Sunday, November 23, 2008

The Obama Bid

Whether they planned it this way or not, the Obama administration displayed remarkable market savvy on Friday.

First, in leaking they were working behind the scenes on a plan to stimulate the economy come January 20th (something we're seeing news on this weekend), and then the market-timing of the announcement of Tim Geithner as the new treasury secretary.

The Geithner news was floated following a terrific flush into lower-low territory for the market, but not until things had already begun to stabilize...and then, right into the last hour of trading.

How can we be sure the market was stabilizing? Well, think of it this way: The latest death-spiral Financial, this time the titanic Citigroup (Piggy), was crashing further into oblivion Friday with the dreaded weekend and the promise of equity euthanasia at hand (Kill Piggy). And yet the market indices were basically flat at worst, before the treasury secretary news sparked a late, 500 Dow-point surge higher.

If the market cannot manage further grim while a former-darling Financial is being pursed for the reaper - then I would say the market was ready to rally.

I definitely had a rocky week, but I was market-neutral or net-short 75% of the time, utilizing Ultrashorts SDS and/or TWM as hedges. On Friday I removed hedges no less than 4 occasions, each time the market began to re-reverse positive on the day. On the last occasion I dumped hedges at-the-market the moment the Geithner news was uttered. At this writing, I am exposed to many of the longs listed below.

The shorts have had it very easy lately, but bear-market rallies have a tendency to get medieval on the shorts, insuring it is not only the longs who are marauded (this is an equal opportunity unemployer). The market has had a substantive flush (understatement), the new administration is now at the helm and we're heading into the strongest seasonal period of the year. If we undercut lows again, I will adjust, eat crow and retreat with maximum cowardice. In the meantime I'll argue strongly that the retracement period for the market has begun; that the upside of this retracement will be the strongest for quite some time; and while there will be dips along the way, that trend will remain in tact until the inauguration January 20th.

Buy the future Obama rescue - sell the fact.

The following is my current Woolen Woot Suit of Longs which I am trading around and largely long at this writing. With the exception of the Golds, all of the groups are currently highly ranked in terms of relative strength. The Golds are only middle-ranked, but they are climbing in ranking and you'll see major volume in the breakout rally of that group on Friday...

ALGT (thin)

Commercial Schools:
CPLA (thin)

Biotech/Biomedical Svcs:
GXDX (thin)

Commercial Svcs/Healthcare:
HMSY (thin)

Commercial Security/Safety:
EMS (thin)
ASEI (thin)



Metal Ores-Gold/Silver:
GDX (Miners ETF)

Wednesday, November 19, 2008

Bend it Like Bedlam


Let's look at today. While volume was far from extreme, declining stocks bested advancing stocks on the NYSE by more than 11-1; Down-volume traded on the Nasdaq was an overwhelming 98%; the early CPI report highlighted a rising surge in deflating prices; not good. The Financials swooned another 10% as bellwether Citigroup choked on its own bile; the commercial real-estate woes came crashing homeward; Insurers continued their death spiral; the US auto sector...forget I mentioned it; Transports were down >8% as the supply chain there braces for a possible fail3er; GM's bonds are trading at 15 cents on the dollar; a single Nasdaq 100 stock was up 3 cents today (CA), while the 99 remaining Yahoo's declined; The S&P 500 posted 492 declines; grim.

Must be time to cover; must be time to buy.

But timing is everything. I don't know if we're going to breach 7800 and reverse immediately, or cough-up another 600, 800 or 1800 points in a couple of days before beginning a retracement. The only thing I feel confident of is that time-wise, we are close to beginning the retracement period. The levels will be what they will be; and again, that first retracement rally from the lows is going to be the best and most significant, assuming this market plays out like crashes of the past. Why? Because it will commence from the extreme-high in implied volatility (VIX, VXN), and the oscillations are at their most violent at the onset of the first trough. Thus, even if we're not going to see any economic recovery for quite some time, the upside of the initial retracement bounce won't realize this as it drives 20, 30, 40 or 50%. It will have plenty of time to drift into oblivion then later.

Of course, there is no rush to be early, no need to peg the exact bottom and no comfort yet should the Dow fail to break 7800 on this 48th re-test (since it may indeed need to break that level before a reversal will reign in any trading confidence).

But this is the belly of the beast. I can only imagine the newspaper covers being put together tonight. Yesterday (I kid you not) CNBC market cheerleader Maria Bartiromo said "There is no reason to buy this market - bottom line." She said this just prior to the 300-point surge higher in the last hour of trading yesterday. I'm not going to bash Maria (not with a seal-pup at least), but this women has gotten emotional at key turns in the past. Why else would I listen to that crap all day?

With a break of the 7800 level on the Dow, we should see if there are any buyers in the wings. Volume has been light and the market is (a tad) sold-out, so I'm not sure if we have what it takes to really break hard from here, even if the Big-3 Bailout fizzes (or perhaps - especially if that plan fizzles). The S&P, Nasdaq, NDX, Russell 2000, NYSE (all the majors other than the Dow) have already closed now lower than the October 10th lows. Only the Dow remains.

