I'm not going to talk about the debt ceiling "crisis" because I'm sick hearing about it....it's all you hear in the media right now. Instead, I'm going to talk about my stock market religion. I've been playing this game for over 12 years and I've heard about dozens of theories and systems that attempt to predict the market. You can find thousands of books about technical analysis, fundamental analysis and everything in between. There's so much information out there and a diversity of opinions that it will make your head spin. Through out it all I have come to realize a few general but important things that have shaped my investments decision making and helped me make money.
1) The purpose of the stock market is to make fools of as many men possible. The stock market cannot be easy to play. If it was, nobody would work "real" jobs which would make the stock market impossible to exist. So, it should come to no surprise that the overwhelming majority of people who play the stock market lose or hardly make much at best. It also means that anytime an indicator, system, guru or a particular outlook on the market becomes popular - no matter how successful in the past - odds are high it will fail/be incorrect.
2) The retail investor and main street media ranks highest as the dumb money. They are the last ones to realize/believe when there's a trend in place. They are ignorant and rely heavily on lagging economic indicators. They form opinions/make decisions based on "after the fact" events failing to realize that the market only cares about what's ahead not what's behind. They are emotional making all of the mistakes you will see in behavioral finance textbooks.
3) Play the big trends/themes and avoid short term trading. The shorter the time frame the more random the market is. Not only that, but big money is made riding the bigger trends. The legends such as Buffet, Templeton and Soros made huge money because they bet on big trends/themes....they didn't trade ST using silly things like fibbonoci retracements and elliot waves. Most people out there who play the market appear to be ST traders and thus losers. These guys are no better than sports gamblers. I'm sure there are a few successful ST traders out there but by far most of them are losers as the stats show.
There's several other things I've learned but the above 3 are the major ones and throughout these pages I've been preaching them. Because of it, I have been a LT bull since the summer of 2009 while media and the popular "gurus" seem to have been doing everything they can to keep you out of the market since that time. I know it's hard to be a LT bull during times like this when there's so many problems but you have to keep in mind that all throughout history the best time to be LT bullish was when there was problems because expectations are so low and there's a lot of buying power on the sidelines. As these problems get resolved or turn out to be less than feared the market rises in response as expectations rise and new money comes in. When's there's no problems out there that's when you should be worried because expectations are high and everyone is pretty much all in. Remember 1999? A "new era economy" with 3% unemployment and government surpluses as far as the eye can see. Of course, everyone loved to invest for the long term back then.
So, what is the message being conveyed now based upon these 3 pillars of wisdom? Much of the same....it suggests the correct position is to still be LT bullish since the doom and gloom is thick as it ever was, retail continues to be skeptical and bitter and yet the stock market is not much off it's bull market high. However, market action of late is no longer in a rising, grinding uptrend like you tend to see in bull markets which is a caution flag but not a red flag because this action is normal during consolidation phases much like how we saw last summer. Some are saying we are seeing bull market topping behavior but I have strong doubts about that... but it warrants to have a wait and see approach here given the sloppy market action.
I see a lot of people out there who are so hooked into the doom and gloom cult permabear cult. I'm quite sure a lot of these people were the same ones who got burned in 2000 by the tech crash or from the crash of 2008 and became bitter ever since. It seems nothing will ever turn them back to being optimistic about anything until they see a complete collapse like in the early 1930s. It's easy to get brainwashed by the permabears especially if you are bitter about losing as a long. They can provide some pretty convincing arguments to feed your bitterness but you have to keep in mind that a lot of these guys have been saying the same shit since the 80's and 90's. They have constantly underestimated or failed to see the impact of new growth industries.. They have constantly underestimated the willingness of the government to step in with aggressive counter cyclical policies during recessions. Lastly, they dogmatically believe that such and such indicator - whether it's p/e ratios, book value or some other measure - has to reach a certain level before the market is a buy. They fail to realize that the goal posts can move or that it can take a few market cycles before their levels are reached.
I know all about the permabears way of thinking. The first time I became LT bearish was from the summer of 2000 to the summer of 2003. At one point I almost became brainwashed like most converts do but I was able to snap out of it by the summer of 2003 when market action was telling me that a new bull market may have began. The market was suggesting to me "new bull market!" while the permabears were telling me to dismiss the move as just a bear market rally. I turned my back to the permabears and bet against them. In hindsight, this was like passing a big test to get to the next major level on the way to becoming a good investor/trader. From that point on, many of the bears I held in high regard were severely downgraded. I still respected some of them though but I came to realize their broken clock, egotistical, dogmatic and inflexibly attitudes. I didn't go from permabear to permabull either. I came to the realization that it's not wise to be perma anything and that you should just seek to be on the winning team willing to switch sides immediately and let market action be your guide - new bear and bull markets tend to behave in a particular way which coincided when certain macro and sentiment conditions were in place. Knowing this helped me to successfully distinguish between a new trend change vs a correction in an ongoing trend. I really hope that I can continue to read the market correctly like I have been. I'm sure there's going to be fuck ups along the way but hopefully I can make the appropriate adjustments to get back on track if I do.
