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!
Saturday, July 9, 2011
Wednesday, July 6, 2011
crosscurrents
A couple days ago Doug Kass wrote a piece "the curse of negativity" which was more a less a mea culpa for being overly negative throughout the years. He basically said that despite the ups and downs of the past several years it has paid off to be a optimist rather than a pessimist and he admits to have been overly pessimistic at times. I bet he's really refering to the last couple of years in particular. What's interesting is that in early March Kass made a similar mea culpa which I noted and within a few days the market took a sharp dip due to Japan. Ya, I know Japan was a fluke but hey, maybe the market would have dipped anyhow..... we'll never know. So, it will be interesting if his post will be another top signal.
On the other side of the ledger, the put/call ratio closed over 1 each of these past 2 days which suggests a lot of people are aware of the overbought condition I talked about last time and are betting/hedging on a pullback here. Oh brother....how many times have I seen aggressive top picking like this go wrong these past several months? Most of the time, somehow someway the market ends up going higher still until these jokers throw in the towel. We'll see what happens this time.
I'm in a position now where I can just sit back and watch the action. My long exposure is down to 30% and I've taken profits such that I can really let them ride paranoia free. If they continue to rise I'd be inclined to lighten up further. If they drop I could be a strong holder or dump. No matter what, I'd still make out good considering my entry points. There is one investment though that I will never sell no matter what the price is and that's my daughter. She had her first birthday today!
I'm in a position now where I can just sit back and watch the action. My long exposure is down to 30% and I've taken profits such that I can really let them ride paranoia free. If they continue to rise I'd be inclined to lighten up further. If they drop I could be a strong holder or dump. No matter what, I'd still make out good considering my entry points. There is one investment though that I will never sell no matter what the price is and that's my daughter. She had her first birthday today!
Monday, July 4, 2011
Take a wait and see approach
Man, I can't stop eating cherries. I just picked a bunch from my tree and it's stopping me from typing this post. OK first of all, last week....wow. Nobody, neither bull nor bear expected that degree of a pop. So, did we see the bottom? Well, I have my doubts. There was plenty of doom and gloom as I was noting at the time, but there wasn't panic. I also don't think the market "reset" enough as I talked about in my previous post. This rally had short squeeze written all over it. It looks like the bears were overzealous "shorting strength". It seems as if the entire trading community went short at 1300 "resistance" and got their asses handed to them.
Now we have a market that is as overbought ST as I have ever seen seen it. During the first thrust out of a correction bottom or new bull market, you tend to see such behavior which is actually bullish longer term but in a bear market or a still ongoing correction phase, such conditions represent a great selling opportunity. We're gonna find out which one it is. During last summer the market got this ST overbought in late July. What happened later was a small dip followed by a higher high and then the market tanked the whole month of August. So, even when ST overbought conditions do occur in bear/correction phases it can still be tricky for bears to capitalize on the short side if they try to play the day to day action using tight stops.
Looking at the bigger picture it still suggests taking a wait and see approach. It looks as though the effects of China's tightening are finally starting to be felt wth a key manufuacting guague showing a slowdown for the month....and yes I know it's just 1 month. Will there or will there not be a "hard landing" in China and emerging markets in general? Commodity related investments are obviously at risk here and they have been in a declining trend this year in response to global slowdown fears. I just read an article on bloomberg that said net long positions in 18 different commodities has been reduced to the lowest level since July 13, 2010. If you remember, that's right where the market and commodoties bottomed last summer. So from a sentiment perspective, this is good news for commodity bulls and equity bulls too. However, I should point out that regarding oil, arguably the most critical economic commodity, there is still a rather large net long position of about 153,000 contracts. At the July lows of last year it was only about 50,000. So, all in all, the hot money is being flushed out of the commodity space but there's still room for more flushing. This is part of the "resetting" that I think the market needs. Unfortunately, last week's rally prevented this reset from being fully completed.
So, is the slowdown in global growth going to be temporary like last summer or will it result in a reccession? I think the answer will lie in between. The Economic Cycle Research Institute (ECRI) is an economic forecaster that I respect the most. These guys have a superb track record of calling major turns in the economic cycle. Last summer they predicted a slowdown and some permabears like Hussman were using this call to justify their double dip predictions. ECRI was quick to respond by saying that they were only predicting a temporary slowdown not a reccession. This time around ECRI is more bearish. Although they aren't calling for a reccesion (at least not yet), they are calling for a slowdown that will likely persist throughout the remainder of the year. They also made it clear that this forecast had nothing to do with Japan. Bernanke thinks this "soft patch" will end by the summer. This goes against the forecast of the ECRI which has the better track record.
