Tuesday, November 30, 2010

POMO Similar to Anthrax (market history repeats)

While many consider POMO (Permanent Open Market Operations) a net-negative for US markets in the long run, it is widely considered to be a near-term positive for equities. That may no longer be the case (POMO being a positive) and it's important to monitor now.

We're still seeing equities bounce, coincident to POMO valves being opened (during the actual operation). But equities are no longer routinely ending the day higher after the conclusion of a POMO session.

Before POMO is completed, you should be prepared for potential sell programs hitting as POMO actions ensue. The market reactions to anthrax events in 2001 provides an interesting precedent, inversely speaking.

On the heels of 9-11, the onset of anthrax news-breaks negatively affected the market (not surprisingly). Anthrax was never considered to be a positive, but before it was over anthrax was a driver rallying the markets.

It worked like this: After the resumption of trading following 9-11, the market was emotionally charged and news-driven. As anthrax stories began to spread, fear and contagion ensued. Anthrax was a predominant news story for several weeks. Both humans, and certainly markets, fear uncertainty. Anthrax created fearful uncertainty. If the market was open for trading when a new anthrax story hit (which was almost always the case), index futures sell programs were the instantaneous initial response.

The sell programs were severe in the beginning, but consistently the market made near-term lows within a minute of the initial panic. This became fairly obvious, to traders especially, that if you bought into the sell program you could trade-out an hour or two later at reasonably higher prices; as the market slowly worked its way back to the mean from which it had dived.

It's not surprising then, that the sell programs had less and less dramatic impact and after several of these events, there was only a muted response to stories suggesting new anthrax outbreaks.

By the end, there was at least one new anthrax break which led to an immediate buy-program for equities and the market's reaction was an immediate lurch higher. Anthrax had evolved from being a buy on the negative news, to an actual positive. Anthrax became a bullish timing signal to buy stocks.

Yesterday was our first double-POMO session and while the market did manage to recover from early lows, it could not finish the day positive. Today (thus far), equity markets are again broadly lower, coincident to POMO valves open. Yes, we're still bouncing as POMO operation are in process, but the impact is having less and less affect.

POMO is providing liquidity to the markets and the calendar for this inflow is widely distributed (whereas anthrax events were random, presumably). Liquidity is great for bulls, as it generally helps improve prices. But liquidity is an even greater benefit for sellers, larger holders especially, as it provides them the ability to reduce positions without negatively affecting prices. When liquidity rises and prices fall, what you're left with is called distribution. The greater the liquidity, coincident to falling prices, the greater the degree of distribution. Think of distribution as larger holders unloading to more numerous, but weaker hands.

The market reactions to anthrax indicated clear signs of accumulation (large holders buying into the negative news as smaller selling hands increased liquidity). The way POMO is progressing now, I will not be surprised to see net-selling ensue as POMO valves open. Should this become a reality, the market won't take forever to figure it out. And...

POMO would then become a near-term negative, in addition to whatever long-term impact it may or may not hold.

I love POMO, since it provides such an easy means with which to measure broad-market strength. If equities rise broadly while a chorus of criticisms attack the policy, I know I should position long. And at the same time, if equities sell broadly, in spite of POMO liquidity, then I know I want to be short.

Like anthrax, POMO makes the game easy to play, by defining the true strength underlying the market.

-Equity accounts currently 1.28-1 net-long, 79% invested

-Follow Centrifugal to fade trades in real time

Thursday, November 25, 2010

The Battle for Investment Survival - A Contemporary Course on Trading Markets, Lecture-III

All this suggests the question – are we learning to trade for the quick turn or to invest for the long pull? We are investing for appreciation, and the length of time one holds a position has nothing to do with it.
My third lecture in my series regarding The Battle for Investment Survival is out. Click here

Friday, November 19, 2010

Updated Position (CRM is the institutional darling now)

right-click and expand to view chart

CNBC says we're on course for our second week in a row of finishing in the red. But while the surface of the market today is essentially flat, leadership is driving higher now with intention. That is a recipe for buying strength; at least for today; at minimum.

