Oil producers know that too high a price is not in their best interest LT because it could harm the economy leading to a price bust (I'm not so sure though what would be the "economy choking price" of oil). Most would be happy to see oil in between $75-$90. I'm sure because that's the price where it would be not too hot and not too cold.
For me personally, I would be in favor of the government stepping into raise margin requirements for crude or somehow limit the hot money flows into them...not because I hate capitalism and I'm rooting for the government to keep up it's stimulus measures but because I believe there should be limitations in the speculation of commodities that are essential for everyone. Actually, I'm in favor for government restrictions to all forms of speculation....and I said restrictions, not elimination. Excessive speculation in any part of the financial market creates consequences for everyone either directly (like with oil which everyone uses) or indirectly (like the tech bubble bursting...not everyone bought tech stocks but the tech fallout tanked the economy which did effect everyone).
The bottom line as far as crude oil prices go is that they are vulnerable here for both financial and potential regulatory reasons. A further fall in the oil price would take away the drag of high energy price in the economy. More importantly, it creates falling inflation which would then result is China ending their tightening campaign. When the market starts to sniff out that China is just about done, it could be the eventual catalyst that powers the market to new highs. We'll just have to see what happens now won't we? For me personally, since I'm bearish on oil in the IT, I have been further reducing my energy services position and look to lighten up further on strength.
I realize that my words and actions have been quite an "about face" from what I was saying and doing before. Well, that's the way I roll. When I sense change in the market or no longer have confidence in my thesis, I will act swiftly and take swift action. I have no ego to protect nor do I have any loyalty to any of my positions or any particular side of the market. I have no problems going from super bull to a super bear or vice versa because if that's what the market suggests I do, then I should do it. Right now I feel the same way I did last year at this time which was LT bullish but IT term cautious/neutral. Although I'm bullish LT, I have a "show me" attitude towards it because the burden of proof is now on the bulls. This correction will likely be just that...a correction but I don't want be left holding the bag with a high exposure to equities (especially the way I was with energy services) if it turns out to be more than just a correction. My strategy is to wait until mostly in cash until I see either a truly sold out market with an extreme in bearish sentiment across the board or the market acting like a bull market again.
I said it before, I think the market is going to break well known support levels and moving averages, in particular, the 200 DMA to flush out the last remaining weak holders and truly convince a lot of people the LT trend has changed to bull to bear. Remember, most people out there are traders now....they no longer believe in buy and hold (which ironically has been the best strategy to go by) so therefore, in order to make fools out of as many men as possible, Mr. Market is probably going to target the traders and their indicators. He's been doing it all throughout this bull run so far.
Now on to crude. I've been thinking a lot about it lately. The IEA's release of oil into the market is a drop in the bucket but the fact that it caused such a large drop in crude could mean 1 of 2 things. Either it's just a knee jerk reaction or there is large underlying weakness in the oil price i.e. it was heading down anyway and so any kind of bearish news like this simply accelerated the inevitable downside. It could be a bit of both but I think the latter has more to do with it. There was a ton of hot money in the form of long futures positions that chased oil earlier this year when it broke above $90. This net long position in crude is unwinding putting pressure on the price and it's still quite large. With the IT trend now decisively down for oil coupled with soft economic data we've been seeing, these liquidations are likely to continue. It's seems quite unlikely to me that this downdraft in crude will end for good until this large net long position substantially shrinks. You argue peak oil all you want...the motto of this blog takes precedent every time in my book.
There's been rumblings out there for Washington to restrict speculation in key commodities like oil for quite some time but the rumblings seem to be getting louder after oil spiked to over $100. Now that the economy is in need of further stimulus and there seems to be no other options left, what better way to do so than to try to bring down the price of oil by chasing out the speculators which would drive down the price.... and dong so wouldn't cost the government anything. Now, some people might be thinking "great, more government intervention" but to this I would say who's really intervening here? Do you think that crude oil futures speculators are adding value to the economy? Some of them are indeed needed to take the other side of the trade from hedgers such as oil producers, but thanks to the proliferation of CTA pools and hedge funds there's a lot of money flowing into commodities speculation..oh sorry I guess the proper term is "investment demand. These hot money flows are probably distorting what the price would be under more "normal" circumstances. I say probably because I know there's arguments for and against this distortion in commodities actually being true. Well, it just seems logical to me that if you have a billions of dollars worth of net long positions in any asset class, the price has to be higher then what it would be if that money wasn't there. Anyhow, the bottom line is that if the government would enact higher margin requirements for oil or some other method to choke off speculators, the price would likely drop sharply. When we see the hot money get chased out of the oil (through government action or just on it's own) the price of oil will drop further and we will see what the "real" price is. I think this would be a benefit to all. Oil producers know that too high a price is not in their best interest LT because it could harm the economy leading to a price bust (I'm not so sure though what would be the "economy choking price" of oil). Most would be happy to see oil in between $75-$90. I'm sure because that's the price where it would be not too hot and not too cold.
