A few notable things to discuss. We saw Buffet make a big splash with his $5 Billion investment into BOA which is similar to when he make that investment in GS in October 2008. Buffet's motto is be greedy when others are fearful and fearful when others are greedy. He's clearly acting on this principle. Buffet's move in October 2008 didn't signal the final bottom but if you bought into the market at that time and held for at least 1 year you did quite well. This move by Buffet also reminds me of when he bought into Level 3 communications in early July of 2002. Again, this wasn't the bottom of the market but a year later the market was comfortably above July of 2002 and the year after that, well above.
So, should you follow Buffet's lead? Yes and no. As I said before, cherry picking some names into the panic was warranted because even though it's unlikely, there's the chance of a V bottom in the market or the stock you had your eye on. There's also the chance that the stock you had your eye on will shown great relative strength due to strong company specific fundamentals. But as we saw the last few times with Buffet's bottom fishing expeditions, he tends to be a bit early and we know from the history of panics in the past that it takes several weeks of base building in the market before a sustainable rebound occurs. Then of course, there's the possibility of total disaster whereby Europe implodes triggering another global financial crisis and/or the US goes into a recession. Such a turn of events would surely send the market to significant new lows. Therefore, the appropriate course of action, in my opinion is to have limited market exposure only with strong conviction stocks while keeping a high cash reserve while we wait for signs in determining how this will all play out.
Now, let's get back to the reccession debate. Notable bears Hussman and Mauldin have gone "all in" on their recession forecasts. Last summer they warned about a recession and were wrong but this time they are officially on record calling for one. Here's what I think. First of all, I think these bears are acting similar to what a gambler does when he "doubles down" on his next bet trying to make up for previous losing bets. Not only were they wrong last summer, these guys were on the wrong side on the entire bull market skeptical the entire time and probably got embarrassed by that as well. No doubt their egos are brusied and so now, to make up for it, to get their revenge, they are very eager in wanting to be early in calling the next recession. They do make some good arguements, I won't deny that, but here's the main problem I have with believing a reccession is comming....there were no excesses. Reccessions have always exposoed and cleansed away the greed and excess of the boom that preceeded it. Where was the greed? In 2000 it was the tech sector, in 2007 it was housing. What about now? Did the economy overheat or overexpand in some way? Hardly. Can you say the average retail investor was greedy during this bull market? Hardly. Most people still believed we were still in recession during the entire bull market. There were some equity inflows but they were quite modest compared to the inflows of the previous bull cycle.
In my lowly opinion, I think there's a good chance these bears could be mistaking a recession for what could just end up being a downward blip in the slow growth/sluggish nature of an economy recovering from a housing led downturn.1990 was also a housing led reccession and it wasn't until the second half of the decade before the economy was running in full gear. The bust in 2008 was larger and so the sluggishness should be even more pronounced. Now of course, there's differences from 1990 and I respect the idea that this time could be final straw....that the government can no longer come to rescue of the economy because the damage is too severe, debts are too high, ect. The thing is though, the pessimists have been saying this every fucking time for the last 30 years and listening to them would leave you poor, envious and a miserable SOB. Oh sure, they had their moments of glory but they had far more moments of humiliation.
As far as the latest rebound goes, notice how it has pretty much done via gap up and go action. That's the signature of a dead cat bounce fueled by the unwinding of reckless bets made by idiotic bears. As I mentioned on August 10th, bears were getting reckless with their ridiculous put buying and eventually they were going to pay for it and so now here we are. How long could it last? Tough to tell but the easy money has been made as the market is now ST overbought.
Even though there have been times where I felt strongly about the ST direction of the market I have avoided ST trading as a matter of discipline because my simple buy and hold strategy was working so well. I was going by the "if it ain't broken don't fix it" principle. Plus, I know from experience that ST market moves are often too random to trade. However, once in a while I find that the market offers ST set ups that have high reward to risk ratios like when I noticed the reckless put buying on strength a few weeks ago. I knew from experience that such an occurrance has always resulted in the bears eventually getting reamed.
I believe it's time for me to incorporate a more active trading strategy until the market can exhibit bull trend behavior because it may be a while before that happens. That doesn't mean I'll be trading every week...what it means is that I need to take advantage of those rare set ups which I know from experience, are high reward/low risk opportunities. It's very, very important that when you miss out on an opportunity you don't go "on tilt" trying to make up for it. Chances are you will get involved in a mediocre or weak set up that ends up backfiring. This is a mistake I would often do in my younger days. Then what ends up happening is you lose confidence and are too gun shy to pull the trigger on the next good set up creating a vicious cycle. DO NOT revenge trade. If you missed out or fucked up, blow off some steam. Go for a walk, punch a wall...whatever and don't enter another trade until you are mentally normalized.
