Bull Market in Volatility

There was nothing positive about today's action, as the market internals started soft, never really improved and then ended ugly. Subsequently there was no use for last night's menu of long-side buckshot.

The volatility index (VIX) remains high and we should expect ranges of 200+ Dow-points for the days ahead. Should we revert back to a positive tape (which remains to be seen), then I will be only too happy to attack long from the new long-list.

I missed a decent short-opp today (hanging out for signs of improvement since the volume was too weak for me to quickly paint the action as totally bearish). In the end, the tape was easy to short but I wasted my day sitting on ass hairs.

The Democrats surprised me a little too - After everyone was so colorfully painted into the corner by the emergency meeting Thursday night, I surmised a likelihood Washington would all get in line and just allow the Feds shove this plan down the collective gullet. If virtually none of them were willing to speak out against going to war with Iraq, for fear of political suicide, then this little crisis had a precedent for mouths being shut (so I thought). They're playing politics now instead (although no one is really questioning the deal itself, which might be the best idea, they want to use the occasion to tack-on additional agendas). It's more like normal politics after all...so far.

Whatever, I'm still in the game and the powder here is dry. If the tape is ugly again tomorrow, I might short some indexes, depending. But if we can firm again and the tape is sufficiently positive, I'll shop from last night's hit-list of longs (zeroing-in on areas showing the best group-strength on the day).

Otherwise I'll keep on my ass and act like I don't know what's going on - since I won't!

New Live Long List for Killing the Upside

Will it work?

Is the crisis over?

Was the whole financial system really about to crumble before our very eyes if those Feds didn't goose the market and run the shorts out of town?

Forget all that. The public and the media are as confused and tentative about current market conditions as ever - in fact, no one understands the rules to the game anymore, so even if they knew what to do they fear they cannot trust it.

That's the good news too, because meanwhile new leadership stocks are emerging. Volatility remains high (VIX) so opportunity is alive and well. Assuming the internals are reasonable-to-strong, this is the greatest wall of worry set-up in 7 years.

If it weren't for that last part I'd be just another blog, railing right now at how God damned ridiculous all of this intervention is - not the least of which is that the masterminds in control of the new rules did not include GE in their list of only 799 financial stocks now forbidden to short. Think about that for a moment? I guess if they'd have rounded up to an even 800, GE would have made the cut? That company makes lightbulbs or something, right?


Anyway, here is the Maximum-Woot Live Long List for killing the upside in the near term. I'm here to make money, not to complain about who's running the asylum. Over the next several sessions I am looking for a good tape first (further strong/positive mkt internals) and then zero-in on which groups are acting best on that day. If Financials and Homebuilders are leading on a given day and the market action is resolutely positive, I'll choose Financials and Homebuilders from the list below. Some of these might seem counter intuitive to some of you. Good!
**see below for a note regarding short interest percentages.

Banks Savings/Loan:
PNC
HCBK
WFC
BAC
BBT (16% short int)
SIVB (13% short int)
DCOM
FNFG
TRST (13% short int)
CFFN
UBNK

Finance Investment Bankers:
SWS
JEF (13% short int)
NITE (12% short int)
TWPG
KBW (15% short int)
SCHW
RJF (17% short int)
ETFC (24% short int)
AMTD

Financial Services Misc:
RMG
CYBS
NDAQ
ECPG

Homebuilders:
MHO (25% short int)
MTH (25% short int)
PHM (12% short int)
TOL (15% short int)
NVR (20% short int)

Oil/Gas Exploration:
REXX
ARD
APA
CXO
DVN
WLL

Oil/Gas Machinery/Equipment/Services:
GTLS
TDW (14% short int)
SII
RES
NR
SWSI

Machinery-Gen Industrial:
DXPE
FSYS
PNR (10% short int)
GRC

Retail Clothing/Shoe:
BKE (15% short int)
URBN (20% short int)
PSUN (23% short int)
ROST
HOTT
GES
NWY
DBRN (13% short int)