For me personally, I would be in favor of the government stepping into raise margin requirements for crude or somehow limit the hot money flows into them...not because I hate capitalism and I'm rooting for the government to keep up it's stimulus measures but because I believe there should be limitations in the speculation of commodities that are essential for everyone. Actually, I'm in favor for government restrictions to all forms of speculation....and I said restrictions, not elimination. Excessive speculation in any part of the financial market creates consequences for everyone either directly (like with oil which everyone uses) or indirectly (like the tech bubble bursting...not everyone bought tech stocks but the tech fallout tanked the economy which did effect everyone).
The bottom line as far as crude oil prices go is that they are vulnerable here for both financial and potential regulatory reasons. A further fall in the oil price would take away the drag of high energy price in the economy. More importantly, it creates falling inflation which would then result is China ending their tightening campaign. When the market starts to sniff out that China is just about done, it could be the eventual catalyst that powers the market to new highs. We'll just have to see what happens now won't we? For me personally, since I'm bearish on oil in the IT, I have been further reducing my energy services position and look to lighten up further on strength.
I realize that my words and actions have been quite an "about face" from what I was saying and doing before. Well, that's the way I roll. When I sense change in the market or no longer have confidence in my thesis, I will act swiftly and take swift action. I have no ego to protect nor do I have any loyalty to any of my positions or any particular side of the market. I have no problems going from super bull to a super bear or vice versa because if that's what the market suggests I do, then I should do it. Right now I feel the same way I did last year at this time which was LT bullish but IT term cautious/neutral. Although I'm bullish LT, I have a "show me" attitude towards it because the burden of proof is now on the bulls. This correction will likely be just that...a correction but I don't want be left holding the bag with a high exposure to equities (especially the way I was with energy services) if it turns out to be more than just a correction. My strategy is to wait until mostly in cash until I see either a truly sold out market with an extreme in bearish sentiment across the board or the market acting like a bull market again.
Thursday, June 23, 2011
Taking swift action
The IEA announced that it was going to release oil from it's reserve and that coupled with weak unemployment claims data was enough to send oil down as much as $5 to about $90/barrel before recovering a bit. I've been overweight energy services big time since last fall and today I did some major trimming to that position. Most of the stock I own in that space are small/micro cap and overall have held up well considering the damage done to the market thanks in large part to my biggest holding isc.vn. Amazingly, it actually has been climbing making new 52 week highs despite the correction in the market and the falling oil price to which it is levered to. I took 1/3 of my position off the table this morning. I consider myself quite fortunate that my largest holding has held up so well like this and quite frankly, I don't see how the stock can sustain such high levels in the short run given that it's peers have been trading down along with a backdrop of weak oil prices and weak stock markets, but hey, I would love to be wrong! I also got stopped out of my position in esn.to which was formerly tec.to (tec.to merged with esn and I got shares of esn plus cash this week). Given that I wasn't really all that thrilled about esn to begin with, it made me a weak holder. But all in all, I still made out well with that one given my original cost of tec.to and the cash given to me as part of the merger.
The key to surviving a correction if your a long term bull is to be a strong holder. I simply could no longer be a strong holder with my energy services holdings given the size of my position relative to my portfolio and the conditions of the markets, in particular the oil price making new lows.... so I sold to the point where I can now indeed be a strong holder.