Sunday, July 31, 2011
Saturday, July 23, 2011
Playing a dangerous game
I'm 70% in cash and I'm playing a dangerous game with my account. You might be thinking "wtf are you talking about? How can being so heavily in cash be dangerous?" I'll tell you why. It's because by being so heavily in cash, I'm (temporarily) siding with the dumb money - main street and I risk missing out on the bull market. I told you early in the year about how according to polls, over 60% of Canadians and Americans still believe their economy is in recession. I'm quite sure that hasn't changed....if anything even more are gloomy given that consumer sentiment recently dove to 2009 levels. Here's another tidbit of dumb money sentiment I just read in an commentary piece.
"CNBC recently reported that investors were more concerned about the economy than at any other time during the past five years; a CBS poll found that 39% of Americans believe the economy is in a state of permanent decline"
Wow, this is powerful, powerful stuff isn't it? I don't think I'll ever see such a divergence in stock market action vs public sentiment in my life again. Maybe I'll be wrong about that because in the last 12 years I saw so many "once in a lifetime" things happen! It's bizzaro world folks. 12 years ago, there was this belief that we had entered a "new era" of permanent prosperity thanks to the marvels of technology and the internet. Mainstreet was dead wrong as they most often are. Now we have all this gloom and hopelessness out there and yet here we have a stock market that is flirting to make a new bull market high. It's becoming more and more clear to me that a bullish resolution is going to be the end result of this sideways action we've been seeing since March. I'm sure there will be headfakes, whispsaws and scary moments on the way to this bullish resolution but the odds seem quite high to me that the bulls are somehow going to win simply because bear markets don't start with gloom and despair - they end with gloom and despair!
I'm not sure as to the exact timing of the bullish resolution though....but I still think we'll get at least one more meaningful dip in the market before we do see the market break out for good. I run the risk of being on the sidelines too much if I'm wrong. That's what happens when you try to trade in a bull market. I've always said that you'll have a hard time beating buy and hold in a bull market. If I get punished for missing out, I deserve it because I didn't have the courage to fully believe in my convictions and I tried to be too cute timing the market. But in my defense, I simply could no longer stay status quo given the size of my paper profits and the IT concerns I had about the market and so I had to realize some of those profits. Discipline (i.e. prudence) vs conviction....you need to have the proper balance between the two.....too much of one vs the other can be detrimental to reaching your full potential. It could very well turn out to be the case that I had too much of the former....it's usually the case.
In the meantime, I'm still looking for new candidates to add to my account. What I'm looking for are small/micro cap plays that are fundamentally undervalued with little/debt, huge potential and good price action. Stocks that are in solid downtrends, no matter how fundamentally appealing, are avoided. This has been my winning formula... I would simply buy such stocks and hold them for several months adding to my positions only if they went up (one of my rules is to never average down, since that is the equivalent to rewarding bad behavior).
So far, I've found 3 small cap stocks that have great upside potential but are still in the bottoming process. Discipline prevents me from taking a position until the price action is better. However, there's always a reasonable chance that an undervalued stock can do an explosive V shaped bottom and not the ideal saucer type bottoms I prefer. Therefore, I do have a rule that allows me to make a "conviction" buy when the chart is not the most appealing but only a partial position (no more than 5% of capital per stock) is permitted until there is favorable price action. I may end up using up to 20% of my cash position to make such conviction buys with these 3 stocks if after I complete my DD I feel real strongly about them and the risk of the V bottom is high.
"CNBC recently reported that investors were more concerned about the economy than at any other time during the past five years; a CBS poll found that 39% of Americans believe the economy is in a state of permanent decline"
Wow, this is powerful, powerful stuff isn't it? I don't think I'll ever see such a divergence in stock market action vs public sentiment in my life again. Maybe I'll be wrong about that because in the last 12 years I saw so many "once in a lifetime" things happen! It's bizzaro world folks. 12 years ago, there was this belief that we had entered a "new era" of permanent prosperity thanks to the marvels of technology and the internet. Mainstreet was dead wrong as they most often are. Now we have all this gloom and hopelessness out there and yet here we have a stock market that is flirting to make a new bull market high. It's becoming more and more clear to me that a bullish resolution is going to be the end result of this sideways action we've been seeing since March. I'm sure there will be headfakes, whispsaws and scary moments on the way to this bullish resolution but the odds seem quite high to me that the bulls are somehow going to win simply because bear markets don't start with gloom and despair - they end with gloom and despair!
I'm not sure as to the exact timing of the bullish resolution though....but I still think we'll get at least one more meaningful dip in the market before we do see the market break out for good. I run the risk of being on the sidelines too much if I'm wrong. That's what happens when you try to trade in a bull market. I've always said that you'll have a hard time beating buy and hold in a bull market. If I get punished for missing out, I deserve it because I didn't have the courage to fully believe in my convictions and I tried to be too cute timing the market. But in my defense, I simply could no longer stay status quo given the size of my paper profits and the IT concerns I had about the market and so I had to realize some of those profits. Discipline (i.e. prudence) vs conviction....you need to have the proper balance between the two.....too much of one vs the other can be detrimental to reaching your full potential. It could very well turn out to be the case that I had too much of the former....it's usually the case.
In the meantime, I'm still looking for new candidates to add to my account. What I'm looking for are small/micro cap plays that are fundamentally undervalued with little/debt, huge potential and good price action. Stocks that are in solid downtrends, no matter how fundamentally appealing, are avoided. This has been my winning formula... I would simply buy such stocks and hold them for several months adding to my positions only if they went up (one of my rules is to never average down, since that is the equivalent to rewarding bad behavior).