Back to the markets...as I said earlier, market action of late smacks of a dead cat bounce or bear market rally. These rallies can be quite sharp and powerful doing whatever it takes to shake out and punish weak and greedy bears. At this point in time from a ST trading perspective either the long or short side doesn't look appealing because the market is now ST overbought which favors bears but not IT overbought which favors the bulls (since a few days of sideways action could work off the ST overbought condition clearing the way for a move higher).
I wanted to also talk about the high level of insider buying. It's a positive no doubt but I wouldn't take any long term cues from it. I remember in August of 2007 the market sold off sharply and insider buying hit a 15 year high (similar to this August). It marked a ST low but nothing more.....we all know what happened in 2008. All insider do is buy weakness and sell into strength. In 2008 insiders got it wrong big time and then they sold heavily into strength in the summer of 2009 and that was hardly the end of the bull market.
I had originally planned to discuss gold but I will leave that for a future post otherwise I'll never end up finishing this post. Hope all is well with everyone.
Wednesday, August 31, 2011
Tuesday, August 23, 2011
Give it time
My feelings basically boil down the this...give it time. I realize this sounds repetative. Whether this is a new bear or correction in a bull market (which I still think it is) the best move is to wait and sit mostly in cash. If it's a new bear market then it's obvious as to why sitting in cash is the right thing to do. If instead this crash turns out to be a severe correction in a bull market like last year, 1987 and 1998 then it's quite likely there will be base building required and so there's no need to pick bottoms fearing you will be left out when the turn comes. History shows you don't simply do a V bottom out of such crashes. You may point out the March 2009 as a V bottom but that was really a 3rd bottom in a complex bottoming formation (October, 08 and November 08 being the first 2 bottoms).
Take a look at last years flash crash, take a look at the 1987 crash and take a look at the 1998 crash. These crashes were all corrections in bull markets and so if that's what we have here, then those historical charts are what you should be looking at. You will see that it took at least 2 months to make the bottoming process. Even take a look at the crash in silver this year as yet another example. Although no two bottoms look identical, they have 1 common feature...it took time to mend the damage.
I talked about the market needing a reset a few weeks back. Well, we've reset and the bulls have a full tank of gas. By gas what I mean is fear....the unwinding of fear/skepticism is what drives a market advance and with mutual fund investors fleeing the market in a big way, the VIX hiting 49,10DMA of the put/call ratio reaching 1.25 and the 10 year bond tagging 2%; the bull-mobile's gas tank is pretty much full....the only question now is whether the car still works....if it does then we have enough gas to make new all times highs once the dust settles.
Plenty of people are bracing for a recession. I'm not going to be smart ass and sayi just because everyone's expecting one doesn't mean it can't happen. I remember in January 2008 there was plenty of recession talk and did indeed happen....a lot quicker and more severe than people expected. But unlike in early 2008, we did not have tight monetary conditions in the preceding 6 months from developed countries, there was never any investor greed, profits haven't rolled over and main street had never showed any optimism towards the economy. I'm sure bears would counter by saying that the recovery we had was never a true recovery and so this recession is simply the undoing of this government supported farce of a recovery.
You know what I say? Let the market decide who's going to be right. The market will tend to give "tells" as to what mode it's in. I'm not talking about moving averages and fibi-nachocheese retracements. I'm talking about the way in which it advances and declines and how it deals with overbought and oversold conditions. Bull market rallies tend to be slow, steady and relentless finding a way to go higher in spite of overbought conditions....they don't give you a chance to get in unless you chase it. Rallies within a bear market (or major correction) tend to be sloppy and volatile often done via gap ups and give you plenty of inviting dips to get in which end up being traps. Remember when I told you about how inviting that dip in early July was?
It can be very, very difficult to just sit there in cash and do nothing if you watch the market every day, every hour. The temptation to pick bottoms and do some ST trading is very high....I fight it everyday. In some selective situations it may be warranted but overall it's not....you will likely end up getting ran over or whipsawed by the volatility and headline risk.
It looks like we could get a double bottom attempt here but I don't think the market will make it so easy that it would be upward and onwards if that double bottom holds. It could last for a while but it's quite likely there would be yet another retest or lower low sometime later on, so if you want to play along better be nimble.
Sometimes I wish I could just fast forward the market by 2 or 3 months. Then again, I don't want to age so quick!
Take a look at last years flash crash, take a look at the 1987 crash and take a look at the 1998 crash. These crashes were all corrections in bull markets and so if that's what we have here, then those historical charts are what you should be looking at. You will see that it took at least 2 months to make the bottoming process. Even take a look at the crash in silver this year as yet another example. Although no two bottoms look identical, they have 1 common feature...it took time to mend the damage.
I talked about the market needing a reset a few weeks back. Well, we've reset and the bulls have a full tank of gas. By gas what I mean is fear....the unwinding of fear/skepticism is what drives a market advance and with mutual fund investors fleeing the market in a big way, the VIX hiting 49,10DMA of the put/call ratio reaching 1.25 and the 10 year bond tagging 2%; the bull-mobile's gas tank is pretty much full....the only question now is whether the car still works....if it does then we have enough gas to make new all times highs once the dust settles.