I said before that these oil service companies can still do well with oil prices at current levels and even in the $80's. However, the trend is now down for oil and it remains to be seen whether the price will indeed find a floor in the $80's or $90's. Although I believe this will happen, I have to respect the downtrend which means there's no justification pressing with an overweight position....you press positions when the wind is at your back not when it's against you. Plus, when you are dealing with small/micro caps, liquidity can dry up quickly if things head south in a hurry and so you need to get out when the getting is good if you feel you are too exposed and I did that with isc.vn. If when the dust settles, the oil price can establish a bottom in the the $80's or $90's then I would be inclined to add back what I sold. Also, if isc.vn and esn.to end up rocketing higher now that I sold, I'm not going to be kicking myself. I know I did the right thing. It's not as if I was chicken shitting here....I had about 50% of my portfolio in energy services at one point this year concentrated in 3 small cap names. Now it's down to about 30% after these recent sales. My cash reserve is now up to 60%.
Having a more comfortable exposure to the market also makes me better able to look at the market more objectively. When you feel you are over exposed and you are caught in a downdraft you can easily slip into the "deer in the headlights" mode of thinking and then what ends up happening is that your emotions take over and you end up capitulating near the worst possible time.
Right now I'm researching a list of new names that I want to add to my portfolio. If you see some good long opportunities and are able to be strong holder then by all means, do some picking....just be aware that this correction/consolidation could drag on for months even if we see get some sort of bottom in the coming days/weeks.
In the 2004 consolidation, the market dropped as much as 10% from the high. That would give us a downside target of about 1233 on the SPX which could very well be hit before the summer is over....not necessarily on this slide but in due time. A 10% correction is not the end of the world or the bull market. Again, I must stress how far we have come since September alone. 1233 would put us where we were in mid December and back then the market was overbought on several measures and everyone was in awe as to how far it had gone up. If we hit 1233 now, the situation would be a lot different wouldn't it? The market would be well oversold and it would really flush out the weak holders as more trend lines and moving averages get violated. Investors/traders would be hiding underneath their desks bracing for the worst and pessimism would probably hit multi-year extremes. That would be the sort of situation that marks a final low. We'll just see how this plays out....and don't ever get fixated on price targets like 1233. There's no law that says the market has to drop exactly to that point or exactly 9%, 8% or whatever. Leave that dogmatic thinking to the loser elliot wavers
The key to surviving a correction if your a long term bull is to be a strong holder. I simply could no longer be a strong holder with my energy services holdings given the size of my position relative to my portfolio and the conditions of the markets, in particular the oil price making new lows.... so I sold to the point where I can now indeed be a strong holder.
I said before that these oil service companies can still do well with oil prices at current levels and even in the $80's. However, the trend is now down for oil and it remains to be seen whether the price will indeed find a floor in the $80's or $90's. Although I believe this will happen, I have to respect the downtrend which means there's no justification pressing with an overweight position....you press positions when the wind is at your back not when it's against you. Plus, when you are dealing with small/micro caps, liquidity can dry up quickly if things head south in a hurry and so you need to get out when the getting is good if you feel you are too exposed and I did that with isc.vn. If when the dust settles, the oil price can establish a bottom in the the $80's or $90's then I would be inclined to add back what I sold. Also, if isc.vn and esn.to end up rocketing higher now that I sold, I'm not going to be kicking myself. I know I did the right thing. It's not as if I was chicken shitting here....I had about 50% of my portfolio in energy services at one point this year concentrated in 3 small cap names. Now it's down to about 30% after these recent sales. My cash reserve is now up to 60%.
Having a more comfortable exposure to the market also makes me better able to look at the market more objectively. When you feel you are over exposed and you are caught in a downdraft you can easily slip into the "deer in the headlights" mode of thinking and then what ends up happening is that your emotions take over and you end up capitulating near the worst possible time.
Right now I'm researching a list of new names that I want to add to my portfolio. If you see some good long opportunities and are able to be strong holder then by all means, do some picking....just be aware that this correction/consolidation could drag on for months even if we see get some sort of bottom in the coming days/weeks.
