NOV. 15th: SOME QUICK THOUGHTS THIS MORNING
The only consistency coming out of Europe is the ability for the rolling wave of contagion to sweep from one countries shore to another. There isn't one solution that hasn't arrived prepackaged with a new set of problems. Until this trend changes, there will be no consistency out of the market. Europe may not have that ultimate solution similar to what the US market saw in 2008/2009. Europe doesn't have the cohesive thought process necessary to put together a TARP program or its own version of QE. We have already seen what has come of the EFSF program. It is essentially dead on arrival. Of course, my concern isn't with dissecting the macro aspects of what each politician, central banker or influential analyst says. My concern is with profiting from this scenario with the least amount of risk and the maximum reward. Unfortunately, at present, the type of scenario that allows me maximum reward with minimal risk simply doesn't exist. Equity indexes are in no mans land. Commodities that I think present significant short opportunity, such as silver, are still being steamed not yet ready to be served. Individual stocks? Forget about it. Why take on individual company risk when the entire market has become one correlated slug? Yes, stock picking is dead. Those reptilian, mouth breathing fund managers who are taking on 20, 30 or 50 individual stock positions within their portfolios can enhance their performance and greatly simplify their lives by moving into 4-5 ETFs. That frame of thought makes a lot of Wall Street pros insecure due to the fact that it makes them irrelevant. Jurassic park comes to Manhattan. Back to trading. Crude oil is coming up on my radar as a potential short opportunity. It should break 100 and move upwards of 105 before I decide to take a stab. I wouldn't be surprised if 105 oil coincided with a runup in equities. At that point, I would consider an inverse energy stock ETF. A bursting crude oil market and "toppy" equity market would be a proper formula for outsized gains. Despite the early morning weakness in the futures market, we do remain range bound. Range driven markets force me into cash. That's where I am currently, with a small amount of FAZ that initiated on Friday. You have toes, stay on...
NOV. 14th: CURRENT PORTFOLIO POSITIONING
I tweeted the following trade during the final hour of trading on Friday: A small position for me is 10% or less of the portfolio. I have no plans of adding new positions over the coming week. I am fine remaining with a large portion of cash in the portfolio awaiting a move to the top of our current range. That should be around 1300 on the S&P. At that point, I will be happy to further put on short exposure. It's too early to become wildly bearish and too late to be outstandingly bullish. Cash is the call...
THE NEXT LEG DOWN WILL BEGIN ONCE THIS INDICATOR FALLS IN LINE
One word: Sentiment. There are still too many bears to reward them with a decline to the October lows. I will illustrate my point with the charts below. What should be noted is that the markets don't necessarily need to skyrocket in order for bearish sentiment to subside. The market can also resolve sentiment by moving sideways for a period of time. In this case, that is exactly what I expect. A range between 1210-1320 into December and possibly January. The charts below are moving average only charts of the combined put/call ratio. I use moving averages only to smooth out the daily spikes, which amount to noise on the chart. As reference points, I have used the fakeout moves that I outlined in yesterday's posting. You will see a clear pattern emerges in order for the market to experience a top: click chart to...
WHY CURRENT PRICE ACTION MAKES ME BELIEVE WE WILL REVISIT THE OCTOBER LOWS
During times of confusion in the marketplace, I have found it beneficial to clear my focus through the elimination of all methods of analysis but one. The attention to price action is what has allowed my success in the past and will do so in the future. For that reason I am giving up my biases - every single one of them - in favor of looking at the market from only a price action standpoint. What is the market telling me? That's what I want to know. Here is what I have come up with thus far: 1. The consolidation we have seen occur over the past couple of weeks in the S&P is not your typical "crunch, rest and explode" pattern that you see in healthy bull markets. A healthy consolidation does not have 1000 point swings in the Dow during a week that end up bringing the average to basically unchanged for the week when all is said and done. That's what happened this week. This type of volatility, marked by a proclivity towards random acts of violence, is the sign of a significant turning point. We don't have to look back far to see when this last occurred. In fact, it was only a couple months back within the range we just exited from. If you look at the current range that is forming, compared to the August - September time period in the S&P, the similarities are notable. click chart to enlarge The point here is that what we are seeing now is not consistent with a continuation pattern, but rather a pattern that seeks to change the trend in a violent manner. We saw that violent change of trend take place with the October 4th bottom after the choppy consolidation that had the bears thinking we were headed for sub-1000. Now we are starting to see the same action here. The change in trend, however, will come in the opposite direction as the October bottom. 2. Healthy bull markets off of "real" bottoms have a tendency towards moves that see the averages move up in steady bursts, followed by short periods of consolidation. NONE of the moves are marked by excessive volatility within a wide range. Especially in the first few months of the move up. Here are some examples of "real" bottoms that have taken place over the past decade: click chart to enlarge 3. A move that is made off of a market bottom that proves unsustainable is typically marked by excessive periods of consolidation that contain volatility. The moves are sharp in nature, which is consistent with both real bottoms...
RISK ASSESSMENT WEDNESDAY: LIQUIDATION EDITION
I ended the day in 100% cash, spending the final two hours of the day liquidating portfolios. A necessary part of keeping risk under control. Moderate losses across the board. If you are going to play in the dragons lair (meaning leveraged ETFs), you had better be damn sure you know how to control your risk. The moments of emotional weakness you have and doubt as to whether you should wait it out may not harm you in the QQQ. But when you triple the volatility with TQQQ, it will eat you alive and dissolve you in pink stomach acid. The upside won't work if you can't control the downside...that's the bottom line with this method of trading. Here are the Twitter...
