On Aug 3, I made mention how the market was sucking in weak longs which was ST bearish for the market. Amongst the weak longs are the traders who are permabears at heart but now claim to “play both sides of the market", your run of the mill market technician and the mutual fund idiots...ooops did I say idiots?...sorry I meant "investors". Those same "investors" who poured $8 Billion into equity funds a few weeks ago now pulled $9 Billion out this week with the market down 4.5% since. Surprise, surprise, they got it wrong! The other sources of dumb money have also pulled in their horns after this dip. You see...they are called weak longs for a reason.
In today's game of chicken environment more than ever it's important to pay attention to the schleps of the market which I identified above and fade them or at the very least step aside for a better set up.
Regarding the idea of shorting bonds, I believe this is a crowded trade at the moment. I'm seeing a lot of traders contemplating or already in the same trade (some of whom have less than enviable track records). A similar thing happened in the fall of 2008 as bonds were making a parabolic surge. A lot of trader types shorted bonds thinking they were way overbought only to get ran over further fueling the upward move as they capitulated. It would have ultimately been profitable if these weak shorts hung on to their positions and took the pain for another 1-2 months but most of them probably didn't. Doug Kass is also quite bearish on bonds calling it a generational sell. If Kass ever gets something right he's often early (his bottom call in March 2009 was a rare time when his timing was excellent). I think we are in the same situation here with bonds as we were in the fall of 2008....if you short you probably will be rewarded in 2-4 months time but in the interim you will feel pain and frustration.
Thus, I'm lowering my downside target for the 10 year to 2.25%. On a ST basis bonds could see a bit of dip here. If the market rallies next week and bonds only sell off modestly that would be a tell that there is still one more surge left before they finally top out for good on a medium term/long term basis.
Friday, August 20, 2010
Thursday, August 19, 2010
Lessons from a Legend
Famous hedge fund manager Stan Drunkemiller just recently announced his retirement.
http://http//noir.bloomberg.com/apps/news?pid=20601109&sid=aQSyeyQp8fOI
He made big money for his clients during his 30 years and he did so riding big trends not by day trading, scalping or whatever you want to call it. I've said it here before; big money is made riding the big trends. If you want to become a winner like Drunkenmiller, you need to emulate what winners do. As per the article above here are some valuable points
Fierce Competitor
Druckenmiller’s friends say the money isn’t the reason he’s continued to trade long after becoming wealthy.
“It’s about winning -- he’s a fierce competitor
When you’re sure you’re right, no trade is too big. And the bigger your gains in a year, the more aggressive you can be. (comment: I don't agree with the notion that no trade is too big. If a trade puts you in a position whereby an small adverse move wipes you out then the trade is indeed too big)
“It takes courage to be a pig,”
"He’s also quick to change his mind when he’s wrong."
“I’ve always loved to play games, and face it, investing is one big game,” he said. “You need to be decisive, open- minded, flexible and competitive.”
“You need to have a certain amount of intelligence, but it’s wasted over a certain level. After that it’s more about intuition.”
I agree whole heartedly with this last statement. I've said before that you need to approach the market more so as an artist rather than a scientist...this has to do with the intuition part of the game which is critical to success.
I believe it takes both experience and natural ability to have good intuitive instincts about the markets. Some people are just born with sharp instincts but that's not enough. They need to be honed through experience and the person needs to be in the proper state of mind i.e. confident and emotionally dethatched from the market.
http://http//noir.bloomberg.com/apps/news?pid=20601109&sid=aQSyeyQp8fOI
He made big money for his clients during his 30 years and he did so riding big trends not by day trading, scalping or whatever you want to call it. I've said it here before; big money is made riding the big trends. If you want to become a winner like Drunkenmiller, you need to emulate what winners do. As per the article above here are some valuable points
Fierce Competitor
Druckenmiller’s friends say the money isn’t the reason he’s continued to trade long after becoming wealthy.
“It’s about winning -- he’s a fierce competitor
When you’re sure you’re right, no trade is too big. And the bigger your gains in a year, the more aggressive you can be. (comment: I don't agree with the notion that no trade is too big. If a trade puts you in a position whereby an small adverse move wipes you out then the trade is indeed too big)
“It takes courage to be a pig,”
"He’s also quick to change his mind when he’s wrong."
“I’ve always loved to play games, and face it, investing is one big game,” he said. “You need to be decisive, open- minded, flexible and competitive.”
“You need to have a certain amount of intelligence, but it’s wasted over a certain level. After that it’s more about intuition.”
