Welcome to Stock Geometry! This casual music and financial blog typically involves posts of music videos and candlestick stock charts looking at intermediate term trends. Think MTV meets CNBC. My positions fluctuate, but I’ll always disclose positions in posted stocks. You are responsible for your investments! – Dr. pythagoruz
For most of the past 6 months MDC has been channeling lower bound between its falling 50 dma and a trend line (shown in blue) . That was until it reached and broke its former 4 year low at $38.26. When this break occurred the volume increased as MDC began to slide faster below the lower end of the channel. But then the entire homebuilding sector began a magical "this is really the bottom" rally like all great bear markets do about once a year and MDC had its biggest rally of 2007, at 30%+ gain in two weeks.
Well now that thats behind us MDC appears to have resumed its usual form. After new home starts fell to a 12 year low today which was much worse than expected, MDC has slipped back below that former 4 yr low, closed below its 50 dma and other indicators are giving big green lights to short the heck out this stock again.
I think the worst case scenario is that MDC will just resume its relatively boring, yet reliable, channel lower. The best case scenario would be that MDC really breaks badly as the market begins to accept that the homebuilders won't make a profit for a very long time, the ones that don't go bankrupt that is. I have talked about this worse case scenario before and my price objective remains at roughly $27 but it could certainly go much lower. Click here for the weekly chart from my last post on MDC.
Oh and by the way, the head honchos at MDC decided that they deserved some pretty hefty bonuses this year (2 million for the top guy), this is after the company they run had its worst quarter ever. They also decided that despite the 40% decline in company revenue they would keep their salaries unchanged. What a worthless investment MDC is.
CVX likes to rally hard off its 40 week moving average, at least in the last three years (click on chart above). Furthermore, a significant breakout will occur if CVX makes a new all time high over $95. I like the front month $100 calls when $95 is crossed.
And heres an ICE chart thats a few days old, but its still valid:
The people who write these blog posts are all members of a real-time chat group who meet during the trading day. The chat room is generally by invitation, but for the 24th, after the market hours we'll have an open house chat. We'll have the trivia-bot up and running too. Everyone is welcome, but be advised, trouble makers won't last long.
We're on the IRC system, or Internet Relay Chat, using the Othernet. The room name is #postoftheday. That should be enough information for many of you to find us. The URL is; irc://othernet.org/postoftheday.
For those of you not familiar with the IRC, you'll need a bit of software in order to connect with us. The most common program is mIRC and can be downloaded from http://www.mirc.com/get.html. Once you've installed that you can find your way to us by going to Tools/Options/Connect/Servers, and select "random othernet server" from the list of servers. Connection time can take up to a minute, but once connected type in "/join #postoftheday", and you're there!
Firefox users can use the Chatzilla add-on. With that installed you'll have to issue the command "/attach othernet.org", and again once connected to the othernet type in "/join #postoftheday".
One of Pythagoruz recurring comments on this blog has to do with fast moves from failed moves, and I need to pay more attention to that. The recent head and shoulders move in EURUSD led to a breakdown in the value of the Euro that moved at a speed that surprised me. See the chart below, and click on it for a larger image. The last two candles have me shaking my head in wonder.
The Head and Shoulders formation is considered the most reliable reversal signal that exists, and while I knew that, last week I was paying more attention to the expectation of interest rate changes, inflation data, and trade deficit news.
The fact that the dollar strengthened on inflation data, after the FOMC cut rates surprised the hell out of me. Does anyone think that Bernanke and the rest of the Fed governors didn't have that inflation data in hand when they cut rates? Of course they did, and they cut interest rates anyway.
I'm not a great believer in Event Risk for long term positions, but apparently I'll have to start paying more attention to that too. The inflation data spurred the dollar bulls into a buying frame of mind, and year end profit-taking provided absolutely no support for the Euro.
So where does that leave us for possible trades in the currencies?
Well in my honest opinion, with a good buying opportunity in the Euro. The chart below is a longer term weekly chart that shows remarkable similarity over time. In particular the rising SAR meeting the value of the Euro has sparked strength in the Euro 7 times in the last two years.
Could things be different this time? Well, sure they could be but I'm not the only fan of chart similarity on this blog. I'm also fond of charts showing higher highs, and higher lows.
The timing of this SAR trigger probably couldn't be better. As the year-end positioning comes to an end this week a savvy trader could find a good entry point to the Euro currency. I would recommend FXE calls, at least three months out.