IS THE MARKET SITUATION *THAT* SERIOUS? THE ANSWER IS HERE
During tumultuous times in the market, I have a habit of waking up every few hours to check futures quotes. You can imagine my glee when I awoke at 3:30 a.m., picked up the IPad and saw that Dow futures were down 250, the Euro had plummeted and talk was once again of the pessimistic variety. Needless to say, I didn't go back to bed and my first words of my morning were restricted to four letters only. A lot of experienced market prognosticators today have been expressing their sense of dismay and surprise at how difficult this market has become. I don't know if what we are experiencing is the symptom of a failing economic mechanism or merely a cancerous cell that is contributing to the overall problem. The difficulties that come from days such as today cannot be understated enough, however. They not only prove devastating to portfolios, professional and retail alike. But they serve as a means of deteriorating confidence in the system itself further. It becomes a self-reinforcing cycle of non-participation and liquidity gaps that create further volatility. If I look back on Tuesday during the last hour of trading, I could not see one single item that begged of me to reduce exposure. The warnings were anecdotal at best. Investors are helpless against these types of violent gaps down after seemingly bullish foundations are established in the marketplace. All one can do is react to the situation in as beneficial a manner as possible. I outlined in my morning thought that I would wait until the last hour of trading to make a decision to liquidate or hold tight. I jumped the gun, after seeing the persistent weakness throughout the day only get worse with two hours left in the trading day. I liquidated positions during the last two hours of trading, ending the day with a 100% cash position. I had an investor contact me today wondering what my next move would be? I couldn't answer the question. A sign that I should probably step back until I see concrete information that will keep me from getting whipsawed yet again. I rarely do chart reviews during the week. However, the current situation is critical enough to warrant looking at the two indices that matter: S&P 500 and BKX. click chart to...
ITS A GUN FIGHT. BRING A MACHINE GUN.
The news cycle has moved on from Greece and is now focusing on Italy. Italian bonds to be specific. The problem for the past week has been yields on the Italian 10 year. The higher they go, the more chances there are that the country they provide financing to is about to go belly up. The perceptions on these issues have a tendency to take on a life of their own. From one day to the next they are magnified, dissected and investigated a million times over. The resulting assessment changes from wildly pessimistic (today) to abundantly hopeful (yesterday) on a day to day basis. Today we're catching the pessimistic side of the trade. There is no way to tell whether this assessment is any better than the abundantly hopeful side that was presented to us yesterday. The articulate incompetents that populate Wall Street will dissect the news for you, using seemingly sophisticated analysis backed up by a suit and a tie. For all the sophistication they present, the applicability of the analysis to your bottom line as an investor is nonexistent. The truth is often times presented to you in the prices that prevail. Equity markets, at present, aren't thrilled with the fact that Italian yields are blowing through levels that have in the past signaled impending death for sovereign nations. The US markets are reacting by selling off some 2% in the futures. As so often times is the case, the opening of the market on days like today is where emotions lie. The close of the market on days like today is where reality lies. With that said, I don't plan on taking any action until the final hour of trading. If I do take action, it will be in the reduction of exposure to equities. If you plan on participating in this gun fight, you better bring a machine...
PORTFOLIO UPDATE
I added a long position in silver to the party today. During the last half hour of trading today I tweeted the following: Medium sized position. Wouldn't mind making it a large position if it acts well. I discussed silver in the chart review over the weekend here http://www.zenpenny.com/wp-content/uploads/2011/11/SLV.gif The strength we are seeing in gold is very real. I'll be the first to admit that I didn't expect to see the metals perk up so quickly following their bombardment in August and September. The fact that gold has rebounded so fervently is a positive that should not be ignored. The pullback may have been much less destructive than most initially thought. Given the scope of the nightmare in Europe and the liquidity parade that will be unleashed as a result, you can bet that the bullish case for gold will be marched around the block until investors become dizzy. Silver should be a beneficiary on the periphery of the bull run in gold. Now holding AGQ, TNA and...
THE PATH OF LEAST RESISTANCE
It continues to be up. The bears had yet another chance to take the market down through some important technical levels today. 1240 was on the verge of breaking, putting the ball in the court of the bears for the short-term. With two hours left in the day, the bulls staged a convincing reversal and not only closed the market above 1250. But rather managed to close the S&P 500 above 1260. Showing again which team controls the ball at this stage of the game. With that said, the question becomes what will come of the remainder of this week? There is a strong possibility of the move to 1320 taking place by Friday in the S&P 500. I say that because we have now had six days of consolidation. In the meanwhile, all the important leading indices have consolidated in a perfect manner before resuming their respective uptrend. The financials, semis, Nasdaq 100, commodities. All of these averages faced a view from the edge of the cliff and promptly turned around to run the other way. It bodes well for the bull market. The bears have run out of chances. The nature of this bull run has been short, steep explosions higher followed by several days of consolidation. This falls in line perfectly with models comparing this run to previous Q4 explosions that have marked a bottom brought about by excessive bearishness resulting from seemingly insurmountable negative fundamental headwinds. Bottomline: The consolidation has run its course. I expect this week to see the bulk of the gains for November, with an upside target of 1320 by...