So then, what to do? My belief continues to be that this bull market has not fully played out because monetary conditions and public sentiment towards the market/economy suggest it is still in tact. But having said that, bull markets will tend to have large consolidation phases where the market goes sideways or moderately down for several months, even up to a year or so. I think this is where we're at for the time being. If you play the bigger swings like me and have been riding the run since September, then it's time to step back, harvest profits and take a wait and see approach to see how this shit plays out. This implies having a large cash balance and reducing exposure to growth sensitive stocks (preferably on strength). There's a time to press offense and there's a time to play defense. From a 2-6 month perspective, it's time to play some D here.
I always emphasize focusing on the bigger picture. Weeks like last week will make you very tempted to do just the opposite. I for one will not get sucked into the casino of daytrading and ST trading. So, what do you do then? Just sit in cash? Well, not entirely. I would still be willing to have some exposure in names that have a good story that aren't strongly correlated to the general markets. What about shorting? Well, in bull markets I am reluctant to do so, even during times like this when I feel the trend will be down/sideways for a while. I have to admit though, I get very tempted. But what if this is not a bull market anymore? Well, in that's case it's best to wait for the market to truly roll over with the fundamentals (earnings) in a decisive deteriorating trend, not just a downshift from positive to less positive. If the permabears end up being right and we're going back to SPX 700, there will be plenty of opportunity to make money on the short side....there's no need to pick tops. Top picking bull markets will destroy you. Just ask an elliot waver who went 200% short as per the recommendation of Prechter in November 2009. I wonder if that loser ever apologized for that call.
One trade I'm considering is long TLT December 90 calls which I suppose is similar to a short bet against the market since bonds have been negatively correlated to the market as of late. Why this trade? A few reasons. 1) There is so much hatred towards bonds from both equity bulls and bear alike
2) Given the data, it's quite unlikely the fed is going to raise rates until at least some time next year
3) The recent peak in commodity prices suggests that inflation pressures will be abating
4) Taking a look just at the chart ignoring any news, biases or predispositions, it sure looks to me like a bottom has been recently formed and the recent dip in bond prices looks like a pullback in a new uptrend which is ideal for an entry point.
If I go ahead with the bet, it will be an "all in" type trade meaning that I'm willing to lose 100% of any capital I commit to this trade. To me, this is the way to play option trades like this....you gotta swing for the fences because the day to day noise volatility with option trades like this is far too great to use stops effectively. So, if you're gonna risk losing 100% if you're wrong, you ought to be aiming for at least a 100% gain if you end up being right and that's the case with this trade. I think TLT hitting 100 before the year is over is quite doable and that would translate into at least a double for TLT Dec 90 calls.
It's been well over a year since I've made an option trade. Here are my rules
1) the trade must be with the trend
2) give yourself at least 3 months until expiration
3) Use in the money options with at least 65% intrinsic value
4) go all in, no stops aiming for at least 100%
If you are going to be aggressive like this going "all in" you must never risk a large amount of your capital. For me it's going to be in the 5% range if end up pulling the trigger.
Now we have a market that is as overbought ST as I have ever seen seen it. During the first thrust out of a correction bottom or new bull market, you tend to see such behavior which is actually bullish longer term but in a bear market or a still ongoing correction phase, such conditions represent a great selling opportunity. We're gonna find out which one it is. During last summer the market got this ST overbought in late July. What happened later was a small dip followed by a higher high and then the market tanked the whole month of August. So, even when ST overbought conditions do occur in bear/correction phases it can still be tricky for bears to capitalize on the short side if they try to play the day to day action using tight stops.
Looking at the bigger picture it still suggests taking a wait and see approach. It looks as though the effects of China's tightening are finally starting to be felt wth a key manufuacting guague showing a slowdown for the month....and yes I know it's just 1 month. Will there or will there not be a "hard landing" in China and emerging markets in general? Commodity related investments are obviously at risk here and they have been in a declining trend this year in response to global slowdown fears. I just read an article on bloomberg that said net long positions in 18 different commodities has been reduced to the lowest level since July 13, 2010. If you remember, that's right where the market and commodoties bottomed last summer. So from a sentiment perspective, this is good news for commodity bulls and equity bulls too. However, I should point out that regarding oil, arguably the most critical economic commodity, there is still a rather large net long position of about 153,000 contracts. At the July lows of last year it was only about 50,000. So, all in all, the hot money is being flushed out of the commodity space but there's still room for more flushing. This is part of the "resetting" that I think the market needs. Unfortunately, last week's rally prevented this reset from being fully completed.