Plenty of people are bracing for a recession. I'm not going to be smart ass and sayi just because everyone's expecting one doesn't mean it can't happen. I remember in January 2008 there was plenty of recession talk and did indeed happen....a lot quicker and more severe than people expected. But unlike in early 2008, we did not have tight monetary conditions in the preceding 6 months from developed countries, there was never any investor greed, profits haven't rolled over and main street had never showed any optimism towards the economy. I'm sure bears would counter by saying that the recovery we had was never a true recovery and so this recession is simply the undoing of this government supported farce of a recovery.
You know what I say? Let the market decide who's going to be right. The market will tend to give "tells" as to what mode it's in. I'm not talking about moving averages and fibi-nachocheese retracements. I'm talking about the way in which it advances and declines and how it deals with overbought and oversold conditions. Bull market rallies tend to be slow, steady and relentless finding a way to go higher in spite of overbought conditions....they don't give you a chance to get in unless you chase it. Rallies within a bear market (or major correction) tend to be sloppy and volatile often done via gap ups and give you plenty of inviting dips to get in which end up being traps. Remember when I told you about how inviting that dip in early July was?
It can be very, very difficult to just sit there in cash and do nothing if you watch the market every day, every hour. The temptation to pick bottoms and do some ST trading is very high....I fight it everyday. In some selective situations it may be warranted but overall it's not....you will likely end up getting ran over or whipsawed by the volatility and headline risk.
It looks like we could get a double bottom attempt here but I don't think the market will make it so easy that it would be upward and onwards if that double bottom holds. It could last for a while but it's quite likely there would be yet another retest or lower low sometime later on, so if you want to play along better be nimble.
Sometimes I wish I could just fast forward the market by 2 or 3 months. Then again, I don't want to age so quick!
Wednesday, August 10, 2011
Comments about Tuesday's action
I don't mean to sound like a hypocrite talking about day to day market action and bottom picking when I've been preaching not to obsess about it....in this case however, I feel it warrants an exception due to the obvious unique circumstances the market is in.
Tuesday's reversal looked pretty good. During the bottoming process of a panic you will see such types of reversals whereby there's a downside flush followed by reversal to the upside by day's end. The stronger the day ends the more reliable the reversal. Not only was Tuesday's close super strong but the put/call ratio closed at a ridiculous 1.29 which is normally what you see during sharp declines. During a severe downtrend when you see a high put/call ratio like this in the face of a strong market day it's an indication that the bears are getting recklessly greedy. A high put/call ratio is justified when the market is weak but not when it's strong. Sometimes the market will actually go down in the days ahead proving these bears right....for the time being... but within 1-2 weeks they get punished severely. This same behavior occurred on June 10 and I made note of it in the comment section in a post a few days later. As you know, the market bottomed about a week later and roasted the bears badly with a viagra induced boner move that ended in early July. I remember first seeing this phenomenon in November of 2008 and it took about 1 week for the bears to get roasted whereby initially they were correct in fading the rally.
So, it's looking a lot better for the bulls now in the ST. Don't rule out another run for the lows, but downside from here should be contained at least for the time being and an upside snap back to 1200-1225 appears to be in the cards.
Ok, that's enough ST talk. In fact, I think I'm going to take a break from blogging for a while. I think I said all I needed to say. Now it's just a matter of watching to see how things play out for the next few months. Feel free to send emails and comments in the meantime...and good luck!
Tuesday's reversal looked pretty good. During the bottoming process of a panic you will see such types of reversals whereby there's a downside flush followed by reversal to the upside by day's end. The stronger the day ends the more reliable the reversal. Not only was Tuesday's close super strong but the put/call ratio closed at a ridiculous 1.29 which is normally what you see during sharp declines. During a severe downtrend when you see a high put/call ratio like this in the face of a strong market day it's an indication that the bears are getting recklessly greedy. A high put/call ratio is justified when the market is weak but not when it's strong. Sometimes the market will actually go down in the days ahead proving these bears right....for the time being... but within 1-2 weeks they get punished severely. This same behavior occurred on June 10 and I made note of it in the comment section in a post a few days later. As you know, the market bottomed about a week later and roasted the bears badly with a viagra induced boner move that ended in early July. I remember first seeing this phenomenon in November of 2008 and it took about 1 week for the bears to get roasted whereby initially they were correct in fading the rally.
So, it's looking a lot better for the bulls now in the ST. Don't rule out another run for the lows, but downside from here should be contained at least for the time being and an upside snap back to 1200-1225 appears to be in the cards.
Ok, that's enough ST talk. In fact, I think I'm going to take a break from blogging for a while. I think I said all I needed to say. Now it's just a matter of watching to see how things play out for the next few months. Feel free to send emails and comments in the meantime...and good luck!