Apparel - Clothing/Shoe Manufacturing:
WRC (15% short int)
TRLG (daytrade consideration only due to 51% short int)
COH
NKE
DECK (26% short int)
SHOO
KSWS (13% short int)

Retail-Restaurants:
PZZA (9.5% short int)
BWLD (daytrade consideration only due to 39% short int)
PNRA (daytrade consideration only due to 32% short int)
CPKI (20% short int)
MCD
EAT
SBUX
CEC (24% short int)

Retail Misc Consumer:
POOL
SBH
CRMT (23% short int)
ZLC (daytrade consideration only due to 49% short int)

Medical Systems:
VAR
BABY

Medical - Biotech/Genetic; Medical/Dental Services:
CELG
PRXL (12% short int)
SQNM
GENZ
VPHM (13% short int)

Medical-Software:
QSII
ATHN (12.5% short int)

Energy Other:
ENER (21% short int)
SOL
CSIQ (13% short int)
SOLR

Transports-Rail:
GWR
NSC

Airlines:
AMR (13% short int)

Internet Software:
WBSN
ARBA (12% short int)
OMTR (uncomfortably high short int - 21%)

Electronic - Component/Connector:
IIVI

Electronic - Military Systems:
AXYS
FLIR

Utility - Power:
HE
EOC

Misc:
GEF
AZZ (15% short int)
SEAC (11% short int)

**Short interest percentages: I've noted the companies above where short-interest is higher than 10% of the float. Depending on a variety of factors, a high percentage of shorts can be either bullish or bearish from a trading perspective, but it is a giant red-flag from the point of view of investing. I avoid intermediate and long-term investing (long-side) in companies with a high-percentage of shorts (>15%). Longer term, the shorts are usually right when their numbers are aggressive. Smart money isn't shy about homework and when a short percentage is exceptional, you can be sure much of that is smart money. At the same time there is a giant short-squeeze at this moment, so quick trades on some of these might be a good idea.

Party Like It's 1999

A funny thing happened on the way to the woodshed today. The market caught a bid.

Too much too fast? Sure, maybe. But it is not like there aren't a lot of shorts out there at the moment needing to cover. And from the onset of the late day rally there just wasn't enough time and not enough sellers for the shorts to cover (an explosive mixture). Pressure had been building for this (if not a severe breakdown instead) and the combination of relative strength today throughout various industries in the market, coincident with an undeniable panicky mood and rampant expectations of doom out there, gave you the opportunity to get in and buy before the big news event of the day kicked everything into hyperdrive.

In other words, when the USA Today flashes the CRISIS cover with investors tumbling out of the sky and your phone is ringing off the hook with nothing but fear-based inquiries, coincident with firm, decent action on the tape in front of you - well, it's time to get back to basics and buy stocks.

I'll be focusing almost exclusively on longs only now for the time being. I might hedge here and there if I get caught long when a pullback transpires and I acknowledge that some amount of re-test at some point in the next several weeks will likely occur. But I also acknowledge that we've now see the lows for the intermediate time frame and this is what is key.

Again, I don't like to sharpen pencils and measure moves before they happen. I just like to get it right when there is power in a move and keep firing at it as long as it behaves appropriately.

So far so good - this doom and gloom, good for nothing stock market is now going to go higher. Hopefully an over-abundant amount of fear and distrust will prevail for a lengthy spell before the masses start considering coming back into the fray. Assuming the action is favorable, then the longer most of the participants and media-heads question it, the longer I can keep firing aggressively.

That's my biggest wish here - a firm and healthy tape coincident with massive fear, suspicion and doubt. The punch bowl remains full in that case.

Crack that whip!

Tipping Point

I came in today long and not without a certain egg on my face. The internals were so ugly however I managed an about-face by mid-day and scratched-back most of the early losses.

