Jackass Hole

Everyone's been waiting for tomorrow's Jackass  Jackson Hole meeting with baited breathe as to what Bernake is or isn't going to say. The popularity of this meeting has exploded since it's what apparently sparked the massive 6 month rally in 2010 with the announcement of QE2. Last year though there wasn't such a rally immediately after Jackson hole as "operation twist" was announced but was widely anticipated...and that's the key word...anticipated. When something is widely anticipated the surprise factor isn't there and so any expected big move in a particular direction doesn't materialize and is already baked in. Coming into the Jackson Hole meeting in 2010, sentiment (both short and long term) was quite bearish, the market was oversold and few were expecting QE2. The market was therefore ripe to respond favorably to a positive surprise and it did.  You should know by now that the motto of this blog is as true as 1+1=2 and so it follows that to make fools out of the most amount of people it requires the unexpected - not widely telegraphed events or concerns which makes the likelihood of Jackson Hole tomorrow not nearly as important as it was 2 years ago.

Despite what I just said though, tomorrow still has a chance to provide at least ST volatility as it seems expectations have been lowered. From what I gather, most are not expecting an implementation of QE3, but rather only a disappointing discussion about it and what it may entail. How much disappointment can there be if everyone is already expected to be disappointed?! So, there's actually a possibility for a minor upside surprise if Bernanke announces QE3 starting and if not, there will probably only be modest downside because most people are already expecting a "no immanent QE3" result.  I expect to see only modest upside on any positive surprise relative to Jackson Hole 2010 because we're not in the same situation as then. In 2010 the market was oversold and both LT and ST sentiment (AAII, Rydex, NAAIM) was bearish. Right now, the market is not oversold and ST sentiment is extended to the long side as per NAAIM and Rydex but big picture wise, there's no way you can argue people in general are giddy about stocks...and it's been the case since the bull market in 2009 began.

I wanted to talk about my failed GOOG trade a bit. Last Friday I was correct in expecting the market to bounce but I didn't get paid for it because GOOG, which usually outperforms on up days, badly lagged. Had it preformed like it normally did I probably would have make money on that trade or at the very least broke even. So, was this simply a bad beat or was there something else? It may have been the latter. The verdict of the Apple vs Samsung patent case (which apparently has implications towards GOOG given Android) was delivered over the weekend and so perhaps GOOG was held back because of this. GOOG dropped about 2% on Monday the first trading day after the verdict was delivered so I think I'm right about this. When I made the trade I was unaware of the pending Apple vs Samsung verdict. I was ignorant and I got punished for it. As I said before at least once on these pages, sooner or later the market will expose your weaknesses and one of them could be ignorance (elliot wavers learn this in due time).

Going forward I'm going to stick with the indices instead of individual names if I'm contemplating quick option trades. I know this sounds like hindsight bias, but the correct trade last Friday would have been to bought TZA 17 puts on the morning dip last Friday. They could have been had for .07 and sold for .30+ a couple hours later. I was asleep at the wheel, too busy watching GOOG that day that I failed to notice this opportunity until it was too late. Lessons learned.

As tempting as it may be given the potential for a volatile day, I will not be making any ST trades tomorrow. I don't feel I have a good enough edge.

GOOG trade

I'm taking a shot at a GOOG breakout tomorrow buying the weekly 685 calls which expire tomorrow. I always bet very small with these type of trades as I stand to risk loosing 100% in an instant if I'm wrong but reward potential is well worth the risk in my view.  First of all, with today's modest decline, the market has worked off it's ST overbought condition without much in the way of damage giving it the green light to make another upside stab if there's any kind of positive catalyst tomorrow. We also had a pcr in the 90's again which signals once again that there's a decent amount of top picking going on. So, all in all, there's ample room for a snapback rally tomorrow should there be a positive catalyst. This was a similar ST condition the market was in when I bought the SDS puts a few weeks ago but unlike 3 weeks ago where I knew there was definitive potential positive catalyst via the non-farm payrolls, there's not one like that. I need some luck here. If we do get a decent up day tomorrow, I stand to do very well with GOOG with it being perched right at the 52 week high showing great relative strength. I'm hoping a breakout to new highs in GOOG would translate into sharp 10-20 pt move in the stock which I think is very doable as this tends to happens with there is such a breakout. That would give me 5-15 bagger for my calls...that's the kind of risk-reward setup I like. This was practically the same risk-reward set up I pegged with my SDS put trade a few weeks back as well.