I agree whole heartedly with this last statement. I've said before that you need to approach the market more so as an artist rather than a scientist...this has to do with the intuition part of the game which is critical to success.
I believe it takes both experience and natural ability to have good intuitive instincts about the markets. Some people are just born with sharp instincts but that's not enough. They need to be honed through experience and the person needs to be in the proper state of mind i.e. confident and emotionally dethatched from the market.
Tuesday, August 17, 2010
What's the deal with the bonds?
No, this is not a Seinfeld-like opening to a comedy bit. I'm talking about this eye popping rally in bonds that has sent the 2 year hitting record low yields day after day and the 10 year back to March 2009 levels. Is the bond market signaling double dip? Well, as I made mentioned a few weeks ago, I think there's more than just a flight to safety trade going on in bonds. The bond market is clearly signaling strong deflationary pressure is imminent which goes hand in hand with a weakening economy. So again I ask, is the bond market signaling a double dip? With the short end of the curve at 0% unfortunately, the yield curve can't get inverted to give us the reliable recession warning that it historically has been able to provide. In such a scenario when the short end is at 0%, I've always said to myself that a break below 3% on the long end (10 year) should be considered a dangerous sign and inversion-like but it's not per se because an inversion implies tight monetary conditions which tends to put a break on economic activity tipping it towards recession. Monetary conditions are clearly not tight overall. There is still a positive yield curve spread albeit a shrinking one. But it's hard for even the staunchest optimist to argue against the notion that the bond market is at the very least signaling soft patch in the economy (correctly or not).
Determining the implication of the bond market on equities is not so clear cut in my view. Generally speaking, a declining interest rate environment is positive for equities because it enhances valuations from the perspective that future expected cash flows become more valuable as they are discounted using a lower discount rate and lower interest rates is stimulative for the economy. But on the other hand, a low interest rate may be a harbinger of significant disinflation or deflation which goes hand in hand with a weak economy and although expected cash flows are discounted at a lower rate, the expected cash flows themselves end up shrinking significantly as a result of the deflationary pressures/weak economy which is a large negative for equities more than offsetting the positive implications of a lower discount rate.
Therefore, when it comes to interest rates and the stock market, the goldilocks analogy applies here....they have to be not too hot and not too cold to give thumbs up for equities. I believe we are now in the "too cold" territory and should be bracing for weak economic data points to hit the market for the next 1-2 months at least. Remember, the 10 year bond yield hasn't been this low since March 2009 when the economy was at its nadir and everyone was bracing for a depression. I don't think any economic softness will be so bad as to trigger a double dip but it's a definitely a decent possibility so I'll be on guard for it.
There's also the possibility that the big move in bonds has been fueled by a massive short squeeze from bears who thought the European sovereign debt crisis would spread to the US. There's no shortage of bond bears who for years and years have been calling for a collapse in bond prices. I know a friend who got murdered trying to short bonds in 2008 using TBT.
The ironic thing is that from a trading perspective, bonds now actually look to be a good short. As I said previously, the 10 year yield is just as low as it was when the economy was a complete basket case in March 2009. Therefore even if we do get a double dip the bond market has already priced in plenty of weakness and so after perhaps a knee jerk reaction to any surprisingly weak data points it's more likely to see bonds "sell on the news" and head lower. I'd be looking for the 10 year to hit 2.5% before contemplating a short.
We are at interesting junction here. I'm doing my best to be nimble and patient for good set ups. No long term commitments as this point.
Determining the implication of the bond market on equities is not so clear cut in my view. Generally speaking, a declining interest rate environment is positive for equities because it enhances valuations from the perspective that future expected cash flows become more valuable as they are discounted using a lower discount rate and lower interest rates is stimulative for the economy. But on the other hand, a low interest rate may be a harbinger of significant disinflation or deflation which goes hand in hand with a weak economy and although expected cash flows are discounted at a lower rate, the expected cash flows themselves end up shrinking significantly as a result of the deflationary pressures/weak economy which is a large negative for equities more than offsetting the positive implications of a lower discount rate.
Therefore, when it comes to interest rates and the stock market, the goldilocks analogy applies here....they have to be not too hot and not too cold to give thumbs up for equities. I believe we are now in the "too cold" territory and should be bracing for weak economic data points to hit the market for the next 1-2 months at least. Remember, the 10 year bond yield hasn't been this low since March 2009 when the economy was at its nadir and everyone was bracing for a depression. I don't think any economic softness will be so bad as to trigger a double dip but it's a definitely a decent possibility so I'll be on guard for it.