Today was exceptional and opportunity is blistering right now. But you've got to get the direction right. If you're wobbling senseless, you cannot afford to play; as it tends to just get worse before you finally give up. This is a lot of why I change on the dime as much as I do - I cannot afford to lose my crazy mind.

To the point, Wednesday's high-volume turnaround was violated today and with further violations in a distressed market, accelerating declines become common (the psychology of fear takes hold, whereas hope and greed had until then stayed illuminated). I cannot measure the size of a move, but there is a certain power building at the moment that is undeniable. And if you ascribe to the notion that there is no floor when the floor is removed, then you have to acknowledge that the worst-case scenario is as likely as anything else.

It's not a comfortable market to just hang-out and hope right now.

So for the moment, the evident fear and emotion (notice the VIX has risen to important levels) cannot be considered a positive UNTIL the market defines a new floor. That could end up being today's close or that could be 30% lower by Monday, I don't know. All I know is that you must respect the possibilities if you want not to blow-up.

Naturally, then - any hour now may again mark an incredible long-side opportunity (shorts get trampled as well, eh?). Don't do what I do, but I'm keeping very keen on the internals before sweating the long side. Today's internals were resolutely negative, and remained so throughout every rally attempt on the day. Subsequently, every rally attempt ultimately failed.

If you read this regularly you know I cannot shut up about internals (breadth and relative strength between the various indices, industry groups, etc.). The Advance/Decline line was so fantastically negative today there was little doubt as to whether or not we would close on the lows (there were no more than 300 advancers on the NYSE virtually throughout the session, out of a possible 3549 issues). Additionally, the price of gold made the biggest 1-day percentage gain in history, while treasury notes were trading below zero (meaning you had to pay to trade into a T-bill - as opposed to the typical business of receiving interest when depositing money. This deposit costs you a fee until you sell your money back...to yourself!).

There was a continued run on the investment banks today and GS and MS were woodshedded in the most primal sense. Reportedly, their borrowing costs (and they borrow a lot of capital in their business) doubled overnight last night; that amounts to something ridiculous like $8B/yr in additional fees for Goldman, so it's not just walking around money.

So, around the globe the markets are sucking-up capital faster than the Federal banks can inflate it. Our Fed is so far picking and choosing what to "bail-out" and at fat, favorable terms. This could end up making the US taxpayers hearty capital gains, once the Fed unloads these in times of less panic. But if too much of the chowder comes out of the pot, the Fed will have accumulated too much wet chowder on their face to look very good with all these blow-ups on the books.

The Fed writes a lot of the rules and as they see fit. They do not like to lose either, as their credibility is of tantamount importance, so the stakes are very, very high right now for the Fed. This begs the question: Is now really the time to fight the Fed?

I've been having fun being short, but I still say that outside of the select casualties, the overall environment is not that negative. Professionals everywhere are chiming that they have never seen anything like this in their 20 and 30 and infinite year careers - fine. Technically, I've been trading the market since the day it opened and I can tell you this is certainly different (it always is) but it is not yet extraordinary by historical terms. They have seen the market drop much further en-mass than anything like what we've seen so far on this move. They just feel awfully wiggy at the moment. So don't miss that point. As bad as everything is, this market as a whole as so far managed to hold its en-mass entrails, in-check.

The next few sessions might be the tipping point, where the cascade does indeed show folks something they've never seen. However, in the strong possibility that this turns out not to be the case, then I'm keeping very keen on the internals and firing long with abandon to take advantage of the sling-shot which will instead occur in the other direction.

I really doubt this will end with malaise and boredom - in my view the market is either on the cusp of its lows right now (don't forget the inevitable re-test of sorts however, so there is no rush for widows and orphans to buy membership cards for the next rally) or the air-pocket beneath us is going to spill en-trails, ala GS today.

Good day sir.