Specifically, Enterprise/Cloud-space leader Salesforce.com (
CRM) is breaking-out powerfully from a 3-month base; on volume running ~5x's normal pace. This is a major breakout of a an institutional leader. Given the calendar, if the market cooperates you can expect strong flows to continue for the remainder of the year (IF IF IF). The tremendous volume is suggestive of much more than any 1-day wonder and has implications on the overall Tech space. I recommend not over-thinking this or trying to get clever. I recommend respecting your leader.

I won't to speak to the market here, since a re-trenching macro bear would snuff the trajectory of any decent launch and I know too many are expecting a strong year-end for me to get cozy about it. But study CRM in the coming weeks and learn what an institutional darling looks like ahead of, during and after the launch.

Fortunately for me, I remain an idiot.
I added to CRM last night at the previous highs. But I wasn't enough of an idiot trying to buy it further in the opening minutes today. I have enough to be patient and I'm currently keen on adding towards 15%, within a couple percent of the previous 123.83 high (or ~125).

Pyramid your winners - blow out your losers. Easy game ;)

Follow Centrifugal to fade trades in real time

Total Position: Currently 2.74-to-1 net-long, 95% invested

Currently Long (according to size):
CRM (10.7%); NOV (increased today, 9%); COH (7.3%); ULTA (7.4%); SBUX (6.7%); NFLX (6.7%); ROSE (6.2%); LVS (Reloaded today, 6.1%); RVBD (5.4%); QLIK (5.2%); OVTI (3.2%)

Currently Short: NDX-as-hedge via $QID (reduced today, 9.9%); DISH (6.3%); GMCR (4.9%)
(currently weighting QID at 1.6 x's and not 2 x's, into the net-long calculation; based on relative beta of longs vs. qid)

Futures: no current position

Thursday, November 18, 2010

Reposted BUGnotes (year-end 1999, ahead of the tech-crash)

It is a great mistake to think that what goes down must come back up.

Gerald Loeb, The Battle for Investment Survival, originally published 1935

The following are four re-posted BUGnotes, I originally published to MarketBUG.com at the end of 1999. I've been reviewing the material for a related work and I think they're worth looking at today (fresh!). BUGnotes ran from late 1999 to early 2001 and were edited by, and the more fantastic material co-written by, Jay Jurisich.

The end of 1999 is a fascinating period for studying markets. Following an amazing decade for Technology stocks and highlighted by Y2k hype and uncertainties, the week closely precedes the all-time Nasdaq high of 5048.62, ultimately achieved on March 10, 2000 (gives me goose bumps still to write that today).

Commerce One
, mentioned a couple of times, is a company which rallied 1,000% in 1999, would ultimately peak March 9th, 2000 at $331 1/2 a share, crash to $136 by the end of that month (-60% in 3-weeks!), and ultimately go-out a zero - de-listed from the Nasdaq in 2004.

BUG notes
December 28, 1999


This Nasdaq looks determined to blow through the 4000 psychological barrier today. A plethora of put options in the last two days suggests that investors are hedging themselves going into Y2K, another sign that Apocalypse 2000 will probably be a non-event, though I for one don't plan on getting within a hundred miles of an electric razor on New Year's Eve. What may surprise some people is that the market will have trouble rallying substantially once the Y2K fears do not come to fruition. The leading stocks such as Commerce One and Qualcomm continue to blowoff here. It is typical that the year's strongest stocks run big in December.The first week of a new year though, we have discussed, is a different story.

My team that has been readying the Y2K ChronoPod up and blewoff in the middle of the night, leaving me to go it alone out here in the Nevada desert, deep underground beneath the MarketBUG Airstream trailer. Seems they had some qualms about just what havoc BUG may wreak if unleashed on the far-flung future or, even worse, the posthumous past. So I will assure you all as I assured my team with the Christmas fortune cookies I bestowed on them for all their hard work: I hereby swear to try not to change the course of history, or the fabric of destiny.

