Bulls Bears and Pigs

This has an October 2010 feel to it

2012-01-19T23:44:00.000-05:00

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.

Follow what they do not what they say

2012-01-12T22:15:00.000-05:00

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.

Weekend Ramblings

2012-01-07T11:31:00.001-05:00

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.

My resolution for 2012: brass balls

2011-12-29T21:15:00.000-05:00

This is the time of year when I look back to see all the hits and misses I made. First the hits. Coming into the year my longs were almost entirely in Canadian small cap energy services stocks. These stocks and this sector in general were winners in 2011 despite the TSX being down 12% or so for the year. Despite all the dips in the first half of the year, namely, the March dip due to the earthquake in Japan, I held my longs strong. I then started substantially cashing out in June and early July when I sensed a change in character in the market. My timing was excellent. These stocks tumbled alongside the market shortly after...but now most of these stocks have either rebounded back to or above where I sold them! I'm not bitter about that because a) At their lows I no longer had the same positive LT conviction about the overall market as I did earlier in the year b) Oil prices, which these stocks are largely dependent on, rebounded a lot more than I had believed possible. When oil prices dropped below $80 in the summer I figured it was likely that base building would take place and therefore these stocks would do likewise. Of course, that didn't happen and instead oil, along with these service stocks, did a strong V shaped rebound thanks in large part to geopolitics, something which is difficult to anticipate and account for.

Perhaps I should have nibbled on the stocks I sold near their lows in October but even if I did, I could not have justified buying back anything close to the amount I had sold given a) and b) above. Oh well. Hey, shit like that is gonna happen. It's one thing to sell too soon for good reasons only to see the stock go higher and it's another to sell too soon due to emotional factors such as when despite your positive LT convictions you panic during a correction or you try to be smartass trying to bob and weave through every little rally and dip - that's a bonehead move and the latter is what I did late 2010 with PSV.to and got punished BIGTIME for it....you see there's a reason for my avatar.

My biggest bonehead move of 2011 was the failure to pull the trigger on buying TLT calls that I was contemplating in early July missing out one of the biggest bond rallies in decades. The timing of that entry would have been impeccable. I wasn't planning on making a huge bet mind you....something like 5% of my capital....but that 5% bet would have resulted in an additional 10-15% to my results this year.

Overall though I think I did Ok but only just Ok. While a 24% return this year seems pretty damn good considering what the world markets did (especially my home Canadian market which is down 12% ), I should have done better because I didn't fully capitalize on my convictions. Why? The answer is pretty simple. A lack of balls. You see, unlike most traders who tend to make the mistake of being overly aggressive and overly confident in themselves, I tend to be overly cautious. In general, my mistakes tend to be trades that I don't make as opposed to trades that I do. To my credit, I had only 1 losing trade this year and it was minuscule....essentially breakeven. That's not as impressive as it seems because what I think it shows is that I'm playing too tight. I should have been making more trades which no doubt would have resulted in more loosing trades but also more winning ones as well and the additional winners would have more than made up for the additional losers.

Anyhow, what's done is done. The best you can do is learn from your mistakes. So on that note, my resolution for 2012 is for me to grow a pair of brass balls (as inspired from the movie Glengarry Glen Ross). I need to be bolder. I need to believe in myself more. I need to take on more risk when the risk is worth taking.....the latter part of what I just said is key....being bold when there is little or no perceived edge is reckless and that's not what I'm talking about here. Trying to get "revenge" after you made a losing trade or missed out on what would have been a winning trade is also reckless. There's a fine line between boldness and recklessness....don't cross it.

As far as 2012 goes, as I said before I don't have a clue as to how it will turn out. Unlike last year though, it's very likely the market will be up big or down big. As Russell Peters often says "somebody's gonna get a hurt real bad" - either the bulls or bears because we are going to find out next year whether the world economy be dragged into recession by Europe or not.

2012 certainty has the potential to be a very good year because expectations are low. There's plenty of "bullish fuel" in the tank given the significant equity outflows overall in 2011 and a rush to safety via money market and bond funds that rivaled what we saw in late 2008. Despite all the turmoil in Europe, earnings did not roll over in the largest economy in the world, the US. Bears will point out that this is just a matter of time given some of the red flags out there like ECRI's recession call and the rolling over OECD leading indicator. I say "fair enough" to that but until we actually see some hard evidence I'm not going to fully embrace the bear case but nor will I fully embrace the bull case either at this point given the broken market action which suggests to me that this rally we have been seeing is dubious even though it can linger for a while still. There's also a few indicators like the smart money put/call ratio that suggest we're not out of the woods yet. I think there's a good chance we will see a significant sell-off sometime by the end of March and maybe at that point the market will be in a better position to advance in a sustainable way ...we'll see what happens.

So, given these cross-currents I am going to looking for both long and short opportunities. On the long side, I'm looking for deep value opportunities in the small cap/micro cap space - stocks that were perhaps unjustifiably dragged down or held back due to the general market malaise and could be ripe for a rebound via merger/acquisition or otherwise. I recently purchased 2 of such stocks. On the short side, I'm looking to make an IT bearish bet on the market using put options when I get the sense that the market is "ripe" for the sell-off I envision in the first quarter of 2012. At the most, I will only commit 50% of my account to the above long/short strategy. I know I said I want to be bolder in 2012 and beyond but that can only be allowed when I have a substantial LT edge/conviction on the general market which I don't. As a result I will only be willing to commit up to half of my account on any ideas.

Go with the flows

2011-12-23T00:30:00.000-05:00

The best sentiment indicator as of late has been equity inflows. Despite how crazy market action has been with all these wild swings, if any rally was not accompanied by significant inflows it wouldn't be in danger of collapsing....you could still see big dips but not a complete retracement. The only 2 times since the August crash that we saw a spike in inflows were in mid September and late October, both of which marked significant tops and were followed by losses of about 120 points on the SPX. Since the bottom in late November, despite how erratic and gap happy the rebound has been (which tells me ultimately it's gonna fail) it has attracted negligible inflows so far...in fact, on a net basis, there has been outflows since the November low. The lack of inflows along with other sentiment indicators has made me avoid the short side.

The other sentiment indicators I'm talking about are AAII and NAAIM. AAII currently shows only a modest ratio of 1.2 bulls vs bears and NAAIM shows that active managers have only about 37% long exposure. Those are not the sort of statistics that make me salivate towards playing the short side....they both suggest there's more room for bullishness to rise before reaching the danger zone. One thing though that is indicating complacency is the VIX. At 21, it's pretty damn low considering the market volatility these past several weeks, not to mention all the fundamental issues out there that have yet been resolved.

The VIX has hit one of my bear bet triggers. The other triggers would be AAII sentiment showing about 2:1 bulls vs bears, NAAIM at least 65% exposed long and of course, a spike in inflows. Obviously, there's no law that prohibits the market from tanking big before such stats are reached but from a risk/reward perspective, that's what I need to see to bet along side the bears. If I don't see it, I don't play it. Until then, I'm going to stick with strategy of picking away at some individual names that I can be a strong holder of should I get "caught" and the market does indeed tank big before I believed it was ripe to do so.

Here's something I read this week that I found interesting.

Money market funds brought in $3.2 billion globally last week, extending their longest weekly inflow streak since a 12-week run during the financial crisis at the end of 2008, according to EPFR, a research firm that tracks fund flow data.

When I read things like this it makes me temper my conviction of a big bear market playing out.

If the rush to safety is rivaling what we saw near the depths of the bear market lows in 2008 (when there was far more chaos and destruction compared to now) it suggests we are closer to a LT bottom then an LT top. And remember when I said back in September how the late night talk show hosts were making fun of the economy...something that I also saw in late 2008. Late 2008 wasn't the final bottom but it was close.

The above makes me lean towards the thesis that although it appears likely the market will make another run to the lows in the weeks/months to come due to the shitty market action we have been seeing and a few other things, such a run to the lows would end up being the last move down completing the LT bottoming process that began in early August. As always, I will try my very best to be flexible and open minded about how things are going play out. One thing's for sure is that 2012 is going to be yet another interesting year in the market....aren't they all though?

Ok, that's enough stock market talk. When the closing bell rings Friday, turn off your computer and forget about the market. This is a time for family, friends and food! Remember how you felt as a kid this time of year? Try feeling that same way if you can. Don't be a miserable SOB. I know this sounds cheezy....have a positive attitude and be grateful to be alive and in good health. We all want to make the best out of our life and that's not possible if you're negative or apathetic. And remember, to be really successful you have to consistently do things most people don't do.

Merry Christmas!

Still Perplexed

2011-12-18T02:48:00.000-05:00

When someone asks me where I think the market is headed for the next year or so, I can usually give them an answer. Whether I end up being right or wrong is not the point, the point is that up until now, at least I was able to have a reasonable amount of confidence and clarity to provide a market outlook for the next 1-3 years. Anyone reading this blog since 2009 would know that the outlook I have had since the summer of that year was LT bullish. Coming into 2011, I believed the market would have another good year but it would have to go through a multi-month consolidation phase first at some point because the market was quite overbought. During this phase, I didn't think the downside would be more than 10%. Well, I was clearly wrong about that. Lucky for me I was largely in cash bracing for a correction. It didn't matter how much of a correction it turned out to be - I was safe.

Since the crash I've been having serious doubts about my longer term bullish outlook. There are some economic red flags out there and other indicators that suggest we could be in for a new bear market driven by a global recession. At the same time, there are good arguments to be made against a new big bear market and that this is simply a large correction or mini-bear market. You can always find arguments that support a bullish view or bearish view at any given time which could sometimes cause you get "analysis paralysis". I don't have a case of that. When I was bullish in 2009 and 2010 I was always aware of the bear arguments but I was able to dismiss them. Similar to how a judge scores a fight, I would determine who landed the bigger blows - the bulls or the bears - and then pick who I believed was the winner. This time around though, I can't seem to pick a LT winner because I score the match pretty much even between the bull case and bear case and I have made a few detailed posts highlighting the reasons why it's so tough to pick a side. If you look at what the market has done in the past few months it seems to reflect my judgement of a draw.

IT wise however, my outlook is not as clouded. Evidence to me suggests we aren't done with
downside even if Santa comes to town next week and the market lifts higher all the way into the new year. Capitalizing on IT market moves has been very tricky for me and in that regard, I think I have indeed been a victim of analysis paralysis to some degree but part of it has to do with the type of insane volatility we are seeing. The market is forcing me to either pick tops and bottoms or else chase a potential turning point after a big gap up/down - things that I refuse to do. When In doubt I stay out.

I'm willing to play IT moves if I get a good enough edge and I'm willing to pick away at some individual names trading at excellent values with solid balance sheets with still good prospects for growth. GDC.to was one I bought into last week...very small position. I did well with this one last year. Until I can get some LT conviction about these markets, I'm going to be playing tight and that means being very selective about my trades keeping plenty of powder try.

So when someone asks me what's in store for the market in the next year or two I answer "I have no fucking idea"....at least not right now.

The importance of having the wind at your back

2011-12-13T11:44:00.000-05:00

I've said here more than once that this game is not supposed to be easy. If it was, everyone would be playing it and you wouldn't have those dismal statistics that show 90% of traders lose money in the long run. Although the game is not easy, there are things you can do to make is easier. One of those things and in my opinion, the most important thing, is to have the wind at your back and that means trading in the direction of the general trend. You want to be aggressively long stocks when the trend in the general market is on the rise and when economic fundamentals (earnings, leading indicators) are on the rise or stable. Using the same line of thinking, you want to be primarily short when you see the inverse of the above. When a trend in in place today, odds are high that it will be in place tomorrow which makes it whole lot easier to make money if you bet with it is as opposed to against it. If your entry happened to be bad and you get caught in counter trend reaction shortly after it, odds are high that you will eventually get "bailed out" by the primary trend. This is why they say the trend is your friend. Unfortunately, most people follow this adage only when a trend has been in place for a long time and is just about ready to change. Then they fight the new trend not realizing the main trend has changed!

Right now the wind is no longer at the back's of the bulls as it has been since the spring of 2009. The general market has been be flat for the past 6 and 12 months and has been very volatile. Earnings have remained strong, however leading indicators have rolled over which potentially bodes ill for future earnings. I say potentially because sometimes a roll over in leading indicators may simply be an indication of a mid cycle slow down as opposed to a full blown contraction. ECRI has just reconfirmed their recession call. The latest OECD global leading indicator chart corroborates what the ECRI sees.

Now as you can see by this chart the rollover in the leading indicator doesn't guarantee a recession, it could simply signal a mid cycle slowdown much like what happened in 2005. Notice how the leading indicator didn't roll over last summer when there was a lot of worry about a double dip. This time though, that's not the case. The stock market will often bottom and go back to bull mode a little earlier than leading indicators do, but until we see that behavior you have to be skeptical of the bull side and take it a step further and make a bearish bet if you detect complacency during such conditions of shitty market action and deteriorating leading indicators. Of course, I'm talking about longer term bets here. Those of you who play ST moves need not listen.

I think we will probably have to wait until at least March before we could be in that bullish "sweet spot" again whereby the market is early in a new sustainable uptrend with fundamentals on the rise. During such a phase picking winning stocks is a lot easier as you get the benefit of "the tide lifting all boats". Realizing success going long stocks in bear markets or sideways markets is lot a harder. 2008 was an extreme case of that where practically no stocks in the world went up.

Neither the bulls or bears have the wind at their back at the moment and it shows with the market being flat on multiple time frames. This type of sideways market is supposed to be ideal for ST trader types but that's hardly been the case thanks to the unpredictable headline driven nature of this volatility and the big gap up and gap down moves that go with it. Overall though, the bears have the edge here because this volatile, broken action we are seeing suggests we are not yet done with the downside and with economic momentum on the down slope, the market has the opportunity to gain traction to the downside making new lows. One possible silver lining to this broken action is, as I've pointed out before in a recent post, we saw similar broken action in the drawn out bottoming formations of the 2 previous big bear markets. So, the bulls could find some solace that if history is any guide, any downside from here will not be catastrophic and will lead to a LT bottom. The way I look at it is this. I'll believe it when I see it. Given the shitty action we are seeing and the deterioration of fundamentals it's likely there will be another run for the lows sometime in the coming weeks/months. If afterwards the market action and fundamentals suggest a new bull market then I'll be on board long stocks in a major way. In the meantime, there's no sense in loading up on stocks now gritting your teeth hoping that the downdraft in the market you believe is ultimately going to occur, will only end up being part of the bottoming process. If it ends up being worse than that, you are caught holding the bag and that's a spot you don't want to be in.

So, overall this where I stand right now - I believe ultimately the market is going to at least make a run for the lows within 6 months. Despite this outlook, I currently don't see enough favorable conditions to make a bearish bet. Discipline trumps conviction. I will only be willing to purchase a limited amount of stocks at this time and such purchases will be very selective and price sensitive. I will also be willing to go net short. Right now I'm about 95% cash.

Still not out of the woods

2011-12-12T03:21:00.003-05:00

From what I've been reading on the blogs I can tell this market has been hurting traders. If and I stress if, we are at the "endgame" and a big bear market is upon us, Mr. Market is preparing the groundwork to allow for a sudden and large slide to take place. He is doing so by whipsawing the bears into an oblivion while conditioning them to cover any profitable short positions quickly before they get taken away in a blink of an eye. That's what happened in the first half of this year as well which set the stage for the big drop in late July early August. Bears were conditioned to not "go for the kill" because anytime they did that it was they who got killed, and so they covered position far too early and missed out on the large portion of the crash. The same type of conditioning could very well be taking place right now if Mr. Market is planning on sending the market back to the October lows or beyond. He can only do so when there's little company.

The market is still broken behaving as it does when bear market conditions are in place. In my view, whether the market is going up or not and by how much, is not the sole determiner of what constitutes a bear or bull market....it's the way it goes up or down that gives one a better sense in distingushing a correction from a change in trend. Mechanical trend following systems make no such distinctions as they are based purley on price levels and moving averages. That to me is like agreeing to go out with a girl only knowing that she has nice measurements. What about her face, her skin, her age, her personality, her intelligence?

The way this market has been behaving on the upside since any of the rally attempts made off of IT lows, namely the early August and October lows, suggested to me that they are not sustainable. They smack of short covering panics and squeezes. It does not matter to me how high the market goes...if it continues to go up erratically with high volatility like what we've been seeing lately, I will continue to be skeptical. That doesn't necessarily mean I'm going to bet against it....I won't unless I see enough weak handed investors/traders embrace the rally while at the same time a lot of bears throw in the towel. I've been around this game long enough to know that the market will do whatever it takes to squeeze every last weak bear into submission while sucking in longs. The bear market rally from late September 2001 to March 2002 is a perfect example of how long Mr. Market can keep the balls in the air before pulling the rug right from underneath everyone.

Friday's Euro zone meeting was essentially a dud. No definitive and bold action was made to stem the crisis. At best it was a baby step. The market had sold off sharply the day before and then rallied back to recover all the losses the day after. Bears are pulling their hair out as to how this could be. The reason is probably because there wasn't enough longs to milk while at the same time there were plenty of bears still remaining who figured that the euro zone meeting hype was going to be sold. Thursday revealed that as per NAAIM active managers only had 35% exposed to the long side, no net inflows into equities during the preceding 14 days and AAII sentiment showed a neutral 1.1 bulls vs bears. That to me suggested there wasn't enough suckers for the bears to capitalize on and in the end it was them who were the suckers as they trampled over each other running to the exits. Compare these numbers to the latest ST peak in early November when the numbers which were respectively 54%, 1.8 bulls vs bears and about $15 billion of inflows - these number weren't really that extreme either (which is why I didn't pull the trigger on a bear bet) but they were a bit on the high side.

Until I see a strong edge I am going to continue to be patient and just simply watch the action. It's been agonizing doing so for such a long time but when I took at the chart and look at the meat grinder that is this market, for the most part I believe I have made the correct decision. I am still willing though to make some buys in individual names but they gotta be really ripe for the pickings and I'm not going to commit large. Until I'm can feel bullish again about the trend in the general market I can't justify being aggressive long stocks no matter how appealing some of them may be. On the bear side, no matter how skeptical I am about a rally, I will not bet against it if I feel such a trade is "crowded" for I know Mr. Market can squeeze and squeeze and squeeze the bears into submission. In this type of market, doing less is doing more.

Book review: Confessions of a street addict

2011-12-07T16:10:00.000-05:00

I just finished reading this book written by Cramer in 2002. In it he tells the stories of his carreer including how he broke into the business along with major ups and downs he went through with his hedge fund and his website thestreet.com. It was an entertaining read for the most part and that along with gaining some insights into the inner workings of the hedge fund world were the main reasons why I read this book. There were some nuggets of wisdom that can be gleaned from the book as well. If you weren't trading during the late 90's which featured the Asian contagion, the collapse of LTCM and the dot com mania, this book will give you a "in the trenches" prospective of it. The most interesting part of the book is when Cramer talks about his struggles in 1998 whereby his hedge fund was on the brink of collapse.

Now a days, Cramer is despised and ridiculed by pretty much everyone in the retail trading community who has been trading for at least a few years. While I am certainty aware of his faults and have been critical of him myself at times, but I've always respected him because he is successful. Say what you want about him but you don't get to where he is by being a loser. He made millions for himself and his clients both as a broker with GS and at the helm of his hedge fund which averaged about 24% net of fees over a span of 12 years under his tenure. He is a veteran of the street and has a lot of knowledge of the inner workings of it. He is well connected and comes up with useful ideas and insights now and then.

After reading his book, I had more respect for Cramer in some ways but less respect in other ways. On the positive side, if what Cramer says is true (which I believe is the case), there are very few people on this earth who are more tenacious and hard working than him. It was inspiring to me. He battled through many personal and financial adversities which were brutally agonizing. On the negative side, some of things that Cramer and his fund did to make money bordered on insider trading and market manipulation. Cramer's firm would generate a lot of commissions for various brokers and as a result they would be able to get access to the important people in the sell side like the big analysts. One particular strategy emphasized by his trader wife, was to talk to analysts gaming them if they were about to upgrade or downgrade a stock and then jumping in with a position if they had good reason to suspect one was coming. If they felt the analyst was warming up to stock they would feed them positive information to give them the "push" they needed to pull the trigger on an upgrade.Another benefit of their "pull" with the brokers was that they were able to know things that the typical retail trader would never be able to know such as if there was a big seller who was putting pressure on a stock and was just about done liquidating their position. When it comes to ST trading individual stocks, which a lot of hedge funds like Cramer's former fund focus on, retail trader's are at a significant disadvantage because of what I discussed above. This is one of the many reasons I don't believe in ST trading.

Cramer also talked about how grueling, cruel but yet ridiculously lucrative it was to have worked for him. Would I have worked for him if given the chance? Yes...the money would be too great to resist. Would I have lasted? Probably not. Aside from his rapid ST trading style which isn't my forte and is incredibly stressful, I would probably not be able to put up with the abuse he inflicts on his subordinates which included getting water bottles thrown at you and having a post-it note stuck to your forehead all day with the stock symbol of the bad trade you made. I would probably be burned out and stressed having little time and energy for sports, friends or any other kind of life. I realize hard work and sacrifice is essential to success in this game but if attaining success in such a way is going to make you miserable then it's really not success. Perhaps it would have been worth it to put up with the abuse for a few years to build up a good chunk of change then quit and work for yourself.

I've being doing this full time for about 3 years now and my returns have been on par with Cramer's when he was at his fund but I achieved them far more passively, with far less stress never on the brink of collapse and without having the advantage of the inside scoop from the big brokerages at Wallstreet. I've also done it in more difficult market conditions. But 3 years means jack. I could have just as well been lucky rather than good which is similar to the line Cramer ends with in his book.

Weekend Ramblings

2011-12-03T04:26:00.000-05:00

Wow, what a crazy market. We went from having one of the worst weeks in history to one of the best! Anyone who has been using a mechanical trend following system has been getting absolutely butchered by this volatility. For me, I haven't been getting butchered but I haven't been making anything either as I continue to remain sidelined. I'm willing to entertain intermediate term trades but the market has been moving too quickly for me. For instance, coming into this week the risk/reward for such a trade on the long side was looking favorable. The market was deeply oversold and sentiment was bearish enough to give the green light (it wasn't super bearish but bearish enough). All I needed to see was a little bit of stability to give me the impression that the market had found a bottom. Instead we opened up the week with a big gap up and never looked back. We gaped up big not once, not twice, but trice this week! Now, as I said before, when it comes to bear market rallies vs new bull market rallies, they tend to look the same initially - they are explosive and a gap and run to start either isn't uncommon. What distinguishes them is how the market behaves after the initial thrust is over. But to see 3 gaps like that in one week on flimsy catalysts tells me this is a bear market rally IMO.

Let's look at the reasons for the rally this week. First there was a report Sunday night that the IMF was going to help Italy, which didn't even end up happening. Then the big rally on Wednesday was due to the coordinated efforts of central banks around the world to provide liquidity to European banks. Lol! Come on...who actually thinks this is some sort of panacea? It does fuck all to address the underlying problem of insolvency. We saw similar types of liquidity aid in 2008. Did that mark the end of the crisis? Hell no. If anything it tells you that there's more trouble ahead. Sure, there was better than expected data out of the US but that was clearly secondary. (And what about the weak data coming out of China?). I don't mean to sound like zerohedge.com here but the reasons for last week's rally were a joke.

Here's what I think basically happened. Coming into the week a lot of shorts were nervous with their finger on the cover button because they knew the market was very oversold and so any hint of good news would send them running for exits. The IMF rumor did the trick. With the rally on Monday having been done of low volume and Tuesday showing no follow through, the rally looked week and destined to fail the next day and so I bet a lot of these bears put back on those shorts and bears who had missed the recent decline figured this was their chance to make amends. Then the bears got blind sided again by the central bank news and panicked probably flushing out the more "longer term" swing trader/mechanical types who had shorted the market after the "triangle breakdown". It was one lemming domino toppling another. I've said recently a few times before that bears are their own worst enemy not the PPT, not Goldman Sachs but their own herd behavior. Remember the motto of this blog folks. The market is not going to easily accommodate the legions of permabears that are still out there even if it were to have terminal cancer and on its way to the end game. The bear will take their money too!

Anyhow, I've decided that it's time for me to take some action. I'm going back to basics by looking for individual small cap/micro cap stocks that are overlooked, trading near or below tangible book, have low debt, turning the corner with earnings (or have stable earnings) and are not heavily influenced by the behavior of the general market and have promising technical action (base building bottoming formations or gently upward sloping charts). These are hard to find but they are out there and you tend to see more of them out there when you have markets like this. I've put in some orders already for a couple stocks. I have a few others I'm looking at that are promising but need to show another month or two of base building. Once I have exposure to these names I will be much more inclined to hedge unlike before. I will likely use puts on index or sector ETFs. I will also consider engaging in IT trades on the general market should the opportunity present itself and I will also be keeping a cash reserve of at least 50%. I've been pretty good at picking winning stocks that have outperformed the market big time although I know all too well that in bull markets it's much easier to pick winners. In bull markets everyone is a genius as they say. Although in this bull market there hasn't been many geniuses....in fact there were more dummies than geniuses this time around because so many were bitter and angry at the market during it's rise.