Stop Worrying and Love the Bomb

OK, the Fed held steady today on the Fed Funds rate, but they dumped an additional $50B into the banking system reserves (which follows the historically significant $70B they already shot into the system Monday). Then after the close announced they will indeed bridge AIG an emergency loan to the tune of $85B.

I covered anything left short at today's open, picked-up my rubber band woot suit from the cleaners and started buying long ~90 minutes into the session. By the time the market started driving higher with about 90 minutes left I was fatter than Brando and running like God. I sold my larger index trades into the rip higher, but I held several names long going into tomorrow; un-hedged.

I would expect a bit of follow-through tomorrow, and perhaps a sharp advance, but if it is dramatic I'm just selling into strength. If the advance is more casual (which will tend to have a bit more staying power), we might get a few days to a couple weeks of a firm market, but a re-test of sorts should eventually be expected.

So a strategy of selling emotional spikes higher and buying emotional dips lower is the gameplan here for the time being.

If we manage a successful re-test, or mark a bottom in another fashion (to be defined later), then I would actually move back to managing portfolios for a living; instead of reverting to this late-90's style daytrading (it was fun while it lasted at least).

If we don't manage a successful retest, but drive to lower-lows instead - I will get aggressively short and forget about getting flat by the close any longer. They'll be no way to be short enough should that develop.

Turn The Worm (Say Awe)

While there wasn't really panic in the broad price-action today, there was at least a cascade in hope and good cheer. The chorus crowd on the market ship is tilting dramatically to one side.

And you thought it was all bad.

Earlier in the month we had too few positive factors to begin looking at getting long, not the least of which was the calendar month (historically the weakest of the year). But now mid-way through September we have a few important features for a potential market turn; and counting.

I continue still to trade short-only for the time being, but that could change any hour now, depending. Every TV head right now is telling you: "don't be a hero," etc., etc., but if you've been short you can afford a few heroics when the time is right. Interest rates are driving lower again (IRX, TNX), and this includes home mortgage rates (no chart). Fed fund futures today began to indicate the Fed will cut rates at tomorrow's FOMC meeting. And they'll throw the State of Kansas at you, if you know this Fed, so I would expect full-tufted Fed butter; nothing less.

As far as technicals, I look for three general factors to turn before doing anything more than covering shorts (prior to going long). Below is a brief outline of those factors and where they stand. I can't spend a great deal with this tonight, but if I had a few hours I would write up something most entirely useful, complete w charts, timely suggestions of individual stocks, industry groups, mouths of foam, three green clovers, etc.

Positive Divergences: Ok, the S&P 500 is at a fresh 2-year low tonight. Naturally, the Financials (XLF) are in worse shape, right? Well, they are worse than they were 2 years ago, but the group is actually well-above the July 15th low. In fact, the lovely SKF, which is the Financial's double-short, shoot first and shoot-harder tool for the Street, spiked dramatically higher in July than it is now. Everyone should glance at the SKF chart, because you won't believe me otherwise; At the same time, the Nasdaq and much-more so the NDX (which tend to lead the broad market), have made lower-lows on this wave down. [Edit: the Russell 2000 is also well above previous lows]. Unfortunately, the Semi's have continued to draw lower-lows, but this is probably not the beginning of an important new economic cycle anyway (and we'll probably end up re-testing, perhaps not even successfully any lows we make Tuesday), so I'm less impressed that the Semi's don't show a positive divergence; Momentum, as measured by any reasonable tuning of the MACD (moving average convergence divergence line), is well-above any previous lows on any and all indices right now. In other words, momentum is set to make a higher-low vs. prices (which would be resoundingly bullish from a short-term perspective).

Sentiment: Negative sentiment improved dramatically today, although many of these indicators are still off of extreme levels; Put-to-Call ratios at the CBOE spiked-up, but they were coming from relatively complacent levels and therefore the 5 & 10-day moving averages are not yet extreme; The volatility index (VIX) surged, but it too is well off any records (not yet bullish); But importantly, the financial media swooned ugly today and Main Street was at attention; At least from a quick-trade perspective (potentially more) the succinct, low-flying mood in the air right now tastes awfully interesting (it is undeniably bullish once prices begin to show life*).