So far, I've found 3 small cap stocks that have great upside potential but are still in the bottoming process. Discipline prevents me from taking a position until the price action is better. However, there's always a reasonable chance that an undervalued stock can do an explosive V shaped bottom and not the ideal saucer type bottoms I prefer. Therefore, I do have a rule that allows me to make a "conviction" buy when the chart is not the most appealing but only a partial position (no more than 5% of capital per stock) is permitted until there is favorable price action. I may end up using up to 20% of my cash position to make such conviction buys with these 3 stocks if after I complete my DD I feel real strongly about them and the risk of the V bottom is high.
Tuesday, July 19, 2011
Some of this and that
As you know, I've been advocating a sell longs into strength and high cash position strategy for the next few months as we wait to see how all the current issues in the market play out and to get clues as to whether we are seeing a consolidation phase here in the market or if it's something more ominous. I believe it will turn out to be the former but I'll look for clues from the market to confirm.
I gotta tell you though, the media, both financial and mainstreet, is certainty doing it's part to try to convince you to stay out of the market. I've been seeing a lot of doom and gloom articles out there. In late June the cover of Time magazine was this
you can read the story here. The best contrarian indicators for the stock market come from Main street media.
Remember what I always say about contrarian indicators.....they are the most effective when they are against the current trend of the stock market. The stock market has been in a solid bull trend for over 2 years and so bearish articles like this are indeed strong contrarian indicators.It just so happened that this article came out right at the latest ST bottom in June...that doesn't always happen and so you should not use such indicators as precise timing tools.
I read the weekly commentary from noted bears Hussman and Mauldin both whom of which I respect but don't always agree with. They paint quite a hopeless picture for the US as I see with many other "experts" out there. There are bulls out there too no doubt, but there's just as many bears if not more.
But let me tell you something about the bears. They have been dead wrong about this bull market....as wrong as you can be. Many of them like Hussman missed out on the entire 100% rally or even worse bet against it. And the thing about these bears is that despite being horrendously wrong about the market don't you find that they have shown little humility? Don't you find that the bears are just as bold as they were 2.5 years ago near the beginning of the bull run? Such lack of humility when they have been embarrassingly wrong about the the market is a sign that they have not been humbled enough IMO. I find that most bears have way bigger egos than bulls and are far too self righteous and dogmatic. They think they are are always right and the market is always wrong when it goes against them no matter how much or for how long it goes against them. The "I'm not wrong just early" excuse is no way to play this game. It's quite possible the bears will end up indeed being proven right in due time but in my eyes they are already wrong no matter what happens because if you listened to these bears (aside from the gold bug bears) you would have lost so much money betting against stocks. If you simply just sat in cash the entire time, it's unacceptable as well because missing out on a 100% stock market bull run is a massively wasited opportunity.
Do you guys remember how it was during the depths of the crash? Anyone bullish was humbled to the point of silence while being ridiculed from others. Do you remember Cramer getting roasted on the Daily Show? That happened on March 12, 2009 right smack dab at the bear market bottom. How many bullish gurus did you see angrily wringing their fist like bears are doing now saying "Just you wait and see! There's a huge reversal coming....I'm not wrong I'm just early!" That folks is what you see at major turning points....when those who have been wrong are finally humbled, silenced and are no longer taken seriously by the media. Have the bears reached this point....not by long shot.
Alright then despite all I said, I've been siding somewhat with the bears just for the time being. The main reason being that market action no longer suggests we are in the type of bull run that we saw from September-March and as one who's sitting on some nice profitable positions, it make no sense for me to press these bets and so I've been cashing out... but.not entirely mind you.
Notice that we are getting a lot more days where the market is up or down 1% +. That's not bull market behavior....that's bear market/consolidation behavior. This is the exact same type of action we saw last summer. Therefore, even as a believer that the bull market is not over, I show respect towards this non-bullish action by maintaining a high cash balance. Despite my longer term bullish convictions, I defer to the market action which is telling me "not yet" or possibly "you're wrong". Respect the market folks or it will beat it out of you.
The best market advances i..e the ones that are the most powerful and sustainable usually don't give you an ideal entry point if you missed the bottom....if forces you to chase if you want it as the market doesn't give much in the way of pullbacks. Just take a look at the September low as an example. Now, take a look at the latest market action. We got quite a pullback from last week giving you a good opportunity to get in if you missed the rally from late June. That to me says that you should beware of such an opportunity unless you're a ST trader. I for one will not get involved with ST trading especially during this environment of highly elevated headline risk which makes the market seem like a roulette wheel.
I continue to maintain a 30-70% split between stocks and cash. My method of investing is often the equivalent of watching grass grow. There could be several weeks or even months when my account balance doesn't move much in the other direction....then things can exciting for a week or 2 only to go back to boring for several weeks again. A lot of people out who trade crave excitement and attempt to capture every wiggle of the market. These people are no better than sports gamblers in my opinion. Don't get me wrong......what I do is also gambling but I like to think of it as gambling with an edge. Time will tell if I'm no better than the typical sports gambler.
I gotta tell you though, the media, both financial and mainstreet, is certainty doing it's part to try to convince you to stay out of the market. I've been seeing a lot of doom and gloom articles out there. In late June the cover of Time magazine was this
you can read the story here. The best contrarian indicators for the stock market come from Main street media.