Just over two years ago Under Armour went public in the most successful (in terms of % gain on opening day) ipo since 2000. After being offered and opening at $13, UA climbed to close at $25.30, almost a 100% gain in the first day of trading. That was just the beginning because UA then rose to a peak of $73.40 before rolling over to around $45 recently:
This chart is really interesting to me for a number of reasons. You can clearly see a change in UA's momentum that occurred in August leading up to the most recent quarterly earnings on Oct 30th (the big red circle). After giving up its 50 dma, UA had bounced off its 200 dma and trended higher up into the report. On news of yet another blowout quarter the stock exploded higher the day of earnings back above its 50 day, volume surged to the highest level since the ipo as the bulls and bears duked it out over their impression of the earnings. The bulls seem to have been happy about the better than expected earnings per share while the bears complained about the growing inventories.
At any rate the battle for $60 by was won by the bears and the stock slid to back under 45$ on Friday, the next level of major significance/support. As you can see in the weekly chart up top, the average price that shares have traded at since the ipo is about $45. So above this level the typical investor is net positive and below this level the average investor is at a loss. There maybe be a significant number of people looking to just get out without a loss once $45 is lost. Watch for $41.37 to get tested and taken out after $45 is gone. Hat tip to Xerxes for the play.
What a difference a week makes. Just last weekend the headlines were all about how investors were inspired by the lower cost of burrowing money to buy stocks for the seasonal Christmas rally. We had the fed cut interest rates by .25% , as widely expected, but the market responded with a not so jolly sled ride.
I mentioned last week that I tend to agree with Jim Rogers (more clips here) about the fed being pretty much irrelevant, at least for now. They simply do not have the power to juice our economy and housing market without causing runaway inflation. I think the fed pretty much did the right thing by giving the market the rate cut they wanted but given the reaction we saw in the dow jones and the surging inflation reported Friday, they might have well just left rates unchanged:
When I say the fed is irrelevant, of course I don't mean this entirely. The fed clearly has a large impact on what happens in the stock market as clearly seen in the move over the last two weeks surrounding the event on Tuesday. I've noted (click on the chart above, see the yellow circles) how the market gapped significantly every single day last week with that massive 200 point higher open on Wednesday after the fed announced their plan to auction off money over the month. The market reacts to the fed, but often not in the way the media would make you think. After gapping higher on Wednesday the market slid to end the week at it's lowest levels, closing 450 points lower on the dow than it was just before the fed cut rates. If the dow gaps down on Monday that will put an interesting island reversal into play.
Anyways, all this market gloom is kinda depressing. Just get yourself some DXD, be glad your not this guy or this poor gal, enjoy the falling snow (if you live out here in the midwest) and have some happy holidays.
I've noted here before that failed moves often lead to quick counter trends. A good strategy with the dow jones over the past few months would have been to take a position after a breakout or breakdown fails. The two most recent glaring examples are at the high in October and the low in November. The down broke above 14,000 to make record highs in late October but after it slipped back below 14k it dropped like a rock, 10% actually. More recently, the dow broke down when it closed below it's closing low made in August and also below its February high. Then in the following days the dow moved back above this level (which acted like support) and then we got this quick rally from the Thanksgiving low.
In order to trade this strategy you have to first establish where the significant price levels exist, then after a break watch for these levels to fail. Just as an example, lets say the dow broke it's high at 14,200. I would watch for the a move back below 14,000 on good volume then get aggressively short. These reversals suggest that big players took advantage of the obvious chart break to load up on or dump stock. When a major support level is breached many investors will exit their positions and traders will go short, this provides a huge supply of stock for institutions who may want to load up. When the break fails, the newly short get squeezed and investors who got shaken out may jump back in thinking they made a mistake. There are sound reasons why these failed moves would lead to fast movements.
You could also use this strategy with the 50 and 200 day simple moving averages. Since many investors watch these averages and expect them to be price support and resistance they can be considered significant price levels. Take a look at what happened the last two times the nasdaq 100 broke below it's 200 dma. Within a few days it reversed and that would have been the ideal time to go long:
You can also similar action on the dow jones chart up top back in August when it first broke below it's 200 dma.