Tuesday, August 9, 2011
Oversold as early October 2008
Just when you think you saw it all. Wow! There's no way to sugar coat Monday's action. Ugly to the last second and a close at the LOD suggests ultimately, we're not done yet bounce or no bounce. Regardless, this sell-off is getting asinine and at yesterday's close we were as oversold as we were in early October of 2008 which was where the market made a bottom. It wasn't the ultimate bottom mind you...but .it was one of the 3 series of bottoms that marked the ultimate low of the bear market.
As of Monday's close only 6.6% of stocks in the SPX is trading above the 200 DMA, while 0.2% is trading above the 50 DMA and 0% above the 20 DMA! Stats like this all occurred near the depths of the bear market of 2008. The ST trading oscillator I keep tabs on hit -1412. During the crash of 2008 the lowest it ever got was about -1520.
Let's try to look at this objectively. Yes, this crash is similar to the panic of 2008 in terms of the oversold readings we are getting but let's remember this....the above stats are what you see in the bottoming process not the topping process or first down leg in a new bear market. Also, prior to the crash of 2008, the market trend, along with fundamentals i.e. earnings and credit quality conditions were already in deterioration for several months whereas this time around they weren't, not to mention that there was nothing close in the way of optimism on main street and the retail investor prior to this crash....they were still pessimistic. That to me makes me quite skeptical to believe this is a new bear market but if there's one thing I've learned over the years is to respect the market when it's not agreeing with you and I was fortunate enough to detect danger in June when I noticed the market was showing a change in character and significantly reduced exposure in the weeks that followed. I said this before.....respect the market or it will beat it out of you. Discipline (prudence) must trump conviction. If you have a thesis about the market, only act boldly when it's agreeing with you. When it's not, it means you are either early or wrong, so step aside.
The market right now is saying that I stand a reasonable chance of being wrong....but it could also just be correction, albeit a severe one within an ongoing bull market to clean out the weak hands and test the conviction of bulls. If you're still LT bullish and have doubts that's a good thing....that's what corrections are supposed to do...they are supposed to humble you and make you sweat. I'm sure many who were bullish last summer had strong doubts too...I know I did and I'm having them now again. There's a lot of calls for a new recession and new bear market and again, that's what corrections are supposed to do. Anyone who traded the bear market from 2000-2002 would have experienced the same thing but in reverse...strong rallies gave hope to everyone that worst was over and made bears sweat or capitulate.
So, in conclusion I reiterate was I've been saying lately. I doubt it's a new bear market but I'm respectful of market action telling me that it could be and I need to see evidence of a LT bottom first before getting aggressive on the long side. Cherry picking some names you have on you watch list that are showing ridiculous selling is warranted but keep powder dry. Throughout the history of panics and crashes triggered by financial fears (not exogenous events like 911 or Japan earthquake) it took at least 2 months of base building before the market was ready to take off again in a sustainable way. Therefore, if you wait it out, you'll likely still have plenty of opportunity to get in at good prices. You may not be buying at the ultimate bottom but you'll still make good money and with the wind at your back you'll do it much easier, less likely to get whipsawed.
Most people lose in this game because they obsess too much about the day to day. They trade every day or every week thinking they can catch every little wiggle in the market. A lot these people try to be smart asses by zigging when the market zags making a dime here and there. That's a losers game. Eventually they either miss out big time or get ran over when the market makes a big move. In fact, I can tell that a lot of bears who got crushed shorting the market for 2+ years either didn't capitalize on this crash covering way too soon and/or got ran over being a smart ass playing for a bounce that never happened last week and the week before. This is exactly what happened in 2008 as well.
Days like today will make you think "Damn, I wish I would have loaded up the boat on Monday's close". That's a gambler's mentality. Gamblers are always attracted in trying to pick tops and bottoms and catching all the day to day moves. If I had to give just a few pieces of advice when it comes to investing/trading successfully it would be this....stop obsessing about the day to day and focus on the bigger picture. Only take a position when the wind is at your back which implies no bottom or top picking no matter how tempting...I know, it's difficult to resist picking tops and bottoms. I've been trading full time since 2009 and my success thus far is largely attributed by strictly following this principle. The exception I have to this rule is when there is a blow-off panic or mania. In that case, bottom or top picking is permitted but only with a very limited amount of capital (so you can be a strong holder)....no aggressive bets are permitted until you have the wind at your back and are showing a profit with your initial entry.
Take a look at the trade I was considering with TLT about a month ago to see a perfect example of what I'm talking about. In early July there was a pullback in TLT in what appeared to be a new uptrend. That's the sort to opportunities I look for....pullbacks/consolidations in emerging up trends (not mature ones). These are the sort of "sweet spot", premium opportunities you should be looking for but they don't come around every day. You may have to wait several weeks or even months for them while twiddling your thumbs all day and that be can difficult...the temptation to do make something out of nothing is always high because you feel you have to make money every week/month. More often than not that will backfire.