The Euro crisis has everyone fixated including me (I gotta stop this shit). As a result, I think you'll be able to find some real gems there in the small cap/micro space that have been unduly trashed. I love this space because not only are the gains more potentially explosive, you have a much higher chance of getting an edge because they tend not be followed much by analysts and institutional investors until after they make a big move which then creates another upside catalyst. Another thing too is that these stocks can sometimes be slow to react to major trend changes in the market giving you the opportunity to buy or sell before they get pulled in by it. Finally, they are not being whipped around by HFTs and day trader types. Low liquidity can be an issue however and often times these stocks will be dormant for weeks or even months. So, if you crave day to day excitement and use tight stops these stocks are not for you. And just remember, if we get another 2008, very few stocks will be able to withstand being sucked into the carnage including the small cap/micro cap space. But it's not always that way with bear markets. In 2000-2002, small cap value and gold stocks did very well relative the SPX. So, you can find winners out there in a shitty market.....it's just that it will be a lot harder and using a hedge could be the way to go. If however, you have good reason to be very bearish in the IT or LT then you must go at least net neutral...you should optimally be net short though. That's the mindset I'll be having going forward until I have good reason to believe the bull market is back.

As far as the market goes now we're no longer oversold but not overbought yet either. I don't see a huge edge either way although I do see a couple of things that favor the bulls. There was an outflow last week despite the big rally. That's bullish. Also current NAAIM sentiment shows that active mangers reduced their exposure despite the big rallly and it's only at 30% (it got as high at 50% at the peak a couple weeks ago and historically that's only neutral). This too is bullish and suggests this rally still has legs. If however it doesn't and the rally ends up failing soon then it likely that any downside would not be the start of a big bear downleg to new lows.

Everyone is eyeing when the Euro leaders meet next week (I think it's the 8th) and it's expected some sort of a "plan" to deal with the crisis will be announced. Barring any major surprises, the market will probably not do much up until that day. Hold on....didn't I just say I gotta stop being so fixated about Europe?

The song remains the same

2011-11-28T11:05:00.001-05:00

Hope, despair, hope, despair. Big gap up, big gap down, big gap up, big gap down. That's been the pattern in the market for the past few months. This has been a very frustrating, annoying and dangerous market.

Let's forget about indicators, sentiment, opinions about the bailouts, Merkel and what-not and just try to look at this market using objectivity and common sense. I've said before that bull markets don't have the type of volatility we are seeing. What we are seeing reminds me a lot of the months that followed the Lehman crash. About a month ago I saw this chart posted on tickersense.com which proves what I'm talking about. This is a very important chart.

The red areas highlight prior instances when the market had the type of volatility we are seeing now. These signals all previously occurred in bear markets. That's the bad news, but there's good news too as you will see. Whenever we saw such instances of "high volatility" as per the above chart, it signaled the start of the puke stage of the bear market. Significant and immediate damage lied ahead in the weeks that followed but that ended up marking close to where the bear market had finally bottomed - that's the good news. However, the bottoming process took about half a year to complete the previous 2 times we got the signal. Even last summer's flash crash (arguably a mini-bear) which didn't trigger a high volatility signal, took about about 4 months to complete.

So, let's consider the current situation. Just like with the two previous high volatility triggers, we saw significant and immediate damage occur. The signal was triggered on July 27th. The good news is that if history repeats, there's a good chance the worst of damage has already taken place. The bad news is that the bottoming process is quite likely not be complete and some sort of retest of the lows, whether it's a higher low or lower low is in the cards. We made the first significant low on August 9th. Therefore, it's quite likely that the bottoming process won't be complete for another 1-4 months - if we are indeed in a bottoming process. But let's be careful not to be dogmatic about this....there's no law that says the market can't bottom sooner. It's been just under 4 months now since the bottom in August and so I suppose that might be considered long enough time to have completed the bottoming process. I'm doubtful about that but I'll keep and open mind and be on the lookout for the return of bull market behavior (which is characterized by a upward grinding market with low volatility)..

There's also the possibility for a grim resolution this time around. Bears will argue that massive policy intervention stymied the last 2 bears and if not for that the damage would have been a lot worse. As a result, the heightened volatility could have been an indication of the beginning of the "end game". According to the bears, all the authorities did was delay the end game creating even more imbalances. This time around authorities have largely exhausted their "bullets" to thwart the end game and so that leaves us much more likely to experience it this time around than ever before. It's still an unlikely outcome but IMO, the odds are higher than anytime since about 1996 when many of today's permabears first started calling for it. If this ends up happening I can guarantee you most bears will not even come close to fully capitalizing on it since the market would likely go down in an almost straight line down fashion for months.

A few words on today's rally. The market was quite oversold heading into this week and so it's not surprising to see it go up like this on rumors about the IMF helping Italy or whatever. Anything could serve as a excuse because most shorts by nature are weak and fickle and focus on the ST and they have been clown raped so many times during the past couple of years that they are now conditioned to cover when the market gets oversold. There's room for the market to go higher still even after today's run up but if you bet on it just remember you're likely playing the game of chicken. This seems like yet another hope rally doomed to fail if you ask me.

Bear market strategy

2011-11-18T11:12:00.003-05:00

During times like this to keep me focused, I tend to review the principles I believe in....principles that have been forged out of years of experience. Doing so helps me to resist the temptations to do something impulsive instead of patiently waiting for the right opportunities. Let's talk about bear markets because that's what were are in right now. The main "tell" that distinguishes a bear market from a bull market aside from an overall downtrend vs an uptrend is that bear markets have much higher volatility on all time frames: intraday, weekly, monthly. This is how you can tell a bear market rally from a bull market rally. While the initial rally from a bottom in both bear and bull markets often appear the same, (fast and furious) what happens afterwards gives you a better sense of determining if the rally is "real" or not. In bull markets you will see small but relentless upward progress almost daily. If you want in you have to chase because pullbacks are few and are quite shallow. In bear market rallies you tend to see the type of volatility like we've been seeing for the past several weeks - huge up days and down days.

My main philosophy regarding bear market is this. Don' lose money. Making money is secondary and if you want to do so you need to take a trading approach both on the short and long side (emphasis on the short side) as opposed to a long only, buy and hold approach that is optimal in bull market. By trading I'm referring to the intermediate term 1-4 month swings not ST trading and especially not daytrading..... I don't believe in those types of trading. As a speculator you should be looking to make money in any type of market but I find that with bear market because of the heightened and erratic volatility it is easier said than done. Bear markets tend to destroy bulls AND bears alike.

As a result of the heightened and erratic volatility in bear markets, you need to be able to withstand a lot of noise. If you are convinced that the market is headed a lot lower in the months ahead (and not because you're biased or bitter but because you actually have objective reasons) and want to profit from it, you need to make yourself a strong holder and ensure that your holding period in line with your beliefs. I chuckle when I visit some of these bear blogs and I read commentary from them about how they believe the economy/market is doomed due some macro argument/facts. Then they go out and make a trade like "Short QQQ at 55 with a stop at $55.20". Lol! That's fucking retarded. They are using ST trading tactics to profit from a macro conviction. In bear markets because volatility is so high and erratic, making trades like this will almost certainly result in failure.Your trade has to be aligned with market conditions and your conviction. If you can't comfortably make such a trade then don't make it!

In my opinion, it's only worth trying to profit on the short side during bear markets when the market is overbought and there is strong evidence of complacency with weak bears throwing in the towel. This is characterized by a VIX in the low 20's, a string of low put/call ratios and AAII sentiment 2:1 bulls vs bears. In such instances, the risk/reward is favorable to make a bearish bet. In the bear market of 2000-2002 we saw this happen in May of 2001 and March 2002. In the bear market of 2007-2009 we saw this happen in May of 2008. At the peak of this latest rally the above conditions were not met...some were almost met but not quite. As a result I didn't pull the bear trigger. That's fine. Again, protecting capital is the primary objective. The fact that we rolled over so soon also suggests that there's a decent chance we are in a situation similar to December 2008 or August 2010 whereby the roll over in the market was part of the LT bottoming process.

To play the intermediate term swings in the market allowing yourself to be a strong holder able to withstand the day to day noise, I believe that the best strategy is to purchase long dated deep in the money options with an amount of capital that you can afford to lose should you end up being wrong. No stops. By risking only a limited amount of capital, that in effect is your stop. This strategy is especially advantageous when betting on the downside. By using puts as opposed to shorting you will never be forced to cover your position if the price goes against you by a significant amount nor will the fear of "unlimited losses" make you unable to sleep at night and tempt you to make an emotional decision. By using long dated deep in the money puts, you also don't suffer from the time decay that one would experience holding bear ETFs and short dated OTM puts which is the preferred choice of the retail schmucks who try to profit on the downside. When playing the bigger swing it's important to stick with your plan. Don't get tempted by ST market action taking profits too soon in the hopes of getting back in on a counter trend reaction...more often then not you will find yourself on the sidelines missing out.

It's a jungle out there. I'm hearing a lot of market veterans who have trade for over 30 years say that this is the toughest market they have ever seen. It doesn't have to be tough. You can simply not play and wait for things to settle down or wait for those really fat pitches.

Word on the street

2011-11-17T13:00:00.001-05:00

There's two things I'm hearing a lot about. The first is the triangle formation in the chart and the second is the notion that the ECB will be end up having to print money to end the crisis once and for all. Let's focus on the second issue first because that's far more important. I've been saying for a while that ultimately we need to see the entire restructuring of PIIGs debt before all is said and done. The cancer needs to be cut out from the system. For a while, European authorities were in denial about the crisis thinking the problem was one of a lack of confidence as opposed to the grim structural reality which is that these countries have dug themselves in a hole too deep. They figured if they took care of Greece confidence would be restored and all would be well. They tried to pay for the solution as cheaply as possible ...and they got what they payed for. As this crisis has been unfolding the market has been dragging Merkel and others by the collar kicking and screaming forcing them to take further action. It wasn't too long ago whereby a Greek default was considered out of the question and now we've esssentially seen it happen via the 50% haircut. Now the Germans are saying that money printing is out of the question. In fact, a few minutes ago on BNN I saw a quote from Merkel that said she believes the ECB acting as a last resort won't solve the crisis. If she was such as expert as to what will and what won't solve the crisis why the fuck has she not solved it yet and why does it appear to be getting worse? Merkel has her head up her ass just like she did with Greece a couple months ago. It's seems to me that it's either print or see messy defaults and a break up of the Euro zone.

As far as the market goes, we are finally starting to see a breakdown from the widely watched triangle which according to textbook t/a should have resulted in an upside breakout. Since everyone is a technician now a days, you can toss the textbook out the window. And who knows, maybe this is a downside head fake to foil the technicians. I wouldn't play that game of chicken though given that we are seeing bond yields blow out in Spain and France. One thing the bulls have in their favor is that the put/call ratio continues to be high day in and day out and the VIX is well above 30. This suggests that if we see the market roll over and make a run for the October lows, there's a good chance it will end up being part of the bottoming process as opposed to a new down leg. It could also mean that the short side is still too crowded and this dip we are seeing today is going to end up being a massive head fake. Either way, I'm still stepping aside. I didn't see enough sentiment indicators give me the green light to make a short bet and so if the market tanks I won't be on board. I don't have a problem with that unlike in early October when there was in fact enough sentiment indicators lining up to give the green light for a trading buy but I never pulled the trigger.

What I haven't liked about this rally since the recent bottom in October has been the high volatility and now the oil spike to $100. The last thing the global economy needs is oil back to $100. I couldn't give a fuck about seasonality and Santa Claus rallies, fundamentals and market action trump and neither suggest this rally from the October lows is the start of new bull run and so if you play the long side you're playing a game of chicken with the bears hoping to that they'll blink before you do. The problem with this game is that once the bears are shaken out the market will likely drop abruptly leaving you the risk of being trapped holding the bag. There's two ways bears tend to get shaken out 1)by a strong rally or 2) covering way too early on the first dip of a major downside move.

It's been frustrating being on the sidelines for so long. I am however starting to see some emerging bottoming formations on a few small cap stocks I have my eye on that have attractive fundamentals. I'm in the process of making a short list of such stocks.

In these types of volatile, headline driven markets, protecting your capital is paramount. While it may seem likely that this rally from the October lows will fail, there's no telling if it will fail now or a few months from now and so if your betting on the downside you could easily see yourself get stopped out for losses because too many people were in the same trade. After all, the bear case regarding Europe is no a secret and because of that, I believe the bears have been their own worst enemy and the cause of their own frustration these past several weeks and not the "PPT".

Silvio che cazzo fai?

2011-11-09T13:20:00.001-05:00

This translates to "Silvio what the fuck are you doing?" In today's National Post it showed a picture of 2 protesters from a Ukranian women's rights group in Rome holding up signs. One of them said this and the other said "Silvio stai scopandi L'Italia" which translates to "Silvio you're screwing Italy". I couldn't help but chuckle when I saw this but at the same time feel a bit sad. Being of Italian decent, I can't help but recognize the decline in the country of my ancestors. Italy's economy has been pretty crumby to say the least for the past several years even during times when the global economy was in expansion. Now it seems like they might be next in line at the barber shop to get a debt haircut. Oh dio.

My previous post did indeed help put things into perspective. I believe it's likely there will be a retest of the October lows in the coming months whether it's due to Europe or other reasons. But I also believe that until the chronic hedging stops (i.e the high put/call ratio), it's not worth making a bet on that outcome. Today's action doesn't change my opinion on this. High put/call ratios like we've been seeing doesn't guarantee there will be no major downside by any means.... nothing in this game is guaranteed....it's all about probabilities and risk/reward. It's just that in my experience, when you're in an uptrend as strong as the one we've been in since October, bear market rally or not, it usually doesn't end untill you see complacency in the options data i.e. low put/call ratios and a VIX in the low 20s. If that doesn't turn out the be case this time, fair enough. I'll have no regrets if I miss out profiting from the downside because I didn't see what I needed to see to pull the trigger. Nor will I have been burned playing the game of chicken long side. Despite the severity of today's decline it doesn't really look too bad when you look at the chart now does it? The uptrend is still in tact and we could simply be consolidating before another push higher. But what today's decline does tell you is that the market is still headline driven and it's still broken. Bull markets don't behave like this.

Look people, this market is dangerous for all players on either side of the market and I've been saying that for quite some time now. The only way to have captured today's downside was if you made a bearish bet before yesterday's close gambling that the after hours headlines would be negative. It could have just as well went the other way. The same thing goes for the upside. Most of the upside has been done via gap ups due to favorable headlines. The market is therefore forcing you to gamble at the end of the trading day to capture the big moves the following day. You typically either get instantly rewarded or your nuts chopped off the next morning via the gap. That's not much different that going to a roulette table and betting on red or black. I know not everyday has been like that but a lot of them have been and that's not my kind of market. I know I said I need to be more flexible but I'm not going to play a game that forces me to gamble in a casino-like way....sorry. I'll just remain in cash until things settle down or I see a really good ST edge. You know what? When I first started trading full time in December 2008 it was the same. The market was crazy volatile and I although I was somewhat sure there would be a retest of the November 2008 lows, I couldn't bring myself to bet on it because the market was too nuts and there was too many cross currents and not enough edges. I ended up making very few trades until the summer of 2009.

Don't force it. Wait for your pitch. You don't have to trade every day, week or even month for that matter. The market is not going away.

Remember Lester? Here's what he posted last night....no wonder the market is tanking lol!

I fucking give up. I closed my two remaining IWM Puts near the close today. They were Dec 66s and sold for 0.98 after paying 1.35 last week. So this leaves me $200 from the $4000 that I started with in mid-August. I have taken that $200 and bought a SPY Dec quarterly 133 Call for 1.84. This will give me the whole month of Dec to catch the Santa rally.

This guy is gold I tell you!

Who should you believe?

2011-11-05T14:22:00.001-04:00

As you know, I've been dazed and confused about where the market and economy is going longer term because there's a strong case to be made for either a bullish or bearish resolution. We're at a major cross road here and if you take the wrong path you're either going to get hurt in a big way or miss out in a big way. It all hinges down to the reccession debate. In this post I'm going to flesh out all of the things running through my mind that is causing me such conflict. Hopefully this catharsis will help me get a better feel for what probably lies ahead. Some of this will sound repetitive given my recent posts.

Last weekend Hussman made a convincing case to support the case for a recession. Here's a crucial except from his lengthy commentary...

Since 1963, when the ECRI Weekly Leading Index growth rate has been below -5 and the ISM Purchasing Managers Index has been below 54, the economy has already been in recession 81% of the time, and the probability of recession within the next 13 weeks was 86%.

If in addition, the S&P 500 was below its level of 6 months earlier, the economy was already in recession 87% of the time, and the probability of recession within the next 13 weeks climbed to 93% (and then to 96% within 26 weeks). Under these conditions, once the PMI fell below 52, the probability of recession within 13 weeks climbed to 97%.

That simple set of conditions (WLI < -5, PMI < 52, SPX < 6 months earlier) has been seen in every postwar recession for which the data is available. Though we've seen recessions without a drop in the WLI much below -5, when a WLI below -7 has been coupled with a PMI below 52 and an S&P 500 below its level of 6 months earlier, the economy has been in recession within 13 weeks, 100% of the time. This is the combination, incidentally, that we observe today.

Now, here's some convincing points from James Stack that totally refute the reccession call

the four-week moving average of weekly jobless claims had hit a six-month low. How often has the economy fallen into recession after such a development? Trick question. It has never happened in 44 years of claims data, he said. The Index of Leading Economic Indicators just hit an all-time high. When has that occurred in the six months prior to or in the early stages of a recession? Never in the 52-year history of the LEI data.

So, you have Hussman arguing that there's a 100% chance of a reccesion according to historical data and Stack who says there's a 100% chance of no reccession according to a different set of historical data! lol! WTF!!!! Well, somebody is going to be wrong....obviously.

Do you see folks why I am so fucking frazzled? Ok, let's get back to the the ECRI recession call. I mentioned how I don't like the fact that they are so popular amongst the masses which in my experience makes it more likely that the guru in question will soon be wrong in a big way. It's interesting to note that the previous 2 times the ECRI made official recession calls were in March 2001 and March 2008. In both those cases, leading indicators, coincident indicators and reported earnings had all already decidedly turned down from their peaks. That has not happened this time around with their call. Also, when ECRI made the previous 2 recession calls, the stock market had made its peak several months prior and was in a well established downtrend - undeniably in a bear market. Therefore, the ECRI was a little "late" in making their official recession calls from a market timing perspective in 2001 and 2008 (but in their defense, in the months leading to official recession call, ECRI was strongly warning about the negative things brewing in the economy). This time around, with earnings still elevated, leading indicators still making new highs and the stock market not off it's highs as much relative to when the last 2 recession calls were made, could it be that ECRI is jumping the gun with their recession call? And isn't it funny how bears love the ECRI now but didn't mention jack shit about ECRI's bullish calls in March of 2009 and November of 2010? In fact, the media mentioned fuck all when ECRI turned bullish. And where was Hussman when ECRI was bullish? Did he make mention of this? Of course not. He was wallowing in his dogma. That's permabears for you folks and that's why you need to have a balanced approach when reading commentaries from these guys. It's still worth reading what smart guys like Hussman have to say though because they can provide facts and studies that can help you form objective opinions.

Aside from issues with ECRI's latest call, a couple of other things are making me suspicious of a recession and a big bear is forthcoming. I mentioned a couple weeks ago how dumb money thinks one is coming, in particular, a few of my friends on facebook and the late night talk show hosts making jokes about the economy. You have consumer confidence plunging to early 2009 levels where historically it's a great time to buy LT and again, all of this is happening in the face of still strong earnings that are poised to make all time highs this year which makes the gloom appear unjustified. If you look at the crash of 1987 and 1998 earnings were still strong and hadn't rolled over thus the crash was simply a severe correction in a bull market (or a short and sweet mini-bear market....whatever tickles your fancy) while many believed it was indeed the start of a big bear market.

The media both mainstreet and financial are quite sour and that bodes well for an eventual bullish resolution to this crisis and we never did see any signs of giddiness from them near the peak either. Sure, you had Wall street strategists bullish and equity inflows were coming in, but that's to be expected in a bull market and those inflows were just a drop in the bucket compared to the outflows that occurred from 2007-2009. And now, those inflows have been completely reversed and then some and so any kind of budding optimism has been completely undone. Bull market tops are usually characterized by giddiness and corporate greed and it's the unwinding of this greed that fuels the bear market that follows. We did not see such greed at the latest peak. The only case where a big bear market occurred under the above circumstance was in 1937 and admittedly, as I pointed out in a recent post, there some important similarities with today's conditions vs. those in 1937.

Lastly, if you look at how severely oversold the market got after the crash in August, the statistics matched what you see towards the end of bear market not the beginning of them and I mentioned back in early August how we were as oversold as we were in October of 2008. That to me again gives me reason to believe this is just a severe correction and not a new big daddy bear.

Now, let's exam the bear case. I have concerns aside from Hussman's work that concludes a recession is pretty much guaranteed. My instincts tell me that untill we see a complete restructing of all troubled PIIGs debt this market ain't out of the woods. This situation reminds of me of late 2007 and early 2008 when toxic MBS was really starting to wreck havok. I remember telling my co-worker at the time that in the end the government is going to end up buying all this toxic shit from banks before this is over and that's what ended up happening but not before the markets went down a lot more. MBS was a cancer to the system just like PIIGs debt is and until this cancer is removed once and for all, at the very least I don't think this market is out of the woods and a major retracement of this latest rally at the least, is inevitable. Bond markets for PIIGS are saying loud and clear that it does not end with Greece. The potential fallout from this European debt debacle could be just as serious if not worse than the MBS meltdown. And this time around government authorities have their hands tied a lot more to intervene given already low interest rates and pressure to embrace austerity.

Next you have yield curves in the BRICs - the number one driver of the bull market still flat overall suggesting a serious slow down lies ahead for them. It's likely that they will end up having to cut rates but with oil back to the mid 90's, they may have their hands tied as inflation concerns will remain given that food and energy account for a lager portion of overall inflation compared to developed nations. It seems that the only way for easy monetary conditions to be possible for them is if there's a global downturn sharp enough to take the air out of commodities and that translates to lower stock prices.

A rather obscure but historically quite effective indicator that I keep tabs on is OEX option data. Unlike the traditional put/call ratio, the OEX put/call ratio is a smart money indicator, therefore a high put/call ratios is bearish for the market and low ones are bullish. It doesn't always pinpoint major tops and bottoms to the exact day....it can be early upto a few months, but's effective in signaling an immanent change in IT/LT market trends in the weeks ahead. It's worth paying attention to only when where there's a bullish or bearish extreme. Look at the chart below and you will see that when the market was close to making it's bear market bottom in March 2009 and during the aftermath of the flash crash, OEX option traders were aggressivly buying calls pushing the 10 DMA below 0.75. OEX traders then became quite bearish during the spring and early summer of 2011. The bearishness unwound only modestly after the crash in August and it's now deep into bear territory again.

Unlike what happened in the months following the flash crash of 2010, wherby OEX traders became aggressivly bullish, they only got so far as being less bearish for a while before going back to deep bearish territory which is where we stand now. This supports the thesis that the market isn't through with this deep correction/bear market. Would I bet the farm on this one indicator? No! There have been some false signals over the years (not evident on this chart) but this indicator clearly favors the bears and suggests at the very least a major retracement, if not a full retest or worse in going the occur in the months ahead.

Next, I want to mention Lester - the worst trader in the world. I discovered this guy posting on blogs 3 years ago and I kept tabs on him because he is bar none, the worst trader I have ever seen. His major achievements include switching his 401K from equities to cash in November of 2008 and then blowing his entire $300,000+ IRA using option trades in about 18 months wherby practically every single trade he made was the wrong trade! He trades purely on impulse and emotion. Do you know what Lester did this year? He switched half of his 401K back into an SPX equity mutual fund in March when the SPX first hit 1300. Usually he panicks during sell-offs but this time around he actually doubled down on his bet by averaging down into equities about 2 months ago (at around 1200). He then later went even more aggressive by switching half from the SPX fund to his company stock! This is not a good for the bulls medium/longer term! Bulls need him to flip flop and go back to cash but that's not going to happen until the market goes down in a big way and given Lester's track record that's likely going to happen! I realize you shouldn't base your investment thesis on just one man's behavior but I gotta tell you if I was forced to, I would pick this guy hands down. He is the absolute worst!