Here's a look at the S&P 500. Theres not much to say other than that its been range bound for the past 6 months. A small inverted head and shoulders has formed which has a price target near the top of the range and hence new all time highs. Unfortunately for the bulls there are a number of resistance levels on the way up there and given the weak follow through on the 50 dma break last week, I doubt the S & P 500 will be able to hold on to recent gains.
You know I can't do index charts without including the small caps with a Russell 2000 plot. There is nothing bullish at all whatsoever about this chart. I've highlighted a few of the obvious points below like the down sloping moving averages and the lower highs and lows:
The various reporters in the foreign exchange markets like to play up what they call "event risk", but I suspect it's just a ploy keep the interest of their readers, to keep them returning regularly. There were a couple of cases in point this week including the Bank of England meeting, the European Central Bank meeting, and the non-farm payroll figures from the USA.
Admittedly the Bank of England cut their interest rate targets in a move that those same reporters called, "a bold step", or "a surprise move", and the value of the pound sterling declined because of the rate cut, but only to levels that were common for most in the second half of 2007.
In this case the markets were in fact surprised and anyone long the Pound ahead of the meeting faced substantial risk. At this point FXB may be yet another way to diversify away from the US Dollar or the Euro (FXE).
In direct contrast to the Bank of England, the European Central Bank also met on Thursday and elected to maintain target interest rates at 4%. This was widely expected and in one article some 72 economists were polled in advance of the ECB meeting and all had the same opinion. The relevant data points are widely known because there is a constant stream of data coming from all the national members in the Eurozone. Inflation is rampant throughout the zone, mostly because of energy and food costs, but economic output is still growing and German unemployment rates are at post-unification lows.
This unparalleled access to information tends to eliminate the event risk when trading the Euro, and that can be shown graphically by directly comparing the above FXB chart with the chart for FXE.
There are none of the wide swings in the FXE chart, such as what is seen in the FXB chart, and I strongly suspect that is because little to no event risk exists. In fact, the FXE chart shows an incredible series of higher highs, and higher lows. I'm sure an Elliot Wave chartist would have a field day on that one. There is a simalar series in the FXE 2-year weekly chart, and I feel strongly that the Euro will soon resume it's steady rise against the dollar. There are also fundamental reasons for that, including one I described in a previous post.
The last item in our news items this week was the Non-Farm Payrolls. NFP is widely watched because it is forward looking and helps to predict consumer spending in the coming months. Consumers are able to spend more if they are employed, or better employed than in the past. This weeks number was a goldilocks numbers and was widely expected because of a similar labor report earlier in the week. In fact, trading yesterday was one long boring affair in the equities and exchange markets that I follow.
Ok, "event risk" is real but not universal and while it can produce trading opportunities, I would still contend that reporters tend to overuse the term.
disclosure: I own FXE calls, and will probably be buying FXB calls in the near future.
I'll be commenting more on this later so check back for updates to this post. Its and I just wanted to get these charts up here. They are pretty self explanatory, the fed funds rate is strongly correlated with the S&P 500. Interestingly, the fed funds rate seems to lag the stock market by months but they both move in the same direction. I will give more color later, but for now here are some links:
Short term argument: FSLR has had a HUGE run to say the least and after breaking out to a new high last week it has reversed on very large volume. The last time a breakout of this nature failed FSLR dropped 40% in three weeks! Oil is pulling back which should take the wind out of the solar stocks and frankly I think the broad market is going lower in the near term. It looks like the first level of support will be a 38.2% fib around $185, then the rising 50 dma around $165 which is also the 50% fib and finally big support from the prior breakout at $120. I wouldn't be surprised to see this think crater down to that $120 level given the amount of momo in this stock.
Long term argument: There isn't enough Tellurium production (a key material for their solar cells) in the world to sustain their rate of growth for more than a few years. I haven't worked out the details but they should be getting close to a brick wall in a year or two in how much Tellurium they can get at a reasonable price. The PE is currently 166 and the market cap is almost 17B. Just read this or this or this. Oh yeah, and I think the market is going lower in the long term (2-3 years minimum).
Disclosure: I have been watching FSLR like a hawk for this to happen but don't have a position, yet.