Do you notice a theme here? To be success at this game you have to do difficult things. I suppose that could be a life lesson a well.
As of Monday's close only 6.6% of stocks in the SPX is trading above the 200 DMA, while 0.2% is trading above the 50 DMA and 0% above the 20 DMA! Stats like this all occurred near the depths of the bear market of 2008. The ST trading oscillator I keep tabs on hit -1412. During the crash of 2008 the lowest it ever got was about -1520.
Let's try to look at this objectively. Yes, this crash is similar to the panic of 2008 in terms of the oversold readings we are getting but let's remember this....the above stats are what you see in the bottoming process not the topping process or first down leg in a new bear market. Also, prior to the crash of 2008, the market trend, along with fundamentals i.e. earnings and credit quality conditions were already in deterioration for several months whereas this time around they weren't, not to mention that there was nothing close in the way of optimism on main street and the retail investor prior to this crash....they were still pessimistic. That to me makes me quite skeptical to believe this is a new bear market but if there's one thing I've learned over the years is to respect the market when it's not agreeing with you and I was fortunate enough to detect danger in June when I noticed the market was showing a change in character and significantly reduced exposure in the weeks that followed. I said this before.....respect the market or it will beat it out of you. Discipline (prudence) must trump conviction. If you have a thesis about the market, only act boldly when it's agreeing with you. When it's not, it means you are either early or wrong, so step aside.
The market right now is saying that I stand a reasonable chance of being wrong....but it could also just be correction, albeit a severe one within an ongoing bull market to clean out the weak hands and test the conviction of bulls. If you're still LT bullish and have doubts that's a good thing....that's what corrections are supposed to do...they are supposed to humble you and make you sweat. I'm sure many who were bullish last summer had strong doubts too...I know I did and I'm having them now again. There's a lot of calls for a new recession and new bear market and again, that's what corrections are supposed to do. Anyone who traded the bear market from 2000-2002 would have experienced the same thing but in reverse...strong rallies gave hope to everyone that worst was over and made bears sweat or capitulate.
So, in conclusion I reiterate was I've been saying lately. I doubt it's a new bear market but I'm respectful of market action telling me that it could be and I need to see evidence of a LT bottom first before getting aggressive on the long side. Cherry picking some names you have on you watch list that are showing ridiculous selling is warranted but keep powder dry. Throughout the history of panics and crashes triggered by financial fears (not exogenous events like 911 or Japan earthquake) it took at least 2 months of base building before the market was ready to take off again in a sustainable way. Therefore, if you wait it out, you'll likely still have plenty of opportunity to get in at good prices. You may not be buying at the ultimate bottom but you'll still make good money and with the wind at your back you'll do it much easier, less likely to get whipsawed.
Most people lose in this game because they obsess too much about the day to day. They trade every day or every week thinking they can catch every little wiggle in the market. A lot these people try to be smart asses by zigging when the market zags making a dime here and there. That's a losers game. Eventually they either miss out big time or get ran over when the market makes a big move. In fact, I can tell that a lot of bears who got crushed shorting the market for 2+ years either didn't capitalize on this crash covering way too soon and/or got ran over being a smart ass playing for a bounce that never happened last week and the week before. This is exactly what happened in 2008 as well.
Days like today will make you think "Damn, I wish I would have loaded up the boat on Monday's close". That's a gambler's mentality. Gamblers are always attracted in trying to pick tops and bottoms and catching all the day to day moves. If I had to give just a few pieces of advice when it comes to investing/trading successfully it would be this....stop obsessing about the day to day and focus on the bigger picture. Only take a position when the wind is at your back which implies no bottom or top picking no matter how tempting...I know, it's difficult to resist picking tops and bottoms. I've been trading full time since 2009 and my success thus far is largely attributed by strictly following this principle. The exception I have to this rule is when there is a blow-off panic or mania. In that case, bottom or top picking is permitted but only with a very limited amount of capital (so you can be a strong holder)....no aggressive bets are permitted until you have the wind at your back and are showing a profit with your initial entry.
Take a look at the trade I was considering with TLT about a month ago to see a perfect example of what I'm talking about. In early July there was a pullback in TLT in what appeared to be a new uptrend. That's the sort to opportunities I look for....pullbacks/consolidations in emerging up trends (not mature ones). These are the sort of "sweet spot", premium opportunities you should be looking for but they don't come around every day. You may have to wait several weeks or even months for them while twiddling your thumbs all day and that be can difficult...the temptation to do make something out of nothing is always high because you feel you have to make money every week/month. More often than not that will backfire.
Do you notice a theme here? To be success at this game you have to do difficult things. I suppose that could be a life lesson a well.