Finally, there's the action of the market itself. Although the market rally has been impressive with what still appears to be plenty of doubters via the frequently high put/call ratio and only modest equity inflows, the rally has been done primarily via gap up behavior. Also, volatility is still high which is not the characteristic of a new sustainable advance coming out of a correction that's going to last several months and make new highs. Take a look at how the market behaved off the July 2009 bottom and the September 2010 bottom. It grinded higher with small but frequent up days temporarily interrupted with sharp but short dips which were few and far in between. That's classic bull market behavior. The upside we've seen so far has been erratic characterized by large gap up and gap down days because most of the movements in the market as of late has been happening after hours or before the bell driven by headlines. That tells me the market is still broken without a solid foundation of true buyers. It's the chronic shorting/hedging that has been keeping it afloat but that can only go so far. Once the shorts eventually give up (as the always end up doing) the market will be very vulnerable to an abrupt drop. Admittedly, this short squeezing could potentially last for several more weeks but it can just as well last for a few more days so you better be careful if you try to go long playing the game of chicken with these bagholders. Look for the VIX to drop to the low 20's to signal potential true bear capitulation.

So there you have it....a complete info dump from my brain as to my thoughts and observations about this market. I'm going to take some time to review what I just wrote and let it sink in. Hopefully this will help provide me a better understanding as to were this market is headed and what actions I need to take with my account which is still primarily in cash.

Trick or treat?

2011-10-31T13:41:00.000-04:00

First off, I'm disgusted with myself. I'm one of the many chumps who missed this entire rally since the bottom in early Oct. Prior to it I was noting that sentiment was showing extreme pessimism and although bulls had not gained any upside traction at the time it was just a matter of short time before they did. I know I said I would rather wait to see the dust settle and be a buyer early in the new uptrend (should it arise) and that would cause me to miss the bottom, but this was a ST trading opportunity that I missed and should have made a bet on....not a large one (because I have a strict rule of not committing large on top or bottom picking no matter how tempting) but a bet nontheless....something like a bull call spread. Given how oversold we were and the sentiment, I knew the risk of a V shaped bottom was high whether it was a snap back dead cat bounce or the start of a new sustainable move up. Although I respected the possibility of a September 2008 type waterfall decline whereby oversold and pessimistic conditions were ignored, market conditions this time around were not nearly as bad as they were in late Sept 08 when earnings and credit conditions were in serious deterioration and the financial system was literally imploding. I realize a lot of this looks to be hindsight bias and perhaps it is but I think a lack of balls to get out my comfort zone explains my mishap best.

Come December, it will be 3 years since I started trading full time (I have been trading "part time" for 9 prior to it). I've done pretty good so far and my success was almost all due to buying and holding individual stocks for months at time. No short term trading, no counter trend trading, no bottom/top picking. When I was unsure or ST/IT bearish I would go to cash. I'm a large believer in playing the bigger trends and avoiding ST trading but there's usually an exception to a rule. I was too inflexible and not bold enough to get out of my comfort zone. It cost me a missed opportunity in this recent rally and also with TLT calls I was thinking about buying in early July right before the explosive bond rally. And it's not like I was going to risk a lot of money on these trades either....but even despite that I still didn't pull the trigger. Why? I think it's because I'm trying to protect my self confidence from taking a hit should I end up losing on these trades.My thinking was this - I was up pretty good on the year so why risk losing any of that with a non-standard trade? I was playing not to lose instead of playing to win and that's a no no. Playing the market is a great way to learn about yourself, in particular, your weaknesses. Sooner or later they will be exposed.Back in March is said this

One thing the market will do is expose your weaknesses. If you are ignorant and make decisions based upon data the market doesn't care about or useless indicators, you will get punished. If you don't believe enough in yourself or your convictions you will get punished by not making nearly as much money as you should have or getting shaken out near the end of a dip/correction. If you believe too much in yourself and your convictions the market will eventually humble you for being greedy, stubbornly dogmatic or arrogant. If you're bitter/biased you will not see the market for what it is and you will get punished. If you are disorganized and reckless (don't have guidelines/rules, don't plan your trades) you will get punished. If you are emotional and make snap decisions you will get punished.

My weakness has tended to be that I'm overly cautious and not confident enough in myself when I should be and it showed again. When I look back at my mistakes, in trading and in life, they have primarily been things I didn't do as opposed to things that I did do. Since I started trading full time, my losing trades have been few and when I did lose I lost small. Although that appears to be a good thing it's not neccessarily so because in my case, it reflects that I'm playing too tight i.e. folding too many hands as I did with the TLT calls for example. So, despite that I've been doing well, I could have been doing even better..... significantly better if I had more confidence in myself and pulled the trigger more often.

I look at all the tremendously successfull people in the world and they had success by being bold. I need to be more bold - not reckless mind you...but bold...there's a fine line between the two.

Enough about me what about the market. Well, I'll leave it up to the experts and dogmatists to analyze in detail the big news out of the Europe regarding the increase to the EFSF and the 50% Greek haircut. I'll chime in quickly by saying "what about the rest of the PIGs?" I realize this criticism isn't original but it's just painfully obvious to me given what the bond markets are pricing in, the rest of the PIGs will have to be given haircuts. I mentioned months ago that China would need to step in and help and they are willing. That's good but what about the dark clowns brewing over China itself? And now we have oil back to the mid 90's which is going to make it difficult for rate cuts from the BRICs which I think is necessary. It's because of these issues I don't think we aren't quite out of the woods even if this relief rally ends up having legs.

Sentiment wise, only AAII is showing somewhat of excessive bullishness. NAAIM exposure has gone up to 40% equity exposure which is neutral sentiment wise indicating more room for the rally to carry on higher or for the market to at least stay afloat for a while. There was minuscule participation from retail via fund inflows and that's bullish and suggests the rally isn't in immanent danger of collapsing (however that could change quickly if we see a spike in inflows this week).

One thing that has stood out is the asinine put buying that has been going on for the past 2 months and even to this day. Despite the fact that the market has rallied 17% the put/call ratio never showed anything resembling mild optimism on any single day. It has been well above 1 most of the days and the lowest it ever got was the high 80's and low 90's a few days. This stubborn and reckless bearishness that the put/call ratio reflects, has been the culprit of this rally in my opinion. The trading community shorted the rally repeatedly and as result have been clown raped for this group think. This is not the first time I have seen this behavior in the past 2 years. Even the technical types who trade mechanically have been getting murdered. The so called "death cross" that was triggered in early August has resulted in death alright....for those who followed that signal and went short. The exact same whipsaw happened last summer as well. Carl who runs the charting service I use decisionpoint.com, issued a bear market signal after the death cross was triggered and is now calling it a bull market again but only after the surge on Thursday. He got chopped up to bits with his mechanical methods. Let's just say I'm a not a fan of using such methods and end it at that.

So what to do now? Trick or treat? With the market as ST overbought as it is, a pullback/consolidation appears quite likely. How people react to it will be key. If weak types buy the dip then look out below for the market will give a trick. If instead they stay on the sidelines and the asinine put buying continues the market will give a treat and we will probably see this make a run back to the highs of the year. It's going to be difficult to see major downside traction if so many have their guard up. Ultimately, whether it's this year or next, I think there will be a major retracement of this rally. I'm in the process of hammering out a game plan given my outlook which could involve my typical small cap long plays using a market hedge. However, I feel I need to approach the market with fresh eyes and a clear head and I'm not quite at that point yet. I can call it a year here and walk away with a 22% gain for the year. That's not too shabby considering what's happened this year but I have to learn from recent mistake of playing not to lose instead of playing to win.

Happy Halloween everyone!

Dark days

2011-10-19T13:50:00.000-04:00

I've make it no secret that I've been frustrated lately. I've been sidelined not only with the markets but also with the other game I love - soccer and sports in general. I've had this annoying lower abdomen/groin injury for 2 months. A groin strain is the worst strain you can get because it fucking lingers and when just you think it's healed, as soon as you put it to the test with a hard sprint or 50/50 challenge against another player you realize that it's not and you're back to square 1. This is the 3rd time I've had a major groin injury. The first time it happened I was 14 and I was out of action for over a year - I hurt it quite bad whereby just coughing would cause pain. The 2nd time was the spring of 2010 and it took 6 months to heal. The birth of my daughter that year counter acted the frustration.

And now here I am again suffering for the 3rd time. Let me tell you some thing about groin injuries. When you first start feeling a bit of pain in that area STOP PLAYING! Also, DO NOT attempt any rehab until the pain is completely gone because it will only aggravate it. Trust me on this. Only rest and time can heal it. I didn't seem to learn my lesson though this time around because I was so eager to play again.

Although bad luck had a part to do with I really have nobody to blame but myself for this injury. Although I always warm up before games, I don't stretch enough on a regular basis and strength train my abductor area and given how inflexible and injury prone I am, I should have been doing so. Also, I first started feeling the pain in June and if I had stopped playing then I would have been out for probably 2 weeks or so but I "played through the pain" until the point where it was unbearable and by doing so I made the injury a lot worse.

This brings me to the occupy movements around the world. Although there are some valid reasons for protest, I get the sense that a lot of these people are whiners and complainers and should look in the mirror to see who's really to blame for their lack of success in life. This is going to sound very harsh but losers tend to blame others, complain and have the "why me?" attitude when they fail. Winners persevere through tough times by learning from mistakes, working hard and believing in themselves. They take control over their destiny as much as they can. They don't mope around and hope politicians or others are going to solve their problems. I know there's been a lot of praise about Steve Jobs and what he has achieved but If you looked at what made him successful in life aside from his outside the box thinking, it was his attitude towards life.... it was a winner's attitude. If you haven't yet done so, go to youtube and search standford speech 2005 and listen to it. It's well worth the 15 minutes.

But here's the cold hard reality of it all. In a capitalistic society such as ours only a small minority are going to be winners while the rest wallow in mediocracy or less. If you do the things that most people are unable or not willing to do you'll maximize your odds of being a winner....and those things tend to be difficult or unpleasant.

Dazed and Confused

2011-10-17T13:43:00.000-04:00

The last few days I've been taking a step back to try and get a clear perspective on things. I've never had such a lack of conviction about where I think this market is headed as I do now. The conflicting cross currents are making my head spin out of control. Ok where to begin...let's start off with the viagra induced boner run the market has been on. Is it just a bear market rally or was that the bottom and it's upward and onward from here? I've always believed the best rallies are the ones that don't give you much of a chance to get in without having to chase it and that's the kind of rally this has been. Unfortunatley though, often times bear market rallies look likes these types of moves if the majority of the advance has been done via a gap up and run and that's what happened here. Now, it's actually not uncommon to see the first "real" rally out of a bottom start with a gap up...that happened in March '09, July '09 and Sept '10....but after that intial gap and run day you don't see so many follow up gap and run days like we have been seeing.... that's indicative of a bear market rally behavior as weak shorts (and most shorts are indeed weak) cover one after another toppling each other over like dominos. To make a long story short, I think this is indeed a bear market rally and not the beginning of a new bull run and if a LT bottom was made, some sort of major retracement of it is eventually going to happen.

With active fund managers still very underweight equities (current NAAIM shows they are 0% net long) there is still room for this market to run higher sentiment wise perhaps after the current ST overbought condition is cleared. If earnings continue to come in good, some sort of positive progress is made in Europe and Greece is given their next tranche of bailout funds, we could very well see fear of losing money turn to fear of being on the sidelines missing the boat. Plus you have positive Nov-May seasonality kicking in soon which would give these underweight managers yet another excuse to say "fuck it, I'm getting back in. I can't miss the boat and miss my chance to make up for losses before year end". Ultimately, such naive emotional based buying would fall flat on it's face.

But forget about sentiment and the ST. What about LT....the thing I care about the most? Well, the issues in Europe have not been resoloved, ECRI has reconfirmed their recession call and China is slowing. It's quite possibile that we may not feel the impact of these potential storm clouds until q4 or q1 of 2012 and the market could stay afloat or go higher till then. You might say "isn't the market supposed to be forward looking?" To that I say yes but it can appear downright dumb and shortsighted at times. Just take a look at what happened in October of 2007 when even though it was crystal clear that subprime had imploded creating ripple effects in the economy and leading indicators had rolled over, the market rebounded from a sharp sell-off in August of that year to make an ALL TIME HIGH! Why? Because just like now, sentiment had become very negative and bears pressed. Then the fed came in and cuts rates. At the time, subprime had only impacted the financial institutions that were directly exposed and so earnings for the broad market were still good. There was this belief by many that subprime would be "contained" and with the fed to the rescue, fear of a collapse turned to fear of missing the rally.

So, if the bear case end up being played out, we may very well have to see "proof" in the form of a material decline in earnings before the market breaks down to a significant new lows because as of right now, the European debt crisis, the China slowdown and other storm clouds appear not to have impacted broad based earnings or guidance of future earnings in a material way. Therefore the market still looks "cheap" on a forward p/e basis especially with ultra low interest rates. Call the market stupid or whatever you want for being so naive but that's the way it can be....deal with it.

So the big question is obviously this. Are we going into a big recession or not? You know I have respect for the ECRI but I also don't like how they are becoming so popular these days....but as I said before...I'll give them the benefit of the doubt. I've been talking about the bear case lately so let's talk about the bull case.

To sum of the bull case from my perspective it would be this...the fears/concerns in the market are either not going to come to pass or will turn out to be a lot less damaging than feared because the dumbest of the dumb money is quite negative about the economy. I've said here before many times that the dumbest of dumb money is the public and mainstreet media. In my opinion they are displaying massive negativity and despair that matches what you see at major market bottoms. On just that basis, it suggests that the recession either is not coming or will be rather muted and so the market has already discounted it and more. I said myself last week that to believe Europe would be handled well with minimal fallout, China to have a soft landing and ECRI to be wrong would mean you'd have to be wearing rose colored glasses and I stand by what I said. However, the thing that's driving me crazy is that there is such overwhealming negativity from the public and media that to bet alongside with the bears means that the dumbest of dumb money is going to be correct and I just can't fathom that happening because they never are. Let me give you some examples of what I'm seeing out there.

I think it was Wednesday night when by fluke I happened to be watching the Jay Leno show. He was making jokes about how bad the economy is. In fact, after doing some googling I noticed that the other talk show hosts like Conan are doing it too and it's been going on since at least September. In the past this has been an excellent LT contrary indicator. I remember these types of jokes in late 2008 and early 2009. I also remember Jay Leno making jokes about the economy in July of 2002 just days before the bear market bottom. Now, keep in mind, these types of anecdotal contrary indicators take time for them to bear fruit. Take for instance what happened near the July 2002 bottom when Jay Leno made jokes. After a big rebound the low was retested twice, once on October and then finally in March of 2003 before the new bull market began. Same thing in late 2008 when the jokes started coming....the market had not yet completed the bottoming process...the market actually still went down quite a bit more but in all of the above instances if you bought stocks and held for at least a year when the talk show hosts make their economy jokes, you would be laughing.....but for a different reason. It should also be noted that in July 2002, October 2008 and just recently, Warren Buffet had been making significant buys into the market. So you had 3 times in the recent past when dumb money was quite negative while one of the best investors of all time was bullish. So far Buffet is winning 2-0....although it should be noted Buffet had been a bit early.

In addition to the talk show indicator, I also noticed a couple of my friends on facebook who never bought a stock in their life say "looks like a reccession in comming". My soon to be sister in law who never once talked to me about the market asked me how I have been doing given that the market crashed. When you have people who don't even know what p/e means show any kind of attention toward the market or the economy like this, in my experience this has told me the trend was in the late innings. And it's not just main street folks that are gloomy....even the seasoned trader types appear to be. Back in late September I made note of the "Death of Equities" rant I saw on realmoney.com by trader Alan Farley. You can also add me to this list since I've been gloomy as well (but certaintly not to the degree of permabears like Farley and the most others).

Then you have rock bottom consumer confidence numbers that match what we saw in March 2009 and the occupy movements around the globe. If this is not proof of extreme b main street pessimism then I don't know what is. I suppose you can look at the occupy movements as having the potential to be the beginning of massive upheaval and social unrest which in that case would suggest we haven't seen anything yet in terms of pessimism.....it could indicate we're in for a period of sustained, structural pessimsim due to an economy that is terminally sick. While such a thing can certainly happen such a notion would be the complete opposite of the one in late 90's whereby many believed we had entered a "new era" of permanent prosperity.....we all know how that turned out.

The bull case can be summed up as follows. History shows over and over that you will do very well LT in the markets betting against the dumb money when they are are pessimistic as they are now....on some measures pessimism rivals what we saw at the March 2009 lows yet the market is well above those lows - a positive divergence. Meanwhile you have smart money i.e. Buffet, buying and you have bond yields collapsed to lows that were seen during the depths of 2008 which signals extreme risk aversion and therefore a LT buy signal for equities. It usually requires a leap of faith to buy in an environment like this because during such times it appears as though things are utterly hopeless but that's what you see at bottoms and that's why most people don't buy low. What ends up happening is that somehow someway things end up turning out much better than what people feared. Maybe it's because fear motivates authorities to find solutions for the issues that are concerning everyone and it motives people to work harder and smarter and some sort of new growth industry comes along as a result. Earnings are still high, corporate balance sheets are solid and there was no greed or reckless behavior near the latest top in the market which is what you typically see at the start of big bear markets. In fact, there was still quite a large amount of skepticism at the latest peak of the market and that to me made me believe that any downturn in the market would not be the start of a serious bear market. Even if earnings where to decline somewhat, when you compare the alternatives (bonds, money markets) stocks still look compelling. Earnings would have to collapse like in 2008 for the case to be made that stocks have serious downside from here given how low interest rates are. As a result, the market may be able to handle any future negative setbacks in the global economy without making a major breakdown to new lows.

The bear case can be summed up as follows. The situation in Europe is just getting started. We still have not yet seen all the bankruptcies, restructurings and haircuts that are likely to happen. To believe that the bankruptcy of Dexia will be the only one would be quite very naive. There will be more bankruptcies and they will be larger and like in 2008 they will catch people by surprise. Prior to the market peak in the summer the yield curves of Emerging markets were inverted signalling a sharp slowdown in growth was immanent for these countries and since Emerging market growth was probably the largest driver of the bull market that began in 2009, the global economy is in big trouble. These economies are only just beginning to show weakness and so the worst is yet to come. China, one of the important saviors of 2008 will no longer be in a position of strength because they are showing signs of a debt hangover themselves. The reputable ECRI is confirming a recession will be unavoidable and betting against them in the past was not wise. All bearish sentiment can do at this point is result in bear market rallies. You can't just simply "sentiment your way" out of this. The condition is terminal and the authorities have ran out of the traditional monetary and fiscal bullets to respond to the coming crisis because rate are already at 0% and austerity in now embraced. We have finally reached the "endgame". Analyst expectations for future earnings are still high and do not reflect the storm clouds brewing. Finally, the market is behaving like bear markets behave - huge volatility with a downward bias.

I think I made a good case for either side of the market and that's why I'm torn as to which side of the market is going to be proven right in the LT. One thing that I'm somewhat sure about is that if the bulls are going to be proven correct, it's still probably going to take more months of base building even if we saw the low last week. The " talk show host joke indicator" and the actions of Warren Buffet (who tends to be a bit early) confirm this. If authorities make a "decisive response" to the crisis, it would be naive to assume everything is going to be hunky dory immediately following it and naive to think that there will be no additional responses required and no more economic fallout. That too would keep a lid on the market's upside. We also likely need to see Emerging market countries slash rates and their yield curves to be upward sloping again before the market is ready for bull market take off.

I have respect for the bear case but only to the point where I'd be inclined to sell longs into strength and remain in cash and not to the point where I'm looking to go short on a longer term basis. I have a hard time doing that because of where sentiment conditions are right now. But even if you believe the bulls will ultimately prevail, at this point in time, as I pointed out, I don't believe you are in danger of missing the the next bull run by staying on the sidelines aside from ST market moves. Keep in mind though that the ST moves could end up being quite powerful (for example, after the bottom in July 2002 the market rebounded 25% before giving it all back). So, go ahead and try to catch them if you can but odds are you won't be able to as you'll likely get whipsawed or stopped out prematurely. There will be a time when the market will be a lot easier to trade/invest in....and that time is not now IMO....at least not for me.

We need to respect the possibility for the "endgame" that bears talk about. I realize bears have been like the boy who cried wolf calling for it over and over throughout the past 15+ years to no avail, but if there was ever a time for it to happen it would be now when you have no potential boost from rate cuts (in developed nations), high government debt levels and little tolerance for increased spending and the type of bailouts we saw in 2008. It's now up to the BRICs to be the world's saviors. Will they or can they do it?

Let's try to keep an open mind about what's going to happen and the most important way to get clues about that is to observe the market itself and not just whether it goes up or down but the way it does so.
I've done a good job protecting gains this year by largely sidestepping the crash but I can't remain in cash forever. For 2 years my strategy was to simply buy and hold small cap stocks for months at a time. That's the way to go in bull markets but until I'm confident to believe the bull is back I need to change strategies and adapt to these market conditions figuring out a way to make money with an edge because I can't stay in cash forever....but if it turns out I can't find an edge or have any serious doubts I'll remain in cash for as long as it takes.

Defense first offense second.

Massive short squeeze

2011-10-12T10:48:00.000-04:00

Well, it turned out that the bearish extreme in sentiment finally resulted in upside traction. We've seen the market do a 12% boner move from the bottom. The put/call ratio has shown absurd skepticism in the face of this rally which no doubt has helped fuel this move. Yesterday in particular it closed at 1.41 which is what you typically see when the market has been getting slammed. If we close out the day near current levels the market will be fully ST overbought. In the past few months the market has not been able to handle ST ob conditions well....the tell tale sign of a bear market.

I'm pretty frustrated and frazzled right now. Am I too bearish? Am I being too inflexible and should be looking to play these ST moves? It's not what has given me my success and I know forcing trades will backfire but I think I need to start getting involved more with the ST. I know, I know, I said this before but never did anything.

Stock Market Purgatory

2011-10-09T23:34:00.001-04:00

First off let's talk sentiment. The latest NAAIM sentiment number released Thursday shows that active managers are now actually net short -3.5%. Since 2007 this net short exposure has only happened twice. You can see for yourself in the chart that I posted last week that when this has happened the market was at or very close to a ST bottom with the market eventually rallying about 10% from the low. However, you will also notice that the market was in bear mode the last 2 times it happened and the bottom only turned out to be temporary..

When the market broke 1100 last week and then reversed hard to the upside creating a "bear trap" and "key reversal day" I was quite skeptical about it. Normally, I like to see these kind of days to signal that a capitulation has taken place however this "bear trap" seemed too obvious and by reading the bear blogs out there I got the sense that shorts were covering not pressing into that break. As a result I don't think it was much of a trap at all and that to me says we haven't see the lows yet. I'm also noticing a lot of traders including bear types, are thinking that there's a good chance we've seen the low of the year. How can anyone be so confident about that when the market made 52 week lows just recently especially given the shoes that can still drop out there? It seems like people are trying to will the market into a 4th quarter rally....it usually doesn't work out that way though. Now I realize the market is entitled to a bounce given sentiment but I just do not like the action and apparent bottom picking from weak holders. Maby I'm over analyzing here but something just doesn't feel right. I think there's a very good chance the lows will be retested or broken before the year is over bounce or no bounce and that's what keeps me hesitant from trying to bottom pick.

I realize some of the data has been better than expected last week but doesn't change the overall downward trend in the economic indicators that's been in place since the early summer. Now sure, negativity is high and the market is ripe for some good news to give people the excuse to jump into the market for a 4th quarter rally but the fundamental headwinds are with the bears and in the IT/LT, that matters most and can overrule negative sentiment. We often saw the same thing happen on the upside when bullish sentiment appeared "too high" but the market simply kept chugging higher because earnings were exploding to the upside constantly beating analyst expectations.

There's chatter that the Euro authorities are working on a plan to recapitalize the banks. Even if that were to happen successfully we still have do deal with the potential faltering from China and other emerging market countires. Remember in June when I said that the yield curves were inverted for these countries signaling danger? Well, danger Will Robinson danger! The markets of Emerging markets have been spanked the most aside from European ones, and continue to act poorly. Emerging market growth was probably the largest driver of the bull market that began in March 2009 and so if these horses have stopped running...look out! . The inverted yield curves predicted a serious slowdown for the BRICS and so far we are seeing only early signs of it which means there's plenty of room for more deceleration in the months to come. Some are saying the market has already discounted the bad news. Really? How can you be so sure when fresh 52 week lows just recently made? The truth is these people are hoping the market has discounted all the bad news.

We are just starting to see the economy roll over with the reputable ECRI who called the last 2 recessions and recoveries correctly, on record calling for a new recession. With earnings and margins at record highs there's plenty of room for disappointments. The bulls need ECRI to be wrong, Europe to be handled well with minimal economic fallout, China and emerging markets cut rates and have soft landings, political bickering to stop and austerity toned down. That's a mighty tall order. Do you really want to stick your neck out here and assume that's what's going to happen? You really have to be wearing rose colored glasses to think so. That doesn't mean can't see big rallies when the market gets oversold and bears press but I think that's all we'll be able to see for a while.

