Existential Volatility

Here lies a short post regarding the decline in market volatility. May it soon rest in peace.

This last week, due to the further trend of reduced volatility, combined with the season (my SEC Celebrity Hawksters calendar indicates we're into mid-December now), I changed gears and traded ahead of market moves instead of following along right behind them.

I had a little help. Besides this period of the calendar being a little easier to trade in general, by late in the session Wednesday I found most everyone I follow (good traders as well as my fade-parade) leaning on the negative side.

There was a scent of rat, I'll grant us that. The most pronounced warning signs included a distributive deterioration of leadership growth Monday and Tuesday, coincident to modest gains in the Dow and S&P500. You never want to see the leaders falling while the Dow is shining, if you're long. And recent extremes in measures of bullish sentiment have become perhaps an even greater concern.

But Rome wasn't wrecked in a single work week and even if we are setting the stage for trouble ahead, topping is more of a process and less like an event. The market was stable late in the session Wednesday, unlike Monday and Tuesday and I pressed onto the accelerator; ahead of any turn higher.

Now, when volatility is high and especially when measured moves tend towards severe, front-running these directional moves can be deadly; while keeping just slightly behind the market can be a license to print money.

We all like to demonstrate our brilliance and insight, but the act of anticipating direction in a volatile market creates occasional tremendous losses when you happen to get things wrong (known to happen). Such setbacks even-out and sometimes obliterate ones more brilliant, cowboy profits.

I'm much more profitable in the long run saving my spurs for special situations only. There are some very good traders who can do manage to get away with this (Jim Rogers comes to mind), but you need to be extremely rich and importantly - extremely right. Anyone else making a routine of getting ahead of the trade is extremely dead; sooner or later.

When volatility shrinks, however, as long as I'm reading the market well I'm more or less obliged to position ahead of moves. If not, I end up mediocre compared to my benchmarks, like so many other pros (client money is well aware most money managers under-perform index-funds and index-ETFs, and it has a way of disappearing when a simpler, cheaper strategy is generating more profit than you are. Fortunately for me, I'm an independent thinker and not afraid to go against the herd when I see the opportunity, but I am also willing to go with the herd as long as the music is playing. Unfortunately, however, I was not born a computer. So while I may have demonstrated a nice history of out-performing my peer group, my peer-group has turned into a machine; a machine that is still improving relative to my former peers and indeed, myself as well).

We saw lower volatility before the world began blowing-up in 2008. Volatility from 2005 to early 2007 was low enough that I was beginning to fear my days were numbered. The machines are better in this environment, better than I at squeezing the most out of a lackluster market. Fortunately for me, when the shit hit the fan and volatility exploded in 2008, a large number of machines were blowing-up right along with it, spectacularly in some cases. For a time I was able to capitalize on programs and typical human pros alike, neither of whom were equipped for what was taking place. Perpetual white swan models and long-term value beliefs were getting a major dose of - irreality.

Anyway though, it's clear the machine is only going to get only smarter, while I am myself (and maybe you) will only evolve weaker, certainly on a relative basis. It won't happen overnight (three cheers!), but I suspect it will announce itself more in a period of lower volatility.

In that case - long live higher volatility!

Note: I'm (still) working on a couple of larger posts, which might be good if they are ever finished.

Follow Centrifugal to fade trades in real time

Total Position: Currently 1.31-to-1 net-short, 107% invested

Currently Long (according to size): PPO (9.6%); WLT (9.5%); CRM (9.1%); BA (6.1%); COH (6.1%); OVTI (re-increased Friday, 6%); SYT (6%); ARBA (re-loaded Friday, 6%); NOV (6%); RVBD (5.2%); BEXP (4.9%); BSFT (added Friday, 4.9%); VRA (thin, added Friday, 3.3%)

Currently Short: AAPL (added AH Friday, 10%); GMCR (7.1%); DSX (6.7%); VMC (added Friday, 6%); DISH (5.9%); ERTS (re-loaded Friday, 5%)
Note on AAPL short - this is a temporary hedge stemming from the distributive close on Friday. I will be covering early Monday if there is no sufficient market selling pressure. I expect to trade AAPL short again on December 31st, for different reasons. I'll discuss in better detail before then.

Futures: no current position. Traded-out March 10-yr long Friday at 119'31 (from 118'30 Thurs); Traded-out March Silver long Friday, 29.175 ave. (from 28.845 ave. thurs.).

