Wednesday, January 30, 2008

Pullback Ends with a Hammer Reversal

Well that rally sure was nice. Not only did it provide some cool long side opportunities but it also gave us some sweet shorts. The pullback I was looking for on the indexes has completed perfectly. After a week long 1000 point rally on declining volume the dow staged a major reversal today on huge volume (note the inverted hammer). This sharp move up was characteristic of the types of rallies I expect us to see over the next few years. As you can see on the dow jones below, we rallied back up to the area where we first broke down which happens to be the 50% retrace of the overall decline from all time highs. Using a measured rule, I am expecting another 15.6% decline in the dow (matching the first leg) which will bring it down to roughly 10,500 in the next few months.

Now I've talked about the fallacy of thinking rate cuts are good for the markets, but today was something else. The market has seen the most rapid decline in interest rates ever with a 1.25% drop in a little more than a week. So if cutting rates was ever going to boost the stock market it would have happened today and the market did rally at first, a couple hundred points in fact. However, these gains did not last and the broad indexes all closed in the red at their lowest levels of the day, this is exactly what a hammer reversal looks like.

The media tells you big rate cuts are ultra bullish when in fact they signals major economic problems. Furthermore, the fed is essentially murdering the US dollar. You can expect to see gas prices much higher, food prices much higher and traveling much more expensive in the coming years. Is the tanking US dollar going to prevent a depression or signal one? I heard someone say today that the market acted like a spoiled brat demanding a new toy. It got the new toy, played with it for about an hour then threw it on the ground and started screaming again. Here's the S&P intraday action:

What I'm try to say here is that I am once again 100% bearish on the stock market. I have to admit that I was fooled briefly today and made the stupid decision of buying back some JASO and NYX calls after the cut. But I will be out of those tomorrow as I'm pretty much threw with calls for a while. Luckily, I had the foresight to load up big on DIA and BAC puts near the highs, so I did ok today. Time to be bears again, new lows are coming up in my humble opinion. I'll leave you tonight with a 3 year chart of the US dollar index, your hard earned tax dollars are working hard against themselves:

Disclosure: I own March DIA puts

The plot thickens... (rogue trader)

"Jerome Kerviel, the Societe Generale SA trader whose unauthorized bets led to the biggest trading loss in history, told prosecutors the bank cast a "complacent look'' on his practices.

"As long as we were winning and it wasn't too visible, things worked out, no one said anything,'' Kerviel told police in a transcript cited by Le Monde, which was confirmed by the prosecutors' office. "I am convinced my managers turned a blind eye to the means and amounts in question.''"

French Rogue Trader Claims Societe Generale Turned Blind Eye

"Three employees at Societe Generale in Paris have committed suicide in as many years, unions said on Tuesday, as they raised concerns about the stressful work environment at the scandal-hit bank...

The most recent incident, confirmed by Societe Generale, involved a trader who threw himself off a highway bridge in June last year nearby the bank's head office.

The man was in his 30s and a specialist in equity derivatives, like the rogue trader blamed for last week's losses -- Jerome Kerviel.

Union officials said the man killed himself just hours after he was reprimanded by management for losing 9-10 million euros ($13.31 million) in unspecified trades."

SocGen Suicides Put Stress at Work Under Spotlight

French Rogue Trader Timeline

Rogue Traders Are Lovable

Jerome Kerviel Becomes Internet Hero

Kerviel: 'I Never Meant to Become Rich'

BAC lower lows and lower highs

It sure looks like a good spot to short BAC again and thats what I did yesterday. Of course the fed news will move BAC today and it could rally up to around $43 before it hits that trend line but shorting here seems low risk.

