Sunday, October 26, 2008

Reverse Curse

Whenever I find myself growing grim about the mouth; whenever it is a damp, drizzly October in my soul; whenever I find myself pausing before coffin warehouses, I know the worm will soon turn, as the next calendar month steps quietly, methodically forward.

While I don't want to face-paint myself into a corner and lose the flexibility to adjust, I suspect we're on the verge of the next tradable bounce in the very near future. Nothing for widows and orphans to write home about, but this time I'd expect more than the one-day-wonder variety of retracement.

New, compelling reasons were witnessed Friday when: 1.) the volatility index (VIX) exploded to new highs at the US market's open, coincident with 2.) the S&P futures being locked limit-down prior to the open, and yet this resulted in 3.) nothing more than a re-test of previous intraday lows. In spite of far more dramatic declines in the rest of the world and the enormous implied price-move a level of 89 in the VIX indicates, the downside in the US Friday was largely subdued. Standard recent fodder in fact.

Put it this way, if we can't make new lows in a bear market when the futures move lock-limit down, then when?

Of course, given the lack of volume it doesn't indicate any great degree of buying or bonefide accumulation and in no way does this indicate any ultimate lows, but it does demonstrate a succinct lack of selling.

Take what you can get or perhaps be careful with the short side just now - the market appears sold-out for the time being.

I started building a portfolio again (started Thursday), although I'm presently 100% hedged with the S&P Ultrashort SDS. I also added another traunch of long-term powder into Shanghai, which was down only 2% on Friday; besting even the luke-warm 3% decline in the US. The rest of the World, you know, was woodshedded yet again...anywhere from 5 to 16% depending on where you look and what authorities halted trading in their country.

If investors aren't going to play fair then they shan't play at all, I guess.

Okay, if we blast to new lows this week and fail to reverse, then ignore this message (I know I will). In that case add this to the list of loser-calls, expecting anything other than pure, incessant drubbing. But if we see a reasonably positive tape, or an impressive reversal; moles leaving holes without getting bludgeoned; then I think we've begun our retracement.

Praise be retrace.

Oh, regarding the extreme volatility: take a look at Bill Luby's account of extreme volatility readings during the Nikkei's lost decade. While that market sustained its bear status for years and years and, (zzzzzzz) years, the counter-moves higher were routinely preceded by extreme volatility readings. I should reiterate that we cannot get bullish at the point volatility becomes extreme, simply because we don't know that the next day won't bring even greater extreme. If we crashed right now for instance, the readings would go still-higher. But when we see volatility go to an extreme and price unable to follow, we can get interested. Then if volatility begins declining we can get busy. Friday's action provided half of the necessary ingredients, we need to see volatility retract now in order to pen any of this as bullish (timing is everything, right?).

I'm not yet eager, love-sick and salivating over the look of leadership stocks just now, but I can at least now share a list of stocks exhibiting interesting potential. As I mentioned, anything I might own here presently is currently hedged, but I would add to these, find more of the same and let go of short-hedges should the market indeed catch a bid.

As always - don't do what I do. Pay no attention to any of the names below or anything you may have read here above.

Call me Ishmael!

(Early) Dry Powder Long List for the Retracement Rally:

Medical - Biotech/Genetic/Medical Services:
AMGN
GENZ
VPHM (eps due Oct 29)
CELG
GILD
QSII
STE (eps due Oct 30)
EBS (eps due Nov 6)
UTHR (eps due Oct 30)
ALXN
GXDX (thin)

Commercial Schools:
DV
STRA (thin; eps due Oct 30)

Big-Cap NDX (with eps out of the way):
AMGN
GOOG
AAPL

Misc Retail:
WMT
DLTR
ROST [edited-in 27 Oct]
HOTT (holding like a champ, believe it or not)

Misc Financial:
SF
NDAQ (eps due Nov 6)
USB
WFC (2ndary coming)
PNC
JPM
SIVB

Misc Other:
EZPW (pawn shops; eps due Nov 6)
RJET (airline; eps due Oct 30)
ISYS
SYNA

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