Since I believe the bull is back, I've been focusing my attention to sector and stock research. I'm no longer concerning myself with the macro nearly as much as I have been of late. I'll still be willing to put on a protective hedge just in case I'm wrong about the bull being back as I continue my accumulation of long positions in individual names, because I still have doubts deep down (and that's actually a bullish sign). As everyone else out there obbsess about Europe, I'm gong to be looking for the hidden gems and despite the rally, they are still out there especially in the small/micro cap space...it's not too late at all to find them because I have found that some small/micro caps can be slow to react to the major trend changes in the general market. I find it really enjoyable sifting through stock universe and researching sectors to uncover these gems becoming an investor at what I believe to be ground floor levels....remember that word...investor? I bet when most people who are in the game now first started playing the market they were "investors" but then after getting burned by either the tech bubble collapse or in 2008, they turned permabear and became "traders". I consider myself part investor part speculator.... I try to take the best of both worlds. I'll talk more about this and about interesting sectors I'm looking at in the coming posts.
Sunday, January 29, 2012
Looks like the bull market is back
This post was originally going to be long winded, going into the details of my thoughts but I don't want to waste time and so I'll get straight to the point and give the executive summary version. There is a clear change in character in the market - the bull is back. The relentless grind higher and the "upside damage" that has been done is telling me the bear case is dead. I believe the market is suggesting that the worst is over in Europe (I said the worst is over not that the crisis is over) and that the crisis is going to pass without harming the US in a material way. I believe the extremes in bullish sentiment we are seeing is indicative of what you often see early in a new bull market advance and is not cause for alarm aside from an eventual consolidation of these gains. I see plenty of anger and top picking towards this rally by the retail permabear trading community similar to what I have seen early in prior bull market advances since 2009. I'm noticing an obsession of these jokers in bottom picking TVIX getting crushed in the process just like what I saw in FAZ in the summer of 2009. I believe ECRI is going to be tossed into the guru turned goat bin alongside with Roubini, Whitney and Schiff in 2009.
Thursday, January 19, 2012
This has an October 2010 feel to it
Let me first start off by saying that my belief that a run to the summer lows by the end of the first quarter will most likely turn out to be wrong. If you recall how the market behaved a month after the September lows this feels a lot like that - the slow but relentless grind higher with low volatility which is the hall mark of bull market action. And now, just like then, the permabear trading community got caught shorting the rally trying to pick top after failed top. Let's face it, everyone's on the look out for a top including you and me. And seemingly out of nowhere, we have a market that's only about 50 points away from making a new bull market high!
Everyone's harping about how bullish sentiment is. I've warned many times here about he limitation of sentiment surveys. Although extreme bullish sentiment often pinpoints IT tops, you can also see it happen during the first rally out of a major bottom which paradoxically is a LT buy signal! That's what happened in October of 2010 when bullish sentiment hit extreme levels. I also remember this happening in the summer of 2003 when the market was early in a new bull market. Sentiment was off the charts extreme....like 5:1 bulls vs bears and that got all the permabears really excited... yet that hardly marked the end of the bull run and those permabears got ran over big time. But OK, yes, I know that only in hindsight will we be able to know if this surge in sentiment signals a new bull market or an important top....my point here is that don't just automatically assume it's the latter like 95% of the trading community is. And again, I must stress this....what are people actually doing with their money? That counts more in my book. AMG shows yet again only a modest inflow into equities this week. Active managers as per NAAIM show only a modest rise in equity exposure to a 53% net long allocation. That's still neutral and nowhere near extreme. So, people are only gingerly tip toeing back into the market. That's not worthy for me to make a contrarian bet on the downside
Shorter term, the market does appear overheated and ripe for at least some sideways action or modest downside but again any downside should be modest. Because I still have doubts, I intend to eventually initiate a LT, OTM put hedge to augment my long positions which to be honest, is still a pathetically small part of my overall account. I'll initiate the hedge when my exposure is high enough and when I think the market is ripe for downside greater than 3%. Despite the recent bull market behavior, I still don't have a strong enough conviction that the worst is over and there won't be at least one more scare in the market as per the reasons I mentioned a few weeks ago. That makes me somewhat of weak long if I was to add significant more exposure. But with a hedge I'll be able to be a strong holder of longs focusing my attention to company specifics and less on fixation about the fucking market. Yes, I'm frustrated because a couple of stocks I had orders for didn't get filled and they ended up having big moves. Typically, I will use a market order especially when I'm bullish about the general market. I know from experience not to haggle over nickels and dimes when buying a stock because if you do that, the stock can end up running away for hundreds without you on board....and that's what happened to me. I broke this rule because I was unsure about the market so I used limit orders instead at prices slightly below market levels which didn't get filled. And of course, I got punished once again for trades that I didn't make as opposed to ones that I do make.