BUG notes
December 29, 1999

Retro Specter

The NASDAQ hit a new high interday yesterday, but the average stock on the NYSE is 20% off it's highs. The market must grapple with all the similarities of 1972 next year. In the early seventies the Nifty Fifty powered to ridiculous multiples, while the majority of stocks drifted lower. Also, margin debt and speculation went out of control. Sound familiar? The bear market that ensued in 1973 was the worst since the great depression. Happy New Year!

BUG notes
December 30, 1999


Laid-up here on the last market days of the millennium with a wrench in my works, a soda cracker in my coffee, and grease on my elbows. This year was very good, but it will ruin the novice investor. I know what they are thinking: All I have to do is buy Technology shares to get rich! Sorry, but it is not always so simple. In fact, the top sector one decade has typically been the goat of the next. And never has a sector been as rewarding as Technology in the 1990's. Energy in the 70's and Healthcare in the 80's were not even close. So what will be the leading sector in the next decade? Sorry again. Your humble narrator does not have such answers - not yet.

The sweet pigeons fly like chowder from my filigreed brow, arcing through the dry desert night like the backwards meteors they are, looking for a Time to call home. Having been in all Times, or being about to visit them in my Y2K Pod, I can understand the clamoring for stasis. But then, I'm on a mission, now on the eve of another in a long string of millenniums. Souls and stocks, spirits and securities, mutual love and mutual funds. Pass the doochie Dutch, and let's hitch a ride on the Great Crutch to the Crux of Time, ye Mimes of Marmalade and Fire. It's a swell Y2K Party out there in those Roaring 20's, those Fin de Siecle tassels of pasties and a sordid pastry. Have a peek at all the latest Y2K snafus, from almost 200 countries, at the www.iy2kcc.org website.

Oh, and enjoy the future - it's a doozy!

BUG notes
December 31, 1999

New Fear's Happy

Whatever Y2K Disasters that may be unfolding somewhere out in the Southwest Pacific or Eastern Antarctica as you read this are echoed here on the walls of my Y2K Chronopod as I ready myself and our collective BUG Project for the Unforeseeable Past and Predetermined Future. Rome was built in a day, a little know fact they don't want you to believe. But I believe, dearest accomplice, and I invite you to join me. Together we will join hands across the vast desert of Time and link our market fevers to the Great Mother. I know you think I am insane, don't think I can't hear your stage whispers, and in that I couldn't agree with you more. But these are insane times. Who among us market professionals can remain of sound mind while Commerce One et al makes mince meat of all the cherished old beliefs we learned back in school? You remember school, don't you my fellow aching soul? The smell and sound of the mimeograph machine in the teacher's offices churning out lesson plans, 16mm films about the Human Reproductive System or Blood Asphalt in driver's training class. Or my personal favorite: film strips - remember those, oh greedy early adopters of all things High Tech?

Starting tomorrow you'll never write the numbers "19" before the present year again when you scratch out the date on one of the innumerable forms you are forever filling out. Are you quite ready to face the enormity of that fact? I of course have been dealing with this already for thousands of years, traveling through Time as I do, so I've had to learn to adapt, as I am sure you all will learn too. But it is a handicap you will never in the rest of your days fully overcome, while the kids born after today will never have to write that dreaded "19," not even for their birth dates, which is why they already have an advantage over us. So get ready, folks, for the Future. It's nothing you haven't seen before, only the smells have changed. And your greatest competition in the business world is not the Carly Fiorinas and Jeff Bezoses out there with their gun scopes trained on your bottom lines. No, your greatest competition is swimming around frantically in your pampered scrotums and ovaries, dear breeders, already jockeying for position in the world you are readying for them. Your best survival strategy for the epoch eclipse to come? Keep renewing your MarketBUG subscriptions - I'll keep you informed about the Future, just as it gets here, when you most need to know about it. Remember BUG, and just say "I'M FIT to be tied!" - Insane Minds For Insane Times!

