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

Yes I Want to Invest for the Long Term

[For a list of this trader's long term investment ideas, scroll down several paragraphs. Otherwise feel free to sludge through why I will merely trade and not invest in US stocks for the foreseeable future.]

I won't deny that the extreme price action lately has created long term value. Much like Buffett, I think this is the first legitimate opportunity for long term investing in quite some time. But unlike the old man, I'm not especially keen on guessing where in the US market that longer term value exists, or if it exists yet at all. Rome wasn't rebuilt in a day, right?

The US is a mature economy which, following years of various bubbles, accomodative, easy money from the Fed, smoke-and-mirror shenanigans from every direction, has finally peaked. Housing prices, a key component to the economic morass, remain high relative to comparative income levels and incomes will decline for an indeterminate amount of time now as the net-number of jobs decline in the coming months.

I could drag this thesis on, flash my platinum-penciled econometric Mr. Magoo Model-T Model, paint myself as cynical and unpatriotic, but instead let's just admit that we don't know at this time how far US stocks will decline and whether we ultimately make higher highs or not. We could gamble either way, but we don't know.

Now obviously, US economic growth in the long term may turn out to be reasonable, but growth prospects remain suspect and unless we really see things lance pessimistic, the degree of growth going forward should not be spectacular (and growth is what drives markets higher). I need to see much lower-lows, coincident with far, far less enthusiasm about stocks before considering putting long-term money to work in the US. I need to see a consensus of disgust for stocks, a prolonged apathy, nuclear bombs flying, riots in the streets, asteroids colliding, mom's apple pie going uneaten...I need to know that the majority of the public never wants to own a stock again.

I'll trade this market long (or short), but buy the US for the long term? No way. We've ended the most spectacular bull market in the history of bull markets, dating back to 1982 when we finally broke through Dow 1000; after something like 16 years of trying.

I'm not predicting we're on our way to Dow 1000 again and I don't want this to happen, but it is not out of the question either. And given the fact that we have a mature economy, the upside-reward potential just doesn't justify socking money away in US stocks. Not yet, not at these levels...not for me at least.

Yes I Want to Invest for the Long Term:

But hey, for the first time in more than 10 years I am investing long-term money. In recent, dramatic down days in the markets I've begun scaling into Asia; mostly Shanghai, but also Taiwan, Singapore and Hong Kong.

Shanghai is down 70% from the highs in October 2007. While the economy there has certainly slowed, it is still growing. A year ago Chinese officials were attacking their market with tight money, high short-term interest rates, new restrictive policies regarding investing in stocks, etc. Recently however they have begun stimulating - lowering interest rates and adding liquidity. We certainly might go lower from here, but growth prospects for mainland China are considerable and like Buffett points out for the US, the market prices there will be sufficiently higher before that new growth is obvious. If we do go lower, I'll just keep buying. I don't intend to sell for many years.

This may be 1907 for the Chinese economy, which means a long-term investor stands to gain 1000% or more by buying and holding. It's possible that China will not become the World's largest economy in the next generation; it's possible that the US decline will pull all the World's economies beyond the event horizon and no economic-light will escape; it's possible that the world will come to an end as we know it...

Still, I'm a buyer at the end of the World.

Asian plays from the US:

Opening a brokerage account in China is a little complicated and I don't want to commit long term money (on this forum at least) to individual companies, but here is a list of index plays for Asia which I have been scaling long term money into (these are all traded on either the AMEX or NYSE in the US)...

PGJ - ETF corresponding to the Halter USX China Index of 32 companies (Yield = 3.3%)
FXI - ETF corresponding to the FTSE Xinhua China 25 Index (Yield = 4%)
CAF - Closed-end fund investing in Shanghai and Shenzhen-listed companies (Yield = .7%)
EWT - ETF corresponding to the MSCI Taiwan Index (Yield = none)
EWH - ETF corresponding to the MSCI Hong Kong Index (Yield = 4.4%)
EWS - ETF corresponding to the MSCI Singapore Index (Yield = 3.4%)

I am also trading short the ETF FXP, which is a double-short on the FTSE Xinhua China 25 index.

That's me - the long term investor. Good trading!

So You Want to Buy for the Long Term

I had a biology teacher in high school, Mr. Haines, who on day-1 suggested those of us who studied and worked hard every day would be able to achieve an A-grade in his class. But he also made an alternative proposal: anyone who would write (by hand, on paper) the numbers 1 to 1-million sequentially, would be guaranteed an A regardless of how they fared in any other facet of the class, even attendance.

There was a buzz about the class and two or three students immediately went to work on this. As others began to join in, more began to follow. Within five minutes more than half the class was writing down numbers on lined, college-ruled notebook paper. By the end of the hour-long class, more than half of those who had started were already giving up, leaving roughly a quarter of the students working on this easy money assignment. The start of class the next day there were only 2 pupils still at work; the end of that week only one; the start of week-2...exactly none.

Where is this going? I don't know, but I think about this event at least once a year. Usually, what a sadistic biology teacher I had in 10th grade, but more interesting to me is the way the numbers of participants started cascading higher. Once more than a few had joined in, other students followed along, which inspired others to follow as well, even though there was very little fundamental value in this project.