I feel rattled because of this. Remember people, don't make trades when you're emotionally unstable. And know yourself. How are you going to behave if a position moves against you by a certain amount? If deep down your conviction level is weak or if you're too stubborn to admit defeat when it's likely you're defeated, Mr. Market is going to expose you. Given enough time Mr. Market WILL without any shred of doubt, expose your weaknesses and do so over and over. I see a lot of traders out there who are caught short holding the bag in agony and frozen like a deer in the headlines. I see them say "the pain is so great but if I give up now I just know the market is going to tank". Please don't ever be in this situation. First of all, don't be in a situation where the pain is great such that you're taking a big hit and you're hoping to break even. Second of all, don't have this "if I sell now it will go the other way" attitude. That's a psychological trap known as "fear of regret" and typically exhibited by amateur traders who still haven't learned to set aside their ego.
This market has been very tough I know, but DON'T go on tilt folks....he'll get you if you do. If you have to, step away from the game for a while.
Everyone's harping about how bullish sentiment is. I've warned many times here about he limitation of sentiment surveys. Although extreme bullish sentiment often pinpoints IT tops, you can also see it happen during the first rally out of a major bottom which paradoxically is a LT buy signal! That's what happened in October of 2010 when bullish sentiment hit extreme levels. I also remember this happening in the summer of 2003 when the market was early in a new bull market. Sentiment was off the charts extreme....like 5:1 bulls vs bears and that got all the permabears really excited... yet that hardly marked the end of the bull run and those permabears got ran over big time. But OK, yes, I know that only in hindsight will we be able to know if this surge in sentiment signals a new bull market or an important top....my point here is that don't just automatically assume it's the latter like 95% of the trading community is. And again, I must stress this....what are people actually doing with their money? That counts more in my book. AMG shows yet again only a modest inflow into equities this week. Active managers as per NAAIM show only a modest rise in equity exposure to a 53% net long allocation. That's still neutral and nowhere near extreme. So, people are only gingerly tip toeing back into the market. That's not worthy for me to make a contrarian bet on the downside
Shorter term, the market does appear overheated and ripe for at least some sideways action or modest downside but again any downside should be modest. Because I still have doubts, I intend to eventually initiate a LT, OTM put hedge to augment my long positions which to be honest, is still a pathetically small part of my overall account. I'll initiate the hedge when my exposure is high enough and when I think the market is ripe for downside greater than 3%. Despite the recent bull market behavior, I still don't have a strong enough conviction that the worst is over and there won't be at least one more scare in the market as per the reasons I mentioned a few weeks ago. That makes me somewhat of weak long if I was to add significant more exposure. But with a hedge I'll be able to be a strong holder of longs focusing my attention to company specifics and less on fixation about the fucking market. Yes, I'm frustrated because a couple of stocks I had orders for didn't get filled and they ended up having big moves. Typically, I will use a market order especially when I'm bullish about the general market. I know from experience not to haggle over nickels and dimes when buying a stock because if you do that, the stock can end up running away for hundreds without you on board....and that's what happened to me. I broke this rule because I was unsure about the market so I used limit orders instead at prices slightly below market levels which didn't get filled. And of course, I got punished once again for trades that I didn't make as opposed to ones that I do make.