Saturday, August 6, 2011
Weedend ramblings
So much I want to talk about....this was going to be a very long post but I figure it's best I just get down to what's important. Obviously, the big news over the weekend was the S&P US debt downgrade. I said it before, these rating agencies are a joke. Remember, these are the same geniuses who slapped AAA ratings on MBSs and had investment grade ratings on all the financials that went under in 2008 and didn't downgrade them until after they were already crushed and bankrupted. The same thing happened with Enron and Worldcom...these clowns had their heads up their asses keeping investment grade ratings right up untill they filled for Ch. 11.
So, after being badly embarrassed in 2008 for failing to see the collapse, it seems to me that S&P is tying to make up for it by being a tough guy with this US downgrade. The US treasury pointed out that S&P made a $2 trillion mistake in their deficit projections, which is pretty large, and yet these jokers still stuck with their downgrade citing "political factors" as the main motivator. lol! Who are you clowns fooling? You just got embarrassed yet again! My grandmother can do a better job rating bonds then these agencies.
Clowns or not, this news will simply add fuel to the sharp loss of confidence and panic that's taking place in the market. Buying during panics, even during bear markets is usually a money maker so long as you are a strong holder able to take the pain until the rebound occurs. If you bought during the fall of 2008 or the flash crash you ended up doing quite well so long as you held strong because it took months for it to pay off and there were lower lows in the interim...in 2008 the lower lows were quite significant. That is where I see market right now. We are in the range where any buys here will likely pay off sometime down the road, but in the interim, you have to be prepared to grind it out and perhaps be early. If you use tight stops and look at the market every hour, every day, odds are high you'll end up making an emotional decision. You have to be a strong holder. If you can't be then it's best to wait for the dust to settle and buy when the bulls have regained control.
Let's consider the bear case for a moment. The broken clock bears are really pounding the table now with a recession call. Now, just because they were wrong as could be for the past 2.5 years about the market doesn't mean you should automatically dismiss them. Hussman had a lengthy commentary this weekend and is flat out calling for a recession based upon his composite of indicators. He pretty much called for one last summer too along with other bears. Oh, but this time it's gonna happen - so the bears say. Well we'll just see now won't we?
Here's the deal. If the bears are right and this slide is the first leg of a new bear market because of a forthcoming, recession you're going to be sorry if you aggressively bought the dip (and didn't flip quickly on strength) because the market drops 40% on average during recessions. If it turns out that no recession is in the cards and this is just a correction, then odds are the market will do some base building for several weeks or even months before taking off again. Therefore, either way, the best move here is to do nothing if you're mostly in cash like me. Some selective buying on weakness is warranted but you need to respect market action if you're bottom picking....the wind is no longer at your back so don't be a hero.
The bottom line is that it's best to remain mostly in cash and wait patiently for the dust to settle for the next several weeks and maybe months to get a better idea as to where this market is headed longer term. Waiting and doing nothing will cause you to miss out on all the ST bounces and declines that will occur during what will likely be a volatile period. Fuggetabout it. Don't get sucked into the sports gambling aspect of this game.
I want to say more but I've had a long day and I'm going to bed now....maybe I'll post again tomorrow. Hope everyone is holding up ok.
So, after being badly embarrassed in 2008 for failing to see the collapse, it seems to me that S&P is tying to make up for it by being a tough guy with this US downgrade. The US treasury pointed out that S&P made a $2 trillion mistake in their deficit projections, which is pretty large, and yet these jokers still stuck with their downgrade citing "political factors" as the main motivator. lol! Who are you clowns fooling? You just got embarrassed yet again! My grandmother can do a better job rating bonds then these agencies.
Clowns or not, this news will simply add fuel to the sharp loss of confidence and panic that's taking place in the market. Buying during panics, even during bear markets is usually a money maker so long as you are a strong holder able to take the pain until the rebound occurs. If you bought during the fall of 2008 or the flash crash you ended up doing quite well so long as you held strong because it took months for it to pay off and there were lower lows in the interim...in 2008 the lower lows were quite significant. That is where I see market right now. We are in the range where any buys here will likely pay off sometime down the road, but in the interim, you have to be prepared to grind it out and perhaps be early. If you use tight stops and look at the market every hour, every day, odds are high you'll end up making an emotional decision. You have to be a strong holder. If you can't be then it's best to wait for the dust to settle and buy when the bulls have regained control.
Let's consider the bear case for a moment. The broken clock bears are really pounding the table now with a recession call. Now, just because they were wrong as could be for the past 2.5 years about the market doesn't mean you should automatically dismiss them. Hussman had a lengthy commentary this weekend and is flat out calling for a recession based upon his composite of indicators. He pretty much called for one last summer too along with other bears. Oh, but this time it's gonna happen - so the bears say. Well we'll just see now won't we?