In the 2004 consolidation, the market dropped as much as 10% from the high. That would give us a downside target of about 1233 on the SPX which could very well be hit before the summer is over....not necessarily on this slide but in due time. A 10% correction is not the end of the world or the bull market. Again, I must stress how far we have come since September alone. 1233 would put us where we were in mid December and back then the market was overbought on several measures and everyone was in awe as to how far it had gone up. If we hit 1233 now, the situation would be a lot different wouldn't it? The market would be well oversold and it would really flush out the weak holders as more trend lines and moving averages get violated. Investors/traders would be hiding underneath their desks bracing for the worst and pessimism would probably hit multi-year extremes. That would be the sort of situation that marks a final low. We'll just see how this plays out....and don't ever get fixated on price targets like 1233. There's no law that says the market has to drop exactly to that point or exactly 9%, 8% or whatever. Leave that dogmatic thinking to the loser elliot wavers
Wednesday, June 22, 2011
Fake salmon
There's no shortage of drama in the market right now. Here in Canada, the collapse of Sino Forest and RIMM have been dominating the financial news. Famous hedge fund manager John Paulson who made a fortune betting against subprime in 2007 has been taking a licking this year due to his holding in Sino Forest as well as financials such as Bank of America and Citigroup. He also made a large bet on Hewlet Packard which has also been a dud so far.
Then there's RIMM. It wasn't too long ago when analysts and pundits were bullish on RIMM because of it's cheaper valuation vs Apple along with the introduction of playbook to act as an upside catalyst. Turns out playbook ended up being downside catalyst because of it's problems along with RIMM's continuing eroding market share of the smart phone market. RIMM lowered guidance yet again and now with the stock being down about 60% in just a few months, when even my grandmother is aware of the problems facing RIMM, all the pundits and gurus that come on TV hate the stock and call it a value trap and say you should sell or avoid it. Gee, thanks for the advice fuckfaces and no, I don't or ever have owned RIMM.
My point here is that you have to be your own guru. I've said in the past a few times. No matter how great some guru has been in the past, he/she can easily be a goat the next day. Amateurs learned the hard way worshiping the words of Roubini, Prechter and the permabear crowd who earned fame calling the crash. Now you can add Paulson to the list of gurus turned goat.
Remember folks, these people are just human and humans are imperfect beings who make mistakes and can get blinded by ego and bias no matter how smart they appear to be. Some of these gurus like Pretcher are just clowns who were broken clocks that finally got it right....you should do your homework on the track record of these guys....you'll find that many are less than enviable. Also, making a bet or a call on the market requires some luck as well because the future can't be predicted with certainty. The best you can do is size up the odds correctly and so if you make a bet with odds 80% in your favor you can still get it wrong and lose money even though you were correct in making the bet....this is just like in poker when you have someone dominated with AA vs 10,10 but still end up losing.
YOU MUST BE YOUR OWN GURU. Learn from others who have had success but take what you learn and incorporate into your own thinking. You must also have the confidence in yourself to disagree and bet against someone you respect if you have good reason to feel this way. For anyone who reads these pages and considers me one of those people, it applies to me as well.
Now, onto something totally different. I want to share a little story. Today my wife asked me to pick up some salmon at my mom's house that she had saved in the freezer. So I picked up what I thought was the salmon and gave it to my wife. My wife took out the salmon, let it thaw for a bit and then noticed something odd. My mom had told her that the salmon was marinated but it appeared not to be and so she marinated it herself. She also noticed the texture was unusual. After grilling the salmon on the BBQ my wife sliced into it to discovered it was rather tough for salmon... and then before she even tasted it, she realized what was going on....it was chicken! "I knew something was wrong! And why didn't I realize that it had no fish smell?!" she said.
Can you see where I'm going to go with this? Our biases and predispositions can cause us to fail to see things for what they really are when it's normally so obvious. My wife was suspicious about the "salmon" that I had brought home right from the beginning but she was made to believe that it was indeed salmon and so she ignored her observations that something was fishy (bad pun). Had she been given the package without any suggestion as to what it was, she probably would have realized it was chicken right from the get go.
This sort of thing happens with investors and traders all the time when the market changes mode from bull to bear and vice versa. Take the situation when a bear trend had been in place for quite some time but then heads in the opposite direction for several months. What will typically happen is that news headlines and popular financial media are still suggesting that the bear trend is still in place or that the new uptrend is just a "phony" interlude destined to failure at any moment. Meanwhile the market continues to go up and up and up for months and months on end until it becomes painfully obvious that the trend had indeed changed! In hindsight the masses then realize how foolish they were for failing to see how the market had changed when all along it was yelling and screaming that it had. This is what happens when you trade with either bias, bitterness or ignorance. Is it possible to truly be free of these flaws and see the market for what it really is? I don't know...but you better do your best to do so or you will get punished in due time.