There's also the possibility that the big move in bonds has been fueled by a massive short squeeze from bears who thought the European sovereign debt crisis would spread to the US. There's no shortage of bond bears who for years and years have been calling for a collapse in bond prices. I know a friend who got murdered trying to short bonds in 2008 using TBT.
The ironic thing is that from a trading perspective, bonds now actually look to be a good short. As I said previously, the 10 year yield is just as low as it was when the economy was a complete basket case in March 2009. Therefore even if we do get a double dip the bond market has already priced in plenty of weakness and so after perhaps a knee jerk reaction to any surprisingly weak data points it's more likely to see bonds "sell on the news" and head lower. I'd be looking for the 10 year to hit 2.5% before contemplating a short.
We are at interesting junction here. I'm doing my best to be nimble and patient for good set ups. No long term commitments as this point.
Sunday, August 15, 2010
ST oversold with gaps to fill above
Well, now we have a market that is ST oversold with dowside gaps above to fill which suggests a move up is in the cards. Another plausible seneario is that the market grinds sideways or only goes modestly higher to work off the oversold condition before heading down again towards the July lows. If that were to happen I'd expect to see that the rally that follows will fill those gaps and perhaps more because as I said before, I believe a bullish resolution is ultimately what's going to happen with this trendless market. As I also said before, I will be quick to change course if the evidence suggests so. We'll just see what happens.
I'd be looking to play for a bounce intraday if a good set up present itself such a retest of Thursday's lows. I will not however be holding such positions overnight. This is still a ST traders market and there's no strong edge on either side on a medium term basis. Be careful out there.
I'd be looking to play for a bounce intraday if a good set up present itself such a retest of Thursday's lows. I will not however be holding such positions overnight. This is still a ST traders market and there's no strong edge on either side on a medium term basis. Be careful out there.
Friday, August 13, 2010
Still stuck in nowhere
I'm a big believer in market action. To me there’s a big difference between the following
a) A market advance of 10% in a slow but relentless fashion with daily action often characterized by weak or modest opens closing strong by the end of the day.
b) A market advance of a 10% characterized by large volatility gaping up and running on most of the up days.
To your run of the mill market technician, he makes no distinction between advance a) or b) because both will break above a certain trendline, moving average, resistance level, ect just the same. However, a) is indicative of sustainable, bull market behavior while b) is indicative of a rally prone to failure. b) is the type of advance that we have been seeing with any rally attempts since the market peaked in April and I’ve been harping about such “poor action”.
Mind you, we haven't seen "legitimate" bear market action either because the downside is also often done erratically via gap down action and the market is responding well to the upside on oversold conditions. In bear markets oversold conditions are either ignored or get cleared quickly before resuming the bear course (similar to how bull markets act with overbought conditions) and that hasn't been happening.
So, what do we have here then? We have a market that is trendless. Neither bull nor bear market behavior is present although at times the action does show traces of both. I called for a multi-month consolidation phase to the bull market coming into 2010 and it looks as if this is indeed occurring. I'm keeping an open mind as to a bearish resolution but I have my doubts. Although leading indicators have been pointing south which warrants caution in the ST/IT, the ingrained pessimism/doubts of market participants that I've noted over a year are still there which suggests market expectations are still low from a longer term perspective and with the market not confirming such pessimism (bears haven't done that much damage since the market peaked in April considering the advance that preceded it) my experience shows a bullish resolution is ultimately in the cards which suggests that any economic softness that comes our way won't result in the dreaded double dip.
In my view, the market lacks convictions because on one hand, earnings and interest rate trends are very favorable for equities but on the other hand, signs of a slowdown accompanied by still stubbornly high unemployment, soft housing and sovereign credit strains are keeping the upside in check and since there is no hard evidence of these concerns impacting earnings in a meaningful way, the downside is being kept in check as well. Under these conditions, a trading range mentality is most appropriate although it can be quite tricky to profit. A safer, boring approach would be to just sit out and wait for signs of a resolution to this range. I suspect there will be at least 1 more scare in the market which drives us back to towards the July lows or worse but not a lot worse.
You can squawk all you want about negative fundamentals that bears keep pounding the table about, but when the LT sentiment backdrop is like it is now it suggests that somehow, someway the bears aren't going to win on the grander scale of things...at least not for a while. Look, I don't disagree with some of the things the bears point out it's just that if they do turn out to be right it probably won't be before the market rises a lot further first. The 2003-2007 bull market is a perfect example. Bears were correct in 2002 by saying there was unfinished business on the downside but they got humiliated and taken to the cleaners for 5 years before being proved right and by then they were broke. The prime example is Prechter who has been LT bearish for more than 2 decades following a completely idiotic theory called "elliot waves". Anyone following him since his inception would have been dead broke come 2007 before this broken clock finally got it right. Thank God for the lemmings who believe in bullshit like elliot waves. Without such lemmings the market would be a harder place to make a living.