Remember what I always say about contrarian indicators.....they are the most effective when they are against the current trend of the stock market. The stock market has been in a solid bull trend for over 2 years and so bearish articles like this are indeed strong contrarian indicators.It just so happened that this article came out right at the latest ST bottom in June...that doesn't always happen and so you should not use such indicators as precise timing tools.
I read the weekly commentary from noted bears Hussman and Mauldin both whom of which I respect but don't always agree with. They paint quite a hopeless picture for the US as I see with many other "experts" out there. There are bulls out there too no doubt, but there's just as many bears if not more.
But let me tell you something about the bears. They have been dead wrong about this bull market....as wrong as you can be. Many of them like Hussman missed out on the entire 100% rally or even worse bet against it. And the thing about these bears is that despite being horrendously wrong about the market don't you find that they have shown little humility? Don't you find that the bears are just as bold as they were 2.5 years ago near the beginning of the bull run? Such lack of humility when they have been embarrassingly wrong about the the market is a sign that they have not been humbled enough IMO. I find that most bears have way bigger egos than bulls and are far too self righteous and dogmatic. They think they are are always right and the market is always wrong when it goes against them no matter how much or for how long it goes against them. The "I'm not wrong just early" excuse is no way to play this game. It's quite possible the bears will end up indeed being proven right in due time but in my eyes they are already wrong no matter what happens because if you listened to these bears (aside from the gold bug bears) you would have lost so much money betting against stocks. If you simply just sat in cash the entire time, it's unacceptable as well because missing out on a 100% stock market bull run is a massively wasited opportunity.
Do you guys remember how it was during the depths of the crash? Anyone bullish was humbled to the point of silence while being ridiculed from others. Do you remember Cramer getting roasted on the Daily Show? That happened on March 12, 2009 right smack dab at the bear market bottom. How many bullish gurus did you see angrily wringing their fist like bears are doing now saying "Just you wait and see! There's a huge reversal coming....I'm not wrong I'm just early!" That folks is what you see at major turning points....when those who have been wrong are finally humbled, silenced and are no longer taken seriously by the media. Have the bears reached this point....not by long shot.
Alright then despite all I said, I've been siding somewhat with the bears just for the time being. The main reason being that market action no longer suggests we are in the type of bull run that we saw from September-March and as one who's sitting on some nice profitable positions, it make no sense for me to press these bets and so I've been cashing out... but.not entirely mind you.
Notice that we are getting a lot more days where the market is up or down 1% +. That's not bull market behavior....that's bear market/consolidation behavior. This is the exact same type of action we saw last summer. Therefore, even as a believer that the bull market is not over, I show respect towards this non-bullish action by maintaining a high cash balance. Despite my longer term bullish convictions, I defer to the market action which is telling me "not yet" or possibly "you're wrong". Respect the market folks or it will beat it out of you.
The best market advances i..e the ones that are the most powerful and sustainable usually don't give you an ideal entry point if you missed the bottom....if forces you to chase if you want it as the market doesn't give much in the way of pullbacks. Just take a look at the September low as an example. Now, take a look at the latest market action. We got quite a pullback from last week giving you a good opportunity to get in if you missed the rally from late June. That to me says that you should beware of such an opportunity unless you're a ST trader. I for one will not get involved with ST trading especially during this environment of highly elevated headline risk which makes the market seem like a roulette wheel.
I continue to maintain a 30-70% split between stocks and cash. My method of investing is often the equivalent of watching grass grow. There could be several weeks or even months when my account balance doesn't move much in the other direction....then things can exciting for a week or 2 only to go back to boring for several weeks again. A lot of people out who trade crave excitement and attempt to capture every wiggle of the market. These people are no better than sports gamblers in my opinion. Don't get me wrong......what I do is also gambling but I like to think of it as gambling with an edge. Time will tell if I'm no better than the typical sports gambler.
Saturday, July 9, 2011
The most interesting man in the world
No I'm not talking about the dos equis guy I'm talking about Mr. Market. There is no shortage of interesting things going on with him right now. The jobs number on Friday was terrible which was in contrast with the ADP report the day before. I'm not going to go into the nitty gritty as to which one is right or wrong. Suffice to say that with the unemployment rate upticking again to 9.2% the recovery we've had so far as been subpar to put it mildly...which is not uncommon when you have a housing led downturn. Look back to the early 90's to see what I mean. Since this housing bust was larger the recovery has been slower than the early 90's.
It's understandable why there is so much anxiety out there and as one who has been a full fledged bull since the summer of 2009 I'm having a lot more respect for the bear case these days.....in the intermediate term for now. You have the issues in Europe which despite the Greece bailout, still don't appear to be fully resolved. For instance Portuguese 2 year bonds yields hit a fresh high at 16.25%. You have stubbornly high unemployment and sluggish growth which appears to be downshifting. I highlighted this because this is what the market cares about.....the expected rate of change in growth. You have emerging markets- the only part of the world that has showed growth - in tightening mode with India and Brazil having inverted yield curves and China a flat yield curve....a warning sign of an immanent serious slowdown in growth or outright recession. You have energy prices which although have dropped from their highs are still relatively elevated. Then to top it all off, there are pressures to reign in US government spending and raise taxes which would be yet another headwind to GDP growth.