I sure hope I'm wrong folks and I hope my negativity marks a LT bottom. Make a fool out me Mr. Market because I don't want to see more misery and hard ship. I'll play the bear side if that's what I have to do to make money but I will only do so "intelligently". I can't justify opening a bearish bet on the market given where sentiment conditions are now but I can't justify a bullish one (even for a trade) given the roll over in fundamentals with shitty market action because in such a situation it's quite possible to see the market go down even more in spite of negative sentiment. That puts me in frustratingly in stock market purgatory as I remain mostly in cash.

Trying to figure it all out

2011-10-04T01:06:00.000-04:00

When I look at what's happening today it makes me wonder if there was ever a time when we saw something similar in the past. If we're indeed heading into a recession we have to assume that there's still significant downside to the market. If this happens it would be the first time in a long, long time that a new recession and bear market had begun when consumer confidence and the mood in general was still one of pessimism at the peak of a bull market. Was there ever a past precedent? I didn't think there was but perhaps I'm wrong. The best historical similarity could be the recession and bear market of 1937-1938. Prior to it, the market had been enjoying a powerful cyclical bull market from the depths of the 1929-1932 collapse. During this recovery, profits had recovered back to pre-depression levels much like what has happened now. However, unemployment was still quite high dropping moderately from the depression peak of 25% to 15% before the market peaked and the recession of 1937-1938 began which was accompanied by a drop of about 47% in the Dow before hitting bottom.

With 15% unemployment at the market peak in 1937, I would speculate that there was probably still a general sense of pessimism from main street. Could the same turn of events be happening again? Well, history doesn't repeat but it can rhyme. The main culprit for the 1937-38 recession was arguable but it coincided with significant spending cuts in the US to balance the budget and an increase in bank reserve requirements. Fast forward to today and we have the entire world embracing government austerity. It's argued by many that back then the government had pulled the economy off life support too early and as a result the economy went sick again as it had not fully recovered from the damage done by the 1929-1932 collapse.

Whatever the real reason for the downturn of 1937-1938 what it proves is that it may be indeed possible to see a recession and big bear market when the public was still feeling sour just prior to it....I say maybe because we didn't have hard data like consumer confidence numbers to verify this and so I used the high unemployment rate at the time as a proxy. Why did contrarian analysis fail? Well, first of all, contrarian theory offers no guarantees, it just gives you an edge just like how being dealt pocket aces gives you an edge but no guarantee you will win....sometimes you have to fold aces to make the correct play. Secondly, contrarian analysis suggested there was potential for further advances since there was still plenty of pessimism to unwind, but that potential went unfulfilled because of policy errors and/or an underlying economy that was still sick and fragile.

Here's what the 1937-38 bear looked like

Notice that this bear market did most of the damage in a straight line down fashion without any significant bear market rallies. It was basically 3.5 months of destruction, a brief respite and then a final leg down. It was a short but very painful bear. Do not rule out something like this happening. No two historical charts are alike so forget about thinking that a tit for tat reply of 1937-1938 will happen...all I'm saying is that when the fundamental tide turns for the worse and one thing goes wrong after another you can see a sickening slide in the market that catches even the bears off guard. That's what happened in the fall of 2008 as well.

What about the motto of this blog? At this point how would the market make fools of as many people as possible? There's two ways. 1) The market makes a LT bottom around current levels, we avoid a global recession (or it's very minor) and everything goes right in Europe or 2) the market just keeps sliding and sliding like in 1937-38 and we get no "4th quarter rally" that people are starting to chatter about while bears don't really make nearly as much as they should have as they cover shorts far too early, not making up for the losses they sustained over the past 2 years shorting the market in vain.

Whatever the case may be, I for one am not going to touch this market until I see a favorable risk/reward set up. I refuse to chase the short side with the market as compressed as it is even though I know we could very well go down a lot more and I'm not going to go long at a fresh 52 week low either especially when the fundamental tide has just turned for the worse only a few months ago, there's continued bickering in Washington and in Europe and there's unresolved issues that pose a major systematic shock if not handled correctly which let's face it, may very well not turn out to be the case given all the clownery (if there's such a word) in Europe

It may turn out to be that I will remain mainly in cash for several months....who knows. If I don't like my starting hand I will fold it over and over and over for as long as it takes. I will not force trades nor will I play the intraday game of chicken with other traders. I don't give a rats ass if I miss the bottom or miss out on a continued crash. I've harvested nice profits over the past soon to be 3 years by being disciplined and patiently awaiting proper set ups and I'm not about to go squandering them chasing sub par set ups for the sake of trying to grow my account....I learned the hard way several years ago that this will backfire more often than not.

I'll end off by saying this....keep an open mind to the possibilities out there. It's easy to listen to the permabears when the market is bad and it's easy to listen to permabulls when the market is good. If all you do is listen to one or the other you will not see the market objectivity and get burned at major turning points from bull to bear markets or vice versa. I know for a fact tons of retail got burned worshiping the permabears over the past few years and now that the market has finally turned they don't have much money left to capitalize. I also realize that I've done a complete 180 turn from just a few months ago but that's what you have to do sometimes...you have to be willing to do a 180 turn from a long held belief in the market immediately if the evidence suggests so. Leave your pride and ego aside.

Weekend Ramblings

2011-10-03T01:36:00.001-04:00

In case you haven't heard yet, ECRI is now on record calling a recession. Check out the interview on cnbc here. I've said it before that these guys have a great track record and the market has certainty been acting as if were are on the way towards a recession. I've noticed the popularity of ECRI has soared. When I first discovered them 10 years ago hardly anyone knew about them and they certainly weren't making all of these TV appearances like now. One thing I've learned over the years is that when a guru becomes popular with the financial media they are on the verge of going from sage to goat. I'm not so sure if ECRI has reached this point and I'm willing to give them the benefit of the doubt with their latest call, but I'd feel a lot more confident in their call if they weren't so damn popular now a days. Anyhow, given the behavior of the markets which are one push away from making new lows, given the rise in credit spreads across the board, given the deterioration in economic gauges and now given the recession call from a firm who correctly foretasted the last 2 recessions, at the very least you have to respect the bear case if not embrace it.

The bear market playbook calls for a trading approach on both sides of the market as opposed to a long only buy and hold investing approach that's optimal in bull markets. The psychology of bear market cycles goes from despair to hope and back to despair over and over. When despair becomes acute, bears press and the market gets oversold, some sort of positive news will come along to trigger a rebound as hope emerges that the "worst is over", "the market has discounted the worst" or whatever. Then of course, that hope turns out to be false and the market heads down again making new lows. Despair, hope, despair, hope over and over until you reach the point where most people given up on all hope and that's when the bottom arrives.

In bear markets I personally like to focus mainly on index trades using long dated deep in the money options. Right now, however, neither side of the market is appealing to me. Despite the likelyhood of a new reccession and new bear market, establishing a bearish bet when the VIX is over 40 and sentiment showing multiple bearish extremes is piggish and not what I call a "sweet spot opportunity" that I look to play. We could very well be at one of those points where despair is acute and we are overdue for a "hope rally" but because the market is not yet fully ST oversold, showing no signs of bullish traction whatsoever and is one push away from making new lows, the long side is not appealing either - you must respect the primary trend in this case and that trend is down. So, in conclusion this argues for staying in cash as neither side of the market is appealing.

Let's talk bigger picture now. If the bull market we've had since 2009 was just one big economic dead cat bounce and we've reached the end game where no more or little can be done by authorities to save the economy then you better watch out because it's going to get really nasty. I sure hope that's not the case and I truly hope that all my bearish talk of late proves to be the ultimate contrary indicator.... I honestly do. I don't wish to see more misery and hardship. As a trader you need to able to play both sides of the market and not be biased towards one side but when you play the short side on an IT/LT basis you are rooting for bad news and profiting from the demise of others. That takes a toll on you....unless you are a miserable SOB who's happy to see more people become miserable too.

Be careful out there no matter what side of the market you are playing. I'm still standing aside.

Another bearish extreme but it may only be good for the ST

2011-09-29T13:29:00.001-04:00

Another key piece of sentiment is showing a bearish extreme. The National Association of Active Investment Mangers measures the net long exposure active managers have. The latest reading is 4%. This is pretty much as low as it has gotten even during the 2008 crash.

Keep in mind however that this is more of a ST timing indicator. It does tends to give more accurate contrarian buy signals then sell ones which is good for the bulls here but again, the current low reading may only turn out to be indicative of a ST/IT bottom and not a LT bottom. Take first instance the bottom in August of 2007, January 2008 and July 2008 when there was a low reading similar to today's. At those bottoms there was clear symptoms of the impact sub prime debt was having on the economy which created an oversold market and a lot of negativity. Then, for one reason or another the market bounced for a few weeks on hopes that the worst was over or that the market had "discounted the worst" but of course that wasn't the case. The major economic damage still lied ahead along with the clean up process of restructurings, recapitaliations and government programs such as TARP. People kept underestimating how quick and severe earnings and the economy contracted.

We could very well be in a similar situation today as we were when the market hit temporary bottoms in late 2007 and the first half of 2008 whereby negativity became acute, and the market was oversold. But it seems inevitable to me that before it's all over the tough medicine will have to be swallowed i.e the haircuts, recapitalizations and TARP like programs. I don't know if that will take 1 month or 1 year to fully play out but I think it will happen.

As always I'll keep an open mind as to how this may all unfold.

Perpectives

2011-09-26T02:04:00.002-04:00

First, let's talk sentiment. The latest reading from AAII is showing 2:1 bears vs bulls. In bull market conditions such a reading would signal a signficant bottom but in bear market conditions, it's only good enough to signal a bounce at best. Last summer we saw AAII sentiment hit 2:1 bears vs bulls or more three times before the correction was over. Given that conditions now are worse than they were last summer, I'd expect to at least see the same before we see the final bottom.

Here's a mussing from Alan Farley a trader who writes on realmoney.com

Death of Equity Investment

We're entering the 3rd bear market in the last four years (if you view the flash crash as a mini-bear, which I do). This is the nail in the coffin for the quaint idea of buying stocks as investments. The public already knows this, which is why we've seen a mass exodus out of the stock markets in the last 18 months. In fact, I think the only ones that don't know it is the Wall Street crowd because they're so immersed in the con game that they have no conception of reality.

Two generations of demographics support this death of equity investment: I’m in the middle of the baby boomer generation and will turn 60 in three weeks. Folks like me are looking to reduce risk so we can pay for our old ages. We have no intentions of taking our low return nest eggs and betting on the next Internet or Starbucks, especially in a Taco Bell society that has lost its flair for innovation.

Our kids, aka the next generation, are dead broke because the old folks in power have abandoned them. They know better than we do that Wall Street is a rigged game because they’ve grown up to an evening news environment that’s bombarded with financial crisis after crisis. Maybe that’s why my two grown children want nothing to do with this industry. Meanwhile, the financial elite have sucked the life out of healthy trends in real estate, raw materials, Internet and a dozen other growth sectors with artificially-created bubbles that are now broken beyond repair. They got rich while their customers got lectured about personal responsibility and thrown out of their homes.

This is fine for me because trading isn't investment, which still works, so I can stick around and turn out the lights and lock the doors when it all ends. But, to tell you the truth, I find the whole thing quite depressing because capitalism is a beautiful thing, when done correctly.

The above reminds me of the famous Death of Equities article in Business Week back in August of 1979 which talks about how people had given up on the stock market after a decade of high inflation and that there was no hope for equities. Of course we all know that in the 20 years that followed we had a massive bull market in equities.

I saw the following comment made by one of my friends on facebook.

Another recession on its way.... and all this time I thought we were still in one? This economy is fucked big time.....

When I see posts like the above two it makes me want to hock the house and go long. I've made mention several times here that the bull market was never fully embraced by the public or the investment community. The public still believed we were in a recession, while inflows into equity funds/ETS, although positive in the first few months of the year, were still quite small relative to how much was pulled out. Then you have the retail trading community who complained about the market all the way up. Common things I heard was "low volume" and "rigged by the PPT" and as the market would make new highs instead of excitement I would sense moaning and groaning. All of this suggested that there was potential for the bull market to climb to new highs because there was a lot of doubters and that it would be quite unlikely for it to end because of that. So now I ask myself will I be wrong about this and if so why? If I'm wrong it will be because of what the permabears have been claiming all along...that the economy was simply a dead man walking and if not for the massive government intervention we would have seen an even bigger disaster after the crash of 2008. Such a once in a century type flood would overwealm any kind of sentiment analysis.

Back in early April of 2009 I made the following comment

I'm quite open to the possibility (no solid evidence of it yet) that we could see another economic revival like in 2003 to once again extend the end game of the super cycle of debt but if and when that occurs, the next downturn will likely be catastrophic because we can't go to negative interest rates next time to stimulate borrowing and we probably can't see governments increase spending to a multiple of today's already massive levels.

This pretty much sums up the fears of what's going on right now doesn't it? Rates can't be cut anymore while governments have their hands tied due to the embracing of austerity. I'm sorry to say but things do indeed look grim and potentially castostrophic. I'm sure there will be at least 1 major effort by European authorities to combat the crisis and that would likely give the markets a lift but after that I don't know. I mentioned before how China could be white knight to help clean up Europe but I'm seeing more and more stories about how bad local debts are starting to surface in their economy...it seems like they are experiencing a hangover from their stimulus plan in 2008. Meanwhile, the bickering in Washington continues.

Let's look at what's happening right now. Market action is shitty. We have global markets led by the BRICs making fresh 52 week lows. We have economic data that is showing weakness and there are many things in my opinion that need to be resolved 1) a restructuring of PIIGS debt and 2) recapitalizing of European banks. How and when will this be done? What will be the economic fallout as a result?

I get the sense that there's a lot that go wrong with all of this. Now look, with the VIX at 40+, AAII at 2:1 bears vs bulls and the 10 year at 1.75% I realize the market is ripe for at least a relief rally...perhaps ever a very strong one on just any kind of favorable progress made in Europe. But at the same, I also get the sense that we could just as well see things unravel more and it gets really ugly. It seems as if it's just a matter of days before we see bank runs and major bankruptices in Europe.

I'll end by saying what I've been saying for several weeks now.....wait for this shit blow over. There's an unresolved crisis, economic momentum has deteriorated and all the while the markets around the world are at fresh 52 week lows. All of this says that the bears are in control and while it may seem too late to go short, it also seems too early to go long aside from ST trading opportunities. Sentiment is very gloomy but remember markets can go higher or lower a lot more than you think possible and a lot faster too. Respect momentum and right now momentum is to the downside. This line of thinking kept me from getting ran over in 2008. I'm going to continue doing what I've been doing and that's a whole lot of nothing.

Will this turn out to be like September 2010 or September 2007?

2011-09-20T14:05:00.002-04:00

First of all, the lemming bears are at it again. The put/call ratiowas sky high this morning in the face of market strength. This time however, the market is not ST oversold so the less of chance of them being squeezed like last week but it still remains a decent probability...at the very least it suggests you stay away from the short side until you see them back off.

When things seem utterly hopeless and the bears pile all it takes is some marginal good news to rip them a new one and that's what happened and may continue to happen. It's a game of chicken though, because the fundamentals are in fact deteriorating which warrants being bearish but Mr. Market rarely likes company. Have you noticed that some of the market leaders namely, Apple and Amazon have made new highs? Amazing. Having your market leaders lead is good sign for the bulls but is this the result of people simply "hiding" in these growth names?

So, there's talk now that Greece may end up getting the next tranche of bailout funds which would keep them afloat till the end of the year. That's probably why the market is ignoring the lemming downgrade of Italy by the new tough guys of the world S&P. Italy is in bad shape? Gasp! Wow, S&P you are so forward looking and market savvy...nobody had any idea the PIIGS were in trouble! Ok, so if Greece does indeed get more bailout funds it could very well be the catalyst for the market to breakout higher simply because too many bears have been shorting the market. Unfortunately, European authorities are in denial and are ignoring the bond market which is saying that Greece is doomed to default. It appears they are throwing good money after bad and if Greece keeps struggling, which they likely will, the next time they come back to the through it would most likely be game over. You can sense that people are completely fed up with these bailouts. Merkel has taken a political beating because of it.

A lot of what's going on reminds me of late summer 2007. August of that year is when we first started to see material impact of bad subprime to those who were directly exposed the most. The market sold off sharply as mortgage companies were going bankrupt and major hedge funds were getting wiped out. Then, just like now, there was massive insider buying on the selloff, which I recall hit a15 year high.
The fed came in, cut rates and provided liquidity which caused the market to rebound and actually make a new high for the year! We all know what happened afterwards in the months to come. So, as you can see, the market never makes it easy for the bears especially since most bears out there using ST trading tactics which makes them either get stopped out on the rallies for losses or cover far too early on the declines.

I've been LT bullish since the summer of 2009 and I turned ST bearish this summer expecting a consolidation with mild to moderate downside and exited positions substantially accordingly. At the time I thought I was playing a dangerous game doing this because I was trying to avoid ST weakness in the context of what I still believed was a LT uptrend and when you do that you run the high risk of being left of the side lines as the market goes up without out you. Lucky for me the prudence payed off. As things have been unfolding I find myself becoming more bearish for the intermediate term (2-6 months) and perhaps long term. Economic fundamentals are rolling over while policy makers are making mistakes (in my view). The similarities between subprime housing and subprime Europe are quite eerie. You might be saying "what about all of the talk you were saying about how skeptical and pessimistic people were througout the bull market which meant it still had a ways to go?" Well, all I can say is that sentiment is only one aspect of the equation and it has it's limitations. During the bull market we had negative sentiment in the context of improving fundamentals (earnings and credit conditions) - that's when contrary theory works best. But when you have pessimism in the context of deteriorating fundamentals it doesn't work nearly as well because pessimism is justified....at best it can result in temporary rallies when it gets acute.

The bottom line is that I believe the foundation for a bull market advance is no longer there. I wouldn't call myself a full fledged bear yet but I'm on their side in the intermediate term. In the ST, it wouldn't surprise me to see the market go higher still because bears have been too aggressive betting against the market, but I don't say that with the confidence I had last week when bears were piling in because the market was ST oversold wheres now it's not.

Authorities dealing with the symptoms not the problem

2011-09-16T14:05:00.000-04:00

Alright so we got the short squeeze that I saw coming. Unfortunately it looks like just that....a short squeeze and not the start of sustainable rally that ends this rout we've been in since July. News that China is buying bonds and Central banks are willing to provide liquidity to European banks were likely the triggers. Like I said, it could have been anything.

I read an article in the post today which talks about how European banks were reluctant to lend to each which was exactly what happened in late 2007 and 2008 when the sub prime started to go sour. Adding liquidity to the system did nothing to solve the crisis. Ultimately, the bad assets had to be expunged via TARP and the banks that were exposed to them had to be recapitalized, merged with a stronger bank or let fail. Ultimately, I think this is what is going to happen in Europe. It could happen next week, next month, next year who knows....but until it does I have my doubts the market will be able to go back to bull mode.

Unlike with sub prime and MBS which due to the slicing and dicing of mortgages were complicated messes the exposure of" sub prime European debt" appears to be a lot more transparent. Once authorities come to terms with reality (realizing that restructuring/haircuts/bankruptcies have to happen) hopefully, they have learned from 2008 what to do and what not to do (such as letting banks fail like Lehman instead of taking receivership like Bear Sterns).

Timing is everything. A lot of bears saw this crisis happening over 2 years ago and they either shorted the market or stayed on the sidelines and got wiped out or embarrassed badly as the market went up 100% from the bottom. I don't care how smart you are or how times you said "see I told you so"...if you can't translate your predictions to making money, you are a loser and are no better than someone who lost money because he was outright wrong about the market.

It still remains to be seen if indeed the bears will be right about Europe having to bite the bullet....I think they will have to. Now, this doesn't necessarily mean we will see 2008 all over again. If the right steps are taken the damage could be a lot less. China is really the only country out there that has the fire power to contain the damage. They indicated their willingness to help out but I don't think they are going to be willing to throw good money after bad in a material way. They have been buying bonds but they have been token purchases from what I gather. If the haircuts are taken and the bad assets are expunged I think the Chinese would be then be willing to make a major move in recapitalizing the system.

We are just going to have to see now how this all plays out. If I end up being right we will see at least a retest of the lows at some point but in the interim, there's going to be sharp rallies just like we've seen this week. You think Mr. Market is going make it easy for the bears to profit? Not a chance. When the market gets oversold and bears pile in like they have been they will get crushed. Go take a look at the last 2 bear markets to see just how sharp rallies can be.....we're talking about rallies that can last more than 2 months and rise 20%+. Bear markets destroy both bulls and bears and yes, I'll call it a bear market because it's acting like one but by the same definition, last summer was also a bear market abliet a very short one, therefore, it's possible this could be short one as well but until the market starts acting in a way that suggests it's over you better have respect for it and so that means the best course of action is to remain mostly in cash until it's over.

Is it possible that we can kick the can again like we did last year? Sure, but I don't think it's likely. The damage done to the banks in Europe and yields on Greek debt suggest to me that the condition is terminal and there's no turning back. Again, it could take days or months for this to play out much like the life span of a terminally ill cancer patient but my gut is saying that it's not going to be hunky dory for another year like last time when the market rocketed 30% for 6 month. If I'm wrong, hey, it won't be the first time and hopefully I will be able to adjust but as of now I just cannot be a strong holder of equities given what I see out there. ST trading opportunities will present themselves but the headline risk is ultra high right now to make me comfortable with those either.

I've whittled down my exposure to 20% with a position I'm comfortable holding for the LT no matter what happens and so I'm in a position to be able to be patiently sell into strength at favorable prices if I see the opportunity. That's my game plan at the moment.

asinine put buying

2011-09-13T11:57:00.001-04:00

it could be option expiration week related and I know I micro analyzing here but the put call ratio is currently at 1.57 which is asinine considering that the market is modestly up today. If we close the day flattish or higher with this type of reading it would make the market very ripe for a massive short squeeze....all it could take is for some flimsy piece of good news like Bernanke saying that he switched from boxers to briefs. New bear market or not, whenever you see the bears pile in like this they get tend to get spanked.

Just get it over with already

2011-09-12T12:52:00.000-04:00

According to bond markets, some sort of a Greek default is immanent. Greek 1 year bond yields are at 90%. That's pretty much a lock that a default is immanent. Just now I read an article that says that its expected that Greece will receive it's next tranche of bailout funds and that officials are denying speculation of a default. lol! Who are you going to believe? These "officials" or the debt markets? The market is pretty much saying that further aid will either not be forthcoming or won't make a difference if it does.

Now, I realize the market is ST oversold (but not extremely so like it was near the bottom last month) and the gloom is really thick which argues taking a contrarian stance but I've always said that using sentiment is more an art than a science. You need to take into account the fundamental backdrop and with what appears to be an immanent default by Greece, bearish sentiment is justified because of the contagion effects that are possible due to this black swan event. Now, that doesn't mean that in the interim there can't be a sharp rally right here on any kind of marginal good news to clear oversold conditions and punish bears who are pilling into bearish instruments (puts), but playing that game of chicken with other traders is not for me.

ST bounces aside, in my opinion, the market will not be able to resume the bull course until we at least see Greece default and/or restructure. Last summer we got away with just putting a band aid on, but I doubt we can see a replay of that this summer. I know the bears have been saying this for a while to no avail but I think this time they are right when they say that the can kicking needs to stop. When I say right, what I mean is that I believe the timing is right because it seems to me that the market is demanding it whereas before it was willing to ignore it and accept temporary solutions. Dealing with a Greek default/restructuring would probably result in ST pain but if policy makers can come up with a good clean up plan, it could clear the way for the market to advance later on. It's like puking after a heavy night of boozing...once you clear your system of the toxic booze you are on the road to getting better (btw, I haven't puked in 20 years!).

I would love nothing for this post to be the ultimate contrarian indicator and the market soars back towards the highs right here right now. I'm an optimist at heart and I want to see a happy ending to all this but when it comes to the market I'm a pragmatic realist....or least I try to be. We can still have a happy ending to all this but again, I believe we will have to come to terms with the hopelessness that is Greece first among other things.

Last week I couldn't resist the opportunity to unload more of my already limited equity exposure on one of my positions into strength at a favorable price which now puts me at about 80% cash. I think I was quite fortunate to see this stock (wzl.to) hold up well considering the damage in the market. I'm now in a position whereby my all my stocks would have to go to zero to put me in the red for this year and that's pretty much impossible given the solid balance sheets of these companies...one of which is a shell company with 100% cash and no debt. I think I did a pretty decent job transitioning from offense to defense this year. I hope I will be able to do the reverse.

1 month post crash analysis

2011-09-10T13:26:00.000-04:00

It's been one month since the market crashed and hit it's low point and as I expected, we didn't see any kind of snap back V bottom that sent us back towards the highs. So far the market looks a lot like it did after last summer's flash crash...one big volatile choppy mess. We have seen a number of days where the market has gaped bigtime in either direction for a 3%+ daily move and often this has happened back to back with a big up day followed by a big down day or vice versa. That tells you right there that the market is broken and that long term money is on the sidelines. This too was a feeling I had last summer but this time around the volatility and "brokenness" is worse. Now as we all know, last summer's broken market eventually had a bullish resolution. That doesn't guarentee we'll get one this time but at least there's hope that there can be. However, hope is not a viable investment strategy and so until the bulls can prove that they are starting to take back control over the market I will continue to watch on the sidelines for the most part and give the bears the benefit of the doubt.