Here's the deal. If the bears are right and this slide is the first leg of a new bear market because of a forthcoming, recession you're going to be sorry if you aggressively bought the dip (and didn't flip quickly on strength) because the market drops 40% on average during recessions. If it turns out that no recession is in the cards and this is just a correction, then odds are the market will do some base building for several weeks or even months before taking off again. Therefore, either way, the best move here is to do nothing if you're mostly in cash like me. Some selective buying on weakness is warranted but you need to respect market action if you're bottom picking....the wind is no longer at your back so don't be a hero.
The bottom line is that it's best to remain mostly in cash and wait patiently for the dust to settle for the next several weeks and maybe months to get a better idea as to where this market is headed longer term. Waiting and doing nothing will cause you to miss out on all the ST bounces and declines that will occur during what will likely be a volatile period. Fuggetabout it. Don't get sucked into the sports gambling aspect of this game.
I want to say more but I've had a long day and I'm going to bed now....maybe I'll post again tomorrow. Hope everyone is holding up ok.
Friday, August 5, 2011
Assesing the damage
Wow Thursday was really nasty! We've basically seen a mini crash in the market with it down 11% in 5 trading days. Although now were are extremely ST oversold and very well IT oversold, the fact that the market closed at the low point of the day suggests that we haven't seen the worst yet, bounce or no bounce. How much worse could it get? My best guess would be the November lows which is about another 25 points down but as always, I'll look for clues from Mr. Market and make adjustments if neccessary.
Given the crash like nature of this decline, even if a bottom is not far off it will likely take several weeks of basebuilding and whipsaws before the market will be able to regain any bull market behavior on a sustained basis, in other words, it's very unlikely we will do a V bottom from here onwards and upwards to new highs. Look at the period from after the flash crash in late May to September of 2010 to get an idea as to what we could be in for assuming the LT bull case is still in tact.
Let's take at the damage here. The % of SPX stocks trading above the 200DMA is now at 22% putting us well into oversold IT conditions....even more oversold than the depths of the flash crash. On a more shorter term basis, the % of SPX stocks trading above the 50 DMA is only at 3%! Only during the crash of 2008 was the market able to decline significantly more when the market was this oversold on both IT and ST time frames and that was a once in lifetime situation where the system was in collapse. Are we in such a situation now where financial stress is exploding and earnings are collapsing? Far from it. Oh but wait, the market could be anticipating these things happening right? After all, I did make mention of weakening leading indicators didn't I? This is true, but without any actual evidence yet of earnings turning around for the worse, a drop of this magnitude seems more like a panicky over reaction to these fears.
A month ago I said I think we needed to see the market reset. Here's the checklist I mentioned
Oil back in the 80s.....check (but we need to see this last for more than just 1 day)
VIX above 30.....check
10 year bond sub 3%....check
Add to the fact that the market is extremely IT and ST oversold and you have a market that's in the vicinity of a correction bottom and so at this point it makes sense to do some cherry picking opportunities for individual names that you've had your eye on for a long time and you feel they got unduly trashed. Go for it...but keep a healthy cash reserve and be prepared to be early.
Given that we closed right at the low of the day tells me the market was simply "saved by the bell" which is why I expect to see lower lows - not necessarily tomorrow or next week, but in due time before this correction is over with. In the interim there could be and will likely be big bounces along the way as the market will likely undergo base building for several weeks if not months.
If something more ominous is in the cards then I'll deal with it. It's important to not be a hero and aggressively catch falling knives when the market closes at the LOD like this. Again, some selective buying is warranted at this point but respect for the market is even more warranted.
By the way did you see those bonds? Wow! TLT is at 105 and a month ago I was talking about potentially buying December 90 calls which were at about $4.50 at the time. Now they are at $15! I didn't end up pulling the trigger on that trade but I was so close. Fuck me. Oh well, there's always another train to catch if you miss one...just be careful not to go on tilt when you miss an opportunity by endin up playing weak setups trying to make up for it.
Wednesday, August 3, 2011
Intermediate term headwinds kicking in
In the last couple of months I've been making mention of the issues that made me IT cautious about the market...the main reason I went 70% cash. The major concerns I had were that leading indicators such as the ECRI leading index along with global manufacturing guages were downshifting. Meanwhile "market character" started to change such that we started seeing a string of small but persistent declines, something that we didn't see during the run up from September to April. That's consolidation or bear market behavior as opposed to the short but sharp dips you see in up trends. I also made mention that the yield curves of emerging markets Brazil, India and China were inverted or flat warning of at least a significant slowdown. All of these concerns are coming home to roost now as it's becoming more and more evident that a global slowdown is taking place.
A lot of things I was expected to see during this consolidation are finally happening. The 200 day, along with the March lows got taken out During consolidation phases you need to see the weak bulls get cleaned out and the bears get euphoric before a bottom can be reached and with everyone being a technician now a days, I suspected that we would have to see well known support levels and trend lines taken out.... just like last summer.