Then there's RIMM. It wasn't too long ago when analysts and pundits were bullish on RIMM because of it's cheaper valuation vs Apple along with the introduction of playbook to act as an upside catalyst. Turns out playbook ended up being downside catalyst because of it's problems along with RIMM's continuing eroding market share of the smart phone market. RIMM lowered guidance yet again and now with the stock being down about 60% in just a few months, when even my grandmother is aware of the problems facing RIMM, all the pundits and gurus that come on TV hate the stock and call it a value trap and say you should sell or avoid it. Gee, thanks for the advice fuckfaces and no, I don't or ever have owned RIMM.
My point here is that you have to be your own guru. I've said in the past a few times. No matter how great some guru has been in the past, he/she can easily be a goat the next day. Amateurs learned the hard way worshiping the words of Roubini, Prechter and the permabear crowd who earned fame calling the crash. Now you can add Paulson to the list of gurus turned goat.
Remember folks, these people are just human and humans are imperfect beings who make mistakes and can get blinded by ego and bias no matter how smart they appear to be. Some of these gurus like Pretcher are just clowns who were broken clocks that finally got it right....you should do your homework on the track record of these guys....you'll find that many are less than enviable. Also, making a bet or a call on the market requires some luck as well because the future can't be predicted with certainty. The best you can do is size up the odds correctly and so if you make a bet with odds 80% in your favor you can still get it wrong and lose money even though you were correct in making the bet....this is just like in poker when you have someone dominated with AA vs 10,10 but still end up losing.
YOU MUST BE YOUR OWN GURU. Learn from others who have had success but take what you learn and incorporate into your own thinking. You must also have the confidence in yourself to disagree and bet against someone you respect if you have good reason to feel this way. For anyone who reads these pages and considers me one of those people, it applies to me as well.
Now, onto something totally different. I want to share a little story. Today my wife asked me to pick up some salmon at my mom's house that she had saved in the freezer. So I picked up what I thought was the salmon and gave it to my wife. My wife took out the salmon, let it thaw for a bit and then noticed something odd. My mom had told her that the salmon was marinated but it appeared not to be and so she marinated it herself. She also noticed the texture was unusual. After grilling the salmon on the BBQ my wife sliced into it to discovered it was rather tough for salmon... and then before she even tasted it, she realized what was going on....it was chicken! "I knew something was wrong! And why didn't I realize that it had no fish smell?!" she said.
Can you see where I'm going to go with this? Our biases and predispositions can cause us to fail to see things for what they really are when it's normally so obvious. My wife was suspicious about the "salmon" that I had brought home right from the beginning but she was made to believe that it was indeed salmon and so she ignored her observations that something was fishy (bad pun). Had she been given the package without any suggestion as to what it was, she probably would have realized it was chicken right from the get go.
This sort of thing happens with investors and traders all the time when the market changes mode from bull to bear and vice versa. Take the situation when a bear trend had been in place for quite some time but then heads in the opposite direction for several months. What will typically happen is that news headlines and popular financial media are still suggesting that the bear trend is still in place or that the new uptrend is just a "phony" interlude destined to failure at any moment. Meanwhile the market continues to go up and up and up for months and months on end until it becomes painfully obvious that the trend had indeed changed! In hindsight the masses then realize how foolish they were for failing to see how the market had changed when all along it was yelling and screaming that it had. This is what happens when you trade with either bias, bitterness or ignorance. Is it possible to truly be free of these flaws and see the market for what it really is? I don't know...but you better do your best to do so or you will get punished in due time.
Monday, June 20, 2011
Double dippers comming out of the woodwork again
Is this June 2010 or 2011? The reason I ask is because I'm noticing talk of double dip again in the financial media. Watching "Market call" on BNN one emailer asked the guest "does the market pullback suggest the beginning of a double dip?" And it's not just this emailer who's concerned, it's everywhere. For Christ sake people, the market has dipped about 6% after making a 100% gain in less than 3 years! It wasn't too long ago when people were moaning and groaning about how the market had "gone too far to fast" and now that we get a decent pullback everyone's worried about a double dip. Sure, the data is suggesting a slowdown but let's remember a couple things. A lot of those economic guages like the ISM hit 20-30 year highs earlier in the year and so there's really only one way to go and that's down....but that doesn't doesn't mean it will swing to full blown contraction. It could simply suggest going from 6th gear to 5th or 4th for a while. And how much of this soft patch is due to Japan?