This choppy action we've been seeing could be base building for a bottom or simply a bearish consolidation that will lead to lower lows...again, to early to say which, but the longer we see this kind of choppy action without a significant break of 1100 the more likely a bullish resolution becomes. Some people might be noticing what appears to be an emerging rising upward channel in the chart. I would be very skeptical of this channel being the beginning of a new sustainable advance off the lows that powers us out of the doldrums especially since there hasn't been at least 2 months of base building which historically has been a requirement for a market to recover from a crash. It's far more likely that the first move off the bottom that gets us out of the doldrums will be one like last September whereby it starts off with a surge seemingly out of nowhere and doesn't give you much in the way of dips to get on board.

A lot of work has to be done to restore confidence. I think this time around, unlike last summer, there will have to be a grand, final resolution towards PIIGS whether it's market friendly or not. We need to just get this over with because I don't think the market is willing to tolerate can kicking anymore after the 2 flash crashes we've seen. Next, the market needs to get a sense that emerging market countries are done with tightening and are switching to an easing stance. We already saw Brazil do this. We need China to follow. Finally, we need to see the US and some other developed nations have the balls to say fuck you to the rating agencies who are trying to be bullies by saying "austerity or else...." and take bold initiatives to stimulate job creation and clean up the housing mess which go hand in hand and doing so may entail rising deficits in the near term. If everyone goes austeric (is that even a word?) at the same time to keep the rating agencies happy it will soon become obvious that the slow or negative growth it creates results in a worse fiscal situation which would then result in further downgrades anyways.

There's a huge debate as to whether government intervention is effective or not. I think certain types of intervention can be effective and history has shown some instances such as Brady bonds in the early 80's, the RTC in the early 90's and TARP a few years back. If the Obama administration can come up with programs that will effectively stabilize and revitalize the economy in the long run at the cost of higher deficits in the short run they must try to implement them. I'm not talking about your run of mill Keynesian government spending that gives the economy a temporary sugar rush, I'm talking about creative solutions that could help resolve structural problems such as the housing market which is still a disaster. Housing affordability in the US is at an all time high and so I think attempts to stabilize and revitalize it can be successful. So far the attempts to stabilize have been a failure but that probably because the wrong approach has been taken.

But never mind what I think or you think. The market doesn't gives a rat's ass anyways. We should be able to see the signs when the market starts sensing that things are going to get better...right now that's not the case. Right now the market is suggesting to world leaders that they better get their asses in gear fast.

Another rough long weekend

2011-09-05T15:43:00.001-04:00

Looks like the market is set to open with a big gap down tomorrow. A bunch of big US banks are being sued for about $200 Billion by the US government for MBS fraud including BOA....I'm sure if Buffet was taking a bath when he heard this his bath water got hotter by 15 degrees. Economic data coming out of China is showing significant slowdown in activity and European worries are flaring up yet again resulting in the DAX getting smashed for 5% hitting a fresh new 2 years low. Not good....not good at all especially when Germany has been the strongest country in Europe. It's amazing how things have unraveled so quickly due to a flurry of bad news hitting the wires one after another.

The only positive thing to take away from this is that things are getting so bad so quick it makes it more likely that some sort of decisive, coordinated effort that may even involve backstop from China and the US will be forthcoming to deal with PIIGS once and for all and the solution may not necessarily be a bailout but rather a combination of a bailout and a restructuring. Whatever the outcome, disaster or not, I'm getting the sense that the problems in Europe is approaching a climax. It's becoming painfully obvious that a Lehman event is indeed going to happen unless something big is done right now. One thing though that I find very odd is how the Euro has been hanging tough despite all the market turmoil. You would figure that it would have been sinking as it usually does during broad market declines especially given the instability in Europe. What exactly does this mean? hmmm....

One piece of news that nobody talked about is that Brazil cut rates by 50 basis points late last week. I mentioned a couple months ago the ominous condition of inverted/flat yield curves in Brazil, China and India. It seems Brazil now "gets it" that there's economic weakness coming and inflation pressures will be rapidity easing in the months ahead. They are taking decisive, proactive action instead of waiting like most Central bankers do until it's painful obvious things have turned sour. It will be interesting to see if other emerging market countries will follow Brazil's lead. Remember that I said a while back that one of things the market needs in order to clear the way for a sustained move higher is for Emerging market central banks to stop their tightening.

This is a dangerous market right now for anyone bears or bulls alike because the headline risks for either side are huge. Bears have the advantage though because the structural factors and economic momentum is deteriorating.They say the best time to be buying is when there is turmoil like this and that is true but you never know just how deep and prolonged any turmoil can be which is why I prefer to be aggressive on the long side coming out of the turmoil with the wind at your back as opposed to trying to bottom pick at the depths of the turmoil getting ran over. As I've been stressing...give it time. There's no need to rush in fearing you will miss the bottom and if you do so what...there will still be plenty of opportunity to get in relatively early.

I want to bring to your attention 2 dates. October 10, 2008 and July 10, 2009. On both of these dates the market was trading at about the same level (SPX 900). Both of these dates also turned out to be good times to buy longer term but there was a major difference between buying in Oct 2008 vs July 2009. If you remember, Buffet came out with his "Buy American" article in the NY times in mid October of 2008 and said "be greedy when others are fearful". Well, if you followed his advice you would have suffered quite a bit for the next 6 months or so as stocks went lower still...quite a bit lower too....a year later though, you would have been comfortably in the black. But how many people who followed Buffet's advice had the stomach to ride out those interim losses during those 6 months especially when the headlines were suggesting the end of the world? And for anyone who didn't capitulate during those 6 months after October 2008 most of them likely sold at break even in the summer of 2009 thankful to get their money back. I bet few likely held tight for a over a year and actually made money.

Now, take someone who bought into the dip of July 10, 2009. Again, the market was around the same level as it was on October 2008 when Buffet said to buy, but unlike then, the trend in the preceding months was up not down. The economic fundamentals (earnings) and structural factors (credit spreads) were improving, not deteriorating. Although prices were the same, buying in July 2009 resulted in no teeth gnashing and sleepless nights like buying in October of 2008 would have since you wouldn't have been underwater for 6 months (and likely capitulated) before your positions showed a profit. You would have made money quickly and painlessly never being put in a situation where your get whipsawed or emotions get the best of you. That my friends is the way to play this game - with the wind at our back. July of 2009 is an example of what I call a sweet spot opportunity - it's when you get in on a pullback/consolidation early in new uptrend. I told you already about my botched, missed opportunity in TLT calls when I noticed such a pullback in July of this year - shame on me.

We need to patiently await the next sweet spot for the market before getting aggressive on the long side. That could take a long time to happen...possibly as long as next spring! In the interim there will be ST trading opportunities but I'd be very careful and selective about this. The headline risk is super high for either side of the market. Based upon what I'm reading and seeing out there, I can tell a lot of people are struggling this year even most bears, who I can tell have missed most of this move down.

This game ain't supposed to be easy...always remember that. But you can make it easier for yourself and beat the crowd if you only play the premium hands. Probably the biggest mistake most people make is that they overplay the market trying to make money every day, every week. I see clowns on realmoney.com trying to predict the day to day moves. Even veterans like Kass do this. I suppose the pressure to beat your benchmark is responsible for this behavior but all it does it backfire on you. Often times the best thing to do is jack squat for months at a time and not even look at the market at all. If we sink into the abyss you might say doing nothing means missing out on short side profits. This is true, but in my opinion going short when the market is longer term oversold, the VIX in the mid 30's, unfilled gaps overhead and ultra high headline risk is simply not a favorable reward to risk scenario. If you want to go short in a bear market smartly, you need to wait for moments like in May of 2008 when the market had a nice rally to clear longer term oversold conditions accompanied by complacent VIX hitting sub 20. If you don't get those opportunities, it's best you just sit tight in cash and be patient.

Never a dull moment

2011-08-31T11:59:00.000-04:00

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.

Give it time

2011-08-23T16:43:00.000-04:00

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!

Comments about Tuesday's action

2011-08-10T01:50:00.001-04:00

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!

Oversold as early October 2008

2011-08-09T13:06:00.001-04:00

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.

Weedend ramblings

2011-08-06T13:42:00.410-04:00

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.

Assesing the damage

2011-08-05T02:40:00.000-04:00

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.

Intermediate term headwinds kicking in

2011-08-03T15:25:00.054-04:00

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.

My religion

2011-07-31T13:55:00.005-04:00

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.

Playing a dangerous game

2011-07-23T14:09:00.011-04:00

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.

Some of this and that

2011-07-19T12:58:00.002-04:00

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.

The most interesting man in the world

2011-07-09T14:07:00.005-04:00

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!

crosscurrents

2011-07-06T23:55:00.002-04:00

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!

Take a wait and see approach

2011-07-04T17:17:00.002-04:00

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.

Half time report

2011-06-30T13:12:00.001-04:00

I can't believe 2011 is already half over...where does the time go? Overall the market has acted pretty much in line with how I've been expecting it to this year. If not for this latest flurry this week, the market would have closed the first six months around flat YTD. Now, we all know the supposed reasons for the market's volatility since May and some of them are valid ones, but let's take a step back and look at the long term chart. Coming into the year we had a massive move from September and the market got quite overbought on several measures and even despite this, the market still climbed a bit more before finally stalling out. That's not unusual for a bull market but history shows that sooner or later such a strong move is followed by a drawn out consolidation phase and so it doesn't matter what the excuses are. A sprinter can't run at 100 miles/hr forever....sooner or later he's going to stop out of exhaustion but it doesn't necessarily mean that the sprinter can't run anymore...it could very well be that he just needs a break.

Although I expected to see a consolidation phase I didn't dare try to profit from it because I knew the timing would be tricky and man was it ever. Top pickers got steam rolled again and again this year. Until recently I maintained all of my core long positions which were almost entirely in energy services names. They did quite well for me this year largely outperforming the market. I have now scaled back these holdings overall by 50%. My sale of esn.to looks a bit hasty right now as the stock has popped 10% since I sold out. Isc.vn which I reduced, has climbed a few cents more from where I sold. But despite this, I've been having a decent year so far. I realize though that the half time score means nothing...only the score at the end of the game matters.

Mr. Market must have read my previous bearishly slanted post and decided to teach me a lesson because since then the market has taken a hefty dose of viagra and got one hell of a boner. An anonymous poster
may have been trying to rub it in too in the comment section. Hey, it won't be first time I get it wrong but in my defense, my bearish rant pertained to the IT as in 2-6 months not 2-6 days. The market was certainty oversold enough to warrant a bounce, but if you look at how this bounce has been playing out, it's been done almost exclusively via morning strength which to me is the hallmark of short squeeze/dead cat bounce behavior within a downtrend similar to what we saw last summer. Look back to the 2004 consolidation. The first move down in the market during that time was about 6% from the peak, then there was a snap back rally that recovered about 80% of that drop. Ultimately the market headed down again and dropped 10% from the high. I'm not saying I expect to see every wiggle to play out the same as it did in 2004, I'm just saying that in consolidation phases, it's normal to see volatility like this to make it tricky for the bears to capitalize and it's seldom a straight line down to the final destination. When the market dropped in March due to Japan I said that I didn't think this was the beginning of the "real correction". I feel the same about this latest rally....I don't think it's the beginning of the "real rally" that powers the market out of this corrective phase.

I think we need to see a bit of a "reset" here to fill up the bullish gas tank. We need to see oil back in the 80's, the VIX above 30 and the 10 year sub 3%. Near the recent lows in the market we were getting there but didn't make it. Now we already have oil back to $95, the VIX at 16 and the 10 year back to 3.2%. Now, I know I need to be careful not to be dogmatic about my thinking like the permabears out there who insist that they are right and that the market has to do what they tell it to do (and then get run over big time as the market doesn't listen to them). There's no law that says the market has to do what I want it to before it makes substantial new highs which is why I am going to pay close attention to market action. The market tends to act a certain way when it's in bull mode or corrective/bear mode. As I alluded to earlier, upside action in corrective/bear mode tends to be done via morning strength...not always but often.... whereas in bull mode the market tends to start off timid and then finishes strongly...again not always but often.

So, right now I'm sitting here with a hefty amount of cash like I did last summer. I suspect I'm going to be pretty much a spectator for while. I'm still holding some longs but I would be inclined to lighten up further on strength. I get very tempted to play ST trades when I'm in such a situation out of boredom or the desire to do something with the cash. This is a no- no. A lot of traders/investors out there feel they have to make a certain amount of gains every week/month. When you try to "force" the market like this it will usually backfire on you. Last summer I had the World Cup and the birth of my daughter to distract me. This time around I have no such distraction...perhaps I'll take up gardening. What I have been doing is scanning the smallcap/microcap universe for new candidates to add to my portfolio. I've some up with a few interesting plays so far...when I'm done I'll post them.

I've had a sweet ride since September and so if it turns out I was too hasty scaling back my long exposure to over 2/3 cash then so be it. If I still felt I had the wind at my back I would have continued to hang in there but I just don't feel that way anymore and so I can't be a strong holder nor do I want to end up a pig that gets slaughtered....I was sitting on some hefty gains. I also don't want to stay bearish/neutral too long either because it feels mighty crowded in that room. Perhaps Mr. Market will punish me for my lack of courage to stay long....it won't be the first time that's for sure.

Deep thoughts

2011-06-27T02:09:00.001-04:00

There's a lot on my mind so buckle up...this is going to be a long post. Readers of this blog know my LT bullish stance on the market and by LT I'm talking about the up cycle that began in March 2009 which I believe has yet to run it's course. Coming into the year I said to expect to see a consolidation phase and so far this is what looks to be playing out here. The US markets are pretty much flat for the year while the TSX is actually down 4%. But could this be more than a consolidation? Now, let me call a spade a spade. There's clearly a change in character in the market. The downside we've been seeing since the market peaked in May feels a lot different than the dips before that. It's been gradual, yet relentless. Anytime the market hits ST overbought readings it handles them poorly by falling apart quickly. This is not like the action we saw from September to May whereby any downside was sharp but rather quickly recovered and ST overbought readings were often handled well by the market by going sideways for a few days as opposed to falling apart like it has been doing lately. So, what does this mean? It means that the market is either in full blown correction mode or bear mode. Last summer we saw similar action. Even as a bull you must respect this change in character. It means that you have to be on the defensive now and only cherry pick the best of any long opportunity that you see out there while keeping a heft cash reserve until you see the "whites of their eyes" type of despair and a fully sold out market that would mark a bottom. We are seeing lots of doom and gloom out there no doubt, but we haven't seen panic and I think that's what's missing here. Just look at the VIX....it's still too low to indicate we've seen some sort of crescendo in fear.

I said it before, I think the market is going to break well known support levels and moving averages, in particular, the 200 DMA to flush out the last remaining weak holders and truly convince a lot of people the LT trend has changed to bull to bear. Remember, most people out there are traders now....they no longer believe in buy and hold (which ironically has been the best strategy to go by) so therefore, in order to make fools out of as many men as possible, Mr. Market is probably going to target the traders and their indicators. He's been doing it all throughout this bull run so far.

Now on to crude. I've been thinking a lot about it lately. The IEA's release of oil into the market is a drop in the bucket but the fact that it caused such a large drop in crude could mean 1 of 2 things. Either it's just a knee jerk reaction or there is large underlying weakness in the oil price i.e. it was heading down anyway and so any kind of bearish news like this simply accelerated the inevitable downside. It could be a bit of both but I think the latter has more to do with it. There was a ton of hot money in the form of long futures positions that chased oil earlier this year when it broke above $90. This net long position in crude is unwinding putting pressure on the price and it's still quite large. With the IT trend now decisively down for oil coupled with soft economic data we've been seeing, these liquidations are likely to continue. It's seems quite unlikely to me that this downdraft in crude will end for good until this large net long position substantially shrinks. You argue peak oil all you want...the motto of this blog takes precedent every time in my book.

There's been rumblings out there for Washington to restrict speculation in key commodities like oil for quite some time but the rumblings seem to be getting louder after oil spiked to over $100. Now that the economy is in need of further stimulus and there seems to be no other options left, what better way to do so than to try to bring down the price of oil by chasing out the speculators which would drive down the price.... and dong so wouldn't cost the government anything. Now, some people might be thinking "great, more government intervention" but to this I would say who's really intervening here? Do you think that crude oil futures speculators are adding value to the economy? Some of them are indeed needed to take the other side of the trade from hedgers such as oil producers, but thanks to the proliferation of CTA pools and hedge funds there's a lot of money flowing into commodities speculation..oh sorry I guess the proper term is "investment demand. These hot money flows are probably distorting what the price would be under more "normal" circumstances. I say probably because I know there's arguments for and against this distortion in commodities actually being true. Well, it just seems logical to me that if you have a billions of dollars worth of net long positions in any asset class, the price has to be higher then what it would be if that money wasn't there. Anyhow, the bottom line is that if the government would enact higher margin requirements for oil or some other method to choke off speculators, the price would likely drop sharply. When we see the hot money get chased out of the oil (through government action or just on it's own) the price of oil will drop further and we will see what the "real" price is. I think this would be a benefit to all. Oil producers know that too high a price is not in their best interest LT because it could harm the economy leading to a price bust (I'm not so sure though what would be the "economy choking price" of oil). Most would be happy to see oil in between $75-$90. I'm sure because that's the price where it would be not too hot and not too cold.

For me personally, I would be in favor of the government stepping into raise margin requirements for crude or somehow limit the hot money flows into them...not because I hate capitalism and I'm rooting for the government to keep up it's stimulus measures but because I believe there should be limitations in the speculation of commodities that are essential for everyone. Actually, I'm in favor for government restrictions to all forms of speculation....and I said restrictions, not elimination. Excessive speculation in any part of the financial market creates consequences for everyone either directly (like with oil which everyone uses) or indirectly (like the tech bubble bursting...not everyone bought tech stocks but the tech fallout tanked the economy which did effect everyone).

The bottom line as far as crude oil prices go is that they are vulnerable here for both financial and potential regulatory reasons. A further fall in the oil price would take away the drag of high energy price in the economy. More importantly, it creates falling inflation which would then result is China ending their tightening campaign. When the market starts to sniff out that China is just about done, it could be the eventual catalyst that powers the market to new highs. We'll just have to see what happens now won't we? For me personally, since I'm bearish on oil in the IT, I have been further reducing my energy services position and look to lighten up further on strength.

I realize that my words and actions have been quite an "about face" from what I was saying and doing before. Well, that's the way I roll. When I sense change in the market or no longer have confidence in my thesis, I will act swiftly and take swift action. I have no ego to protect nor do I have any loyalty to any of my positions or any particular side of the market. I have no problems going from super bull to a super bear or vice versa because if that's what the market suggests I do, then I should do it. Right now I feel the same way I did last year at this time which was LT bullish but IT term cautious/neutral. Although I'm bullish LT, I have a "show me" attitude towards it because the burden of proof is now on the bulls. This correction will likely be just that...a correction but I don't want be left holding the bag with a high exposure to equities (especially the way I was with energy services) if it turns out to be more than just a correction. My strategy is to wait until mostly in cash until I see either a truly sold out market with an extreme in bearish sentiment across the board or the market acting like a bull market again.

Taking swift action

2011-06-23T17:21:00.001-04:00

The IEA announced that it was going to release oil from it's reserve and that coupled with weak unemployment claims data was enough to send oil down as much as $5 to about $90/barrel before recovering a bit. I've been overweight energy services big time since last fall and today I did some major trimming to that position. Most of the stock I own in that space are small/micro cap and overall have held up well considering the damage done to the market thanks in large part to my biggest holding isc.vn. Amazingly, it actually has been climbing making new 52 week highs despite the correction in the market and the falling oil price to which it is levered to. I took 1/3 of my position off the table this morning. I consider myself quite fortunate that my largest holding has held up so well like this and quite frankly, I don't see how the stock can sustain such high levels in the short run given that it's peers have been trading down along with a backdrop of weak oil prices and weak stock markets, but hey, I would love to be wrong! I also got stopped out of my position in esn.to which was formerly tec.to (tec.to merged with esn and I got shares of esn plus cash this week). Given that I wasn't really all that thrilled about esn to begin with, it made me a weak holder. But all in all, I still made out well with that one given my original cost of tec.to and the cash given to me as part of the merger.

The key to surviving a correction if your a long term bull is to be a strong holder. I simply could no longer be a strong holder with my energy services holdings given the size of my position relative to my portfolio and the conditions of the markets, in particular the oil price making new lows.... so I sold to the point where I can now indeed be a strong holder.

I said before that these oil service companies can still do well with oil prices at current levels and even in the $80's. However, the trend is now down for oil and it remains to be seen whether the price will indeed find a floor in the $80's or $90's. Although I believe this will happen, I have to respect the downtrend which means there's no justification pressing with an overweight position....you press positions when the wind is at your back not when it's against you. Plus, when you are dealing with small/micro caps, liquidity can dry up quickly if things head south in a hurry and so you need to get out when the getting is good if you feel you are too exposed and I did that with isc.vn. If when the dust settles, the oil price can establish a bottom in the the $80's or $90's then I would be inclined to add back what I sold. Also, if isc.vn and esn.to end up rocketing higher now that I sold, I'm not going to be kicking myself. I know I did the right thing. It's not as if I was chicken shitting here....I had about 50% of my portfolio in energy services at one point this year concentrated in 3 small cap names. Now it's down to about 30% after these recent sales. My cash reserve is now up to 60%.

Having a more comfortable exposure to the market also makes me better able to look at the market more objectively. When you feel you are over exposed and you are caught in a downdraft you can easily slip into the "deer in the headlights" mode of thinking and then what ends up happening is that your emotions take over and you end up capitulating near the worst possible time.

Right now I'm researching a list of new names that I want to add to my portfolio. If you see some good long opportunities and are able to be strong holder then by all means, do some picking....just be aware that this correction/consolidation could drag on for months even if we see get some sort of bottom in the coming days/weeks.

In the 2004 consolidation, the market dropped as much as 10% from the high. That would give us a downside target of about 1233 on the SPX which could very well be hit before the summer is over....not necessarily on this slide but in due time. A 10% correction is not the end of the world or the bull market. Again, I must stress how far we have come since September alone. 1233 would put us where we were in mid December and back then the market was overbought on several measures and everyone was in awe as to how far it had gone up. If we hit 1233 now, the situation would be a lot different wouldn't it? The market would be well oversold and it would really flush out the weak holders as more trend lines and moving averages get violated. Investors/traders would be hiding underneath their desks bracing for the worst and pessimism would probably hit multi-year extremes. That would be the sort of situation that marks a final low. We'll just see how this plays out....and don't ever get fixated on price targets like 1233. There's no law that says the market has to drop exactly to that point or exactly 9%, 8% or whatever. Leave that dogmatic thinking to the loser elliot wavers

Fake salmon

2011-06-22T22:58:00.004-04:00

There's no shortage of drama in the market right now. Here in Canada, the collapse of Sino Forest and RIMM have been dominating the financial news. Famous hedge fund manager John Paulson who made a fortune betting against subprime in 2007 has been taking a licking this year due to his holding in Sino Forest as well as financials such as Bank of America and Citigroup. He also made a large bet on Hewlet Packard which has also been a dud so far.

Then there's RIMM. It wasn't too long ago when analysts and pundits were bullish on RIMM because of it's cheaper valuation vs Apple along with the introduction of playbook to act as an upside catalyst. Turns out playbook ended up being downside catalyst because of it's problems along with RIMM's continuing eroding market share of the smart phone market. RIMM lowered guidance yet again and now with the stock being down about 60% in just a few months, when even my grandmother is aware of the problems facing RIMM, all the pundits and gurus that come on TV hate the stock and call it a value trap and say you should sell or avoid it. Gee, thanks for the advice fuckfaces and no, I don't or ever have owned RIMM.

My point here is that you have to be your own guru. I've said in the past a few times. No matter how great some guru has been in the past, he/she can easily be a goat the next day. Amateurs learned the hard way worshiping the words of Roubini, Prechter and the permabear crowd who earned fame calling the crash. Now you can add Paulson to the list of gurus turned goat.

Remember folks, these people are just human and humans are imperfect beings who make mistakes and can get blinded by ego and bias no matter how smart they appear to be. Some of these gurus like Pretcher are just clowns who were broken clocks that finally got it right....you should do your homework on the track record of these guys....you'll find that many are less than enviable. Also, making a bet or a call on the market requires some luck as well because the future can't be predicted with certainty. The best you can do is size up the odds correctly and so if you make a bet with odds 80% in your favor you can still get it wrong and lose money even though you were correct in making the bet....this is just like in poker when you have someone dominated with AA vs 10,10 but still end up losing.