O'neil's proper short sale point is something I have discussed in the past and tonight just wanted to point out a few charts in the context of this "proper" entry and talk about the next best entry if you miss the initial drop. This is discussed in detail in O'neil's book How to Make Money Selling Stocks Short, which I highly recommend. To start with I'll remind you of O'neil's approach with a figure from his book:
Shorting early can be deadly because stocks can rally much longer than you can stay solvent. Furthermore, it is certainly inappropriate to get short before a major decline is confirmed. According to O'neil the proper time to get short is after the stock has vacillated about it's 50 day moving average (or 10 week) then breaks lower on huge volume. You can see that this strategy would have been extremely profitable on SHLD:
But what about if you miss that first major decline? I think the next best entry on shorts comes a couple months later after the stock has bounced back to where it initially broke down which tends to be near it's 200 day moving average (40 week). As you can see from the DSL chart below, a good secondary entry would be when the stock failed at former support near 60$ which was just shy of its 200 dma.
So are there any stocks out there currently at this secondary short sale point? I think LEH is a prime example. Shorting here seems like easy money but wait for the break on heavy volume. LEH has already bounced back up to its initial breakdown price near 67.50 which is where the 200 dma is and where I would place my stop.
I have included the volume by price in these charts since it tends to correlate well with the proper short sale points. When a stock begins to drop away from one of the heavy volume regions, for example $60 for LEH, that is when you really want to be short.
Disclosure: I have puts on a bunch of stuff but not on any of these three stocks at this time.
I ran into this plot of the S&P/Case-Shiller Index for various locations in the US on another blog tonight. It is a measure of average residential real estate prices, pretty dramatic huh? The most recent report of this index came last Monday which showed a 4.5% decline in home prices over the past year, this was the steepest decline in the history of the index. More on the worst housing market since the great depression here.
I hate to sound so pessimistic, but the fact is that we are in a very depressing economic state and things seem to get worse as the days go by. In respect of all the bad news out there, Sarah Chang will perform this Saturday's rock blog, Zigeunerweisen:
I think many people have heard by now about the Proshares UltraShort ETFs, but options on these exchange traded funds only recently began trading. Tonight I used an option calculator to figure out if you get more leverage in the options on the Ultra ETF's as you do with the ETF's themselves. Here's a quick review on the idea behind the Proshares UltraShort fund for the Nasdaq 100 (QQQQ) from yahoo:
"The investment seeks daily investment results, before fees and expenses, which correspond to the inverse of the daily performance of the NASDAQ-100 index. The fund normally invests 80% of assets to financial instruments with economic characteristics that should be inverse to those of the index. It may employ leveraged investment techniques in seeking its investment objective."
While it doesn't explicitly say this above, the "Ultra" funds are supposed to return twice the return of the underlying investment. For example, if the Q's (nasdaq 1000 etf QQQQ) drops 1% then the UltraShort "QID" should go up 2%. If you look at a comparison between the two you can see that QID gets close but doesn't actually move quite that much. It looks more like 1.7x the inverse of QQQQ:
The idea is that investors can quickly and simply get short exposure in a way that moves faster than the broad market QQQQ. In some cases an investor might not have access to short selling, in an IRA account for example, so they can just buy QID instead.
Ok, what if you are crazy bearish and you want to make the most money possible. You might think that you could get extremely high leverage using options on an already more leveraged QID. In otherwords, you might expect that QID calls would move faster than than the QQQQ puts on a percentage basis. Well, you would be wrong. In fact, it seems like you would have even less leverage among other drawbacks to the idea.
I'll admit, I got excited when I heard about QID options and bought a few calls today. But after closer inspection using this free option calculator provided by the cboe, I realized that the extra volatility is priced into the UltraShort options. The QQQQ have around 30% implied volatility while the QID options have around 60%, so double. In othewords, the options have twice the percentage move priced in to their premium. That translates into roughly the same gain in contract value if the expected move occurs. So if QQQQ goes down 5%, and QID goes up 10% then the equivalent options on both will increase in value roughly 90%.
My results are summarized in the image of the option calculator above. I assumed the move in QQQQ's was about 5% lower and I picked the option that would be at the money after that move, similarly I assumed the move in the QID would be up 10% and picked the contract that would be closest to the money. I also assumed that the implied volatility would remain constant. There are errors in this calculation but the result implies that if QID does not actually move at twice the inverse of the QQQQ then the QID options will actually perform worse. And the thing I hate most about the UltraShort options is that they are very illiquid, there are very large spreads on some of these and the volume is super low. I can tell you that I will be getting out of my QID calls soon to try and replace them with QQQQ puts, its really the way to go.