One Line of Thought (in 15 pieces)

Well, I'm really in the cone of silence lately.

It's not that I'm not talking. I'm spitting out material up and down lately (still unpublished). I'm posting every trade as well still + some thoughts; for now.

However, I'm not tuned into what anyone is saying about anything here, in terms of the markets; 3 calendar-days and running now.

Are you bullish? Bearish? What are you doing lately? ...I don't really know. I mean, I know in the universal sense - you are WILDLY bullish!! My god you're bullish. Where'd you get those cool moves? No wonder you're bullish.

But in the micro-sense - I don't know in terms of the folks I keep attuned to.

Yes yes, I tuned into CNBC today (during the normal-session anyway). This was not the day to go completely Zen. Seriously, put-to-call numbers are so outrageous right now I had to listen for certain people and certain octave levels; of excitement.

My favorite source there, whose name I cannot apparently mention anymore (I just read my last post, finally. What a smug bastard I'm becoming). Well, this particular gentleman did not show any particularly important levels of excitement. Pretty boring from him lately; and actually, rather boring all around over at that New CNBC these days; in terms of octaves; certain people's octaves; unnamed.

Otherwise I swear on my line I would have unloaded much much more (exposure long). Watch when it happens. I joke about it now, cuz it's fun and I'm into it. But I won't dance around and hope this time it's different. When he goes off I'm moving fast. I'm going to Disneyworld.

Good game market; when he goes off.

That wouldn't make me particularly bearish further out. Not necessarily. I can't say, the bull may roll further or things may just get worse. Telling anyone about that point now would be fool hearty. And I prefer hearty fool...to fool hearty.

As it is, I'm a little short now. I shifted to neutral all through Friday (from ~6-1 long) and I shifted net-short today; currently 1.31-1 net-short. It's a lot short, compared to anything I've been since August, I think, but not too short really.

I'm short enough that I can buy on weakness, instead of having to scramble-sell as this wave transpires, if it transpires at all. And in the event that nothing curls much, I'll let go hedges, accordingly, and paddle-out again; see what's left of the set.

One thing I will admit to though - I'm truly wondering when the year will actually end (if it wasn't today). I say this because I suspect, which is not to say I predict (or know, or think, etc)...

I suspect we're not going out Dec-31 at 2010 market highs.

Send me a line. Curious here what you might think about it.

Total Position: Currently 1.31-to-1 net-short, 107% invested

Currently Long (according to size): NOV (8.3%); PPO (7.3%); CRM (6.7%); NFLX (reduced today, 6.1%); WLT (reduced today, 6%); MCP (sold today); COH (6%); ULTA (6%); OVTI (4.6%)

Currently Short: DXD (long the DJIA dbl-short, 9.9%); SDS (long SP500 dbl-short, 9.9%); CMCSA (8.1%); TNP (7.1%); GMCR (7.1%); DSX (6.9%); GE (6.9%)
(currently weighting DXD and SDS at 1.55 x's, not 2 x's, into the net-long calculation; based on relative beta of longs vs. dbl-short these indices)

Futures: no current position. Traded short 15% March NDX futs Monday for most of today's drop.

Follow Centrifugal to fade trades in real time

Updated Position (and becoming a kinder gentler scumbag)

I’ve been rather active lately and back to aggressive-long again today, after an absolute spray of neutralizing trades yesterday; beginning with that opening tick.

So why am I hanging my head out so long again, so soon? Well, I could bore you with the less colorful technical and fundamental stuff (like the fact that the market refuses to go down!), but it's more fun to paint the psychological drivers instead.

I personally want to thanks the instantaneous plethoric rise of windbag warnings stemming from the financial media after but one near-reversal session. That was a killer drop, I hope everyone survived it.

Let me stop right there actually. I’m announcing (spontaneously as I write this, in fact) to keep mum on the culprits. Never again will I name individuals flashing traits of the inverse-genius. I’m turning a new leaf - no ill talk - that's a new and permanent promise born only just now.

To be fair, I’ve always contained these calling-outs to famous heads only. No matter, my low-road tactics of measuring my position against the backs of misguided brilliance will not call-out individuals, famous or not; profitable or otherwise.