Either way, no matter which way the market breaks I'm going to do my best to be on the right side of it. You see, I couldn't give a flying fuck if everything I've been talking about turns out to be dead wrong but I was quick enough to adjust and profit going the other way. Profiting is all the matters. Stubbornly defending money losing positions for the sake of protecting the ego is not what I do. I have no ego to protect here. I have no bias. I have no "vendetta" against the market. I don't project my personal circumstances/feelings on my stock market outlook. I don't invest based on how I think the market ought to act like. Ok....I lied. I can’t say that I adhere to the above 100%. My humanity prevents me from achieving such pure objectivity although I do try my best to achieve such as humanly possible.
Human nature causes us to view the markets and the world for that matter through a glass window capable of being tinted in various colours. It seems to me that for most people that window is tinted black. When it comes to trading/investing your window must be wiped clean every day to a crystal clear shine....better yet smash that window! In The Matrix there's a scene near the end when Neo lets go of his inhibitions and finally sees the Matrix for what it truly is. At that point he is able to master it.
a) A market advance of 10% in a slow but relentless fashion with daily action often characterized by weak or modest opens closing strong by the end of the day.
b) A market advance of a 10% characterized by large volatility gaping up and running on most of the up days.
To your run of the mill market technician, he makes no distinction between advance a) or b) because both will break above a certain trendline, moving average, resistance level, ect just the same. However, a) is indicative of sustainable, bull market behavior while b) is indicative of a rally prone to failure. b) is the type of advance that we have been seeing with any rally attempts since the market peaked in April and I’ve been harping about such “poor action”.
Mind you, we haven't seen "legitimate" bear market action either because the downside is also often done erratically via gap down action and the market is responding well to the upside on oversold conditions. In bear markets oversold conditions are either ignored or get cleared quickly before resuming the bear course (similar to how bull markets act with overbought conditions) and that hasn't been happening.
So, what do we have here then? We have a market that is trendless. Neither bull nor bear market behavior is present although at times the action does show traces of both. I called for a multi-month consolidation phase to the bull market coming into 2010 and it looks as if this is indeed occurring. I'm keeping an open mind as to a bearish resolution but I have my doubts. Although leading indicators have been pointing south which warrants caution in the ST/IT, the ingrained pessimism/doubts of market participants that I've noted over a year are still there which suggests market expectations are still low from a longer term perspective and with the market not confirming such pessimism (bears haven't done that much damage since the market peaked in April considering the advance that preceded it) my experience shows a bullish resolution is ultimately in the cards which suggests that any economic softness that comes our way won't result in the dreaded double dip.
In my view, the market lacks convictions because on one hand, earnings and interest rate trends are very favorable for equities but on the other hand, signs of a slowdown accompanied by still stubbornly high unemployment, soft housing and sovereign credit strains are keeping the upside in check and since there is no hard evidence of these concerns impacting earnings in a meaningful way, the downside is being kept in check as well. Under these conditions, a trading range mentality is most appropriate although it can be quite tricky to profit. A safer, boring approach would be to just sit out and wait for signs of a resolution to this range. I suspect there will be at least 1 more scare in the market which drives us back to towards the July lows or worse but not a lot worse.
You can squawk all you want about negative fundamentals that bears keep pounding the table about, but when the LT sentiment backdrop is like it is now it suggests that somehow, someway the bears aren't going to win on the grander scale of things...at least not for a while. Look, I don't disagree with some of the things the bears point out it's just that if they do turn out to be right it probably won't be before the market rises a lot further first. The 2003-2007 bull market is a perfect example. Bears were correct in 2002 by saying there was unfinished business on the downside but they got humiliated and taken to the cleaners for 5 years before being proved right and by then they were broke. The prime example is Prechter who has been LT bearish for more than 2 decades following a completely idiotic theory called "elliot waves". Anyone following him since his inception would have been dead broke come 2007 before this broken clock finally got it right. Thank God for the lemmings who believe in bullshit like elliot waves. Without such lemmings the market would be a harder place to make a living.