I love you all, ye denizens of Millennium Two! See you around the Watercooler Three Thousand some time.

Sunday, November 14, 2010

The Battle for Investment Survival - A Contemporary Course on Trading Markets, Lecture-II

The most important single factor in shaping markets is public psychology.

My second lecture on The Battle for Investment Survival is out: Click here

Thursday, November 11, 2010

GMCR (re-visit short ahead of earnings)

right click and expand to view chart

[edit: GMCR earnings were not in fact reported after the market Thursday, but somehow delayed. I increased the position to 7%, from 5%, as the potential for a sizable gap against me was greatly reduced.]

GMCR reports tonight and I've taken a fresh (though smaller) short-entry ahead of the report. It's speculative, to be sure, but I've got enough of a set-up to take a flier (and a need, in the event the market manages to worsen now tomorrow).

Don't follow along, at least not because of me; certainly not when selling short. This will be educational fodder for tomorrow - throwing tomatoes at me then will be much more fun if you're not losing money.

First, I'll speculate that if the company had resolved issues regarding licensing and their accounting of revenues (which triggered an SEC investigation), it is doubtful to me they wouldn't have already alerted the market. Why save news like that for an earnings call when the market's hating on you every day prior? I'll consider it more likely they will brace the issues as best they can (spin) and update the market only as necessary (like with a conference call following earnings); or else when the news is beneficial.

Call me an idiot. Tomorrow I wear the hat; we'll see.

Further though, I like the risk/reward set-up and it is a hedge. If the market sours further tomorrow, the environment will be ill now, to say the least. To come out then with fundamental news is always dangerous, especially if a company's news is less than great. The potential pummel is greater in my opinion than potential upside; and necessary for me since my positions may be getting rocked elsewhere if a negative market is part of the driver). If the market is not still recovering from the gap-lower of this morning, I'll need a solid hit from hedges to pare things. If the market resumes onward and upward, then GMCR will have to really bake my nuts to cause portfolios real damage.

Finally, here is the set-up (not perfect) for shorting GMCR into the fundamental event...

I've spoken on the GMCR set-up previously, but today the name has poked above its 50-day moving average (MA) now for the third time. According to the optimal short-entry of a fallen leader (engineered by database studies, and a book from William O'Neil), the name should be allowed to poke above its 50-day MA for 3-to-4 times, after the major-volume breakdown through that average. Bullish sentiment does not ease in one day. Rather, a former-leader will usually probe upward several times before ultimately dying. Further, you should be in a negative market trend for this to be optimal. We are not, but I remain sufficiently more long than short overall, into this event; an important caveat.

Further still, there remains a very high short interest in GMCR (close to 20%). While this assist the upside in a stock moving higher, I find it a green light to short a name driving lower. Big shorts do their homework. To bank on a short-squeeze once a name is trending down is fighting everything and the wind. I'll side with the shorts here.

Finally, the name should manage to close today above 33.60, on volume > 5M shares, I will be stopped-out ahead of the report. Stops for tomorrow will be on the Spitter...

Follow Centrifugal to fade trades in real time

Wednesday, November 10, 2010

Updated Position (re-ramp aggressive long)

Got up to 7.75-1 net-long on Monday and as low as 2.14-1 net-long last night.

Ramping up again all morning, my neck 5x's out the window for now.

Follow Centrifugal to fade trades in real time

Total Position: Currently 5.2-to-1 net-long, 86% invested

Currently Long (according to size): NFLX (increased today, 8%); RVBD (increased today, 7.5%);
ULTA (7.4%); CRM (7.1%); COH (7%); DAL (6.8%); LTD (6.5%); VALE (5.9%); STRI (added today, 5%); IGTE (4.2%); GMO (3.6%); OVTI (3.1%)

Currently Short: DISH (7.8%); RSH (6%); Covered GMCR and SLV today

Futures: no current position

Sunday, November 07, 2010

The Battle for Investment Survival - A Contemporary Course on Trading Markets, Lecture I

I've lost a bet. As such I've begun a new guest-lecturer series at Pattern Profits as my pay-out.