Timing is everything. I've always said that the market only cares about earnings and where they are headed and until the market starts sensing that the above factors are actually going to impact earnings in the near future, they will be ignored and they have been for that reason. But it seems to me that we are 1 or 2 quarters away from when these issues will indeed start to impact earnings in a negative way. Bears have been raped repeatedly for being overzealous and jumping the gun. In bear markets or a prolonged correction it's always difficult to profit from the short side because Mr. Market never likes a lot of company especially on the short side and so he'll do whatever it takes to shake out bears and take away their money too. Remember the last bear market? The first sign of trouble with subprime happened in March 2007, but the market fully recovered from that dip to make new highs. Then another more serious warning shot happened in August of 2007. By then bears where thinking "Ok, this has gotta be it now...game over for the bulls" So, what did the market do? Why, it rebounded to make a new all time high of course. Bears were pulling their hair out as they got smoked again. "How the fuck could that be possible with all the problems that are clearly there? "They thought. That's just the nature of Mr. Market folks. Aside from overzealous bears who got squeezed, the reason the market didn't fall off he cliff just yet was because the impact of the subprime implosion and it's domino effect had not yet been reflected in earnings in a material way. But by the 4th quarter it was clear that it had and downside momentum gathered steam. You might think the market is stupid for being so short sited and should have rolled over back in March 2007 or even earlier. Well, that's just the way it is....accept it. Those who trade based upon what they think the market should do go broke and then whine like bitches about it.....there's tons of people like this and they tend to be self righteous pricks with big egos.
It's difficult to profit from what you think may be a major turning point in the market especially on the short side because timing is lot more critical. When you attempt to bottom pick a bear market, so long as you aren't leveraged you can simply buy, hold and wait for as long as it takes for the turn around. If you're early you can simply ride it out. But when you short you don't have that luxury because your loss potential is unlimited if you are wrong and you could be forced to cover via margin call if you're early, therefore you will have "uncle" point where you are forced to give up. To offset this risk and put yourself in a position similar to a bottom fishing bull, what you could is use long dated, deep in the money puts.
Given everything I said, I believe it's prudent to maintain a high cash balance. I'm less confident about riding the bull...for the time being. I certainly run of the risk of being wrong and trading myself out my position and that's a risk I'm willing to accept. The market could very well go to new highs but just like what happened in October 2007, that may not mean anything but a giant head fake to put the final squeeze on the bagholding shorts who are trapped at 1300 and suck in under invested bulls who got out in June. Or of course, it could also mean I'm dead wrong and we go on wards and upwards to challenge 1500.
If the bear case ends up playing out I don't think it will be "game over" for the bull market although it might feel like it. The reason why I feel this way is because we never saw the type of exuberance that marks a bull market peak from the public and I sense no fading of the contemptuous, permabear mentality that still makes up a large part of the financial media and market participants especially the retail type - the suckers of the market. That to me says that somehow, someway, the market will end up going a lot higher in the years to come.
Here's the type of contempt I'm talking about. This is comment from an article I just read in the globe and mail
the US equity market has been propped up by the US Fed using their proxies over at the big investment banks to shovel in the money. Simple. Volumes are terrible and it is basically a few big computers with their algos trading against each other.
I've been seeing bullshit conspiracy and "low volume" bitching like this since the summer of 2009. If you go to marketwatch.com or the yahoo message boards you can see that the retail schmucks thinks like the guy who made the above comment. The root of this contempt is because they got burned by the market either during one of the crashes in the past 11 years and/or shorting this bull market. If these retail schmucks were making money you wouldn't see such bitching. These losers are actually rooting for a crash so that they don't feel so bad about being the chumps that they are. I don't want to be on the same side as these losers for so long or I could end up being one of them!
It's understandable why there is so much anxiety out there and as one who has been a full fledged bull since the summer of 2009 I'm having a lot more respect for the bear case these days.....in the intermediate term for now. You have the issues in Europe which despite the Greece bailout, still don't appear to be fully resolved. For instance Portuguese 2 year bonds yields hit a fresh high at 16.25%. You have stubbornly high unemployment and sluggish growth which appears to be downshifting. I highlighted this because this is what the market cares about.....the expected rate of change in growth. You have emerging markets- the only part of the world that has showed growth - in tightening mode with India and Brazil having inverted yield curves and China a flat yield curve....a warning sign of an immanent serious slowdown in growth or outright recession. You have energy prices which although have dropped from their highs are still relatively elevated. Then to top it all off, there are pressures to reign in US government spending and raise taxes which would be yet another headwind to GDP growth.