Either way, no matter which way the market breaks I'm going to do my best to be on the right side of it. You see, I couldn't give a flying fuck if everything I've been talking about turns out to be dead wrong but I was quick enough to adjust and profit going the other way. Profiting is all the matters. Stubbornly defending money losing positions for the sake of protecting the ego is not what I do. I have no ego to protect here. I have no bias. I have no "vendetta" against the market. I don't project my personal circumstances/feelings on my stock market outlook. I don't invest based on how I think the market ought to act like. Ok....I lied. I can’t say that I adhere to the above 100%. My humanity prevents me from achieving such pure objectivity although I do try my best to achieve such as humanly possible.
Human nature causes us to view the markets and the world for that matter through a glass window capable of being tinted in various colours. It seems to me that for most people that window is tinted black. When it comes to trading/investing your window must be wiped clean every day to a crystal clear shine....better yet smash that window! In The Matrix there's a scene near the end when Neo lets go of his inhibitions and finally sees the Matrix for what it truly is. At that point he is able to master it.
Thursday, August 5, 2010
Mixed message
AAII sentiment just released today is surprising. Despite market strength, bulls actually dropped from 40% to 30% while the bears rose from 33% to 38%. This is contrarian bullish and suggests the market has room to rise further still or at the very least trade sideways with only shallow pullbacks for another week or 2. AAII sentiment alone doesn't invalid the bearish things I've been noticing but admittedly, it does at the very least suggest that the downdraft I'm expecting won't happen just yet and I should hold off on making the bearish bet I was contemplating. Keep in mind, my time frame is typically multi-week not day to day....day to day volatility should still be quite favorable for those who trade day to day or intraday.
Tuesday, August 3, 2010
Market sucking in weak longs
I love browsing some of the popular bearishly biased blog sites to monitor what the lemmings are thinking. Not that I think all bears are lemmings, it's just that these sites became very popular with the lemmings in 2008 when the bear was in full force. 2009 and 2010 sent a lot of these lemmings to the slaughter house and are now nowhere to be seen but there are still quite a few remaining as well as new ones who have joined the frey. A lot of the remaining lemmings have vowed to "play both sides" of the market after the spanking they took last year but they are still bears at heart making them weak longs if they do actually go long.
A lot of these lemmings it seems, are buying into this rally or are willing to buy on dips. At the very least, they are bracing for further upside. Meanwhile, another weak long the "Rev Shark" over at realmoney.com who deep down is also a bear at heart and for the most part has made disastrous calls at major turning points this year by getting overly bullish at tops and bearish at bottoms, has also turned bullish.
When you got bears turning bullish like this it's a dangerous sign because these guys are the toughest to be convinced of a rally and so when they are, it indicates the market is probably going to soon run out of "greater fools" to keep the rally going. Then you got other technically oriented types getting all bulled up because the market has broken some "trend line" or what have you. The guy who runs my charting service decisionpoint.com has just issued a LT buy signal when just few days after the July low issued a LT sell signal after the so called "death cross". Lastly, there was a huge spike in weekly mutual fund inflows which in the past year has led to immanent ST or IT tops.
Not everything is giving a clear cut sell signal but rarely does that happen. What is rare and actually happening is when you see lemmings from all walks of life turn bullish. This can't be a good sign especially when the market is overbought, the VIX is near 20 and the majority of the rally has been done via gap up action. There are quite a few unfilled gaps that lie well below.
For the first time in a long time I'm eying put options even though I know there can still be more headfakes and marginal upside.
A lot of these lemmings it seems, are buying into this rally or are willing to buy on dips. At the very least, they are bracing for further upside. Meanwhile, another weak long the "Rev Shark" over at realmoney.com who deep down is also a bear at heart and for the most part has made disastrous calls at major turning points this year by getting overly bullish at tops and bearish at bottoms, has also turned bullish.
When you got bears turning bullish like this it's a dangerous sign because these guys are the toughest to be convinced of a rally and so when they are, it indicates the market is probably going to soon run out of "greater fools" to keep the rally going. Then you got other technically oriented types getting all bulled up because the market has broken some "trend line" or what have you. The guy who runs my charting service decisionpoint.com has just issued a LT buy signal when just few days after the July low issued a LT sell signal after the so called "death cross". Lastly, there was a huge spike in weekly mutual fund inflows which in the past year has led to immanent ST or IT tops.
Not everything is giving a clear cut sell signal but rarely does that happen. What is rare and actually happening is when you see lemmings from all walks of life turn bullish. This can't be a good sign especially when the market is overbought, the VIX is near 20 and the majority of the rally has been done via gap up action. There are quite a few unfilled gaps that lie well below.
For the first time in a long time I'm eying put options even though I know there can still be more headfakes and marginal upside.
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