The bears shouldn't have been surprised by the rally last Friday after the dow jones industrials reached support at August closing/opening low around 12,800. After a brutal month of selling the bulls really needed to take advantage of the holiday shortened, lower volume, seasonally strong black Friday trading session, and they did. Looking at the chart below it seems appropriate for the dow to be bouncing here and a test of big resistance in the 13,200 to 13,400 level looks almost certain.
I suspect that the media and the market will get a real warm and fuzzy feeling tomorrow morning with the stronger than expected black Friday sales and the prospect of a Santa Claus rally from support. The market is sure to open broadly higher and I think there is a decent chance of the dow reaching that resistance area just above in the next few days, which would be a very safe entry or add point for shorts.
On the other hand I could be dead wrong about a rally early next week since there is an overwhelming number of reasons why the stock market should be dropping here. To worsen the prospect of a nice entry on shorts, the higher total retail sales masked a disturbing trend for post-Thanksgiving shopping. According to bloomberg,
"U.S. consumers spent an average of 3.5 percent less during the post-Thanksgiving Day holiday weekend than a year earlier as retailers slashed prices to lure customers grappling with higher food and energy costs. ... Store visits increased 4.8 percent.
Sales on Nov. 23, called Black Friday because it was the day that retailers traditionally turn a profit for the year, rose 8.3 percent from a year earlier to $10.3 billion, Chicago- based research firm ShopperTrak RCT Corp. said.
Combined sales for both Black Friday and yesterday rose 7.2 percent to $16.4 billion, the firm said today.
ShopperTrak measures foot traffic in shopping centers and malls using more than 50,000 video devices. BIGresearch, based in Worthington, Ohio, polled 2,395 consumers on Nov. 22-24."
Well that sure clears up the confusion! Consumers are spending less but the massive discounts lured in a greater number of shoppers to make up for the lost sales and then some. Here's a little logical thinking for you, lets assume the total number of shoppers is .894% more than last year (due to population growth) neglecting all the foreign shoppers cashing in on the extremely favorable exchange rate. If more Americans did their shopping during this highly watched four day period, then that leaves less to shop in the days before (as we've seen) and after the black Friday weekend. And the real news is that this roughly constant number of shoppers is spending on average 3.5% less per person. Combined with population growth that implies retail sales should be roughly 2.64% lower than last year, and given the tremendous level of discounting, margins should fall significantly (right btb?). In the end, retailers (im ignoring online) are going to show negative earnings growth for this quarter despite the surge in foot traffic over the last weekend. But the media is sure to focus on the "rose 8.3 percent" headline and the dow will rally, right? I suspect.
There is a debate going on about whether or not we are in a recession right now, which is really silly to me because is seems pretty obvious that we are already in one. The homebuilding sector is clearly recession, no need for me to explain right. The financial sector showed a 21.8% year over year decline in earnings last quarter, no doubts there. So how about overall? From Barron's,
"In a piece [Merrill Lynch's David Rosenberg] put out Friday, he says unequivocally that if you're looking for the earnings recession, you need look no more -- it's here. ...
With the tally now encompassing 90% of the companies reporting, third-quarter earnings per share dropped 8.5% from the third quarter last year. ...
David stresses that profits drive the business cycle -- capital spending and employment feed off them. And he sighs: "It has always been thus." Hence, he's ineluctably forced to the conclusion that a recession in the economy "is either here or no more than two quarters away.""
But ok, I'm willing to throw the bulls a bone. They seem to be convinced that stocks are historically cheap here and the collapsing dollar means that all dollar priced asset classes should be lifted, especially as exports become stronger. Plus, this time of year is seasonally strong and I love Christmas just as much as everyone else. So lets see what the bulls can do with this 8.3% headline, I will be watching the current market leaders for guidance.
The current king of the crop is GOOG (or BIDU), which led the recent tech rally then led the most recent reversal. As you can see from the chart below, GOOG has retraced almost 50 % of the pullback from all time highs and is poised to possibly test the 61.8% fib retrace just under $700 or if it breaks that level GOOG could head back into new high territory:
AAPL looks about the same except that it has already completed a 61.8% retrace of the initial decline. It currently seems to be hugging on to its 50 dma as it forms a bear flag. Any move over $177.61 though and I think AAPL could make a new high.