Price/Volume Action: Volume surged today, but it was nowhere near a record (which is not bullish); Declining stocks out-numbered advancing stocks on the NYSE by 19-1 today. Black Monday 1987 was closer to 16-1. Suffice to say, outside of a few names within only a few industry groups, we have not yet seen positive price and volume action on the tape. This can change quickly, in the span of a few hours on a high-volume reversal day in fact, so you have to be on your toes if you plan any heroics.

The last 90 minutes tomorrow are going to be crucial. Indeed, if a long-side trade is setting up now, we will see buying late in the session and the FOMC timing will have an impact fueling this. Look for positive divergences and vastly improving internals before venturing. I would not commit a dime late in the session if the internals look anything close to today. And I would commit money earlier in the day only with very tight stops.

OK, I looked-up a piece from the past where I have better outlined what to look for for a reversal and how to interpret the likelihood. You'll notice today did not exhibit the internals necessary (especially at the important time-of-day inflections, and you'll see a better explanation of positive internals and the emphasis given to time-of-day, etc.)...
From January 8th: Some things I look for from the market for a potential reversal, from this type of deeply damaged tape.

Finally - don't do what I do - Don't be a hero Mr. Billy!!

*I say "once prices begin to show signs of life" because sentiment will be extrememly negative in a market crash and it does nothing to improve the situation; rather it exasperates it. Thus, the improvement in price action, which must include a positive final 90 minutes of trading, is mandatory before clearly negative sentiment is a good thing.

Mr. Billyclub

After a second day of gains, I was forced to lay-off shorting the (commodities-related) material's and energy stocks. Actually, I went long these yesterday for a nice counter-move, but I got hit in the face with a frying pan when they reversed higher today and I was again short.

I love fading one-day-wonder rallies of broken stocks and/or groups and if I see blood the next morning, I really like to dig-in and get medieval - if they'll let me.

They let me - I got middle evil - and I was, well, dug-into.

Market breadth was extremely negative after the first 90 minutes of the session (something which grants me the authority to widen stops if I am inclined to hold my position) and breadth stayed very-negative as segments of the market started rallying. Only after 2/3rds of a session of hard knocks did I give up and move aside.

Fine. Whatever. I'm still alive and willing even to go long here if the market keeps firm; whether a more medieval splash, by getting long Retail and Homebuilders, or something more state of the art (ala, the latest cancer cures and phlegm-stoppers). We'll see when we get there, but I'm pretty sure it won't entail building a portfolio of material's, energy's and other commodity-type themes; let Monty make the money right now going long those groups.

Is there a serious turnaround developing in the overall market? My sense is probably yes but it's too early, and I don't like the idea of accumulating names for more than a day just yet. I'll stick to the quick-trade prospects (long or short) in this environment. But in the meantime I'm building (long-side) lists of stocks and groups demonstrating leadership in this environment.

Some new and obvious (you didn't know?) industry groups which are showing leadership are:

-Retail (incl. Discount, Clothing/Shoe, Home Furnishings, Drugstores and Misc.)
-Medical (incl. Genetics, Biomed, Medical/Dental Services and Products)
-Transports (incl. Airline, Rail and Truck)
-Commercial Svcs-Schools (zzzzzzz)
-Building-Residential/Commercial

Yes, homebuilders are acting very well this week, as mortgage rates have dropped considerably following the US take-under of FRE and FNM.

Individual names may or may not be posted here soon. It basically depends on whether the market can continue to rally or not (the leadership in the market is not exactly awe-inspiring at this point either).

Thus (thrust!), if we can resume the direction downward instead, I'd be happier than Satan at a speaking-in-tongues convention just to again pull-out my Death Spiral Shortlist.

...for new-times sake.