If the trade turns out to be a bust so be it....I'll have no regrets as I believe I have correctly assessed the risk-reward conditions.

Game of chicken dominates the ST

I decided to bail on my FXC puts this afternoon that I bought Friday for a few reasons. First I should say that the fxc put was a play to profit on expected ST market downside. Since the Canadian dollar is considered to be a "risk on" currency it will rise and fall along will the general markets. Why the dollar and not just buy puts directly on the market itself? Good question. It's because I figured I'd get more bang for my buck with fxc puts vs say SPY puts given the option pricing and where my downside targets lied. There was the risk of unfavorable tracking error by going with the FXC puts but I was willing to accept that risk.

I bailed because, although there were signs of an immanent ST drop on Friday as per my comment on stock twits, new evidence appeared to me to suggest such a drop could be delayed. First was the yet again too obvious sell-off at "resistance". The market reversed off the 1425 level which marked the YTD high in May forming a downside reversal. The bagholding permabears over at the message boards got really excited over this and were really excited about the messily 5 pt drop in the futures overnight. So pathetic. This was a sign to me that there were still too many bear bagholders who needed to capitulate and perhaps I would be premature or flat out wrong about my expectations for ST downside. But I was willing to give the bears a little leeway here given that the market was not overbought. As a ST bear,  I was quite disappointed with today's action even prior to this afternoon ramp into the green. If yesterday was indeed a true reversal we should have seen the market go down hard today without giving traders any convenient downside entry points. Instead, it drifted modestly down with a pcr in the 90's (not what you want to see if you want downside). Come afternoon, my patience was just about finished. After the fed minutes we a saw a few whipsaws and then grinded back into the green but just before that ramp I dumped my puts. The bid/ask spread was terrible and I got dinged because of it. Anyhow, I knew that given the liquidity of these option, I would get dinged by the spread if I decided to close out the trade early so I'm not complaining. 

Now, I know that my decision to bail could easily prove to be a hasty one but when you're top picking using front month options, it's a very dangerous game and one that you should avoid most of the times. You have to not only pick a top which is hard enough, but your timing has be near perfect too. If you were right in calling the top but the market goes sideways for a few weeks before finally falling, you still lose. So, if you have any doubts you have to bail and that I did. 

Short squeeze relay

We had a fairly quiet week. The market was up all 5 days but by very small amounts each day. The market has been able to hold up despite a ST overbought condition. Is this a change in character which suggests we have started one of those multi-month bull runs like what we saw from November to May? Could be but I have my doubts. I think what we're seeing here is a case of traders getting caught short one after another squeezing each other, pushing the market higher in the processes.  I've seen this happen so many times since 2009 whereby one group of trapped shorts capitulates pushing the market higher creating a domino effect by triggering the capitulation of the group who are trapped just above them and it keeps going and going untill enough bears are too affraid to top pick and there's no one left to squeeze.  It all started after the "Draghi disappointment" which gave bears the all clear to fire away shorts/puts/bear etfs, which turned out to be a massive bear trap given the surprise payroll number the next day which jacked the market with a large gap up. I'm sure that gap invited even more shorting but they got ran over as the shorts from the day before ran for cover. Now we have another group of shorts who are top picking at the 1400 resistance level and now they too are trapped albeit modestly at this point with the help of the capitulation of last week's shorts. It's the Olympic short squeeze relay as one group of bear bag holders passes the bag to the next!

This type of short squeeze relay can end up being a dead cat bounce, which once exhausted, leads to a sudden and abrupt decline or it can be the spark that ignites a larger, LT move. I get the feeling it's going to the former but there's a good chance we see one last squeeze to 1415+  first as there have been too many weak trader types betting against the market at 1400 from the looks of it. It seems unfathomable, but we are only 18 points away from making a new 4 year high in the stock market. I gotta tell you, Mr. Market always seems to find a way to make fools of everyone including me. I, like a lemming, have been expecting to see another downside scare for some time now and although I haven't lost any money betting on it, I've been wrong about that. Sure, I could be early and eventually proven right, but it just goes to show you how tricky and elusive Mr. Market can be. 