Speaking of ticks (pricks!), I’ve studied my moods and come to discover a really nasty trait. The better my quarter, year, etc., the meaner I seem to get. Right now for instance, I want to chew on bunnies. That’s how I good I feel about countering against these more reasonable twits.

Good luck with your buying at lower levels and good luck continuing to feel like it wants to go lower. I’m sure it will go lower – just to help you out; eventually certainly; maybe now. When it does go lower, tell you what. Those bargain shares you're after - take mine. I'm going to Disney World instead. You can have all the money in that case. It just feels to me like you have an anvil on your head and I want you out of my boat.

You know you want to buy the Yahoo under $200 (the sucker printed 250!). Never mind that it was too expensive under $100 for you to ever buy it. But now that you saw a $250 price, looking at it trading under 200, 150, 100, 50, etc., those seem like reasonable buys, don't they?

Anyway, that’s enough market analysis tonight. Hopefully I’ve not committed to anything, in any direction. I love a live market, but I don't feel like telling the tiger where he’s going (publicly or otherwise). I'm holding the tiger by the tail - that's the best reason I have not to dictate the future.

Oh, I'm still working on Lecture IV of Battle. It may be done soon, or by the weekend at latest. Hopefully you've enjoyed the vacation, but as best as I can, I’m looking to drag all of you through the mud with the next two sections. It may even begin to be clear why I’m making a point of no naming names. I consider everyone more intelligent than I let on (true) and in fact more highly than my peers likely believe. That doesn’t eliminate blunders and errors though, those are only too human. We're all doing our best, so credit for that is deserved. Thus, when you see me referring to inverse-genius (in these upcoming sections), please don’t ask me for names of any accounts. I am mum to names.

The persimmon tree ripens once a year I think, but fruit hangs from the human mill on a regular basis. Go find your own!

Beast out.

Total Position: Currently 6.28-to-1 net-long, 103% invested
(into slight margin overnight; looking to resume under 100%

Currently Long (according to size): WLT (reduced yesterday, increased today, 8.1%); NOV (reduced yesterday, increased today, 8%); PPO (increased today, 7.5%); CRM (reduced yesterday, 7%); NFLX (re-loaded last night and increased today, 7%); MCP (6.6%); ARMH (6.5%); WBC (6.3%); ULTA (6%); COH (6%); GMO (5.2%); FTNT (5.1%); ROSE (5%); OVTI (4.4%)

Currently Short: DSX (6.9%); TNP (7.3%)
[all out and flat SLW and X shorts, traded yesterday to today]

Futures: no current position

Follow Centrifugal to fade trades in real time

Reposted BUGnotes: Fumarole March - December 6, 1999

The money that has been lost "feeling" for the bottom or top never has been generally appreciated. The totals, if they could be known, must be staggering.

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

The following re-posted BUGnotes was originally published to MarketBUG.com at the end of 1999. 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 and included one of the most amazing technical divergences you're ever likely to see. Beginning as early as 1998, the average NYSE and even Nasdaq stock began to trend lower in price, and continued to lower in price, throughout one of the greatest advances in US market history. Nasdaq moved from 1,492.40 in September, 1998 to an ultimate peak of 5048.62, one and a half years later, but the average stock was declining virtually throughout.

NASDAQ A/D Line, April-1998 to March-2000; Credit: Optionetics

BUG notes December 6, 1999
	Fumarole March
	The NASDAQ continues on its relentless upward path, but cracks continue to grow larger under the surface. The pied, sandpaper Pan piper still plays sweet music. Investors everywhere know that. But his breadth is getting more fowl as everyone gets into line. With Friday's wiz-bang rally you'd have expected breadth to be on the sweeter side, but in the end it was not much better than a freshly Lysoiled Greyhound bus interior. The cumulative breadth of this rally could now be characterized as pathetic, medically speaking. Eventually the market is going to get clocked again, the question remains from what level? Nobody knows for sure, not even Mr. Piper, I suspect. So stay with the market leaders as long as they're singing. Never underestimate the power of a December NASDAQ rally. This time of year warrants holding onto the winners, at least through December 31st. Just be ready to get out if stocks violate your mental benchmarks or the momentum ends. Don't get patriotic if stocks start failing first. Drop them like hot lava, in that case.

Updated Position (cute bubbly longs)

I'm working on related postings, including Lecture-IV now for Battle, so I'm merely going to spit-out the updated position here. There has been more than enough activity lately to lose track.