This is a free course, but I intend to kick your ass if you're willing to take it seriously. Read more...

Thursday, November 04, 2010

Archived Repost: Depressing Rally - 15 October, 1998

The following is archived from The Contrarian - notes from the wall street underground; I published October 15, 1998. This day was the first and heavy thrust from the bottom coming off the 1998 bear market low. The Nasdaq traded as low as 1,492.40 the previous week, and worked towards its ultimate top of 5048.62, one and a half years later.

The 1998 low culminated with the blow-up of Long Term Capital
Management (LTCM). Emotion was running high during this period, and while leadership stocks were considerably strong, especially in terms of relative strength, sentiment in the investing community was resolutely negative.

The material is poorly archived, as it was published pre-Blogger and with a password-protected site. I'm typing-up these now because I am using the material on a related work.

The Contrarian is based on Dostoevsky's Notes from Underground.

Thursday October 15, 1998
Depressing Rally

It's uncanny, really. I can't remember a time the Dow rallied 300+ points and folks seemed so little pleased. Where are the happy campers? Where is the goofy celebration that normally caps such a momentous day? I'll tell you reader, I recognized pain - real inexorable pain out there by the end of the day. Skepticism for sure, but more significant was the pain this explosive rally seems to have created. These people are absolutely unhappy, in disbelief, or worse - they're bloody SHORT!

Okay, it's not the majority who are short here, but I'll tell you there is angst out there. This is the most disappointing huge day on Wall Street I've ever seen. Today was the 3rd biggest point rally ever in the Dow and yet there's a kind of despair out there. I'll tell you what it is. It's the sorry fact that investors, long-term investors no less, sold out of their portfolios in a panic last week and missed today's explosive, foolish rally.

It's terrible, really. To have held onto their portfolios through all that pain, right through to the end last week when it was finally clear there is some kind of problem in the world and stocks had to be sold. Only to have the market take-off again now without them, before they've had time to
adjust their perceptions more positive. It's altogether unkind.

I know you think I'm being arrogant, but that's not really the case. So what if cautious folks sold out their stocks, I am the bigger fool. Yes, I may be the world's greatest fool. Perhaps you're down on your portfolio this year, and of course it would have been nice to be a buyer of quality last week instead of finally selling those loser stocks you held for so long. But look - you have a normal, respectable life compared to me. You'll bounce back. But me, reader, I am an insect. A foolish little bug. I live in a hole and I rarely (never really) go outside - I can't risk the good cheer. My biggest draw-downs, you see, my greatest portfolio disasters, have all followed periods of
enjoyment and self satisfaction. I had to put a stop to that. For the sake of future gains, I had to make myself more miserable than even you!

Anyhow, we must address this incredible marketplace. This Sebastian of growth. This depressingly large rally and its significance. Yes, my dears, it is not insignificant that the Fed did cut rates today. And that so many now are skeptical following a session whereby up-volume topped down-volume by a nine to one ratio. Indeed, this is confirmation now that one, this market bottomed last week (Root Canal Bottom), and two, it is going much higher. The other day I mentioned I must be the biggest bull on Wall Street. After today's rally, and with all the cautious forward forecasts, and continual questions of liquidity crisis' and looming recessions, etc., I suspected I was the only bull on Wall Street. Not true, of course, but I would not put a top on this market yet, my friend. As fun as that will be, I must expect now that we will make new highs in the intermediate term, and that includes the Russell 2000! Yes, I am crazy, I have told you that. But you will hate me when the Russell makes new highs.