Timing is everything. I've always said that the market only cares about earnings and where they are headed and until the market starts sensing that the above factors are actually going to impact earnings in the near future, they will be ignored and they have been for that reason. But it seems to me that we are 1 or 2 quarters away from when these issues will indeed start to impact earnings in a negative way. Bears have been raped repeatedly for being overzealous and jumping the gun. In bear markets or a prolonged correction it's always difficult to profit from the short side because Mr. Market never likes a lot of company especially on the short side and so he'll do whatever it takes to shake out bears and take away their money too. Remember the last bear market? The first sign of trouble with subprime happened in March 2007, but the market fully recovered from that dip to make new highs. Then another more serious warning shot happened in August of 2007. By then bears where thinking "Ok, this has gotta be it now...game over for the bulls" So, what did the market do? Why, it rebounded to make a new all time high of course. Bears were pulling their hair out as they got smoked again. "How the fuck could that be possible with all the problems that are clearly there? "They thought. That's just the nature of Mr. Market folks. Aside from overzealous bears who got squeezed, the reason the market didn't fall off he cliff just yet was because the impact of the subprime implosion and it's domino effect had not yet been reflected in earnings in a material way. But by the 4th quarter it was clear that it had and downside momentum gathered steam. You might think the market is stupid for being so short sited and should have rolled over back in March 2007 or even earlier. Well, that's just the way it is....accept it. Those who trade based upon what they think the market should do go broke and then whine like bitches about it.....there's tons of people like this and they tend to be self righteous pricks with big egos.
It's difficult to profit from what you think may be a major turning point in the market especially on the short side because timing is lot more critical. When you attempt to bottom pick a bear market, so long as you aren't leveraged you can simply buy, hold and wait for as long as it takes for the turn around. If you're early you can simply ride it out. But when you short you don't have that luxury because your loss potential is unlimited if you are wrong and you could be forced to cover via margin call if you're early, therefore you will have "uncle" point where you are forced to give up. To offset this risk and put yourself in a position similar to a bottom fishing bull, what you could is use long dated, deep in the money puts.
Given everything I said, I believe it's prudent to maintain a high cash balance. I'm less confident about riding the bull...for the time being. I certainly run of the risk of being wrong and trading myself out my position and that's a risk I'm willing to accept. The market could very well go to new highs but just like what happened in October 2007, that may not mean anything but a giant head fake to put the final squeeze on the bagholding shorts who are trapped at 1300 and suck in under invested bulls who got out in June. Or of course, it could also mean I'm dead wrong and we go on wards and upwards to challenge 1500.
If the bear case ends up playing out I don't think it will be "game over" for the bull market although it might feel like it. The reason why I feel this way is because we never saw the type of exuberance that marks a bull market peak from the public and I sense no fading of the contemptuous, permabear mentality that still makes up a large part of the financial media and market participants especially the retail type - the suckers of the market. That to me says that somehow, someway, the market will end up going a lot higher in the years to come.
Here's the type of contempt I'm talking about. This is comment from an article I just read in the globe and mail
the US equity market has been propped up by the US Fed using their proxies over at the big investment banks to shovel in the money. Simple. Volumes are terrible and it is basically a few big computers with their algos trading against each other.
I've been seeing bullshit conspiracy and "low volume" bitching like this since the summer of 2009. If you go to marketwatch.com or the yahoo message boards you can see that the retail schmucks thinks like the guy who made the above comment. The root of this contempt is because they got burned by the market either during one of the crashes in the past 11 years and/or shorting this bull market. If these retail schmucks were making money you wouldn't see such bitching. These losers are actually rooting for a crash so that they don't feel so bad about being the chumps that they are. I don't want to be on the same side as these losers for so long or I could end up being one of them!
Wednesday, July 6, 2011
crosscurrents
A couple days ago Doug Kass wrote a piece "the curse of negativity" which was more a less a mea culpa for being overly negative throughout the years. He basically said that despite the ups and downs of the past several years it has paid off to be a optimist rather than a pessimist and he admits to have been overly pessimistic at times. I bet he's really refering to the last couple of years in particular. What's interesting is that in early March Kass made a similar mea culpa which I noted and within a few days the market took a sharp dip due to Japan. Ya, I know Japan was a fluke but hey, maybe the market would have dipped anyhow..... we'll never know. So, it will be interesting if his post will be another top signal.
On the other side of the ledger, the put/call ratio closed over 1 each of these past 2 days which suggests a lot of people are aware of the overbought condition I talked about last time and are betting/hedging on a pullback here. Oh brother....how many times have I seen aggressive top picking like this go wrong these past several months? Most of the time, somehow someway the market ends up going higher still until these jokers throw in the towel. We'll see what happens this time.
I'm in a position now where I can just sit back and watch the action. My long exposure is down to 30% and I've taken profits such that I can really let them ride paranoia free. If they continue to rise I'd be inclined to lighten up further. If they drop I could be a strong holder or dump. No matter what, I'd still make out good considering my entry points. There is one investment though that I will never sell no matter what the price is and that's my daughter. She had her first birthday today!
I'm in a position now where I can just sit back and watch the action. My long exposure is down to 30% and I've taken profits such that I can really let them ride paranoia free. If they continue to rise I'd be inclined to lighten up further. If they drop I could be a strong holder or dump. No matter what, I'd still make out good considering my entry points. There is one investment though that I will never sell no matter what the price is and that's my daughter. She had her first birthday today!
Monday, July 4, 2011
Take a wait and see approach
Man, I can't stop eating cherries. I just picked a bunch from my tree and it's stopping me from typing this post. OK first of all, last week....wow. Nobody, neither bull nor bear expected that degree of a pop. So, did we see the bottom? Well, I have my doubts. There was plenty of doom and gloom as I was noting at the time, but there wasn't panic. I also don't think the market "reset" enough as I talked about in my previous post. This rally had short squeeze written all over it. It looks like the bears were overzealous "shorting strength". It seems as if the entire trading community went short at 1300 "resistance" and got their asses handed to them.