YOU MUST BE YOUR OWN GURU. Learn from others who have had success but take what you learn and incorporate into your own thinking. You must also have the confidence in yourself to disagree and bet against someone you respect if you have good reason to feel this way. For anyone who reads these pages and considers me one of those people, it applies to me as well.

Now, onto something totally different. I want to share a little story. Today my wife asked me to pick up some salmon at my mom's house that she had saved in the freezer. So I picked up what I thought was the salmon and gave it to my wife. My wife took out the salmon, let it thaw for a bit and then noticed something odd. My mom had told her that the salmon was marinated but it appeared not to be and so she marinated it herself. She also noticed the texture was unusual. After grilling the salmon on the BBQ my wife sliced into it to discovered it was rather tough for salmon... and then before she even tasted it, she realized what was going on....it was chicken! "I knew something was wrong! And why didn't I realize that it had no fish smell?!" she said.

Can you see where I'm going to go with this? Our biases and predispositions can cause us to fail to see things for what they really are when it's normally so obvious. My wife was suspicious about the "salmon" that I had brought home right from the beginning but she was made to believe that it was indeed salmon and so she ignored her observations that something was fishy (bad pun). Had she been given the package without any suggestion as to what it was, she probably would have realized it was chicken right from the get go.

This sort of thing happens with investors and traders all the time when the market changes mode from bull to bear and vice versa. Take the situation when a bear trend had been in place for quite some time but then heads in the opposite direction for several months. What will typically happen is that news headlines and popular financial media are still suggesting that the bear trend is still in place or that the new uptrend is just a "phony" interlude destined to failure at any moment. Meanwhile the market continues to go up and up and up for months and months on end until it becomes painfully obvious that the trend had indeed changed! In hindsight the masses then realize how foolish they were for failing to see how the market had changed when all along it was yelling and screaming that it had. This is what happens when you trade with either bias, bitterness or ignorance. Is it possible to truly be free of these flaws and see the market for what it really is? I don't know...but you better do your best to do so or you will get punished in due time.

Double dippers comming out of the woodwork again

2011-06-20T07:32:00.006-04:00

Is this June 2010 or 2011? The reason I ask is because I'm noticing talk of double dip again in the financial media. Watching "Market call" on BNN one emailer asked the guest "does the market pullback suggest the beginning of a double dip?" And it's not just this emailer who's concerned, it's everywhere. For Christ sake people, the market has dipped about 6% after making a 100% gain in less than 3 years! It wasn't too long ago when people were moaning and groaning about how the market had "gone too far to fast" and now that we get a decent pullback everyone's worried about a double dip. Sure, the data is suggesting a slowdown but let's remember a couple things. A lot of those economic guages like the ISM hit 20-30 year highs earlier in the year and so there's really only one way to go and that's down....but that doesn't doesn't mean it will swing to full blown contraction. It could simply suggest going from 6th gear to 5th or 4th for a while. And how much of this soft patch is due to Japan?

Then there's all this chatter about Greece and the potential for a "Lehman event" which to me tells me it's something not to worry about. Nobody wants another Lehman event and despite all the bickering in the EU , they will eventually do what it takes to avoid a Lehman because memories and fears of 2008 are still fresh. Merkel specifically talked about avoiding a Lehman event.

Do you notice how quickly fear and misery returns to the market? The financial media it seems, is doing whatever it takes to keep you out of the market. They certainty did their part in scaring the shit out of people during the crash trotting out the permabears like Schiff day in and day out with their end of the world forecasts. And did the media help you get bullish during this bull market? Not a chance....they did the opposite. I don't think there's some sort of bear conspiracy in the media...they are just trying to feed off what what people are feeling and since most people are still dour they prefer to talk about all the negatives out there. In the past several months I read so many times in the National post about how Canadians are supposedly dangerously deep in debt and how housing prices are out of control.

Look, I'm just like you. Despite all I've said I too am worried about the things that are happening out there deep down. How can't you after witnessing the financial system suffer a massive heart attack 3 years ago. But that's my emotions talking. My analysis of conditions along with history suggests that this bull market ain't done. This corrective phase we are going through is going to do whatever it takes to shake out weak holders while making longer term bulls sweat bullets. Just like last year, I'm already seeing technical types get shaken out of longs because of such and such trend line or moving average being violated. Last summer I talked about how I read about some technical type guy saying that if the market dropped below some level (I think it was 1050) the bull market from March 2009 would be officially over which did end up happening.. And remember the "death cross" that happen right at the exact bottom of the correction in July last year? Expect to see these sort of things happen again to yet again cause the market to make fools out of the most amount of men as possible. How long could this consolidation phase that I've been calling for all year last? Quite some time...perhaps as long as October or November! Look back to 2004 to see an example as to what we could see play out.

As far as ST action goes. The bulls need a catalyst to get some traction here. Although the VIX has gotten some religion admittedly it's still low here at 22 which suggests there's still decent risk of final downside puke to 1250 or so. Aside from the VIX everything else is in position for some sort of a bottom here. I still haven't put my cash reserve back to work yet but I'm close to doing so and I'm making a list of potential buys. Very fortunately for me, my core longs have held up quite well overall during this correction. I realize however, that this could change very quickly and so I'm getting mentally prepared for this. Don't get too fixated on the ST. If you see some long opportunities and your holding period is longer than 30 minutes go for it with at least a partial position.

Sentiment in position for an IT bottom...but more patience likely needed for LT investors

2011-06-17T08:25:00.000-04:00

Last time I discussed how indicators were suggesting pessimism was rapidly heading in the right direction needed to establish a bottom but some of them weren't quite at the levels seen at IT lows of the past. Well, that's changed now. The 10 DMA of the put/call ratio is at 1.14 and NAAIM is at 26% pretty much matching what we saw in late May last year after the flash crash.. The VIX is also starting to get some traction and made a mini-spike. So, it's likely were are going to see at least a relief rally very soon. There's still the chance of one more downside spike to say 1250ish but I don't think it would get worse than that.

So does this mean that it's onwards and upwards again if we do put in a bottom around here? Probably not. The situation right now is similar to late May of last year whereby the market made a bottom, rallied nicely but eventually saw that bottom retested and violated (although not by much) later on before the ultimate bottom was put in. This is also similar to what happened during the consolidation of 2004. The market had made 3 bottom attempts before the correction was over for good (check out the chart I posted in Janurary).

So, more patience is likely for LT investors but now is the time to do some picking if you indeed have the patience.

Pessimism rapidly building

2011-06-10T01:19:00.005-04:00

Ok, so my hunch that a ST move back up didn't pan out and we got a downside resolution instead which I said if happened would be quite limited and put us in a better position for a more sustainable advance. We all know what triggered this latest slide - softer than expected economic data. I won't get too much into that with this post. What I'm going to talk about is feelings....nothing more than feelings....ok that was lame. Well, despite the market being down 5 weeks in a row (and working on 6) since making a 3 year high, the SPX got as much as being about 6.5% off from this peak. When you consider how far the market has risen since September prior to making this peak, never mind since March 2009, such a decline is quite modest and normal in a still ongoing uptrend. But you wouldn't know that by reading the financial media and by what traders and investors are feeling. The gloom is palpable.

Let's say you woke up from a 4 year coma and the first thing you did was pull up a 2 year chart of the market. You would probably not think very much of this latest dip. Not knowing any of the news or not being influenced by any of the legions of permabears that now make up a large part of the herd, you would probably think that the market has been looking pretty damn good and this latest dip doesn't look serious at all. But of course, that's not what the tone is out there. It feels like hopeless despair similar to what you feel in bear markets.

Since the summer of 2009 I've been hypothesizing that this has got to be the most hatest bull market of all time and that the herd never came close to truly embracing it which was a solid indication that the bull market was in fact legitimate and would carry on. Oh sure, there were moments when ST trader types and the little guy showed bullishness but that was quickly extinguished and reversed to pessimism as soon as the market showed any modest weakness....just like now. Any bullishness we see from these guys is due to the "don't fight the tape" line of thinking. Deep down most of these jokers are still bears at heart and are quick to run for the hills when we get a dip. That's why when the tide goes out, you get to see who's truly bullish who is just swimming naked (a variation of what Buffet likes to say). The trading community is full of nudists let me tell you.

Let's take a look at some sentiment measures. AAII sentiment released Thursday shows 2:1 bears vs bulls a reading that is consistent with ST and IT bottoms. We saw the same reading just prior to the massive move that began last September. But we also saw such readings at temporary bottoms in May and June of last year which from a longer term perspective were still good buying opportunities but you had to grit it out for a few months as the market ended up chopping around eventually making modest lower lows before hitting a final bottom.

A new sentiment measure I follow is called The National Association of Active Investment Managers (NAAIM). I like this because it not widely followed and it measures what people are doing with money which counts more in comparison to indicators that measure what people are just "feeling" about the market. NAAIM measures the exposure active manages have they have in the market. It's currently at 43% which is near the levels seen at ST bottoms of the past. A reading in the 20's would be more ideal to mark a longer term bottom though, but it's certainly near the the low end of the range.

Next the 10 DMA moving average of the put/call ratio. It sits at 1.03 which is high enough to warrant a ST bottom. We did see this get as high at 1.16 during last summers correction though.

Then there's the VIX. This is probably the only indicator that strongly supports the bears. It has remained rather muted which has many puzzled including me. I won't try to rationalize this one like some people are trying to. In my view it's not bullish that it remains this low and signals that there could still be one last little downside puke to mark the bottom of this slide (like say a sharp move to 1250 from here) or that if we did get a good rebound now, sometime later on in the summer we will go back to the lows of this move.

So in summary, we could be at or close to a bottom but it's likely not going to be "the" bottom that ends this consolidation phase I've been expecting. Having said that though, this looks very much like a correction and not the start of something more ominous and I don't expect to see the market go down more than 5% from here.

Back in the saddle

2011-05-31T12:49:00.007-04:00

It took about 10 days but things eventually normalized here in the nodice household. Korea was a unique experience no doubt and I'm impressed with the country overall. I visited 3 cities including Seoul. Here are some notable things about South Korea from my perspective:

just about as "developed" as North America with Seoul being the most. For example, lots of people appeared to be using smart phones and you can get HD TV and other tech luxuries.
streets everywhere I went were well maintained (I never saw 1 pothole) and sidewalks/public areas very clean
lots of small businesses as opposed to "super stores" like Walmart and Costco.
very few homeless people and beggars relative to Toronto
public transportation very cheap - about $0.90 Canadian for a bus/subway ride. (It's $3 in Toronto)
subway in Seoul is probably the best in the world....you are even able to use your phone!
taxis about 50-65% cheaper vs Toronto
gas is expensive - about $1.85/ltr but you have the option of using LPG (liquefied petroleum gas) which goes for about $0.90/ltr as there are several LPG fueling stations available
coffee very expensive vs Toronto - about double the price
clothing somewhat expensive vs Toronto
generally speaking, anything imported is expensive due to heavy taxes/tariffs slapped on them notably autos which is why probably 90% of the cars on the road are from local manufactures (Kia, Hyundai)
food is cheap expect for certain imported items which can be very expensive (such as watermelons)
tipping for any service not required nor expected
Koreans are peaceful people. I got the impression that the crime rate is very low there
Koreans are noticeably slimmer than North Americans. I saw very few obese people
Koreans are respectful towards foreigners. I have never once felt anyone had a "get the hell out of my country" feeling toward me. In fact, I often experienced the opposite. Being one of the very few white guys around gave me somewhat of a celebrity status! My wife was both a little jealous and amused!
Korean kids all learn English as a second language (but most are far from fluent) and spend several additional hours studying via private schools, tutoring or study groups. I remember walking the streets at 11 pm seeing high school kids going home from class. My wife says that this is the result of the poor public schooling system which apparently is a big weakness of Korea.

The late John Templeton was keen on Korea as an area for investment and I can see why. Overall, I got the impression that Korea is a thriving nation with hard working people. By no means am I an expert on Korea...this is just the impression I got.

Switching gears now towards the market. Nothing has changed in my outlook. I continue to believe we are in a consolidation phase here with risks of an upside surprise as opposed to a down one which so many appear to be bracing for. Based upon what I hear on BNN and read in the paper I get the distinct impression that investors are bracing themselves for a major dip in the market. I've said this before, such a thing will be hard to come by when everyone has there guard up even if it's warranted. I mentioned in my previous post to look for a situation where AAII sentiment hits 2:1 bears vs bulls. We just about got that last week but the market isn't quite in a full oversold condition. So, in such cases the likely outcome is a rally but probably not a powefull multi-month one that takes us to significant new highs. If downside continues it would likely be quite limited and would then put the market in a better position to have a powerful and sustainable run like last fall.

Again, I'm not going to try and play the ST wiggles that I think could transpire...that's not my game. I'm going to keep doing what I've been doing which is to maintain core longs with a cash buffer waiting to take advantage of a truly sold out market or unique opportunity. I'm positioned in way that allows me to be comfortable with either outcome in the ST that I described above.

My wife and I at the top of a mountain we had climbed in Jeong Ju, Korea

Quick update

2011-05-19T07:14:00.004-04:00

I'm still trying to recover from jet lag. My daughter is the biggest preventer of this and it doesn't help that she's struggling the most and is sick. As far as the market goes, I'll say this....nothing has changed much since I've left and returned. The market is more or less where it was 6 weeks ago. I still sense that there's a large cohort of market participants who look at the market with contempt and are quick to run for cash and hunker down or make bearish bets anytime the market shows a hint of weakness including some noted bulls like Cramer. So long as we keep seeing this type of behavior it will be difficult for a significant correction to take place and more importantly, it suggests the bull market is alive and well.

The main worry out there that I sense right now is the potential for a hard landing in China. So far there hasn't been any material evidence of this concern coming to fruition nor have high energy prices had a material negative impact on Q1 earnings but both of these things could change by next earnings season and that's when we could see a material correction take place. In the meantime the market will probably continue to frustrate bears and possibly make a run back to the highs. That's my best guess for now.

The bottom line is that for any kind of notable correction (drop of 5%+ from the high) for whatever reason to take place it requires complacency from ST trader types and hedgers. They need to drop their guard and embrace the uptrend and that simply has not been happening. You can see it in the daily put/call ratio readings which for weeks have indicated that these folks have had their guard up. On Tuesday the put/call ratio closed at 1.15 which is consistent with ST bottoms.

I suspect that sometime this year we will get a situation like in September of last year where the market is well oversold on an IT basis and we see something like a 2:1 ratio of bears vs bulls in the AAII sentiment survey. It doesn't require a flash crash for this happen. A sideways market or a series of mild declines can do the job similar to what happened from March-September of 2004. Don't be surprised if the market goes sideways or makes additional marginal new highs before we get to this type of situation.

My strategy continues to be the same as it has been coming into this year....maintain core longs with a sizable cash position until we see a situation as described above. If I spot a really good individual story stock or a trading opportunity of some sort I would be willing to commit cash to it regardless of the general market.

A few words

2011-05-09T22:19:00.003-04:00

It's been about a month since my last post. I'm still here in Korea but I'll be leaving Sunday. A few notable things have happened. We saw S&P downgrade US debt which not suprising to me only caused a 1 day knee jerk selloff which eventually got fully recovered and then some. These are the same clowns who had AAA ratings on all those toxic MBS a few years back and were as slow as molasas to change their tune and only did so when it was painfully obvious and even my grandmother knew what a toxic MBS is. And now they downgrade US debt at a time when the economic recovery is gaining momentum with tax revenues recovering and spending is being scrutinized....are these guys in some sort of time zone that is 1-2 years behind the rest of the world? If they ever wanted to downgrade the debt with any shred of credibility it should have been done many, many months ago and now they should be looking to upgrade it not downgrade it now that things are getting better. These rating agencies are as useless as tits on a bull.

It never ceases to amaze me how there are so many so called "professionals" out there who are, quite frankly, morons. But the cold hard truth is you need ignorant, simple, unimaginative and emotional people to exploit in this game otherwise making money in this game would be a lot more difficult. Call me an arrogant prick if you want but you know I'm right. Can you imagine a world where everyone was either Warren Buffet or John Templeton? How could you ever make money? So folks, the next time you are frustrated that a position you have isn't at the price where it deserves to be, look on the bright side and be thankful that few can see the bargain you see which has allow you the opportunity to make a big score....that's assuming of course that you'll be proven right in time and have the patience and conviction to capitalize.

On to the next news item...the dip in commodities triggered largely in part due to higher margin requirement for traders of silver futures. The question on everyone's mind is whether the "bubble" in silver has popped and whether commodities in general have peaked. Well, I gotta say that this selloff in commodities look more like a correction rather than a major cycle peak. Regarding silver specifically, the rise it had prior to this sell off did indeed resemble a bubble with it's parabolic assent. Just prior to the sell off I was contemplating buying Janurary puts on SLV for a trade. I figured whether it's just a bull market correction or a bubble popping crash leading to a new bear market, the odds of a sharp drop in silver are high. But being on vacation and in addition to wanting to see more topping action, I didn't pull the trigger so I'm kicking myself a little but not much. The question remains, is silver in a bubble and did it just burst? Check out these points from an article I read which discussed conditions in the silver market just before this latest drop.

3. Take the Sprott fund, which is in such hot demand that buyers this week were paying $1.22 for every dollar's worth of silver in the portfolio.

4. Silver is trading 82.17% above its 252 MA. This is the 99.5% percentile going back to 1920. The other times were near the 1974 and 1980 tops.

5. Silver is up 412% in the last 625 trading days. This is the 99.75% percentile going back to 1920. All 59 times it has gone that high in that time, silver has dropped at least 85.61%.

6. Silver is trading 15.17% above its 21 MA. This is in the 99.22% percentile going back to 1920. The average drawdown from when it reaches that high is down 64.68%.

7. The 252 MA of gold/silver ratio is 70.21% above the current reading which is in the 99.88% perceile going back to 1920. The indicator’s all time readings occurred in 1933/1934 when FDR changed the price of gold overnight. Since January 1934, the highest this indicator got to was Jan 10, 1980 which was 11 calendar days before the silver peak. The 1980 reading was broken on Wednesday April 20, 2011.

8. Primary silver mine cash costs remained relatively flat year-on-year, falling by less than 1 percent to $5.27/oz. from a revised $5.29/oz. in 2009.

9. Silver performance vs. stocks over a 10 year period is in the 99.7% percentile. The only year it was higher was 1979. Silver peaked on Jan 31, 1980.

Wow, these are some eye popping stats aren't they? There is very strong evidence to support that a major silver collapse is immanent. But you know what? Despite all these points, I saw just as many traders on the message boards bearish on silver as I did bullish just prior to the collapse which suggests we are seeing a correction and not the end of the silver bull/bubble. Now perhaps these bearish traders were just playing for pullback which would negate any bullish contrarian implications of these bearish traders. Price action however, does suggest the drop in silver so far looks more like a correction than a bull market peak. The hallmark of any corrections in a bull trend is a short but sharp drop in the price after just making a fresh high without any topping behavior prior to it. I have found that this type of drop is the difference between a correction in a bull trend vs. the first down leg of a new bear trends which starts with a crash. When you see a crash typically, you will see some sort of topping behavior that lasts at least a couple of weeks. If I'm wrong about this and silver is the midst of a crash and new bear trend, we should see the price drop at least 40% from the peak within the next 3 weeks...that would be consistent with the price action of other bubbles bursting. So far we've seen about a 30%.

The playbook for a bubble bursting aftermath is a 40-60% initial decline followed by some sort of a counter trend bear market rally of 35-50%. So, if you miss out on the crash of a bubble, wait for that counter trend rally which could take several months to play out.

From a fundamental perspective, the requirement of higher margin requirement for silver futures which albeit a negative, doesn't strike me as a bull market killer for silver because it doesn't change the underlying psychological drivers for silver. Silver has been driven upwards by the notion of it being an anti US dollar play coupled with the notion that it's in short supply...but the former factor is more important, in my opinion. Higher margin requirements don't change either of these beliefs.

The bottom line regarding silver is this....let it play out. Market action should tell us whether the party is over or just taking an intermission. As frothy and parabolic as silver has been, I have to honestly say that I believe this is just a correction....we'll just see what happens.

anyoung haseyo!

2011-04-10T21:43:00.002-04:00

it means hello. It took me a week but I've finally fully adjusted to the 13 hr time difference here in Korea. I haven't been following the market newsflow all that much since I've been here aside from browsing the headlines on bloomberg.com. I've only been paying strict attention to the news regarding my positions and of course, the one day where I would be most vulnerable to missing out on the market (the day I arrived), there was huge news regarding one of them, tec.to. They announced a merger with esn.to. The stock had run up big time in the prior week obviously due to this news leaking and then sold off sharply after the news was annonounced. I'm not sure if I would have taken action had I'd been there to trade the stock after the news. I probably would have lightened up. At this point though I'm Ok with just leaving the position as is after the pullback. The fundamentals for the energy services sector with a North American oil focus are rock solid so long as oil is at at least above $70. There is boom going on for unconvential oil drilling i.e horizontal drilling and fracing and although nobody can give a definitive number, in my opinion, so long as oil is above $70, it's been quite profitable for such unconventional drilling to take place. I'm assuming this to be true because in 2010 the oil service companies I've been tracking had an explosion in earnings vs 2009 with solid 3rd and 4th quarters and this was achieved with the price of oil ranging from $70-85 for most of 2010. With oil now solidly above $100 these service companies are in a sweet spot because even if there's a serious correction in the oil price they will still be in great shape to make lots of money. Of course, there's other factors to consider but the price of oil is by far number 1. Other positions I have in this sector are isc.v and wzl.to.

I can sense that the concern on everyone's mind right now is the price of oil being as high as it. The market's strength is confounding everyone it seems. The conventional thinking is that there's no way it can sustain these levels and sooner or later we're gonna have a serious correction/bear market and mabey even a double dip. Well, you know what think about conventional thinking. There's no doubt that the sharply higher price of oil is a drag to the overall economy but is it a killer? I don't think so. Food and energy prices have been rising but as a whole it makes up less than 20% of average disposable income in the the US and it's probably about the same for other developed nations. Yes,I know this percentage is a lot more for Emerging market countries but the bottom line is that overall, rising energy prices is not the economy killer it once was. Over the last several decades the food and energy expendatures as a % of income has been on a stready decline and is much lower now than it was say 30 years ago.

Let's also look back to the 2003-2007 expansion. In the economic cycle prior to it, oil hit a high of about $38 before tanking to $20 as the recession took hold. As the recovery took hold, by late 2004 oil handily exceeded the previous cycle high reaching $55 which was also an all time high at the time. Just like now, people thought this was surely going to kill the economy but it didn't.

I've been saying the following on these pages over and over. What kills an economic expansion is tight monetary policy accompanied by public optimism which also tends to coincide with investor greed. The bears will point out that energy price spikes have caused recessions, namely in 1980 and 1990 but those 2 periods also happened to coincide with tight monetary conditions - the true killer. Every recession post WW2 has been preceded by tight monetary conditions i.e and inverted yield curve. Yes, folks, it's been that painfully simple to predict recessions and thus bear markets yet it's amazing how few of the pundits seem to realize this.

In absence of tight monetary conditions what will an energy spike do? It will likely be a drag on the economy but not a killer. Seeing gas prices rise 30% in just a few months will have psychological effects no doubt but at the end of the day, if you still have your job and more and more people formerly out of work are getting jobs, paying an extra $20 at the gas pump is probably not going to be all that serious. Think about the reverse. If you were out of work and people were losing jobs steady how much of a help would saving $20 at the pump be? Not much. And by the way, do you notice how nobody talks about the rapidly falling prices in electronics and other goods over the years? Also, clothing, appliances and autos have either been flat or declining modestly year over for the past several years. Of course you don't hear nobody talk about this things because everyone is a miserable fuck and likes to focus only on the negatives. And not only have prices been declining for these above mentioned goods, the quality is constantly improving giving you even more bang for your buck.

Ok, let's get down to the bottom line here which is this. There will be some sort of a "shock" factor with the price of gas soaring like it has been but it's not nearly large enough to derail the economy. Is it enough to adjust expectations for earnings lower? Yes, but the impact will likely be modest and eventually people will adjust to these rising energy costs by being more efficient and learn to accept them as the norm. Here in Canada there was this fear years ago that the Canadian dollar trading at par with the US would destroy our exports and thus sink our economy. That has hasn't happened.We learned to adjust and deal with it.

I continue to believe that we are in a consolidation phase in this bull market and dips/corrections should be modest because conditions for a serious decline i.e. bear market are absent. At this point you need to be selective with your positions and if you've think you've discovered a real winner don't pay much attention to the general market and have the courage to stick with it. If you have positions that have been dragging ass not living up to your expectations then you should consider dumping them or lightening up.

Herd still sour

2011-03-25T22:27:00.002-04:00

I don't mean to sound preachy or smug with this post or any of my posts. I make these kinds of posts not so much to try to smugly educate people about my beliefs but more so for myself - to reinforce what I know, bringing out the savvy, inner spok within me so that when the emotional, impulsive and paranoid George Costanza in me tries to take over, I can go back and use these posts as a way to talk to my cool, calm and collective self.