I almost did an entire post on GS this weekend as that stock has been on my mind for weeks. Anyhow, it is clearly the strongest wallstreet bank/broker, by a long shot, and it certainly leads the rest of the market. GS recently formed a triple top or head and shoulders top as seen below. If this pattern completes by roughly closing below it's 200 dma aroudn $210, then the price objective is $170 which coincides with strong support from August.
If US stocks are going to plunge into a full on bear market then these stocks are going to need to take a dive on big volume, and soon. While many market leaders have pulled back on above average volume, most remain in healthy uptrends above or near their rising 50 day moving averages. I think next week is really the pivot point where they need to either blast higher through resistance or rollover and make the next leg down, the latter would drag us into a bear market.
Will the bears go into hibernation as usual this Winter, or will they grab a sniper rifle and get busy?
There is a snippet in this article that I read earlier this week in a German language article, but I didn't understand the full meaning of it until I read it again in English. I may be able to speak and read German, but I think in English.
No, I'm not concerned about the arbitrary level of the yuan versus the dollar, or the euro. And I've known for quite some time that ECB chief Trichet will be meeting his Chinese colleagues next week. No, I'm talking about a simple bit of trade related material;
"...the Areva deal will be concluded in euros and not in the customary dollars..."
For the first time ever China will be paying in euros, meaning that they are now going to have to start collecting them. It's not that "collecting euros" will be a difficult thing for the Chinese, because Europe routinely runs a huge trade deficit with China just as America does. In the month of October alone that deficit was almost 14 Billion Dollars.
Dollars. Even the European trade deficit with China is measured in dollars. Even now European importers are forced to buy dollars in order to pay for products of Chinese origin, adding a small amount to the cost of doing business. The Euro was created to do away with this particular cost of doing business, and now that China will be paying for goods and services in euros, I'm sure that they will now start to accept payment in euros too.
This is just one more sign of the waning importance of the US Dollar.
The ICE ipo was two years ago last week and while the price action couldn't look better, i see some long term divergence in the on balance volume. The volume seems important going forward so I have the price by volume for ICE's two year history along the left vertical axis: What I mean is that the stock price made a new high but the OBV did not because the volume has been much higher on declining weeks than it has on rising weeks. You can see this is mostly due to the correction last March.
I've been meaning to do a review on Tim Sykes's new book, An American Hedge Fund, for some time now. Tim contacted me this Summer, when he was still in the final draft stages and offered to send an pre-release copy of the book for review consideration. I actually read the draft within a few weeks of receiving it so I should have done this post a while ago, but I didn't feel all that bad when I noticed reviews popping up on just about every other blog I read. Tim has been pretty cool about the whole thing and actually sent me a copy of the final version, this is what I thought...
When I said I read the book in about two weeks of receiving it, that says a lot about my impression. I think I have ADHD or something because its not uncommon for me to wind up reading multiple books at once. Now that I think about it, I'm reading four books right now. Anyways, I read the book quickly because it kept my attention and was easy reading.
I was initially interested in reading the book when I saw Tim's bio on his website. While he was still an undergraduate (1999 to 2002), Tim took a $12,415 Bat Mitzvah gift and turned it into $1.65M. Sure, these were bubble days when every bull was a genius but Tim was a college kid. Can you imagine becoming a millionaire by the end of your Junior year of school? One of my favorite aspects of the book was hearing about how Tim coped with the stresses of trading and money management in the context of college life. He mentioned a painful lesson of sleeping in hungover one morning when he had a big position and his dorm mates huddled around his computer while he executed trades. I started trading during my softmore year of college so I know how tough it is to balance good grades with profits. Timing trades around class was always interesting. I was trading in a different market from Tim and started with less money, but I found a certain satisfaction from hearing what it might have been like if I had blown up like Tim. Clearly, he lived the dream of any young aspiring trader by making a fortune from nothing.
The book is really a two part story with the first part being about Tim blowing up in college and the second part being about his "hedge fund odyssey." I have always envisioned myself starting a hedge fund, so naturally I was interested in hearing Tim's story. The second half didn't resonate as much with me because I don't have any experience with the hedge fund industry, but it was still interesting. He basically turned himself into a hedge fund where he did all the trading and much of the fund's assets were his own. This enabled him to use his audited performance (323% annualized) from 1999 to 2002 to entice accredited investors to invest in him. Of course its more complicated than it seems and there are all sorts of issues with laws that effectively keep the smaller players out of the game. You get to hear about how difficult it actually is to build a hedge fund scratch, especially with zero industry experience. Tim portrays himself as a champion of free speech because he is telling a story about a restricted by law industry and there is some truth to that.