And yet at the same time, the volatility at highs and lows is extreme, so don't do what I do, don't try this at home, don't stay at your desk and pee in Vitamin Water bottles all day. This piece is for information purposes only - watch the guy trying to catch a falling knife. Watch when he momentarily removes the safety net (hedges) while high-wire walking back to Houston.

It's universal lemons out there right now. I'm just looking to make lemonade. Cases of it.

Monday, November 17, 2008

Get it Up or Duck!

While the action isn't entirely negative (yet), there is nothing overly encouraging since Thursday's big-bang blow-up reversal. If we are unable to resume to the upside by the end of today's trading in the US, I'll argue we'll break to lower-lows, probably in short order.

We know the fundamentals are negative, to say the least. A return to negative technicals leaves little hope for the immediate, near-term. I've cut back the number and size of positions here and I'm scaling into an SDS hedge for now, protecting the remainder of my holdings; I'm presently market-neutral.

Thursday was perhaps another case of too-far-too-fast, bear-market rally action and subsequently, today is key. After closing ugly on Friday, another lower close now and I think then a retest of lows is greater than 50-50. At the same time, if we do stage another retest of lows, I would put the likelihood of holding previous lows at less than 50-50.

In other words, if we don't catch a bid right now, I'd argue we'll purge to lower-lows, shaking the tree once more before beginning a substantive corrective rally.

This then is an exciting moment for Mr. Market. Blow to lower lows now and we'll see selling become emotional. And as I was arguing last week, the high volatility still in the market indicates the retracement rally, once it gets going, will be considerable; thus enabling a reasonable, best-exit for the 'stuck' among us, or a reasonable counter-trend, long-side trade for the rest of us. That view here has not changed - we'll see a substantive corrective rally, which could last several months and retrace anywhere from 20-66%.

The only question for me at this time is whether we have begun the corrective rally already or not. Not being sure, I'm trying to play it safe. Once more certain we have turned the worm, I'll play in long-only portfolio mode for as much of the retracement duration I am comfortable.

Beyond that point, which is too far out to really plan for, I would expect less volatility, lower (and lower) prices and a lengthy bull market in apathy.

Below is a look at the corrective rally which began in mid-November of 1929 and ran until mid-April 1930. The Dow corrected higher 52% at that time. As I mentioned, we don't have a large data sample for market crashes, but the point here is that the early corrective retracement, coincident with high implied volatility, is the strongest bounce to be expected for some time.

Friday, November 14, 2008

Happy Days are Here for Now

While the data sample is small (there just aren't enough US market crashes to go around), here is the simplistic view of how to position this slippery-slope, now that the technicals have shifted:

Volatility has declined (which is bullish), but remains historically high. This is a good thing for the bulls (and 'the stuck').

It is good, because it implies the retracement (bounce) will be significant and at times violent. Remember, volatility and panic operates in both directions. And don't listen to me, but we have now begun the retracement rally. The question is how big a bounce we will see (20, 33, 50, 66%, etc.).

As for chart-geeks, I would put the platinum pencils and Elliot Wave-runners aside - we don't know yet how far the retracement will run. Typically, the sharper the advance, the more short-lived the duration, while the more slow-and-constructive the advance, the longer one can pursue it. I don't like to box myself in, I prefer simply to know it when I see it. But a general rule while we build this in the meantime is to sell the close when the market rushes 6% or more in a day and sell/short a broken stock at the close when it rallies 10% or more in a day (yesterday being a good example of these rules).

When the retracement period has concluded however (cover your ears), we should enter first, a period of lengthy apathy and then ultimately, a new period of panic. The trend drudges lower, lower and lower still; seemingly endless; thereby rendering anyone still clutching their pathetically eroding portfolio ripe for panicking as soon as the first major nation goes bust and/or the first nuclear bomb is launched and/or the next world war has begun. It may not be so dramatic (I absolutely hope it will not be), but the point is that volatility returns again at the end of the cycle (after all the slow, bitter drudgery) and major world or national news can then create the catalyst for late-stage panic. For better or for worse, instead of asking when we will recover - investors will finally be asking if we will recover; the investment game-plans from the past will no longer make sense as everything will have changed (seemingly); the majority of sellers will 'never want to buy another stock again as long as they live' (and ironically, that will be the period for long-term buying in the US market - just don't ask Suze Orman when we get there because she will finally have just sold her stock certificates on eBay).

But that is down the road (smiles). The point to be taken regarding present time is that this is your last chance to reap reasonable gains, or get out at reasonably higher prices, or just grab a lemonade from the sidelines before worrying about the world's end.

Clearly, the scenario that plays out will play as it actually plays out and hopefully nothing terribly dramatic takes place to cause such a panic. But the bottom line is that when markets gets this dramatic, other drama tends to follow. Let's leave it at that.

These are my US stocks right now. I'm trading around (adding more on today's pullback for instance, after selling more-still at yesterday's close), but I am now holding an actual portfolio during this retracement period. I will still continue to hedge when I deem this necessary (not today), however I am no longer merely day-trading - I'm long an actual portfolio of stocks:

GXDX (thin)
EMS (thin)

I'm also holding my newer Asian (long-term) index plays (primarily Shanghai). When and if that region resumes a bull market I will look to trade individual stocks on that side of the Earth, but in the meantime I continue to dollar-cost average in the indices, adding slightly each time the world makes a fresh plunge.