The main culprit of this correction in my opinion is not so much the bickering in the Washington, or PIIGS but rather, high commodity prices. This is the reason for the tightening that has taken place across the globe which has caused growth to slowdown. So therefore, I believe the tightening bias won't end until they come down to the point were inflation pressures are eased. That to me suggests oil in the 80's....at least.
So, until the headwinds abate, the market will at best be in a trading range and at worst it could be the start of a new bear market. I have my doubts about the latter but because I always have respect for market action despite my convictions since unlike the permabears who got murdered since 2009, I realize the possibility that I could either be wrong or very early...either of which is big money loser. Therefore, I won't make any moves until I see either a "whites of the eyes" type moment were the market is extremely oversold and sentiment is extremely bearish or when the market is acting in way that confirms my LT bullish convictions which I suspect won't happen until the market begins to sense that emerging market countries will be ending their tightening campaigns.
Patience folks. One of the hardest things for people to learn is patience. Most people feel the need to make trades every day or every week. This is counterproductive and it will cause you to be myopic about the market. I said this before one time....in any given year, you will very likely be able to capture all of the major moves in the market by making just 2-5 major trading decisions....that's it! You can just twiddle your thumbs the rest of the time! Professional poker players don't play most hands. The vast majority of the time they fold and just watch. They usually wait to play premium hands. Do the same. And unlike in poker, you can't bluff the market playing weak hands...you will get called every time! So, play only the premium hands. If it takes several weeks or even several months then so be it....and you don't have to be forced to play to defend your blinds either.
The good news for the bulls right now is that sentiment is heading to bearish extremes quite rapidly to the point were another ST low is likely not too far away ( if not already put in today), while making large strides in making the ultimate correction bottom low. The % of SPX stocks trading above the 200 DMA is at 40%. At the bottom of last summer's correction it got as low as 30%. The put/call ratio looks poised to close over 1.3 which is consistent with ST or IT bottoms. The fact that such a high reading is happening on an up day is very encouraging from a contrary point of view. We saw a similar reading in mid June, early July of last year and early September of last year of all which were either great ST or LT buying opportunities. I suspect though that if today was a bottom, it will take at least 2 weeks of backing and filling before any kind of sustained rebound will take place.
Ultimately, I think we need to see oil at least in the mid 80's before we can get out of this morass for good.
A lot of things I was expected to see during this consolidation are finally happening. The 200 day, along with the March lows got taken out During consolidation phases you need to see the weak bulls get cleaned out and the bears get euphoric before a bottom can be reached and with everyone being a technician now a days, I suspected that we would have to see well known support levels and trend lines taken out.... just like last summer.
The main culprit of this correction in my opinion is not so much the bickering in the Washington, or PIIGS but rather, high commodity prices. This is the reason for the tightening that has taken place across the globe which has caused growth to slowdown. So therefore, I believe the tightening bias won't end until they come down to the point were inflation pressures are eased. That to me suggests oil in the 80's....at least.
So, until the headwinds abate, the market will at best be in a trading range and at worst it could be the start of a new bear market. I have my doubts about the latter but because I always have respect for market action despite my convictions since unlike the permabears who got murdered since 2009, I realize the possibility that I could either be wrong or very early...either of which is big money loser. Therefore, I won't make any moves until I see either a "whites of the eyes" type moment were the market is extremely oversold and sentiment is extremely bearish or when the market is acting in way that confirms my LT bullish convictions which I suspect won't happen until the market begins to sense that emerging market countries will be ending their tightening campaigns.
Patience folks. One of the hardest things for people to learn is patience. Most people feel the need to make trades every day or every week. This is counterproductive and it will cause you to be myopic about the market. I said this before one time....in any given year, you will very likely be able to capture all of the major moves in the market by making just 2-5 major trading decisions....that's it! You can just twiddle your thumbs the rest of the time! Professional poker players don't play most hands. The vast majority of the time they fold and just watch. They usually wait to play premium hands. Do the same. And unlike in poker, you can't bluff the market playing weak hands...you will get called every time! So, play only the premium hands. If it takes several weeks or even several months then so be it....and you don't have to be forced to play to defend your blinds either.
The good news for the bulls right now is that sentiment is heading to bearish extremes quite rapidly to the point were another ST low is likely not too far away ( if not already put in today), while making large strides in making the ultimate correction bottom low. The % of SPX stocks trading above the 200 DMA is at 40%. At the bottom of last summer's correction it got as low as 30%. The put/call ratio looks poised to close over 1.3 which is consistent with ST or IT bottoms. The fact that such a high reading is happening on an up day is very encouraging from a contrary point of view. We saw a similar reading in mid June, early July of last year and early September of last year of all which were either great ST or LT buying opportunities. I suspect though that if today was a bottom, it will take at least 2 weeks of backing and filling before any kind of sustained rebound will take place.
Ultimately, I think we need to see oil at least in the mid 80's before we can get out of this morass for good.
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