I really respect what Tim is trying to do by talking about his experience in a veiled industry, but it seems to me like there are plenty of hedge fund managers out there who talk about their positions. Without thinking too hard about it, I can think of two cases of managers making their argument for being in positions, and for free online. Amit Chokshi posted about his fund being short CROX before the plunge a few weeks ago, and this guy Zach posts about all sorts of ideas on his blog. So I didn't really buy into the free speech champion stuff as much, although I think he is probably unique in telling the story about how he created his fund.
All around, I did enjoy the book mostly for the story. Hearing about what it was like to make a huge pile of cash in college and create a hedge fund is awesome. While Tim has some good lessons for younger aspiring traders, I don't think it would be all that useful to anyone with 5 yrs or more experience in the markets. That doesn't mean that an experienced trader won't like the book, I just don't think you will be a better trader after reading this book. Other bloggers have compared the book to Reminisces of a Stock Operator (one of my favorite books of all time), but I think they are different kinds of stories, you can really compare them. An American Hedge Fund is great casual summer read for most, and an energizing tale of what hard work and perseverance can accomplish for young traders.
I think the bigger story is in what Tim has done in the online world through networking, but I'll leave that for another day.
One more piece of the exchange rate puzzle came to light on Friday morning, one that is even more fundamental than interest rate differences. The US Department of the Treasury publishes a set of figures monthly known as TIC, or Treasury International Capital. These figures are a measure of the capital that is flowing in and out of American markets.
Capital flows around the world constantly. In international trade it's mostly US dollars of course, but that is slowing changing. Products, or goods are also flowing around the world and in terms of the "dollar value of goods" America has been running a deficit for, well, forever. The value of goods arriving on American shores far exceeds the value of the goods being exported.
The difference in the value of those goods can be made up in capital that returns to America, invested from abroad. Recently though, the in-flowing capital isn't even coming close to making up the trade deficit, and the exchange rate of the dollar has been suffering as a result.
Here are a couple of links, and a couple of good quotes.
"...Treasury International Capital data sparked the renewed dollar sell-off, as a mere $26.4 billion in net foreign investment entered the US through the month of September. Given consensus forecasts of a $60.0B gain, the result was hardly enough to quell fears of further foreign divestment of US financial assets."
The big fear in the dollar markets is that the biggest holders of dollars (the Chinese basically) could start to sell some of their holdings in favor of a stronger currency like the Euro. In reality, they don't have have to sell a thing. If the Chinese were simply to "re-invest less" of their trade balance in the US markets, the exchange rate of the dollar would come under huge pressure and apparently that is exactly what is happening. That $60.0B figure quoted above wasn't just picked from the air. That is the amount that America needs in order to fund its trade deficit. That comes out to 2.0 billion dollars per day! That figure is almost insane.
The Euro has gone parabolic lately, but I'm not calling any sort of a top here. No matter what happens in the interest rates of the various central banks, unless capital starts flowing more readily into the American markets, the exchange rate of the US dollar will continue to suffer.
These are the daily charts of the last three months in the major index etfs. A 3 month perspective is significant because that thats how long it has been since the last rally in the major indexes began. Exactly three months ago on this coming Monday, the stock market reversed from the Summer correction on credit crunch round one and generally made new 5 year highs. Note the two candlesticks on the far left off each chart, that was the reversal. I've also got the 50 day and 200 day moving averages on these for good measure. Aren't they beautiful?
QQQQ (Nasdaq 100), note the dramatic increase in volume as the market distributed (at new highs) then sold off hard over the last seven days: DIA (Dow Jones Industrials), a very bad sign is that it recently sliced through it's 50 and 200 day moving averages on above average volume: SPY (S&P 500), it doesn't look much different than the dow jones except that it is further below the 200 dma: IWM (Russel 2000), the small caps look worse than any other index with the 50 day below the 200 day moving average, both of which are sloping down: This looks like it to me, the only reason why I am skeptical of this starting an all out bear market is that its too obvious. I'm sure there are now tons of people short and everyone sees the carnage in these charts that I do. When everybody is short who is left to sell?
Disclosure: I own QQQQ and DIA puts.