Then there's all this chatter about Greece and the potential for a "Lehman event" which to me tells me it's something not to worry about. Nobody wants another Lehman event and despite all the bickering in the EU , they will eventually do what it takes to avoid a Lehman because memories and fears of 2008 are still fresh. Merkel specifically talked about avoiding a Lehman event.
Do you notice how quickly fear and misery returns to the market? The financial media it seems, is doing whatever it takes to keep you out of the market. They certainty did their part in scaring the shit out of people during the crash trotting out the permabears like Schiff day in and day out with their end of the world forecasts. And did the media help you get bullish during this bull market? Not a chance....they did the opposite. I don't think there's some sort of bear conspiracy in the media...they are just trying to feed off what what people are feeling and since most people are still dour they prefer to talk about all the negatives out there. In the past several months I read so many times in the National post about how Canadians are supposedly dangerously deep in debt and how housing prices are out of control.
Look, I'm just like you. Despite all I've said I too am worried about the things that are happening out there deep down. How can't you after witnessing the financial system suffer a massive heart attack 3 years ago. But that's my emotions talking. My analysis of conditions along with history suggests that this bull market ain't done. This corrective phase we are going through is going to do whatever it takes to shake out weak holders while making longer term bulls sweat bullets. Just like last year, I'm already seeing technical types get shaken out of longs because of such and such trend line or moving average being violated. Last summer I talked about how I read about some technical type guy saying that if the market dropped below some level (I think it was 1050) the bull market from March 2009 would be officially over which did end up happening.. And remember the "death cross" that happen right at the exact bottom of the correction in July last year? Expect to see these sort of things happen again to yet again cause the market to make fools out of the most amount of men as possible. How long could this consolidation phase that I've been calling for all year last? Quite some time...perhaps as long as October or November! Look back to 2004 to see an example as to what we could see play out.
As far as ST action goes. The bulls need a catalyst to get some traction here. Although the VIX has gotten some religion admittedly it's still low here at 22 which suggests there's still decent risk of final downside puke to 1250 or so. Aside from the VIX everything else is in position for some sort of a bottom here. I still haven't put my cash reserve back to work yet but I'm close to doing so and I'm making a list of potential buys. Very fortunately for me, my core longs have held up quite well overall during this correction. I realize however, that this could change very quickly and so I'm getting mentally prepared for this. Don't get too fixated on the ST. If you see some long opportunities and your holding period is longer than 30 minutes go for it with at least a partial position.
Then there's all this chatter about Greece and the potential for a "Lehman event" which to me tells me it's something not to worry about. Nobody wants another Lehman event and despite all the bickering in the EU , they will eventually do what it takes to avoid a Lehman because memories and fears of 2008 are still fresh. Merkel specifically talked about avoiding a Lehman event.
Do you notice how quickly fear and misery returns to the market? The financial media it seems, is doing whatever it takes to keep you out of the market. They certainty did their part in scaring the shit out of people during the crash trotting out the permabears like Schiff day in and day out with their end of the world forecasts. And did the media help you get bullish during this bull market? Not a chance....they did the opposite. I don't think there's some sort of bear conspiracy in the media...they are just trying to feed off what what people are feeling and since most people are still dour they prefer to talk about all the negatives out there. In the past several months I read so many times in the National post about how Canadians are supposedly dangerously deep in debt and how housing prices are out of control.
Look, I'm just like you. Despite all I've said I too am worried about the things that are happening out there deep down. How can't you after witnessing the financial system suffer a massive heart attack 3 years ago. But that's my emotions talking. My analysis of conditions along with history suggests that this bull market ain't done. This corrective phase we are going through is going to do whatever it takes to shake out weak holders while making longer term bulls sweat bullets. Just like last year, I'm already seeing technical types get shaken out of longs because of such and such trend line or moving average being violated. Last summer I talked about how I read about some technical type guy saying that if the market dropped below some level (I think it was 1050) the bull market from March 2009 would be officially over which did end up happening.. And remember the "death cross" that happen right at the exact bottom of the correction in July last year? Expect to see these sort of things happen again to yet again cause the market to make fools out of the most amount of men as possible. How long could this consolidation phase that I've been calling for all year last? Quite some time...perhaps as long as October or November! Look back to 2004 to see an example as to what we could see play out.