So, is the slowdown in global growth going to be temporary like last summer or will it result in a reccession? I think the answer will lie in between. The Economic Cycle Research Institute (ECRI) is an economic forecaster that I respect the most. These guys have a superb track record of calling major turns in the economic cycle. Last summer they predicted a slowdown and some permabears like Hussman were using this call to justify their double dip predictions. ECRI was quick to respond by saying that they were only predicting a temporary slowdown not a reccession. This time around ECRI is more bearish. Although they aren't calling for a reccesion (at least not yet), they are calling for a slowdown that will likely persist throughout the remainder of the year. They also made it clear that this forecast had nothing to do with Japan. Bernanke thinks this "soft patch" will end by the summer. This goes against the forecast of the ECRI which has the better track record.
So then, what to do? My belief continues to be that this bull market has not fully played out because monetary conditions and public sentiment towards the market/economy suggest it is still in tact. But having said that, bull markets will tend to have large consolidation phases where the market goes sideways or moderately down for several months, even up to a year or so. I think this is where we're at for the time being. If you play the bigger swings like me and have been riding the run since September, then it's time to step back, harvest profits and take a wait and see approach to see how this shit plays out. This implies having a large cash balance and reducing exposure to growth sensitive stocks (preferably on strength). There's a time to press offense and there's a time to play defense. From a 2-6 month perspective, it's time to play some D here.
I always emphasize focusing on the bigger picture. Weeks like last week will make you very tempted to do just the opposite. I for one will not get sucked into the casino of daytrading and ST trading. So, what do you do then? Just sit in cash? Well, not entirely. I would still be willing to have some exposure in names that have a good story that aren't strongly correlated to the general markets. What about shorting? Well, in bull markets I am reluctant to do so, even during times like this when I feel the trend will be down/sideways for a while. I have to admit though, I get very tempted. But what if this is not a bull market anymore? Well, in that's case it's best to wait for the market to truly roll over with the fundamentals (earnings) in a decisive deteriorating trend, not just a downshift from positive to less positive. If the permabears end up being right and we're going back to SPX 700, there will be plenty of opportunity to make money on the short side....there's no need to pick tops. Top picking bull markets will destroy you. Just ask an elliot waver who went 200% short as per the recommendation of Prechter in November 2009. I wonder if that loser ever apologized for that call.
One trade I'm considering is long TLT December 90 calls which I suppose is similar to a short bet against the market since bonds have been negatively correlated to the market as of late. Why this trade? A few reasons. 1) There is so much hatred towards bonds from both equity bulls and bear alike
2) Given the data, it's quite unlikely the fed is going to raise rates until at least some time next year
3) The recent peak in commodity prices suggests that inflation pressures will be abating
4) Taking a look just at the chart ignoring any news, biases or predispositions, it sure looks to me like a bottom has been recently formed and the recent dip in bond prices looks like a pullback in a new uptrend which is ideal for an entry point.
If I go ahead with the bet, it will be an "all in" type trade meaning that I'm willing to lose 100% of any capital I commit to this trade. To me, this is the way to play option trades like this....you gotta swing for the fences because the day to day noise volatility with option trades like this is far too great to use stops effectively. So, if you're gonna risk losing 100% if you're wrong, you ought to be aiming for at least a 100% gain if you end up being right and that's the case with this trade. I think TLT hitting 100 before the year is over is quite doable and that would translate into at least a double for TLT Dec 90 calls.
It's been well over a year since I've made an option trade. Here are my rules
1) the trade must be with the trend
2) give yourself at least 3 months until expiration
3) Use in the money options with at least 65% intrinsic value
4) go all in, no stops aiming for at least 100%
If you are going to be aggressive like this going "all in" you must never risk a large amount of your capital. For me it's going to be in the 5% range if end up pulling the trigger.
Thursday, June 30, 2011
Half time report
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.
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.
Monday, June 27, 2011
Deep thoughts
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.
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.
Thursday, June 23, 2011
Taking swift action
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
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
Wednesday, June 22, 2011
Fake salmon
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.
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.
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