If you are idling ignoring the recent developments in the US economic landscape, including the credit, housing and now the stock markets (by not being short or even worse, holding stocks or mutual funds)... then this is all I have to say to you:
If you are bothered by the quality, as I would be, then use this link. The evil record label won't let me embed the youtube version here.
MA is one of the few "way up there in the sky" stocks that has been able to hold onto its earnings report gains but today's selloff brings the gap into play. If MA breaks $180, I think it will close that gap in the next four days by heading to $160 then pin to max pain at $165 or $170 on Friday. Currently, max pain is marginally at $165 ($170 is almost equivalently painful) but that could easily change as option volumes swell closer to the actual expiration on Friday. I'm looking at the 180 and 175 puts for a quick trade. This is a highly risky trade so don't play it with any size!
For more on max pain theory, here is a paper by a professor at the University of Illinois.
Well, the markets broke pretty bad last week. I saw heroes stepping in to buy the dips on Monday, Tuesday and then again on Thursday but they were made suckers of by the market close on Friday. The fact of the matter is that these folks have been trained time and time again that this behavior will be rewarded. Those that have bought the breakouts have also been rewarded handsomely and all of this adds up to a market for the big stock holders to unload their shares onto (a requirement since otherwise they wouldn't sell). I've heard traders say that "from failed moves come fast moves" and that is exactly what we are seeing in the broad market right now. In the dow jones weekly chart below you can see that two recent breakouts to new highs led to swift high volume sell offs. This type of action is indicative of a top because now there are many recent buyers who are underwater and will be happy just to get out break even if the market should try to climb. It also demonstrates that the big money waited for suckers to jump in on the breakout before distributing their shares, in other words smart money trapped the bulls.
I am not ready to declare a full scale bear market yet, but we are getting pretty close. The dow closed below it's 200 day moving average for the first time since mid 2006 on Friday, and while it is not the end of the world it is a huge red flag. The media is trying to spin it like this is just another "10% correction" but two of these in four months? At some point I think this market is going to run away to the downside fast and everyone will be left staring with their jaws open. It might not be tomorrow, it might not be this year, but at some point there will be a wide scale realization that the US is headed into a recession and that we have actually begun a bear market. When that day comes I think the dow will drop 1000 points or more.
The cracks are certainly showing but the stock market hasn't really begun any major hemoraging yet. While the 20 week money flow has turned negative, this wouldn't be a big problem so long as it rebounds quickly. And although the dow closed below its 40 week (200 day) moving average, so long as it regains it quickly the slope should stay positive. Long story short (no pun intended), the market needs to rebound quickly from Monday's ensured big gap down. If it does not rebound, and there is no reason why it fundamentally should... the the last six months will look like a gigantic bull trap.I'm drawing the line in the sand at $126.62 on the DIA or 12,795.93 on the dow jones industrial average. A weekly close below those levels and I am going to declare a secular bear market for US stocks.
For traders looking for some action, I ran into this nice looking DECK chart over the weekend. I think it has opportunity for longs and shorts alike. It could rebound nicely from the trendline test that occurred Friday or it could pullback further to some the fibonacci levels shown above or even test the recent low in the 90's. Which ever direction it moves, there could be some big swings in DECK this week for options expiration. And speaking of which, we could see some major upside in the mortgage insures (ABK, MBI, MTG, RDN, PMI) on put covering.
Ok, that was a bunch of technical stuff, for the more fundamental types check out this video of Jim Rogers I linkjacked from Ugly:
Don't you just love that look on gentle Ben's face. Awwww, poor guy. Bernanke actually had some relatively responsible things to say today that Ron Paul didn't give him credit for, more on that here.
There is quite a bit going on with each of the banks below, some are certainly in more trouble than others. But tonight I just wanted to post these six month charts because I get the impression the market is ignoring what is happening to America's top lending institutions. Things are getting ugly, real fast, and if you think the US economy is going to just keep chugging along all hunky dory without these banks, well, you are nuts!
Washington Mutual: Citigroup: Capital One Financial: Bank of America: Wells Fargo: I'm actually pretty scared here and thats coming from a short. The way things are unfolding, it seems like the US is heading towards a deep recession and I am scared for the welfare of my friends and family. I have actually been telling my friends and family to not hold ANY US stocks or mutual funds for the long term for some time now. I have only grown more concerned over the last six months even as stocks mindlessly went higher.