As far as ST action goes. The bulls need a catalyst to get some traction here. Although the VIX has gotten some religion admittedly it's still low here at 22 which suggests there's still decent risk of final downside puke to 1250 or so. Aside from the VIX everything else is in position for some sort of a bottom here. I still haven't put my cash reserve back to work yet but I'm close to doing so and I'm making a list of potential buys. Very fortunately for me, my core longs have held up quite well overall during this correction. I realize however, that this could change very quickly and so I'm getting mentally prepared for this. Don't get too fixated on the ST. If you see some long opportunities and your holding period is longer than 30 minutes go for it with at least a partial position.
Friday, June 17, 2011
Sentiment in position for an IT bottom...but more patience likely needed for LT investors
Last time I discussed how indicators were suggesting pessimism was rapidly heading in the right direction needed to establish a bottom but some of them weren't quite at the levels seen at IT lows of the past. Well, that's changed now. The 10 DMA of the put/call ratio is at 1.14 and NAAIM is at 26% pretty much matching what we saw in late May last year after the flash crash.. The VIX is also starting to get some traction and made a mini-spike. So, it's likely were are going to see at least a relief rally very soon. There's still the chance of one more downside spike to say 1250ish but I don't think it would get worse than that.
So does this mean that it's onwards and upwards again if we do put in a bottom around here? Probably not. The situation right now is similar to late May of last year whereby the market made a bottom, rallied nicely but eventually saw that bottom retested and violated (although not by much) later on before the ultimate bottom was put in. This is also similar to what happened during the consolidation of 2004. The market had made 3 bottom attempts before the correction was over for good (check out the chart I posted in Janurary).
So, more patience is likely for LT investors but now is the time to do some picking if you indeed have the patience.
So does this mean that it's onwards and upwards again if we do put in a bottom around here? Probably not. The situation right now is similar to late May of last year whereby the market made a bottom, rallied nicely but eventually saw that bottom retested and violated (although not by much) later on before the ultimate bottom was put in. This is also similar to what happened during the consolidation of 2004. The market had made 3 bottom attempts before the correction was over for good (check out the chart I posted in Janurary).
So, more patience is likely for LT investors but now is the time to do some picking if you indeed have the patience.
Friday, June 10, 2011
Pessimism rapidly building
Ok, so my hunch that a ST move back up didn't pan out and we got a downside resolution instead which I said if happened would be quite limited and put us in a better position for a more sustainable advance. We all know what triggered this latest slide - softer than expected economic data. I won't get too much into that with this post. What I'm going to talk about is feelings....nothing more than feelings....ok that was lame. Well, despite the market being down 5 weeks in a row (and working on 6) since making a 3 year high, the SPX got as much as being about 6.5% off from this peak. When you consider how far the market has risen since September prior to making this peak, never mind since March 2009, such a decline is quite modest and normal in a still ongoing uptrend. But you wouldn't know that by reading the financial media and by what traders and investors are feeling. The gloom is palpable.
Let's say you woke up from a 4 year coma and the first thing you did was pull up a 2 year chart of the market. You would probably not think very much of this latest dip. Not knowing any of the news or not being influenced by any of the legions of permabears that now make up a large part of the herd, you would probably think that the market has been looking pretty damn good and this latest dip doesn't look serious at all. But of course, that's not what the tone is out there. It feels like hopeless despair similar to what you feel in bear markets.
Since the summer of 2009 I've been hypothesizing that this has got to be the most hatest bull market of all time and that the herd never came close to truly embracing it which was a solid indication that the bull market was in fact legitimate and would carry on. Oh sure, there were moments when ST trader types and the little guy showed bullishness but that was quickly extinguished and reversed to pessimism as soon as the market showed any modest weakness....just like now. Any bullishness we see from these guys is due to the "don't fight the tape" line of thinking. Deep down most of these jokers are still bears at heart and are quick to run for the hills when we get a dip. That's why when the tide goes out, you get to see who's truly bullish who is just swimming naked (a variation of what Buffet likes to say). The trading community is full of nudists let me tell you.