When I look at some LT variables like bond yields and the Euro, they are at levels are indicative of major bottoms in stocks. If you look at recent history, anytime bonds have had a strong multi-month advance accompanied by a strong multi-month decline in the Euro (a dual signal of major risk aversion) a LT bottom in equities was in view so it's quite conceivable the the June low was the bottom. But the strange thing is that despite the severity of the bond rally and accompanying  Eurodecline, the US equity market did not decline in kind. We only saw a 10% drop in stocks and with these strong trends in bonds and euro unwinding a bit, the market has rebounded a lot more relatively and is closing in on a new bull market high! I've been expecting a retest or at least another stab towards the June lows but I've been wrong so far. 

Here's the problem with this rally. We got oil prices zooming right back up with gas prices approaching the highs in the spring. We got a VIX that broke below 15 which has been a level associated with a market that's either at a top or on its way to one (limited upside). We also have Rydex and NAAIM numbers that suggest we're closer to the end of an intermediate term advance than the beginning of one. Lastly, there was significant gap up action in this advance which to me suggests "unhealthy upside action" (you will know what I mean by that if you've been reading this blog for some time).  So, in conclusion, if we do advance more here because of an continued short squeeze - and I think there's a good chance we will (minor dips aside), it will probably be a bull trap and lead to an abrupt downside move. I doubt it will be a crash but rather something scary enough to put the IT indicators back towards pessimistic readings. If that were to happen, then the market would be in much a better position to make one of those big, 30% multi-month advances to new highs.  

In the meantime, I will continue to look for ST trading setups. I haven't made any trades since that last little score last week. I want to play the squeeze to 1415+ I envision with an option play, but as of now I don't seen an attractive enough risk-reward set up.  

I should also say this...for months now, this market has been a favorable environment for ST traders who buy the dips and sell the rips while frustrating the trend traders and investors. That's likely going to reverse soon.  I'm fully aware that my willingness to engage in ST trading could be a sign that I'm late to the party and that we're probably close to the point where a big, sustained move up or down (I'm thinking up) in the not too distant future (could it have already started?). The problem with focusing on the ST all the time is that you get myopic and fail to adjust in timely manner when the market changes character. I will try my best to avoid doing that. Once the market is in a strong directional move, you will find that ST trading won't work nearly as good as long term position trading even if you're on the right side of the market. 

The temptations of speculation

New site feature

I've added a stocktwits feed to the blog on the right. Here I will post my trades and quick comments about the market.


As I've stated before, I'm going to partake in more speculative endeavors. I've always considered myself part investor, part speculator but since I've been trading full time I've emphasized the investor part a lot more. In fact, up until last Thursday, I haven't made a pure speculative trade since 2009.  I have engaged in speculative trading in the past with mixed results but since I've started trading full time (starting in late 2008) I have not resorted to it simply because from experience I know that in bull market conditions, the most effective strategy is a buy and hold one. I've also learned that that big money is made by identifying and riding the big trends. Most importantly, I've been good at this type of strategy vastly outperforming the market with less downside volatility. But when the market is sideways or in outright bear mode, a ST/IT trading approach is usually the optimal one.  This type of trading is just that....trading NOT investing and such trading is synonymous with speculating whereby you're focus is based purely on price action not fundamentals/value.

Most of the ledgends out there like Soros, Buffet, Templeton all had success using a fundamentals/value approach (although Soros also incorporates a speculative approach as well). I still believe that this is the best way to approach the market longer term. But if you look around the blogosphere and message boards you'll find that your average retail stock market player  take a pure ST speculative approach (with a permabear bias). I suspect the main reason why most people take such approach is because they seek instant gratification. They don't have the patience of these legends. They want to see the results quickly and they want to get rich quick too. Unfortunately, that's that's probably why most people fail in this game.  The market is often too random in the ST and sooner or later those who make large bets on ST trades get wiped out even if they had initial success. Having said that though, I believe there are times where lucrative ST trading opportunities present themselves but they don't present themselves everyday. You need to be patient in waiting for them. I made a really profitable, abliet very small trade last week. It produced a 850% gain in 1 day - the exact type of instant gratification, get rich quick trade that I spoke against of! It's easy to start thinking that you can find such trades every day or every week using size and that's when you'll blow your brains out giving back all your gains and more. I need to make sure I don't fall into that trap.

Embrace the beast or leave it alone

In previous posts I've talked about how for the third summer in a row now,  the market has been held hostage to the headlines, especially those that come out of Europe which makes ST trading treacherous as there tends to be resulting sizeable gap opens. I don't prefer this type of environment and I'm sure a lot of others don't either, but complaining about it is fruitless. You either try to find ways to exploit this type of market with a trading edge (which may mean radically changing your approach) or you step aside and wait for things to return to normal. Getting angry, whining and blaming others like "algos" or  central bankers for your mishaps ain't going to do anything except compound your losing ways. I see plenty of this going on.