Tomorrow, or by Monday I should warn you, I'm going to be a net seller of stock. When I get this excited I must always lighten up - I've learned that. But I refuse to sell low tomorrow, and if the market is only down tomorrow I will go back into margin, buying more stock instead. In fact I hope they sell-off early tomorrow, at least. My suspicion is we will, if only to allow the frustrated chorus another song: "...the buying was overdone; the rally was largely short covering and option-related activity; one had to expect stocks to cool-off." Yes, I can almost guarantee that at some point tomorrow, or at least by Monday, stocks are going to rally much higher still. Then at the point sentiment shifts from prudence, skepticism and disbelief, to where people are actually seeing bullish, I will lighten things up - for the near term at least.

These include: KNDL, PPDI, GENZ, SEPR, ENMD, INTC, ORCL, MU, YHOO, AOL, CSCO, LIPO, NEM and PDG. I'm not selling any Japan though. It will be a while before anyone likes that trade enough for me to hand it over to them.


Tuesday, November 02, 2010

Updated Position (and my strategy ahead of the Fed)

Many think markets move higher when a majority are buying - and trade lower when most people are selling.

Not only is this not accurate, it's the kind of characterization which costs the herd time and time again. (For reference, I wrote about this last September, when former-leader STEC first blew-up on major volume. People were buying that name en masse, early into the decline, and yet action in the stock was straight-down in the face of such participation. As it turns out, STEC would trade pretty much lower-only for brutal 3 months).

For whatever reason, consensus and logic remain over-rated in the markets.

By last week then, it was clear to me that if the market is going to frustrate the most people (as it so often does), then one or more of the following would play true; heading into the post-election and FOMC QE2 announcement; both arriving now tomorrow:

1. The market refuses to sell-on-the-news.
2. The rally would be substantial prior to the news, before commencing such a convenient pullback.
3. The pullback, if so convenient, should not be bought (if the market allows this majority group the opportunity to finally get aggressively exposed to the market, as people are suggesting how they will respond to a pullback, I should give them my shares as well; let them make the money).

I don't have time to make a thesis about this now, but it works like this time and time again; when the future is predicted so consistently by so many who appear to be reading from the same script. Selling off now, on-the-news, in order for folks to buy ahead of a year-end rally, just seems too logical, too easy and too damn convenient.

These points may not surprise you, but it is the third possibility that you might want to make a special note of - that if the market let's these careful, logical players get aggressive with their favorite stocks - you may dodge considerable pain then in letting them have those year-end profits without you. Seasonality has played tricks on us many times since the March '09 bottom. There is no guarantee whatsoever that stocks are going to rise into the year end.

Not unless they are rising into the year end :)

Note on the position below: I'm up to 5.8-to-1 net-long exposure today (in centrifugal, pyramiding fashion;). I will be reducing exposure into the close, however, reducing the number of names long (now 13). This, because I need to be a little more flexible for the Fed-announcement tomorrow (too many kids in the intersection is a bad idea once rush-hour hits), but also because leadership has been a little sloppy lately, relative to the indices. If the market continues strong through Friday's employment report and for several hours into the Friday session, I will re-assert exposure aggressively. In the meantime, after the shift later today, I will keep firmly net-long, though smaller; at least until I see the market can begin selling-off.

Follow Centrifugal to fade trades in real time

Total Position: Currently 2.8-to-1 net-long, 108% invested (will reduce to ~100% or less by close)

Currently Long (according to size):
EWZ-Brazil (7.2%); VALE (7.1%); DAL (7.1%); CRM (7%); ULTA (6.9%); COH (6.7%); OVTI (6.7%); PPO (6.4%); LTD (6.1%); LULU (5%); MCP (reloaded today, 5%); DECK (4.9%); JBLU (4.3%)

Currently Short: CVS (6.9%); ZMH (6.8%)

Futures: Long 10% Dec SP500 (from 1175.50 entry yesterday); relevant accounts only