Let's take a look at some sentiment measures. AAII sentiment released Thursday shows 2:1 bears vs bulls a reading that is consistent with ST and IT bottoms. We saw the same reading just prior to the massive move that began last September. But we also saw such readings at temporary bottoms in May and June of last year which from a longer term perspective were still good buying opportunities but you had to grit it out for a few months as the market ended up chopping around eventually making modest lower lows before hitting a final bottom.
A new sentiment measure I follow is called The National Association of Active Investment Managers (NAAIM). I like this because it not widely followed and it measures what people are doing with money which counts more in comparison to indicators that measure what people are just "feeling" about the market. NAAIM measures the exposure active manages have they have in the market. It's currently at 43% which is near the levels seen at ST bottoms of the past. A reading in the 20's would be more ideal to mark a longer term bottom though, but it's certainly near the the low end of the range.
Next the 10 DMA moving average of the put/call ratio. It sits at 1.03 which is high enough to warrant a ST bottom. We did see this get as high at 1.16 during last summers correction though.
Then there's the VIX. This is probably the only indicator that strongly supports the bears. It has remained rather muted which has many puzzled including me. I won't try to rationalize this one like some people are trying to. In my view it's not bullish that it remains this low and signals that there could still be one last little downside puke to mark the bottom of this slide (like say a sharp move to 1250 from here) or that if we did get a good rebound now, sometime later on in the summer we will go back to the lows of this move.
So in summary, we could be at or close to a bottom but it's likely not going to be "the" bottom that ends this consolidation phase I've been expecting. Having said that though, this looks very much like a correction and not the start of something more ominous and I don't expect to see the market go down more than 5% from here.
Let's say you woke up from a 4 year coma and the first thing you did was pull up a 2 year chart of the market. You would probably not think very much of this latest dip. Not knowing any of the news or not being influenced by any of the legions of permabears that now make up a large part of the herd, you would probably think that the market has been looking pretty damn good and this latest dip doesn't look serious at all. But of course, that's not what the tone is out there. It feels like hopeless despair similar to what you feel in bear markets.
Since the summer of 2009 I've been hypothesizing that this has got to be the most hatest bull market of all time and that the herd never came close to truly embracing it which was a solid indication that the bull market was in fact legitimate and would carry on. Oh sure, there were moments when ST trader types and the little guy showed bullishness but that was quickly extinguished and reversed to pessimism as soon as the market showed any modest weakness....just like now. Any bullishness we see from these guys is due to the "don't fight the tape" line of thinking. Deep down most of these jokers are still bears at heart and are quick to run for the hills when we get a dip. That's why when the tide goes out, you get to see who's truly bullish who is just swimming naked (a variation of what Buffet likes to say). The trading community is full of nudists let me tell you.
Let's take a look at some sentiment measures. AAII sentiment released Thursday shows 2:1 bears vs bulls a reading that is consistent with ST and IT bottoms. We saw the same reading just prior to the massive move that began last September. But we also saw such readings at temporary bottoms in May and June of last year which from a longer term perspective were still good buying opportunities but you had to grit it out for a few months as the market ended up chopping around eventually making modest lower lows before hitting a final bottom.
A new sentiment measure I follow is called The National Association of Active Investment Managers (NAAIM). I like this because it not widely followed and it measures what people are doing with money which counts more in comparison to indicators that measure what people are just "feeling" about the market. NAAIM measures the exposure active manages have they have in the market. It's currently at 43% which is near the levels seen at ST bottoms of the past. A reading in the 20's would be more ideal to mark a longer term bottom though, but it's certainly near the the low end of the range.
Next the 10 DMA moving average of the put/call ratio. It sits at 1.03 which is high enough to warrant a ST bottom. We did see this get as high at 1.16 during last summers correction though.
Then there's the VIX. This is probably the only indicator that strongly supports the bears. It has remained rather muted which has many puzzled including me. I won't try to rationalize this one like some people are trying to. In my view it's not bullish that it remains this low and signals that there could still be one last little downside puke to mark the bottom of this slide (like say a sharp move to 1250 from here) or that if we did get a good rebound now, sometime later on in the summer we will go back to the lows of this move.
So in summary, we could be at or close to a bottom but it's likely not going to be "the" bottom that ends this consolidation phase I've been expecting. Having said that though, this looks very much like a correction and not the start of something more ominous and I don't expect to see the market go down more than 5% from here.
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