I went to Chapters yesterday to buy some books and magazines for my upcoming trip to Korea. When I visited the economic/business section I noticed an overwhelming theme from the book titles. Doomsday books like I.O.U. and books that talked about the crash and why it happened were dominant. I don't think I saw one book that had optimistic overtones...at least from the titles that were visible to me as I was browsing. 11 years ago, books like "DOW 36000" were the dominant theme. The contrarian implications of these doomsday and "after the fact" books that talk about the crash are quite bullish for the long term especially because of the fact that the stock market has recovered so strongly and yet these books still take up the most space on the shelf. You think the bull market is going to end like this? Highly doubt it.

On these pages I've been showing example after example of how the herd is still dancing to an old tune that no longer plays on the radio. Mind you, observing these kind of things won't help predict where the market will be in the next few weeks or months. Think bigger, think longer term....I tell myself this all the time. I know, I know...it's hard to do that given all of the shit that's going on in the world. But you know what? Look at history to see when it was the best to be a long term bull...it was always during times of uncertainty and gloom like now. Would you rather wait until the unemployment rate drops to sub 5%, the government is running surpluses and consumer confidence is high? Ok fine...you do that. But if you think the stock market won't advance substantially before that happens you have another thing coming to you. Unfortunately, most people chose to be bullish when everything is peachy like this which often coincides with the next bear market being around the corner. Guess when was the last time the US had sub 5% unemployment, consumer confidence was at all time highs and the government was running surpluses - 1999.....a great time to be invested long term for "Dow 36000"....not.

I should also say this...don't think I don't have the same worries and concerns as the next guy out there about today's problems. Although it's my belief that they will somehow get resolved or at the very least get pushed back for several years based upon the action of the stock market for the past 2 years, anytime the market does drop sharply I can't help but get concerned. When the market corrects for a prolonged period like it did in the summer, deep down I can't help but have nagging doubts about the LT bull case even if I was expecting such a correction. It has taken a large of leap of faith to be bullish, it takes courage and it feels somewhat uncomfortable. But ironically, I know from experience that if I feel this way I'm probably on the right side of the market. Back in early 2001 I felt the exact same way when I was bearish. Being a bear back then was very difficult. After all, the 10 years that preceded 2000 were glorious bull market years and anyone who was bearish got absolutely crushed over and over. I remember when the fed did a surprise rate cut in January of 2001 and the financial media trotted out statistics that showed every time the fed cut rates the market was up a year later with one exception....1930. These kind of stats made bears sweat I'm sure...it certainly made me sweat.

Back then in 2001 I was still fairly new to the market and although I avoided going long stocks except for some gold stocks (which I sold waaaaaaayyyy to early...don't even go there....I bought them right at the beginning of the gold bull market), I didn't have enough confidence in myself to short stocks and make money from my bearish convictions. This time around as a bull I had more confidence in myself compared to 10 years ago and I've done well, but I could have and should have done even better if I had complete confidence in myself...not to the point of hubris but confident to the point where I where I should have been able to just "let go" and pull the trigger aggressively (but not recklessly) every time I had a strong inclination and be confident enough to believe that if it didn't work out, I would be able to eventually make up it for and more. At times I did do this but at times I didn't.

I'm still struggling to get to that point where I believe I'm operating at the most optimal level. It's very difficult if not impossible to get to this point because it requires you to be maitain multiple delicate balances simultaneously in 1)self confidence 2) perception and 3) discipline vs conviction.

1) It's neither good to have low self-confidence or too high self confidence. The optimal level is to be high but just below the level of hubris. And that confidence has to be earned. A newbie can't have high confidence in his abilities to play the market because he doesn't have a track record of success and therefore should play small. The worst thing a newbie can experience is to have big initial success. That results in a false sense of confidence which leads to bigger, bolder bets ultimately ending in big losses and the humble realization that their abilities were't as good as they initially thought. When you've earned your stripes, you can be bolder.

2) You need to see the market for what it really is without ego, bias, anger and resentment focusing on what counts while ignoring what doesn't. Do you avoid taking a loss because it will hurt your pride too much? Did you get burned by the market in the past and have been bitter ever since? Are you angry at the economy because you lost your job? Are you trying to "push" the market up or down with your positions because you personally believe the economy/stock market "deserves" to go in that direction? If you answer yes to any of these questions your perception of the market is impaired and your performance will suffer...potentially fatally similar to the driving performance of a drunk.

3) Where do you optimally draw the line between giving your position time to be profitable and cutting losses short? What is the optimal degree to which you "let winners run" as opposed to taking profits? There's no way to determine for sure what is optimal.

If any one of these 3 above factors are out of whack it will contaminate the other ones... and there's really no way of knowing for sure whether you are in perfect harmony because you can't quantify these things like you can with your body temperature for instance. Plus, how do you quantify how much luck played a part of your performance? Again, you can't know exactly.

It's a fascinating game isn't it? The fact that there's so many unquantifiable variables at play makes it impossible to know if you have truly mastered it. Although I know that I can never master it, I love the challenge of trying to do so anyways, constantly trying to improve myself. It's like trying to fully understand women. The room you have for improvement is infinite.

myopia

2011-03-23T22:35:00.009-04:00

Most of the financial sites and blogs out there comment about the day to day movements of the market and try to predict and trade them. They think they can capture every wiggle. They post charts and analyze them with a slew of useless, voodoo techncial indicators deludedly thinking that the more indicators they use the more accurate they will be. I'm quite sure most of these traders will end up as failures. I'm sure the are successful ST traders out there but for every success there's probably at least 5 failures and those successes could simply be due to a long streak of luck (for example, if you had 1000 people flip a coin 100 times, there's going to be a handful who managed to flip either heads or tails a lot more than 50% of time but that doesn't make them special in anyway...they were just lucky for a long time). The market is simply too random in the ST for anyone to catch all the wiggles and even if you are correct in being a bull in a bull market or bear in a bear market if you're focusing on capturing all the ST movements odds are very high your myopia will cause you to miss out on the big moves and not get fully rewarded for being right about the major trend.

In my opinion, the proper way to play the market is to have more of a longer term holding period but doing so requires you to do a whole lot of nothing. Probably the hardest thing to do in this game is to do nothing. By nothing what I mean is establishing a position/thesis and sticking to it until it is fully played out while ignoring the noise and the temptation to trade all the wiggles of the market. For those like me who do this for a living, this is especially difficult because you're looking at the market action all day and it's hard to just sit on your hands and do nothing. I fight temptation to make ST trades everyday. Sometimes I wish I had another job or distraction to make it easier. Well, I'm going to have a pretty good distraction shortly. On April 3, I'll be on my way to Korea for 6 weeks. Given the time difference the market will be open at 10:30 in the evening which means I will be able to enjoy the day without wondering what's going on and I'll be asleep most of the time while the market is open.

I said this before one time, for any given year, it would be optimal to have made only 2-5 trades the entire year. Take for instance last year. It would have been optimal to sell in January, buy in February, sell in April and then buy again in either early July or September. Or with a 2 trade strategy: Sell in April, buy in July or September. Making the above trades would have captured all the major moves in the market last year. Now, of course, hindsight is 20/20 and even if you're only making a few trades a year it still requires luck in addition to skill in timing everything right like this. But if you simply did nothing but buy and hold you came out on top as well and buying and holding doesn't require timing skills or luck aside from recognizing when a bull market is in place and having the conviction to stomach corrections and ride it until conditions are in place that suggest it's end is near. I guess the luck part would be that during this time there is no catastrophic disaster such as a nuclear attack that wipes out half the earth.

Riding the major trend to its fullest is a very, very difficult thing to do. Even if you are correct in identifiying the trend and staying with it for a while, somewhere along the way odds are high you will get bucked off it prematurely because either a) you thought the market had gone "too far too fast" and want to get back in on the correction that never materialized or b)something gets you worried that the trend is going to end and it turns out not to be case. I have seen this happen first hand with myself and to others including the so called "pros". During the bear market of 2007-2008 very few bears fully capitalized on the decline. They either covered shorts far too early (around SPX 1100-1000) and/or went long for a trade and got ran over. Some bears like Schiff thought they would be protected via gold and commodities and they too got hammered. Some guys like Hussman who were correct in identifying the bear market very early still lost money because they fell into the "too far too fast" trap. During the bull market some guys like Kass were bullish pretty much near the begining of it but they got bucked off the trend way too early (like at 900 or so) and then lost money betting against it because of...you got it... the "too far too fast" trap.

Man, did Livermore nail it 80+ years ago when he said:

You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched
mine that is, they made no real money out of it. Men who can both be right and sit tight
are uncommon. I found it one of the hardest things to learn. But it is only after a stock
operator has firmly grasped this that he can make big money.

Alright, that's enough philosophy for the today. Let me induldge in some myopia if you will and talk about the ST. During last's week mini-panic we saw the VIX spike to 30, 4 days in a row where the put/call ratio closed above 1, AAII sentiment showing 1.43 ratio of bears vs bulls and other sentiment measures showing traders fleeing stocks. As I suspected the downside was rather contained. In my view, the bare minimum threshold of pessimism to warrant a correction bottom was reached last week, meaning it would have been more ideal for pessimism to have been a bit higher such as seeing a 2:1 ratio of bears vs bulls. Maybe that will happen if we get a retest or marginal lower low of that bottom. I suspect sometime this year we will indeed see those lows get revisited but I have no sense as to whether that will happen in the immediate future or sometime in the months ahead which means it's quite possible to see the market go higher before it goes lower. I'd put the odds smack dab at 50/50 as to whether the next 50 points will be up or down. I know, I know, this sounds a like a pussy prediction because whatever happens I won't be wrong....but it's honestly the way I feel!

For me, I've done nothing. I've maintained my positions throughout all of this volatility. A retest of last week's lows would likely create a more solid foundation for a more sustainable advance. If we don't retest and simply keep advancing, then it's likely last week's low will be revisited sometime later on in the year which happens to fit well with my consolidation thesis.

Patience folks...but again I must stress not to get too fixated on the ST. Big money is made riding big trends.

Keeping composure and observing precedents

2011-03-15T23:43:00.005-04:00

I mentioned before that a couple of years ago I created the "trading/investing" bible for myself which is a 4000+ word document outlining all of the things I have learned and believe in when it comes to the markets. This document was forged not out of dogma or self righteousness but from experience and what has actually worked. One of things I wrote was this:

A bull market will not end due to 1 time external events such as a natural disaster, president assassination, or even terrorist attack. Therefore dips that occur as a result of these events during a bull market are good buying opportunities.

These 1 time events don't effect the longer term underpinnings of the overall economy. They tend to create ST disruptions but that's about it.

If you look at previous nuclear fallouts like Chernobyl and 3 Mile Island, the market responded with only a modest dip (not even 5%) which you can barely notice on the long term chart.

After 911 the economy in the US literally grinded to a halt for a few days and confidence was shaken badly, but it was temporary. The stock market ended up dropping as much a 15% but within 1.5 months those losses were all recovered even despite being in a bear market whereby the ultimate bottom occurred in the following year.

Remember Katrina back in 2005? Despite being the costliest natural disaster in US history, with heavy losses to insurance companies, the stock market impact was rather muted. The market had dropped about 5% for 2 months following Katrina and then ended up closing out the year over and above where the market traded prior to Katrina.

History is clear: disasters like we are seeing in Japan are NOT bull market killers. They create temporary panic and although the panic could last for more than 1 day, the market ends up fully recovering the losses in fairly short order. Had this occurred in October, I'm quite sure the market would have been able to shrug it off after a 1 or 2 day knee jerk sell-off. But given the massive run the market has had prior to this news you could probably argue that the market was already setting up for a correction/consolidation anyways and the Japan news simply expedited this process. This in addition to the other concerns already hamstringing the market makes it tricky to call here.

Considering the damage done in Japan and in Europe, today's damage to the US was rather mild and the recovery from the opening was encouraging because the put/call ratio closed quite high today showing heavy skepticism towards this semi-reversal. By no means does this suggest we're out of the woods but it's a good sign for the bulls that downside will be rather contained from here.

These are the types of situations which test your conviction and determines just how much of a believer in the bull case you are. It's easy to be a believer when the market has been going up week after week but what about now? I suspect today chased out a lot of weak holders.

One thing the market will do is expose your weaknesses. If you are ignorant and make decisions based upon data the market doesn't care about or useless indicators, you will get punished. If you don't believe enough in yourself or your convictions you will get punished by not making nearly as much money as you should have or getting shaken out near the end of a dip/correction. If you believe too much in yourself and your convictions the market will eventually humble you for being greedy, stubbornly dogmatic or arrogant. If you're bitter/biased you will not see the market for what it is and you will get punished. If you are disorganized and reckless (don't have guidelines/rules, don't plan your trades) you will get punished. If you are emotional and make snap decisions you will get punished.

You will definitely learn about yourself playing the market...try to keep the cost of this information at a minimum.

Japan in shambles

2011-03-15T01:28:00.005-04:00

Wow....the Nikkei is crashing tonight. It's down almost 14% as I type this on top of a 6% beating the other day! The damage was rather mild for the US markets on Monday but the futures are very deep in the red tonight down 2.4% as of right now and so it will probably be ugly Tuesday...at least initially. It appears as though the cause of the panic selling is that things are taking a turn for the worse at the damaged nuclear power plant.

Some notable bears like Faber were touting Japanese stocks just recently. Talk about terrible timing. I know, I know...who could have predicted the tsunami in Japan and a possible nuclear disaster, but man, this latest call is adding insult to injury given how wrong he and the other grumps have been about the US market for several months.

These sort of one offs like what's happened to Japan is an example as to why I tend to avoid playing the ST...it's simply too random. These types of events are also the hazards of LT investing as well...you have to be willing to accept that these things can happen and deal with the ST pain that they can inflict. And if the event is extremely serious like say a nuclear attack that wipes out a large country then the market fallout could be very bad and lasting. That's just part of the game that you can't control...no different than a hockey player who gets a career ending injury because of cheap shot hit from behind that sends him head first into the boards.

So, how much of the sell-off is due to adjusting expectations lower and how much is it due to panic? I think the latter has more to do with it. It's been my experience that panic led sell-offs triggered by 1 time negative shocks like this eventually get fully retraced. Think 911. The market was closed for a few days and when it re-opened it went down hard for 1 week. But even despite the market being in the midst of a bear trend, the losses from 911 were recovered and then some a few months later. So, the question is, when does the bottom get put in? Let the market tell you. When you see a big down day initially followed by a late day reversal to the green or close to break even, that has been a reliable indicator of at least a ST bottom but I'd like to see a high put/call ratio day along with this type of reversal to get some confirmation of a bottom; especially now a days when everyone is a technician thus making any kind of chart pattern a lot less reliable than before.

Bottom line: Keep a cool head and let this shit blow over before making any moves. If you end up seeing ridiculous panic selling in some of the stocks you have on your radar then by all means take advantage of it. Otherwise, wait until you see the whites of the eyes of all those Johnny come lately bulls who were late to the party.

And by the way, don't you find it odd how gold is down $13 tonight? Just like in the panic of 2008 the true flight to safety was in the $US. Gold took a beating like everything else.

weekend ramblings

2011-03-11T16:54:00.001-05:00

Middle East unrest, emerging market tightening, Charlie Sheen tirades... pick your excuse to account for the sell off that has taken place recently. You wanna know what I think the true reason is? Duh...winning. The market has been winning i.e. rising relentlessly. It's up almost 30% in 6 months on top of a 100% two year advance. In such cases the market is entitled to some sort of pause and it doesn't really matter what the excuse is. I'm not suggesting the concerns I've mentioned are meaningless. Not at all. But let's take a look at all the other worries that have been out there since March of 2009

commercial real estate shoe to drop
ARMS resets
"shadow" foreclosure inventory hitting the market causing another downleg in housing prices
double dip reccession
head and shoulders top
Dubai
PIIGS

stubbornly high unemployment
low volume
death cross
hindenburg omen

I'm sure there's more you can add to this list. Some of these concerns triggered dips/corrections but despite it all the market has had it's biggest run up since 1955. Oh but wait...it's all a bs government manipulated bull market and the earnings explosion is just a fabrication right?

Let's look at history. The reccession in 1990 was a housing led bust just like in 2008 but not as severe. As the article I posted last week mentioned, the recovery in the early 90s was initially sluggish and structural headwinds appeared firmly in place as is the popular view today. Back then the government had to step in and "manipulate" the market by forming the resolution trust to mop up all the bad real estate related debt banks had on their books.

In the early 1980s most large US banks were technically insolvent due to bad loans to Latin America but the government allowed them to report assets at inflated prices because their market value would have reflected panick/fire sale prices making them insolvent. Sound familiar? I'm sure bears were screaming bloodly murder at the time just like they did this time around.

And so I ask this, how did the market and the economy fare in the years that followed these 2 episodes of goverment manipulation and what looked like a hopeless economy? I'm sure you know. Government manipulation of the economy has been in existance for like...ever. The panic of 1907 is yet another example of when a higher authority had to step in to rescue the market. And so guess what....contrary to popular belief, government manipulation can work - when their timing is right. When they step in during panic situations it works because they are doing akin to what most savvy investors do - buy low when fear is rampant. All you bears out there, don't get all hot under the collar now. I didn't say all government manipulation works. If it did we would never have recessions. But if you think that this recovery is all just a house of cards because of government manipulation in the market then you could be in for a very rude awaking....if it hasn't happened already, which I'm sure for most of the bears it has.

Months ago, I mentioned that I'm going to focus more on big picture issues and less on ST flucuations and I intend to continue doing so. But believe me, I'm not going to be so cocky in thinking that my LT bullish stance is bullet proof. That sort of thinking can get you into a lot of trouble. But I have a very, very hard time embracing the bear case when I see reports like how in the face of the strongest bull advance since 1955, 1 in 7 Americans believe the recovery is sustainable (as per a recent bloomberg survey). Every fibre of my being tells me I have to fade dumb money main street when they act contrary to the stock market like this. Of course, I could have said the same thing in April of 2010 just prior to the flash crash and a 15% correction, since Main Street sentiment was probably the same if not worse then. But I'm not talking about the short or intermediate term. I'm talking about the long term here.

Regading the shorter term, look again at the charts I posted in early January. In bull markets you can see periods of several months where the trend goes sideways/moderately down which typically happens after a big move up and when traditional sentiment indicators show high bullishness. Coming into this year I was expecting to see such a phase begin in the not too distant future but I knew it would be tricky to time it precisely as are most corrections in bull markets which is a major reason why I don't short in bull markets.

Unlike with the start of prior corrections, I didn't see reckless call buying in the options market which makes me believe that any downside from here will be contained. We've had 2 days in a row now whereby the put/call ratio closed above 1 which means bearish sentiment is rapidly rising. In addition, I don't think this correction was very surprising. Therefore there's a good chance this correction will be rather mild and the "real" correction won't start till later on. Whatever...I'm not going to get obsessed about these ST predictions because quite frankly the ST is often just a guessing game and you're more than likely to blow your brains out trying to game the day to day like most people out there do. As I said many times before, big money is made riding the big trends.

I'm in a position whereby I'm comfortable with my exposure. I'm about 60% long 40% cash and my longs have been dancing to their own tune for the most part holding up quite well overall...so far.

Interesting Article

2011-03-05T01:02:00.000-05:00

I found an interesting article from Time Magazine today. Check out this excerpt from it:

The outward sign of the change is an economy that stubbornly refuses to recover from the recession. In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining. At a TIME economic forum last week, forecasters predicted that U.S. growth would amount to only 1.8% this year and 2.6% for next, about half the speed of a normal recovery. The current slump already ranks as the longest period of sustained weakness since the Great Depression.

That was the last time the economy staggered under as many "structural" burdens, as opposed to the familiar "cyclical" problems that create temporary recessions once or twice a decade. The structural faults represent once-in-a-lifetime dislocations that will take years to work out.

A lot of this stuff sounds familiar to you I'm sure. Oh by the way, I forgot to mention that the article was written in September....of 1992.

4 week average of initial claims for unemployment drops below 400K

2011-03-03T20:41:00.004-05:00

I've talked about this a few times in the past....history has shown that when the 4 wk average of initial claims drops below 400K, strong and persistant job creation was immanent. With this week's intial claims number plummenting to 368K
it has pushed the 4 wk avg down to 394K, below 400K for the first time since the recovery started. The ISM number this week was also very strong yet again. Add to the mix strong earnings for well over a year poised to make new all time highs, the evidence appears overwhealming that the economy is ready to stand on it's own two feet and lagging indicators like the unemployment rate is going to rapidly improve within a year. Of course, the forward looking stock market has been reflecting these things all along...yet so many people, retail and pro alike, refused to listen and still for the most part refuse to listen. They were and still are too angry and bitter from getting burned by the dual bear markets of the 2000s to do so.

Doug Kass issued a mea culpa Wednesday morning admitting that he was too negative about the market over the past year. He claims his bearishness was too dogmatic and that he didn't listen to the market which was telling him to think otherwise. Other traders such as the "Rev Shark" over at realmoney.com (who has been atrocious with his calls) also admit to being too bearish. Although the "Rev Shark" admits strong earnings underpinned the rising market, he also blaims the effect of QE for his mishap and says how the market had a manipulative feel to it similar to the typical rants of loser permabear traders who have been crushed. Pathetic.

The above is an example of what I mean by when I said that you need to be strong in your convictions when the market is agreeing with you, when it's not it means you are either early or flat out wrong, either of which will do equal damage to your account balance. When the market is slapping you in the face over and over and over there has to be a point when you come to realization that you're wrong and it's time to change your way thinking. Unfortunately for most people, this moment tends to happen far, far too late and by the time they make the switch the market slaps them in the face again. For some with massive egos, like Prechter, such a moment never happens. He's been LT bearish since 1987. And despite the mea culpas I've noted from Kass and the "Rev Shark", these guys have not turned into full fledged bulls. They are more respectful of the market upside but still cautious deep down willing to run for the hills into their bear caves the moment the market shows any weakness.

I want to say something about market pundits like Kass. Kass made a great call when he pounded the table bullish near the March 2009 bottom. This gave him quite a boost in popularity. This is similar to how bears like Roubini and Pretchter correctly called the bear market of 2008 near it's beginning. But it doesn't surprise me whatsoever to see pundits who made great calls make terrible calls later on. I warned about this in April of 2009 when I said today's geniuses will be tomorrow's goats which is why you can only rely on yourself and be willing to bet against those who have had a hot hand calling the market if that's what's called for. You also need to do your homework on these "gurus". A lot of the times, these guys are like broken clocks who were wrong for months, years or even decades and then finally they get it right and get famous as a result. Meanwhile the media and sheep investors who lick their ass don't bother to look at their long term track record.

Ok, so back to the market now. Although it's a good thing longer term that the evidence is suggesting more and more that the economic expansion will be self-sustaining, at some point the market is going to be looking ahead to the prospect of the fed raising rates especially with inflation pressures building. The ECB has already hinted that they are prepared to do so soon. Bernanke on the other hand, sent a clear message that rates are not going to go up anytime soon and I think this is a mistake. He should have left himself some hedge clause. I think he's behind the curve and I think he'll end up capitulating and changing his tune sooner than most expect. If I'm right, the market would have to adjust it's expectations regarding interest rates and that would be bearish in the intermediate term. This is what happened in 2004 and it triggered a multi-month correction phase with the market dropping 10% throughout it...and if oil prices stay around current levels, it won't be such a bullish thing to see rising interest rates during such circumstances. These are the sort of circumstances that makes placing a bearish bet on the market more worthwhile - not one-offs like social unrest in a couple of small countries. Now of course, if the social unrest spreads to oil heavy weights Saudi Arabia, Iraq, and Iran then it becomes a much more significant concern because that could easily cause another $20-30 pop in oil. Quite frankly it's a legitimate concern to have.

Depsite all the concerns I've noted above, none of them are bull market killers...bull market tamers yes, but not killers. Also, it's going to be difficult as always to capitalize on downside moves in a bull market. Many people have already learned this the hard way on more than one occasion. The consolidation phase I'm envisioning could very well happen at higher prices and start 1-3 months from now or even longer which would can easily drive a bear or sidelined bull insane as they lose money or miss out on gains respectively. For now, I'm still sticking with my longs and cash position and still not making any downside bets....yet. If I end up doing so, it won't be a large bet. What prevents me from making such a bet is the rabid top picking that's still out there which has been counter acting to some degree I'm sure, the contrarian implications of high bullish sentiment in the sentiment surveys, insider selling and retail returning to the market. By the way, did you notice how AAII sentiment has been so quick to drop back down to 1:1 bulls vs bears for 2 weeks in a row now? And for what, a 3% pullback after the market has surged 100% in under 2 years? Yet again, this shows how fickle any retail bulls are and why I said before that the sentiment surveys are only useful for ST market timing. They are NOT a reflection of LT market sentiment which is what matters in gauging the the health of the LT market trend. Deep down, these fickle bulls in addition to the permabears which are still plentiful, are worried about another 2008 or flash crash. Survey's show that 60+% of Americans and Canadians still think we are in a recession. THAT is the sort of sentiment you should be paying attention to. When you see on TV shows like House this week still make mention of the recession and how a character on the show lost money in the stock market THAT tells you what the true underlying market sentiment is. This is why I'm bullish LT because no bull market has ended with people still talking about the recession that caused the previous bear market. It's also why I'm quite reluctant to make any bearish bets as tempting as it often may be at times. If I think the odds are overwhelming for the bears in the ST/IT, I might pull the trigger on a downside bet, but if I have any doubts whatsoever I'll pass and that's been the right play for several months. If I pass on bearish set up that ends up playing out on the downside that's fine by me. In bull markets it's best to error on being too bullish then too bearish especially in my case when my longs aren't very market sensitive. I still don't have that that gut feel that some sort of meaningful correction is immanent - like witinh a week or so. The last time I felt this was in early November and that correction ended up being rather mild.