I feel rattled because of this. Remember people, don't make trades when you're emotionally unstable. And know yourself. How are you going to behave if a position moves against you by a certain amount? If deep down your conviction level is weak or if you're too stubborn to admit defeat when it's likely you're defeated, Mr. Market is going to expose you. Given enough time Mr. Market WILL without any shred of doubt, expose your weaknesses and do so over and over. I see a lot of traders out there who are caught short holding the bag in agony and frozen like a deer in the headlines. I see them say "the pain is so great but if I give up now I just know the market is going to tank". Please don't ever be in this situation. First of all, don't be in a situation where the pain is great such that you're taking a big hit and you're hoping to break even. Second of all, don't have this "if I sell now it will go the other way" attitude. That's a psychological trap known as "fear of regret" and typically exhibited by amateur traders who still haven't learned to set aside their ego.
This market has been very tough I know, but DON'T go on tilt folks....he'll get you if you do. If you have to, step away from the game for a while.
Thursday, January 12, 2012
Follow what they do not what they say
For about a month now, this market has been creeping higher slowly but relentlessly. I have to admit, that's bull market behavior however, let's not get too excited here because one month's action a trend does not make. Sentiment continues to show a remarkable divergence. On the one hand, AAII is showing extreme bullishnessnes again this week and bears are salivating over this. But what is retail actually doing with their money? They aren't putting their money where their mouth is that's for sure. AMG reports only $3.5 Billion in inflows this week which is peanuts. So far since this rally started in late November, net inflows into equities are about 0....it might actually be a slight negative. While I think it's just a matter of short time before retail capitulates and jumps back in (right in time for the next major decline of course!), until they do, the benefit of the doubt goes to the bulls and any downside should be relatively mild.
My game plan is to continue to look for entries in small cap long plays that I can be a strong holder of should I get "caught" by an unexpected major sell-off in the market. Again, I don't expect to see one until more people embrace the market...and not just with "feelings" but with actual money. Eventually I expect to be at least partially hedged.
My game plan is to continue to look for entries in small cap long plays that I can be a strong holder of should I get "caught" by an unexpected major sell-off in the market. Again, I don't expect to see one until more people embrace the market...and not just with "feelings" but with actual money. Eventually I expect to be at least partially hedged.
Saturday, January 7, 2012
Weekend Ramblings
Bizzare behavior in sentiment this week. AAII came in at a dangerously high 2.85 bulls vs bears this week. That's another thing I've been needing to see before making a bearish bet. When I saw this stat Thursday morning I figured for sure it would have been accompanied by a spike in inflows from retail and long exposure from active mangers but it didn't! In fact, there was a modest outflow and essentially unchanged long exposure which remains at a still neutral 43%. I was rather shocked by that. So, you have people "talking" more bullish but not actually putting their money where their mouth is! I always put more weight to indicators that show what people are doing vs. what they are saying. But having said that, the smart money put/call ratio is flashing a very bearish omen. The 10 DMA is back over 2. Not good. Meanwhile Lester (the worst trader in the world) said this on Tuesday
Closing my SPY Put at the open. Being short is being stupid. I made that mistake many times in 2009 2010 and 2011. Election year is bullish year so I am not gonna be stupid this year.
I bought a SPY Call after close on Tuesday - Feb 128. Figured I would buy the dip seen at end of Tuesday. Bears are fools including the old Lester. The new Lester will only play long.
Not good folks, not good! Lester is hands down the worst I have ever seen. He is never right acting purely on impulse no better than a degenerate sports gambler. This doesn't necessarily mean the bulls are doomed this year, because he can and has in the past flip flopped, but so long as this is his disposition right now, it's quite bearish for the market in the medium term. I also noticed decisionpoint.com, the charting service I use, has issued a LT buy signal. Jesus these guys that been atrocious. They use mechanical models which have been an absolute disaster. This same model issued a LT sell signal at around 1150 back in the summer and a whole bunch of shorter term buy and sell signals most of which were a bust as well. We have the VIX back at 20 as well. All the pieces of the bear puzzle are in place except for inflows and long exposure from NAAIM and I suspect in the next week or 2 that will be in place as well.
US economic data has been coming in consistently better than expectations and so far the US economy has been able to be decouple from the woes in Europe. But is this just a last reprieve before it gets sucked in the weakness that appears to be infecting not only just Europe but Emerging markets as well? Well, regardless of whether this turns out to be true, in the IT, the market appears to be just about ripe for at least a major retracement. The "good news" last week on employment may finally cause any weak would be longs who are on the sidelines to throw in the towel and jump in. Once I see that, I'm going to drop the hammer and buy index puts.
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