Market action has kept cute and cuddly since the gap-higher Wednesday. I've continued to scale further long since the post that morning.

Fortunately for me, I remain an idiot.

Total Position: Currently 4.59-to-1 net-long, 110% invested
(into slight margin overnight; looking to resume under 100%

Currently Long (according to size): WLT (reloaded today, 9.2%); CRM (8.3%); NOV (7.5%); ARMH (increased today, 6.5%); ULTA (6.2%); WBC (6.2%); OVTI (6.1%); COH (6%); RVBD (re-increased today, 6%); ROSE (5.4%); PPO (reloaded today, 5.3%); FTNT (5.2%); IL (reduced today, 4.8%); SBUX (4%); TSLA (3.4%)

Currently Short: TNP (7.2%); RSH (reloaded today, 7%); DSX (reduced today, 5.5%)

Futures: no current position

Follow Centrifugal to fade trades in real time

Updated Position (ditto december lights)

While I did engage in some sloppy trading this week, I'm back on track now today. Similar to the market itself.

I've been reluctant to believe we'll see a typically ditto December (seasonality has been largely upside-down this year and a chorusing clamor in recent weeks has had my guard on high). But December is here and it's snowing out of the gate thus far; if you know what I mean.

I don't need to think, really. As long as the market moves continue to exhibit traction, I prefer to keep a half-step behind instead. As the market began to slide (and especially as the majority of leadership began acting poorly last week) I shifted gradually towards market neutral and eventually net-short by yesterday's close. Today's bang-up comes on strong, rising-volume though and positive internals are severe (implying the major indices will close at or near highs of the session).

I'm holding several shorts at the moment still. If we're rallying again tomorrow I'll be reducing that side of my line further (I let go TWM-hedges in the opening minutes today). In the meantime I haven't gotten too excessive (currently 2.54-1 net-long).

The first day of December is seasonally strong, but standard year-end seasonal strength does not find it's better gear typically until around the 20th of the month. Again, I don't want to write any scripts, but to respond to the market's actual and present nature. If a downtrend resumes, I won't put my head on any Xmas turkey chopping blocks; not for very long anyway.

As of this writing - the corrective action may be over.

Follow Centrifugal to fade trades in real time

Total Position: Currently 2.54-to-1 net-long, 95% invested

Currently Long (according to size): CRM (8.4%); NOV (7.3%); SBUX (7%); LVS (Reloaded today, 6.4%); ULTA (7.4%); COH (6%); OVTI (increasing to 6%); WBC (added today, 6%); ROSE (5.3%); FTNT (added today, 5.1%); RVBD (3.9%)

Currently Short: TNP (7.1%); DSX (7.1%); ERTS (6.3%); DISH (6.2%)

Futures: no current position

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

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

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

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
	Blowoffs
	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 Tech-Aide 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.

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

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

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

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...

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.

Bah!

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

Archived Repost: I Am But Him - The Contrarian (28 Sep, 1998)

The following is the original first-post of The Contrarian - notes from the wall street underground; I published September 28, 1998. The date precedes an important bottom for the equity markets (especially for the Nasdaq, which would mark the low of 1,492.40, on it's way to the ultimate top of 5048.62, one and a half years later).

This 1998 bear market came on the heels of the Russian financial crises and 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. One note: you might notice I was not against making market calls publicly during this period. I no longer commit myself to a future-direction for the markets. One might be very good at predicting what lies ahead, but ultimately it's a fools game. I was a good trader, but perhaps more lucky-good, as this was the greatest set-up of my time (this 1998 Nasdaq low precedes a 255% move higher in just 18 months, which is followed by a 78% decline over a two and a half year period). One might have a sense that something big or important is coming, but what is the point of predicting specifics when you're holding a tiger by the tail? You're going to experience some scratches - better to shut-up and keep the tiger in front of you.

Finally, The Contrarian was based on Dostoevsky's Notes from Underground. This is entirely intentional. Enjoy (ha!)

Write this down - Gold, gold stocks especially, the Yen, Japanese stocks even, and oh yes, small-cap US growth stocks are all moving significantly higher in the next few months; perhaps even more.