Now we have a market that is as overbought ST as I have ever seen seen it. During the first thrust out of a correction bottom or new bull market, you tend to see such behavior which is actually bullish longer term but in a bear market or a still ongoing correction phase, such conditions represent a great selling opportunity. We're gonna find out which one it is. During last summer the market got this ST overbought in late July. What happened later was a small dip followed by a higher high and then the market tanked the whole month of August. So, even when ST overbought conditions do occur in bear/correction phases it can still be tricky for bears to capitalize on the short side if they try to play the day to day action using tight stops.
Looking at the bigger picture it still suggests taking a wait and see approach. It looks as though the effects of China's tightening are finally starting to be felt wth a key manufuacting guague showing a slowdown for the month....and yes I know it's just 1 month. Will there or will there not be a "hard landing" in China and emerging markets in general? Commodity related investments are obviously at risk here and they have been in a declining trend this year in response to global slowdown fears. I just read an article on bloomberg that said net long positions in 18 different commodities has been reduced to the lowest level since July 13, 2010. If you remember, that's right where the market and commodoties bottomed last summer. So from a sentiment perspective, this is good news for commodity bulls and equity bulls too. However, I should point out that regarding oil, arguably the most critical economic commodity, there is still a rather large net long position of about 153,000 contracts. At the July lows of last year it was only about 50,000. So, all in all, the hot money is being flushed out of the commodity space but there's still room for more flushing. This is part of the "resetting" that I think the market needs. Unfortunately, last week's rally prevented this reset from being fully completed.
So, is the slowdown in global growth going to be temporary like last summer or will it result in a reccession? I think the answer will lie in between. The Economic Cycle Research Institute (ECRI) is an economic forecaster that I respect the most. These guys have a superb track record of calling major turns in the economic cycle. Last summer they predicted a slowdown and some permabears like Hussman were using this call to justify their double dip predictions. ECRI was quick to respond by saying that they were only predicting a temporary slowdown not a reccession. This time around ECRI is more bearish. Although they aren't calling for a reccesion (at least not yet), they are calling for a slowdown that will likely persist throughout the remainder of the year. They also made it clear that this forecast had nothing to do with Japan. Bernanke thinks this "soft patch" will end by the summer. This goes against the forecast of the ECRI which has the better track record.
So then, what to do? My belief continues to be that this bull market has not fully played out because monetary conditions and public sentiment towards the market/economy suggest it is still in tact. But having said that, bull markets will tend to have large consolidation phases where the market goes sideways or moderately down for several months, even up to a year or so. I think this is where we're at for the time being. If you play the bigger swings like me and have been riding the run since September, then it's time to step back, harvest profits and take a wait and see approach to see how this shit plays out. This implies having a large cash balance and reducing exposure to growth sensitive stocks (preferably on strength). There's a time to press offense and there's a time to play defense. From a 2-6 month perspective, it's time to play some D here.
I always emphasize focusing on the bigger picture. Weeks like last week will make you very tempted to do just the opposite. I for one will not get sucked into the casino of daytrading and ST trading. So, what do you do then? Just sit in cash? Well, not entirely. I would still be willing to have some exposure in names that have a good story that aren't strongly correlated to the general markets. What about shorting? Well, in bull markets I am reluctant to do so, even during times like this when I feel the trend will be down/sideways for a while. I have to admit though, I get very tempted. But what if this is not a bull market anymore? Well, in that's case it's best to wait for the market to truly roll over with the fundamentals (earnings) in a decisive deteriorating trend, not just a downshift from positive to less positive. If the permabears end up being right and we're going back to SPX 700, there will be plenty of opportunity to make money on the short side....there's no need to pick tops. Top picking bull markets will destroy you. Just ask an elliot waver who went 200% short as per the recommendation of Prechter in November 2009. I wonder if that loser ever apologized for that call.
One trade I'm considering is long TLT December 90 calls which I suppose is similar to a short bet against the market since bonds have been negatively correlated to the market as of late. Why this trade? A few reasons. 1) There is so much hatred towards bonds from both equity bulls and bear alike
2) Given the data, it's quite unlikely the fed is going to raise rates until at least some time next year
3) The recent peak in commodity prices suggests that inflation pressures will be abating
4) Taking a look just at the chart ignoring any news, biases or predispositions, it sure looks to me like a bottom has been recently formed and the recent dip in bond prices looks like a pullback in a new uptrend which is ideal for an entry point.
If I go ahead with the bet, it will be an "all in" type trade meaning that I'm willing to lose 100% of any capital I commit to this trade. To me, this is the way to play option trades like this....you gotta swing for the fences because the day to day noise volatility with option trades like this is far too great to use stops effectively. So, if you're gonna risk losing 100% if you're wrong, you ought to be aiming for at least a 100% gain if you end up being right and that's the case with this trade. I think TLT hitting 100 before the year is over is quite doable and that would translate into at least a double for TLT Dec 90 calls.
It's been well over a year since I've made an option trade. Here are my rules
1) the trade must be with the trend
2) give yourself at least 3 months until expiration
3) Use in the money options with at least 65% intrinsic value
4) go all in, no stops aiming for at least 100%
If you are going to be aggressive like this going "all in" you must never risk a large amount of your capital. For me it's going to be in the 5% range if end up pulling the trigger.