I really do believe we are in the midst of a reasonable rally just now, but I have to say that the number of times I heard market participants discuss the long term value of buying the market at these prices was initially concerning and now, increasingly alarming. Today it is worse than yesterday, which was more than the day before. This is not the wall-of-worry sentiment which keeps me buying in an up-market. This is concerning.

As I see it, over half the class at the moment is busy writing out the numbers 1 to 1-million. They know they will one day look back at market prices from October 2008 and they will not believe the incredible values. Mr. Buffett's op-ed piece in the NY Times on Friday was when that opinion began cascading.

How many times recently have you heard (or thought yourself) that when we look back at October of 2008 we will be amazed at the amazingly low prices?

I don't like to go on record in calling the future, but I do know what the end of a bear market is supposed to look like - the majority of participants are not salivating over long-term value - the majority of participants should rather never want to touch the stock market again.

Kisses!

Up Chuck

Panic works in two directions.

Volatility measures remain historically high (VIX, VXN), so timing and tight stops are everything at the moment, but what I can say as a trader worth my own salt and vinegar, we are set for a little splash of upside.

We could drive still lower first, take out Dow 9000 tomorrow, even shake them very, very hard. But whether it is a root canal reversal, or we flog around a few more hours, or we just open-up and never look back, there is an up-move on the (event?) horizon that will open brows and spark a flurry of hope and greed; even if short-lived.

In fact, an explosive bounce would very likely be short lived. A more slow and constructive move higher could stand several days to a couple of weeks. But either way, I think we're on the verge of a tradable reversal beginning Thursday and I'm on hiatus again from shorting this market (long-only mode).

That said, if I am dead wrong, when a low is established here (the lows from where the bounce begins; counts for both indices and individual stocks), I will most certainly bail out and surrender to the bear if fangs begin puncturing ass flanks (Translation: I'll have stops at levels slightly above recent lows, once this trade begins).

For many larger cap names, that bounce began today and with heavy volume from a variety of industry groups. Major volume poured into big-cap names and they acted hugely resistant to pressure late in the day today; at the same time the indices were involved with Nervous Breakdown #19. That is a sign of institutional accumulation and something not seen in a while.

So even if we're still in the midst of massive redemption from so much of the hedge fund community, today we saw a tipping point in the degree of accumulation vs. distribution.

Another point to consider, the S&P futures traded something like an 8% range today in the pre-market (massive volatility tends to mark peaks and troughs, even if short-term).

The public is obviously sufficiently fearful of buying stock - that much has been good all week. But we need the big-money macas to begin buying before we know there is an aggressive counter-trend developing.

Look at the volume on the day in these larger-volume stocks and note how they closed on an otherwise down day (a day the Dow close down 2%):

TGT, XOM, X, INTC, AAPL, RIMM, PCLN, AGU, RIG, SLB, PCU, FCX, RIO, CNQ, NOV, COP, PBR, CHK, SID, NUE, CLF, YUM

This list is mainly to illustrate a point. I'm trading some of them, but mostly it is an indication of a new bid in the market. Until we see more of a bottoming action and not just an indication of an initial low, I'm keyed mainly on index trades.

Have a drink on me.

Trend with the Wind

While I haven't been updating here lately, I've been trading very actively. Unfortunately I left this page last time with a long-side list only and the market coughed-up the greatest decline in 7 years, but the list was in fact useful on days (or half-days, as in Friday's case) when the tape action was firm.

On the short side, I've stayed focused on commodity-related names, larger-cap technology and Ultra short index ETF's (TWM, QID, SDS, SMN, etc.).

Where do we go from here? Well, I just try to keep it as simple as possible and I respect any given day's trend when it is clear and one-sided. I continue to keep trades very short-term, increasing my position size late in the sessions and then backing away at the close.

I've mentioned before, when the market cuts to a new low in an environment like this, there is no floor and no telling how ugly it might get; hope and greed give way to fear and panic and the size of the air pocket beneath is always debatable, but potentially very severe. It's not necessary to get caught up in intellectual analysis of why any of this is occurring. It's a natural process for a market. But it is wise to respect the potential for disaster when there is no support underneath. Then, at the same time, rallies can be quite powerful, even if short lived. You've got to be ready for that as well.

There are not enough groups acting well enough right now to post a list of eligible longs, but it should be noted that the Financials (banks especially) continue to act best and these have been very good traders on the counter-trend bounces. When the market firms I'll be keen on new long lists of leadership groups and stocks, but at this writing there is not enough strength to go by and I'd just as soon stay focused on shorting until something better develops on the long side.

If you cut out the confusion and clutter and merely pay attention to the tape, it's really not that difficult to trade right now. I'm keeping trades very short, I'm zeroing in on the action of the day and I'm much more aggressive in the final 60 minutes of trading than at any other time; since the really dramatic days have had a succinct tendency to intensify in the last hour, and in the same direction of that day's trend.

I know this is not a lot of help to longer-term investors. But seriously, we have not had an envirnment for long-term investing in a very long time. If you get an October crash here, then you can start focusing on long term investing and it would make some sense. Or perhaps Shanghai on this pullback represents a reasonable long-term play.

We could be close to an intermediate term rally here, but we might not. So while short-term maniacs like myself have a reputation of being over-aggressive and risky, it is the long term investor who remains the gambler now.