My perspective on "the game"

2011-02-23T02:04:00.009-05:00

This is another long read...so buckle up.

First of all, some comments regarding Tuesday's beat down. When the market got whacked a few weeks ago due to Egypt turmoil, the sell-off was a one day wonder which didn't surprise me much. Now we got a sell-off due to Libya and what seems to be growing social unrest in other Northern African and the Middle Eastern countries. So, perhaps this time there will be some follow through especially given torrid run we've had in the market and how oil prices have jumped a lot higher this time. But follow through or not, I'm confident this is a just a correction within a bull market. The loser bears who have been decimaited and humiliated beyond belief for 2 years were celebrating Sunday night on the message boards when the futures were down big and today as well. They are thumping their chests as if the market crashed 50% and they recouped all of their losses. And for what? The market is down 2% after just making a fresh bull market high. These idiots act as if they made millions when even if the market drops 15-20% these bagholders would still be underwater big time. I've seen this behavior over and over since the bull market began and it always gave me assurance that days like today were just corrections. Such hubris from losers like this is a sign that Mr. Market is going to spank them some more in due time.

The bottom line is that correction or not, one day wonder or not, odds strongly suggest that the bull market is still in tact. History shows bull markets end when the general public is optimistic about the economy, investors/bankers are greedy and monetary conditions are tight. None of the above are anywhere close to being in existence. Anything less than that is just noise. Events that don't have a material direct impact on broad based earnings will not threaten a bull market aside from creating dips and corrections. Oil prices spiking 7% as significant as it appears to be, it likely not going to effect earnings in a material way. But it's certainty not a positive and with the market up 28% in under 6 months not to mention up 100% in just under 2 years, it provides a reasonable excuse for a pullback. Is this going to be the start of the multi-month consolidation phase I'm expecting? We'll find out soon.....my gut says that the "real" correction won't begin until today's gap is at least filled. Whatever....I'm not going to position myself for a downside trade unless I'm absolutely certain it's going to be more than just a 1-3 day move...and I'm not. I'm happy to stick with my core longs and cash position regardless. Most of my longs are in the energy services sector which actually benefits from this spike in the oil price. They closed flat overall today.

I want to talk a bit about my previous post. Did anything from it really hit home? Reminiscences of a Stock Operator was written over 70 years ago and yet the insights it provides about the markets and human behavior remain true to this day. In this book you will find no mention of things like Fibonacci retracements levels, boligner bands, moving averages, elliot waves and all the other arbitrary t/a garbage that so many people out there use. And yes....all that stuff is garbage in my view. I'm sure you've heard statistics that say something like 90% of traders fail. Well, guess what 90% of traders based their trades on? All of the t/a bullishit I just mentioned. I'm sure there are a handful of traders out there who are successful using a pure t/a approach but I'll tell you right now, such people are in a tiny minority and quite frankly, could simply be very lucky.

I don't think all t/a is useless. In my experience certain chart patterns have been reliable such as consolidations/bull flags in an uptrend. But there's nothing voodo/arbitrary about this pattern. It's simply the reflection of new buyers soaking up shares from profit takers who got in at lower levels. Every big winner I've had in the past 2 years was the result of buying stocks that were in a consolidation phase during an non-parabolic uptrend.

The important things I learned throught the years is exactly what Jesse Livermore in Reminscenses pointed out which is the following

1. When you're right, sit tight and add more to your position. When you're wrong get out early and don't ever average down. Most people do the opposite. They sell winners too soon and hold on to the losers forever while adding more to them. Just because you show a nice profit in your position doesn't mean you should sell. If you have good reason to believe that the price is going to go a lot higher still in the longer run (or lower if you are short) then you need to resist the temptation of getting out in the hopes of getting back in on a correction. You might time it right in the beginning and save yourself a few dollars but eventually you'll find yourself on the sidelines watching the stock soar without you and miss out on the big gains. I'm sure everyone who reads this had made this mistake at least once....including yours truly. This was the lesson Partridge had learned over the years.

2. Big money is made riding trends. This goes hand in hand with the first point. Big money is made riding big trends/themes. I'm sure you've heard about how George Soros made a fortune shorting the pound in the early 90's and how some hedge fund managers made killngs bettng against subprime mortgages 3 years ago. Do you think these guys day traded or used bollinger bands and elliot waves? Their trade was based on fundamentals, they had a thesis and they had conviction/courage to stay the course WHEN THEY WERE RIGHT ABOUT THEM. I wrote this in caps because it's a very important point. You need to have conviction with your position when you are right i.e. showing a profit, NOT when you are wrong. Having strong conviction when you are wrong will destroy you like all these loser bears have been destroyed. But when you have thesis and the market is agreeing with you i.e. you are showing a profit then you need to have the conviction to follow through on your thesis and hold your position untill you believe it has fully played out. Having conviction allows you to be a strong holder not getting shaken out by dips and corrections that the market throws at you.

I realize that it's difficult to be right and sit tight, riding out all the dips and corrections. I know it's also difficult not take profits after your position had a big run up. Let's face it......sometimes our convictions are just not strong enough and we can't resist the urge to trade. So what can you do about this? Designate a portion of your position as a trading position while keeping a core position. This is something I often do. I will designate up to 1/3 of my position as "trading". If you do this, you must have the discipline to not touch your core position until it's time to sell out for good.

There's lots of people out there I'm sure, who would say you need to trade without conviction....they believe the best approach is to have no opinion and just follow the market. Well, I don't agree and it's not that easy to just "follow the market". First of all, the market is not always right...in the sense of what it's discounting. This tends to happen especially during manias and panics. I'm also sure you've heard of the saying that goes along the lines of "the market has predicted 8 of the last 5 recessions" which basically means, it's not always right. So, if you go strictly with the "go with the market" approach you could find yourself long near a major top, or short near a major bottom. It makes you a weak holder unable to successfuuly ride the major trend because you will get easily shaken out by dips/corrections and even worse, get suckered into believing that a correction indicates a change in trend. A lot a loser permabear traders tried to take the "go with the market" approach and could not play the long side successfully because deep down they didn't believe in the bull market which made them weak longs easily shaken out by small dips.

I also believe that if you're going to play this game, play to win big but do it smartly. The financial markets offer you potential for massive financial success but you cannot attain that with diversified portfolio. It will guarantee you mediocracy at best. If that's all you're looking for then fine. But if you're good at predicting financial trends and picking stocks, you need to make significant bets on a handful of positions/sectors to maximize your potential. But NEVER under any circumstances go all in on 1 individual stock/sector/idea. Doing so puts you in a position to get wiped out if you are wrong and no matter how good you are you're bound to get it wrong sometimes.

Getting back to the conviction issue....here's the way I operate. If I have a belief about the market, a sector or a stock I first want to see some evidence that the market is agreeing with me. The only exception I may make to this rule is if I believe there is a mania or panic in it's final innings and I'm looking to bet the other way. In that case, waiting for the market to confirm would mean missing out on a substantial part of new trend because the initial reversal from a mania or panic tends to be fast and furious. But regardless of the circumstances, when I place a trade I only commit 35-50% of my intended position. This way, I can be a strong holder, giving my position plenty of time and wiggle room to prove itself. I will then add to this position only if I'm showing a profit and the position is acting like I expected it to. By trading in such a manner I believe you combine the benefits of trading with conviction and "going with the flow" by trading with the market trend.

The question that traders will struggle with is where do you draw the line between having conviction on a trade (i.e. giving it the opportunity to be profitable) and pulling the plug on it? Well, that depends on a lot of factors and there's really no way of telling where to optimally draw that line in the sand but one thing's for sure is that there needs to be such a line otherwise you'll end up as a bitter, miserable SOB always looking at the market with contempt....not to mention broke.

Partridge had it right

2011-02-18T21:07:00.001-05:00

As traders still bang their heads against the wall for missing or shorting this great bull market, I think it's fitting that I talk about Partridge again. He's a character from my favorite stock market book Reminiscences of a Stock Operator. Here's the actual excerpt from the book telling his story. It's a long read but well worth it.
(by the way if you want to read the entire book online for free click here)

Most -let us call 'em customers -are alike. You find very few who can truthfully say that
Wall Street doesn't owe them money. In Fullerton's there were the usual crowd. All
grades! Well, there was one old chap who was not like the others. To begin with, he was
a much older man. Another thing was that he never volunteered advice and never
bragged of his winnings. He was a great hand for listening very attentively to the others.
He did not seem very keen to get tips that is, he never asked the talkers what they'd
heard or what they knew. But when somebody gave him one he always thanked the
tipster very politely. Sometimes he thanked the tipster again when the tip turned out
O.K. But if it went wrong he never whined, so that nobody could tell whether he
followed it or let it slide by. It was a legend of the office that the old jigger was rich and
could swing quite a line. But he wasn't donating much to the firm in the way of
commissions; at least not that anyone could see. His name was Partridge, but they
nicknamed him Turkey behind his back, because he was so thick-chested and had a habit
of strutting about the various rooms, with the point of his chin resting on his breast.
The customers, who were all eager to be shoved and forced into doing things so as to lay
the blame for failure on others, used to go to old Partridge and tell him what some friend
of a friend of an insider had advised them to do in a certain stock. They would tell him
what they had not done with the tip so he would tell them what they ought to do. But
whether the tip they had was to buy or to sell, the old chap's answer was always the
same.
The customer would finish the tale of his perplexity and then ask: "What do you think I ought to do?"
Old Turkey would cock his head to one side, contemplate his fellow customer with a
fatherly smile, and finally he would say very impressively, "You know, it's a bull
market!"
Time and again I heard him say, "Well, this is a bull market, you know!" as though he
were giving to you a priceless talisman wrapped up in a million-dollar accidentinsurance policy. And of course I did not get his meaning.
One day a fellow named Elmer Harwood rushed into the office, wrote out an order and
gave it to the clerk. Then he rushed over to where Mr. Partridge was listening politely to
John Fanning's story of the time he overheard Keene give an order to one of his brokers
and all that John made was a measly three points on a hundred shares and of course the
stock had to go up twenty-four points in three days right after John sold out. It was at
least the fourth time that John had told him that tale of woe, but old Turkey was smiling
as sympathetically as if it was the first time he heard it.
Well, Elmer made for the old man and, without a word of apology to John Fanning, told
Turkey, "Mr. Partridge, I have just sold my Climax Motors. My people say the market is
entitled to a reaction and that I'll be able to buy it back cheaper. So you'd better do
likewise. That is, if you've still got yours."
Elmer looked suspiciously at the man to whom he had given the original tip to buy. The
amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and
soul, even before he knows how the tip is going to turn out.
"Yes, Mr. Harwood, I still have it. Of course!" said Turkey gratefully. It was nice of
Elmer to think of the old chap. "Well, now is the time to take your profit and get in again
on the next dip," said Elmer, as if he had just made out the deposit slip for the old man.
Failing to perceive enthusiastic gratitude in the beneficiary's face Elmer went on: "I have
just sold every share I owned!"
From his voice and manner you would have conservatively estimated it at ten thousand
shares. But Mr. Partridge shook his head regretfully and whined, "No! No! I can't do
that!"

"What?" yelled Elmer.
"I simply can't!" said Mr. Partridge. He was in great trouble.
"Didn't I give you the tip to buy it?"
"You did, Mr. Harwood, and I am very grateful to you. Indeed, I am, sir. But "
"Hold on! Let me talk! And didn't that stock go op seven points in ten days? Didn't it?"
"It did, and I am much obliged to you, my dear boy. But I couldn't think of selling that
stock."
"You couldn't?" asked Elmer, beginning to look doubtful himself. It is a habit with most
tip givers to be tip takers.
"No, I couldn't."
"Why not?" And Elmer drew nearer.
"Why, this is a bull market!" The old fellow said it as though he had given a long and
detailed explanation.
"That's all right," said Elmer, looking angry because of his disappointment. "I know this
is a bull market as well as you do. But you'd better slip them that stock of yours and buy
it back on the reaction. You might as well reduce the cost to yourself."
"My dear boy," said old Partridge, in great distress "my dear boy, if I sold that stock now
I'd lose my position; and then where would I be?"
Elmer Harwood threw up his hands, shook his head and walked over to me to get
sympathy: "Can you beat it?" he asked me in a stage whisper. "I ask you 1"
I didn't say anything. So he went on: "I give him a tip on Climax Motors. He buys five
hundred shares. He's got seven points' profit and I advise him to get out and buy 'em
back on the reaction that's overdue even now. And what does he say when I tell him? He
says that if he sells he'll lose his job. What do you know about that?"
"I beg your pardon, Mr. Harwood; I didn't say I'd lose my job," cut in old Turkey. "I said
I'd lose my position. And when you are as old as I am and you've been through as many
booms and panics as I have, you'll know that to lose your position is something nobody
can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be
able to repurchase your line at a substantial concession, sir. But I myself can only trade
in accordance with the experience of many years. I paid a high price for it and I don't
feel like throwing away a second tuition fee. But I am as much obliged to you as if I had
the money in the bank. It's a bull market, you know." And he strutted away, leaving
Elmer dazed.
What old Mr. Partridge said did not mean much to me until I began to think about my
own numerous failures to make as much money as I ought to when I was so right on the
general market. The more I studied the more I realized how wise that old chap was. He
had evidently suffered from the same defect in his young days and knew his own human
weaknesses. He would not lay himself open to a temptation that experience had taught
him was hard to resist and had always proved expensive to him, as it was to me.
I think it was a long step forward in my trading education when I realized at last that
when old Mr. Partridge kept on telling the other customers, "Well, you know this is a
bull market!" he really meant to tell them that the big money was not in the individual
fluctuations but in the main movements that is, not in reading the tape but in sizing up
the entire market and its trend.
And right here let me say one thing: After spending many years in Wall Street and after
making and losing millions of dollars I want to tell you this: It never was my thinking
that made the big money for me. It always was my sitting. Got that? My sitting tight! It
is no trick at all to be right on the market. You always find lots of early bulls in bull
markets and early bears in bear markets. I've known many men who were right at
exactly the right time, and began buying or selling stocks when prices were at the very
level which should show the greatest profit. And their experience invariably matched
mine that is, they made no real money out of it. Men who can both be right and sit tight
are uncommon. I found it one of the hardest things to learn. But it is only after a stock
operator has firmly grasped this that he can make big money. It is literally true that
millions come easier to a trader after he knows how to trade than hundreds did in the
days of his ignorance.
The reason is that a man may see straight and clearly and yet become impatient or
doubtful when the market takes its time about doing as he figured it must do. That is
why so many men in Wall Street, who are not at all in the sucker class, not even in the
third grade, nevertheless lose money. The market does not beat them. They beat
themselves, because though they have brains they cannot sit tight. Old Turkey was dead
right in doing and saying what he did. He had not only the courage of his convictions but
the intelligent patience to sit tight.
Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can
catch all the fluctuations. In a bull market your game is to buy and hold until you believe
that the bull market is near its end.

2004 redux?

2011-02-15T11:44:00.002-05:00

Here's an interesting article posted by Dennis. It in it's mentions how the retail investor is returning to the market with Janurary showing the largest monthly increase into stock funds since early 2004 and the first positive monthly inflow since April 2010. Anyone with a bearish mindset would immediately point out this behavior as a bad sign for the market. After all, the last time monthly inflows were positive was just prior to the market correcting 15%. Admittedly, I would agree that the retail investor is terrible at market timing and this could be viewed as ST negative. However, I've always said the following when it comes to market sentiment: In bull markets bullish sentiment is to be expected and therefore can be tolerated for quite some time without having any bearish consequences (the same thinking goes with bearish sentiment in bear markets) We have seen this happen just recently with the sentiment surveys. They have been screaming "too bullish" since October and yet the market has pretty much ignored it (aside from small pullbacks) and continued climb a lot higher since then.

In the article it mentioned this

"For 23 consecutive weeks, surveys by the American Association of Individual Investors have shown a greater-than-average belief that stock prices will rise. The last time the surveys had such a long streak of bullish sentiment was in 2004"

I talked about this in early December. Here's what I said:

"Regarding sentiment. I looked back to see if there was ever a notable time when the market ignored the contrarian implications of excessive bullish sentiment for a long time. There was. It was in the summer of 2003. From the summer of 2003 until the end of the year, AAII sentiment averaged over 4:1 bulls vs bears, Investors Intelligence average 3:1 bulls vs bears and the VIX traded below 20 most of the time. Yet despite what appeared to be very excessive and chronic bullishness for months, never mind weeks, the market still trended higher with only minor dips closing out the year on the highs."

The high bullish sentiment I was talking about above also spilled over into early 2004, so to be more accurate I should have said it was in place until early 2004.

So, based upon the info provided in the article, current sentiment conditions are similar to that in early 2004 when you look at AAII sentiment and mutual fund investor behavior. Economically, there are also similiarities. In both periods, ST Interest rates were rock bottom even though the economy had clearly turned up from a recession well over a year ago with strong earnings growth for over a year as well. Jobs gains were picking up but were still volatile from month to month with strong months and weak months. However, towards the end of q1 and onward in 2004, the monthly job gains were consistent and large. Thus, the surge in bullish sentiment was justified back then because evidence was building that the economic upswing was sulf-sustaining. But ironically, March of 2004 marked an IT top as investors began to deal with the prospect of fed tightening which did end up occurring starting in June of 2004. That kept a lid on the market for many months as it basically went sideways with a downward tilt until October (If you want to see how the market traded in 2004 go back to a post I made in early January).

We could be at a similar cross-roads right here. Aside from serial top picking gone wrong, the relentless rally we've been seeing in the market could be the anticipation that jobs are going to be coming back in a big way proving strong evidence that the economic recovery self-sustaining. So, like in early 2004 the catalyst to mark a IT top could be the worry that the fed is behind the curve and that they will soon start "taking away the punch bowl" by raising rates and ending QE. I think there's a very good chance this worry is going to come to fruition. Leading indicators for growth such as ISM data and corporate profits have been yelling and screaming this for months. Employers have been slow to hire because the wounds of 2008 haven't fully healed. But it's just a matter of when not if they start hiring in a big way if you ask me.

If I'm right about what I just said, we could see a prolonged consolidation phase like in 2004 begin shortly (within the next month or 2) as investors start pricing in the normalization of rates and reversing QE. Now, I realize I'm looking ahead quite a bit here and I could be completely wrong....I'm just fleshing out a thesis here that think could happen based upon evidence and experience. I also realize that when you have thesis you need to be careful not to be a victim of confirmation evidence bias. We'll just have to see what happens in the never ending soap opera known as the stock market.

I should also mention the consolidation phase in 2004 was fairly mild with respect to downside. The market had declined 10% from peak to bottom during a sideways phase that lasted about 6 months. During this phase, bears viewed the market as topping out....they ended up getting their asses handed to them in a big way as the bull market resumed course for another 3 years. And as far as retail investors returning to the market, those inflows in Januarary is just a drop in the bucket compared to all the money that was pulled out in 2008 and 2009. We have a long way to go before mutual fund inflows show any exuberance.

Bizzaro world in full force

2011-02-08T23:25:00.005-05:00

On bigcharts.com today I noticed the following news headline

"Will and Kate to wed in dour economic times"

Right underneath that headline was this one

"Midcap stocks rally above 2007 high"

It's yet another example of how media sentiment is badly lagging the powerful bullish message of the stock market. Here we are with the market exploding to the upside for nearly 2 years and consensus sentiment out there from the media and main street is that the economy is still "dour". And it's not just this one article that proves this. I've proved it with several other examples in the recent past. And the bears want you to believe that everyone is bullish. Do you honestly think a bull market top is going to be made when the general public never turned even remotely positive about the economy with monetary conditions still extremely accommodative?Good luck with that....never has a bull market ended this way. Bears keep pointing out how sentiment surveys and insider selling are screaming bull market top. I'm not going to go over again why these bears are misusing these indicators. Suffice to say that at best they can indicate a ST/IT peak but even that has been stymied for over 2 months now because of group think. Then of course, there's the conspiracy theories about how the fed is buying stocks or the dismissal of the bull market as simply a result of the flood of liquidity in the system. But not a fucking single mention is made from these losers about how earnings are poised to make new all time highs....not one. Do you think that maybe, just maybe the bull market has been the result of these earnings and not POMO, QE2, conspiracies and other bullshit? Nah, couldn't be....it's gotta be the conspiracy...because this way these losers don't feel so bad about themselves for losing money or missing out since they were helpless against such a supposedly rigged market. What a bunch of fucking pathetic, bitter, miserable and in denial SOBs.

What an interesting time to be involved in the stock market. It's complete bizzaro world from when I first ever got involved over 12 years ago. Never did I think I'd see the day where people keep complaining about the market being so strong making new highs! Think about how fucking retarded and sad this is. Aren't most people who play the stock market supposed to like such environments? Funny how nobody was complaining in 1999 and early 2000 when the market was soaring then. That's because the herd was euphorically long and had no problems chasing. Now that the herd has largely missed out or shorted this monster of a bull market you here all this whining and complaining. Fucking losers. Future generations of investors are going to look back at this period and wonder how people could have been such stubborn, miserable SOBs just how we look back to 1999-2000 and wonder how people could have been such suckers in buying tech stocks at such insane valuations. I don't meant to sound arrogant....I'm just venting here.

Let's put things into perspective here in the medium term. If you annualize the 4.5% gain in the SPX year to date you will get a return of about 45-50%. Clearly that's not going to happen and so it means the market is "ahead of itself" even if we are going to have a good year. That means that sooner or later we're probably going to get a consolidation phase similar to what happened in the summer but I don't think the downside will be nearly as severe. Perhaps it will be due to concerns about Emerging market tightening, the ending of QE2 in June...who knows for sure what will be the trigger. This consolidation phase will likely shake out the Johnny come lately bulls who are weak handed.

When does this consolidation phase begin? Probably when all those correction callers become humble and just STFU. In addition, there's nothing stopping the market from going higher for a while still and then cooling off for several weeks/months later on. With the market closing at fresh 29 month highs and plenty of top picking still going on, it's quite likely that we haven't seen the IT peak just yet. Even if I'm wrong about this, I'm sticking with my core positions and cash cushion.

Loser bears

2011-02-07T22:33:00.006-05:00

Yet another 2 year high today. Bears, who continue to be embarssed so badly are still digging in their heels. The higher the market goes, the angrier and bolder they have been and it's not just recently. It's been going on since the summer of 2009. Mr. Market loves no better than to humiliate those who are wrong and show no respect for him digging in their heels like this...guys like Hussman, Faber, Schiff, Roubini and my fav Pretcther to name a few.

And the funny thing is the media and financial blogs out there still love to quote the opinions of these wrong way bears which shows they are still held in high regard despite being hideously wrong for so long and that to me says that the public is nowhere close to fully embracing the bull market which is a bullish LT sign. Sure, these bears were right about the crash but they were dead wrong about the bull market. Not only that, but they didn't fully capitalize on the crash either having covered shorts far, far too early and some even lost money going long too early playing a "bounce" that never came.

All those correction calls we've been hearing about for over 2 months have been dead wrong. I realize the market is "extended" but I rarely have I seen meaningful corrections begin when so many people are bracing for it and I've been right in saying that it wouldn't happen just yet. Last week there was high put buying every day....not extreme but on the high side considering the market was strong. This to me indicated yet again for the thousandth time since September, top picking behavior from worrywarts and stubborn bears which only ends up adding fuel to the fire. I thought there would have been a little bit more downside follow through after the pullback 2 Friday's ago but that didn't happen...didn't matter though because I wasn't expecting much of a follow through anyways.

Like I said before, I'm not going to concern myself too much about the ST wiggles of the market. Now, if I get the sense that a meaningful correction is indeed immanent I may take action but it won't be a major bet and if in doubt I will remain status quo because I'm still LT bullish and I have a comfortable cash position to allow me to sleep at night correction or no correction. Despite my cash position my account has been on fire with sizable breakouts in tec.to, wzl.to and isc.v all of which are in the Canadian small cap energy services sector. So far so good for me in 2011 but I won't ever get complacent or develop of swell head....even though my profile pic suggests I have one.