Now we have a market that is as overbought ST as I have ever seen seen it. During the first thrust out of a correction bottom or new bull market, you tend to see such behavior which is actually bullish longer term but in a bear market or a still ongoing correction phase, such conditions represent a great selling opportunity. We're gonna find out which one it is. During last summer the market got this ST overbought in late July. What happened later was a small dip followed by a higher high and then the market tanked the whole month of August. So, even when ST overbought conditions do occur in bear/correction phases it can still be tricky for bears to capitalize on the short side if they try to play the day to day action using tight stops.
Looking at the bigger picture it still suggests taking a wait and see approach. It looks as though the effects of China's tightening are finally starting to be felt wth a key manufuacting guague showing a slowdown for the month....and yes I know it's just 1 month. Will there or will there not be a "hard landing" in China and emerging markets in general? Commodity related investments are obviously at risk here and they have been in a declining trend this year in response to global slowdown fears. I just read an article on bloomberg that said net long positions in 18 different commodities has been reduced to the lowest level since July 13, 2010. If you remember, that's right where the market and commodoties bottomed last summer. So from a sentiment perspective, this is good news for commodity bulls and equity bulls too. However, I should point out that regarding oil, arguably the most critical economic commodity, there is still a rather large net long position of about 153,000 contracts. At the July lows of last year it was only about 50,000. So, all in all, the hot money is being flushed out of the commodity space but there's still room for more flushing. This is part of the "resetting" that I think the market needs. Unfortunately, last week's rally prevented this reset from being fully completed.
So, is the slowdown in global growth going to be temporary like last summer or will it result in a reccession? I think the answer will lie in between. The Economic Cycle Research Institute (ECRI) is an economic forecaster that I respect the most. These guys have a superb track record of calling major turns in the economic cycle. Last summer they predicted a slowdown and some permabears like Hussman were using this call to justify their double dip predictions. ECRI was quick to respond by saying that they were only predicting a temporary slowdown not a reccession. This time around ECRI is more bearish. Although they aren't calling for a reccesion (at least not yet), they are calling for a slowdown that will likely persist throughout the remainder of the year. They also made it clear that this forecast had nothing to do with Japan. Bernanke thinks this "soft patch" will end by the summer. This goes against the forecast of the ECRI which has the better track record.
So then, what to do? My belief continues to be that this bull market has not fully played out because monetary conditions and public sentiment towards the market/economy suggest it is still in tact. But having said that, bull markets will tend to have large consolidation phases where the market goes sideways or moderately down for several months, even up to a year or so. I think this is where we're at for the time being. If you play the bigger swings like me and have been riding the run since September, then it's time to step back, harvest profits and take a wait and see approach to see how this shit plays out. This implies having a large cash balance and reducing exposure to growth sensitive stocks (preferably on strength). There's a time to press offense and there's a time to play defense. From a 2-6 month perspective, it's time to play some D here.
I always emphasize focusing on the bigger picture. Weeks like last week will make you very tempted to do just the opposite. I for one will not get sucked into the casino of daytrading and ST trading. So, what do you do then? Just sit in cash? Well, not entirely. I would still be willing to have some exposure in names that have a good story that aren't strongly correlated to the general markets. What about shorting? Well, in bull markets I am reluctant to do so, even during times like this when I feel the trend will be down/sideways for a while. I have to admit though, I get very tempted. But what if this is not a bull market anymore? Well, in that's case it's best to wait for the market to truly roll over with the fundamentals (earnings) in a decisive deteriorating trend, not just a downshift from positive to less positive. If the permabears end up being right and we're going back to SPX 700, there will be plenty of opportunity to make money on the short side....there's no need to pick tops. Top picking bull markets will destroy you. Just ask an elliot waver who went 200% short as per the recommendation of Prechter in November 2009. I wonder if that loser ever apologized for that call.
One trade I'm considering is long TLT December 90 calls which I suppose is similar to a short bet against the market since bonds have been negatively correlated to the market as of late. Why this trade? A few reasons. 1) There is so much hatred towards bonds from both equity bulls and bear alike
2) Given the data, it's quite unlikely the fed is going to raise rates until at least some time next year
3) The recent peak in commodity prices suggests that inflation pressures will be abating
4) Taking a look just at the chart ignoring any news, biases or predispositions, it sure looks to me like a bottom has been recently formed and the recent dip in bond prices looks like a pullback in a new uptrend which is ideal for an entry point.
If I go ahead with the bet, it will be an "all in" type trade meaning that I'm willing to lose 100% of any capital I commit to this trade. To me, this is the way to play option trades like this....you gotta swing for the fences because the day to day noise volatility with option trades like this is far too great to use stops effectively. So, if you're gonna risk losing 100% if you're wrong, you ought to be aiming for at least a 100% gain if you end up being right and that's the case with this trade. I think TLT hitting 100 before the year is over is quite doable and that would translate into at least a double for TLT Dec 90 calls.
It's been well over a year since I've made an option trade. Here are my rules
1) the trade must be with the trend
2) give yourself at least 3 months until expiration
3) Use in the money options with at least 65% intrinsic value
4) go all in, no stops aiming for at least 100%
If you are going to be aggressive like this going "all in" you must never risk a large amount of your capital. For me it's going to be in the 5% range if end up pulling the trigger.
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