This is madness? Yes, I am mad. I am sick as well. Sick and mad. I think I need another root canal, but I refuse to see a dentist. I've had no less than six of these rootings and they always seem to come in pairs; rotten dentists. And not two at a time, mind you, never. It is only during or soon after your root canal that it becomes apparent a second will be needed - oh yes, required. Yes, my roots are not good at all, certainly not. But you can be sure I refuse to see a dentist.

I have digressed. You want profit, I know, and I am but ranting about the dental community. But this, dear reader, is my first entry. My prelude. My graceless entrance. And who am I? Why, a sick fowl man in need of root canals and a proper bath. Yes, yes - but I am more like you than one might think. I'm not as much fun as you, perhaps, but you see I know something important. I know something about even you. Try as you like to ignore it, but we are in this together, my reader. This little delightful place. And while I can't show myself face to face (among all those perfect teeth!), I know enough to understand this. We are of this world together. This paradise is a reflection on us both. We are not much fun at all.

I am net-short this market and planning to get a lot more so as soon as this counter-rally quits, don't get me wrong. And I would be perfectly happy to announce to you we are now at the beginning of the end; that we are doomed; that as long-term investors we are about to test our will in the face of the most severe torture. That we are staring at the face of a 70%+ bear. Unfortunately I cannot. You see I am actually getting bullish.

Small-cap stocks. What a call that is? Who among us isn't savvy enough to know the ills and perils of investing in that class of stocks these days? Well, you can laugh at me now because I am such a fool. I am accumulating small, illiquid Biotech stocks for Christmas. The market's still ugly, I'm not denying it. But I'm buying Biotechs I've never heard of on the next wave down. Yesterday you see, and rather quietly, just about every Biotech traded to new highs on enormous volume. Sure, the market has been up for a couple of weeks now, but aside from the Internet group it's tough to find new highs in any stocks. Bet me these will not make higher-lows the next time down. Sell me your shares even. You don't have small-cap shares though, do you? How do I know that? How can I be certain, in fact? Yes, I'm certain. I can also surmise those Financial stocks have got to be pretty tempting to you here, right? They have fallen so far, so fast. The selling is clearly "overdone." It makes no sense these stocks could down this much. Well, it's even more incredible than that, my friend. This is the case, even though every expert on Wall Street knows the Bank and Brokerage stocks to be "oversold," "overdone," and definitely a good buy for long-term investors.

These are no dummy experts, either. These are the same regulars from CNBC and anywhere else that will give them TV-time who explain tried and true concepts such as "never stand in front of a freight train," "never catch a falling knife," or "leave it for stuntmen to play on falling pianos," etc. In spite of this, and even when their stocks have acted this badly, apparently they've yet to sell a single share. And if they aren't holding on for their dear long-term lives already, then they are stepping up to stand in front the freight train and buying even more Financials! God bless them and the horse they rode in on. Yeah, I'm short the market; just looking to buy the small-cap losers coming down from new highs. You'll hate me for it. You'll know me a fool. I am a fool too. Don't think for a minute I am bragging. I'm more miserable and foolish than any of you. But I'm nothing next to the bank stocks. There is misery for you. You can have the money to be made in the bank stocks.

Names, names, names. Give me names you insist. You must be insisting by now. You're still here, surprisingly enough, so I'll satisfy you. Watch this group: Genzyme, Medimmune, Centocor, Biogen, Entremed, Immucor, Immune Response, Liposome(or other), Serologicals, Pharmaceutical Product Development, Covance and Kendle. There's more on the list but I can't stand mentioning any more. I don't know which I'm going to buy. I'll be in with orders under the market for the ugly days to come. Days when Lehman and Bankers Trust are gasping for long-term air. And regardless of which are my favorite, I feel compelled to buy at least a bit of the last three names (PPDI, CVD and KNDL) - three dental Biotechs. I was lying to you when I said I hated dentists. I love dentists. And especially this new-found dental technology - whatever it is. I'm not going to see a dentist, that was the truth. I'm just going to buy these Biotechs. Covance, I read, is involved with integrating a more Chinese-style treatment into western mouths. I'm buying that one for sure. I'm looking to buy all three. I hadn't heard of any of them before yesterday, but I'm going to buy them and not just out of spite. These stocks could double from the lows they post in the next two weeks, before the end of January. I'm not going to convince you to buy them now, I know. By January though it will be OKAY to invest in them. In the meantime do watch.