So, is there a way to profit from this sideways, headline driven, gap happy market? The best way to have done so would be to pay attention to ST overbought/oversold indicators and bottom/top pick whenever the market gets oversold and overbought respectively. When you bottom or top pick, using tight stops is not the way to go in my book especially when the headline action appears random with the tendency for large gaps. Your tight stop will get leapfrogged if you're on the wrong side of these gaps. One method is to scale in and out but even if you use a scale, once you're fully committed you have to draw the line somewhere if the market keeps going against you, i.e. have a stop and that leaves you vulnerable to the gaps and whipsaws. Another way to consider trading ST is the use of options which is my preferred weapon of choice. With options I can make  "conviction bets" whereby I don't have to use a stop and thus don't risk getting whipsawed. This means I risk loosing 100% of my trade amount if I'm wrong but if I'm right I expect to make at least a 200% gain and so I don't have to risk a lot of capital due to this leverage. Sizing up favorable risk/reward scenarios, timing and of course luck play a part but I prefer making these type of bets. With weekly options now available on a variety of ETFs included leveraged ETFs, there are tremendous opportunities for option speculators and of course, temptations that should be avoided. Options are like explosives - they are very potent but if you don't know how to handle them you will quickly blow up yourself and most people do exactly that.

Last week I talked about how I failed to pull the trigger on SDS weekly puts twice and I would have been a big winner both times. Well this time, I actually pulled the trigger. It was for a tiny amount mind you, but at least I finally broke out of my shell. I bought Aug wk1 SDS 15 puts for .02 Thursday. Risky stuff, but with the market down 4 days in a row reaching ST oversold, expectations for Friday's payroll low and with the mood so sour after Draghi's "disappointment" I figured a lot of weak handed traders were short and would scramble if we got a payroll number around 170K and we could see a run towards 1400. Man, did I nail it.  I ended up selling the puts for 0.17 on average for an 8.5 bagger! Again, I didn't put much on the line so by no means did I make a fortune but at least I finally pulled that fucking trigger.  Had I pulled the trigger the other two times that would have made it 3 profitable option trades in a row for an average return of  about 450% per trade with a holding period of only 1 or 2 days!   Lucky? I'm sure it played a part. But I think I may have stumbled on something here. Now it just so happened to be that these trades (actual and contemplated) where 1-2 day holds which I don't expect to be the case on average.  These 3 opportunities just happen to coincide towards the week's end which made the weekly options cheap and therefore lucrative. I will now try to build upon my initial success in the wild, wild west. Now, if I was a rookie, I'd be beaming with overconfidence and bet a large amount on my next trade....not gonna happen with this wily veteran. I expect to see my fair share of duds with these trades but if can score these kind of multi-baggers it should more than make up for them.

Let's talk markets now. In the past few weeks I've talked about how I still expect to see at least one more downside scare. So far that hasn't happened aside from minor dips and here we are now closing in at 1400. A lot of bears I'm sure have hundreds of hair follicles littering there desks or have checked  themselves in to the funny farm . How could this be they say, when you have unresolved issues in Europe which is in a deep recession, a decelerating global economy and lackluster earnings season with lowered Q3 guidance? To this I say it's just Mr. Market doing his thing which is to make fools out of the most amount of people. It could be that problems out there have been too obvious and the marginal players (the ST traders, which now dominate the action) were leaning too much on the short side, which is what I suspected. When the market is in this type of "game of chicken" environment, it's especially important to pay attention to sentiment. How are other people positioned, in particular, the ST trader types?  Because it's traders right now (as opposed to LT money flow) that dominate the action. I've mentioned before that some trader type sentiment (Rydex ratio and NAAIM) are flashing  warning signs but these tend to be relevant to the intermediate term. The shorter term such as weekly AAII reading have and still aren't suggesting "too many bulls". AAII is now neutral with 1:1 bulls vs bears.

Another thing that tipped me off about Friday possibly being strong was how the market held up fairly well Thursday considering "Draghi's massive disappointment" according the media. The SPX only closed down 10 points. Is that all the bears could do? I said to myself. In this game of chicken you need to get a sense of what the other players are doing and capitalize when they are leaning too much in one direction. I did so once...on a very small scale. Maybe I was just lucky or maybe I was right. I think it was both.

Mario "Ivan" Draghi says "I must break you" to the bears

Whatever he hits...he destroys!  Ivan Draghi laid the smack down on the bears Thursday and Friday with his "whatever it takes to save the Euro" comment. After Thursday's morning pop, I'm sure a lot traders shorted it thinking "what a bullshit rally this is" and now after today they are being carried out on a stretcher. Like the last 2 summers, the market is extremely headline driven and headlines of importance are those that come out of Europe and since Europe opens before our markets, there is a tendency for large gaps. So, if you want to trade the ST wiggles successfully, you have to be willing to hold overnight positions gambling  hoping that the morning headlines will be favorable to you. The "buy the dips" and "sell the rips" strategy would have been a winner for the past couple of months assuming you would scale into positions not blowing your load on the first dip or rip.

I want to take more of a trader approach to the market at this point. For me that generally means trading the 1-4 week moves in the market but I've been finding that the market has been moving too quickly for me at the turning points. I would have to be forced to pick tops and bottoms, although I suppose that can be mitigated by scaling. I'm also having a problem with conflicting indicators which give me the case of "analysis paralysis". I need to simplify things and just pull the damn trigger. For instance, twice now I failed to pull the trigger on SDS weekly puts.  Last Thursday and again this Wednesday I had them on my radar. I wanted to see how the market would open the following day before pulling the trigger but the market had gaped up big and so the opportunity was lost. Had I attempted to bottom pick - which I would have nailed perfectly - I would have had 200-400% winners in just 1-2 days. Mind you, I would have bet quite small on such risky trades but I would have won instead of just sitting on my hands doing nothing. Doing nothing is what I've been doing for a quite some time and I'm tired of it. I realize though that trading for the sake of trading will usually backfire and I won't do that but for fuck sakes I need to just pull the fucking trigger sometimes and break out of my shell.  There will come a time when my classic "buy and hold" strategy will work again but I don't think that time is now. I'm sure there are some stocks out there that will turn out to be good buy and holds (and I believe my position in hwo.to is one of them) but until bull market conditions return, buying and holding is not the optimal strategy.  Having said that though, I'm not going to resort to daytrading either. To me that's as close to pure gambling as it gets. I'm sure there's some profitable daytraders out there but to me , I see it as far too random.

I could of course, continue to do nothing this summer and wait for the smoke to clear just like I did in the summers of 2010 and 2011 but I want to do better this time. Also, unlike those last 2 years, I don't have a sizeable gain for the year banked which made it easier to just sit and wait. Again, I realize the danger in trying to make something out of nothing so I need to make sure I only play the premium hands...but I need to play the fucking hand when it's dealt and not hesitate so much because in this market if you blink, your opportunity is gone. 

On the sentiment front, once again AAII showed a dominance of bears over bulls while NAAIM and the Rydex ratio are conflicting showing complacency. I mentioned last week, that despite the complacent conditions of other indicators, this extreme bearish AAII reading prevented me from making an IT downside bet. I was wondering how this confliction would be resolved and low and behold the AAII reading ended up signalling correctly that there was indeed too many bears. Perhaps though, this will only result in ST strength (which we now got) which will clear the way for a larger move down later. Another thing that prevented me from making an IT downside bet was the persistent strength in gov't bonds.  ST/IT tops tend to be proceeded by some sort of sell-off in bonds...it doesn't have to be huge....but at least something. Well, we finally got that today although it's a rather small sell-off given the move up they had.

On the fundamentals front, there's some troubling signs in earnings. This earnings season has not been that great. Remember, in the end its all about earnings...that's all that counts. This  article does a good job in highlighting the concerns. We've haven't seen the threat of earnings deceleration like this since the start of the bull market. One positive way to spin this is that expectations for Q3 earnings have been significantly reduced which makes it easier for upside surprises but I would counter that by saying you could see a situation where expectations are correctly lowered but not not lowered enough. Once there's a turning point in the economy, analysts tend to over or under estimate the new trend. I remember in late 2008 bears saying how foolish analysts were in their expectations for a significant rebound in 2009 earnings...well...it turns out they were right to expect a rebound but they weren't optimistic enough! So, it could turn out the be case that analysts are not downgrading earnings nearly enough  if the economy has indeed tipped towards a recession. Of course, if they are wrong and Q2 just turns out to be a slow patch then you will see a rip roaring rally in the last few months of the year...again.