Disclosure: I own Feb and May BAC $40 puts

Sunday, January 27, 2008


I'm really tired so this is going to be a short post on the recent pullback. I ran into a great article by Bulkowski on throwbacks and pullbacks over the weekend, take a look. Bulkowski defines a pullback as the climb in price back to the base (breakdown price) within 30 days after a descending triangle breakdown. In other words, after a stock breaks badly on large volume it often "pulls back" to the price where the break occurred. According to Bulkowski's statistics, pullbacks occur 56% of the time after an average initial decline of 9% in the three days following the break. Now take a look at the S&P 500:

Depending on where you draw the base of the descending triangle the pullback may or may not have completed last week. Notice how the S&P 500 pulled back to the August low at 1370 last week almost to the penny, then sold off again. The volume was lower on Friday as the market declined so I think there is still a good chance that the we rally back up the November lows before tanking again but we'll see. Bullkowski says there is a 56% chance that the pullback occurs so returning to 1400 on the S&P 500 should be slightly more likely than continuing to fall in the short term. I would really like to see a rally back up to that 1400 area where the 50 dma will be and declining volume would be ideal ( what we are seeing so far). However, I have little faith in this market and will take profits on the long side when I can.

Right now seems like a great time to be looking at individual stock charts for completed pullbacks for short entries. I don't have any specific charts for you tonight but maybe I'll throw some up this week. A few other noteworthy news bytes:

Bush will give his state of the union address Mon night
CFC reports earnings Tues before the bell, no conference call
FOMC decision on interest rates on Wed, market predicts .50% cut
GOOG, MA, ICE and AMZN earnings this week
Credit squeeze is a windfall for the exchanges

Disclosure: I own NYX and ICE calls, also BAC puts

Saturday, January 26, 2008

They got him! (the black swan)

"A rogue trader who cost France's Societe Generale bank more than $7 billion by making bad stock market bets was taken into custody on Saturday for questioning, judicial officials said...

Skeptics from Kerviel's neighbors to France's prime minister have questioned whether a single futures trader could have managed such large sums. Adding to the mystery, the bank said Kerviel may not have made any personal gain from his unauthorized trades...

In an interview published Saturday, Societe Generale's chief executive, Daniel Bouton, insisted the bank's actions after discovering the fraud did not fuel turmoil on world markets.

"It's absurd!" Bouton said of the suggestion, in an interview with Le Figaro daily. "Anyone could calculate our contribution to the market in recent days."

Bouton was quoted as saying the bank, in closing the trader's unauthorized positions, respected market rules that forbid any player from intervening with sums worth more than 10 percent of a given market. The bank says that is why it took three days to close the positions.

The bank maintains it was the biggest loser in the case, because of the timing of the discovery.

Kerviel had been investing the bank's money by hedging on European equity market indices. That means he made bets on how the markets would perform at a future date.

Bouton said the trader had been betting throughout 2007 that markets would fall. "He was therefore winning, virtually," he said.

But the bank says he had overstepped his authority and was wagering more money than he should have.

So at the beginning of January, Bouton said, the trader voluntarily created losing positions, to neutralize his earlier gains and cover his tracks.

But markets dropped this month, and fast. "This sad affair veered into a Greek tragedy: His virtual losing position became huge," Bouton was quoted as saying.

The bank's systems discovered an anomaly on Jan. 18, he said. On Sunday, the full scale of the problem was revealed to the bank's management -- "enormous and totally abnormal," Bouton said.

"I decided ... to close the positions and alert the supervisory authorities," he said.

When Asian and European markets collapsed Monday, "that had a catastrophic effect. The losses of Societe Generale became even more enormous," he was quoted as saying.

Ultimately it took three days to close the positions, and the bank lost $7.2 billion...

French presidential aide Raymond Soubie said the trader had been dealing with more than $73.3 billion. That figure outstrips the bank's market capitalization of $52.6 billion, and is close to the annual GDP of entire nations such Slovakia, Qatar or Libya...

The company, which also posted another $2.99 billion subprime-related loss, planned to raise $8.02 billion in new capital."

Rogue French Trader Taken into Custody

I have a few takeaways from this black swan event:
  • It would cost $7.2B to bring the global markets to its knees, in otherwords using the futures market it is relatively inexpensive to destroy global wealth
  • If this guy was trading $73.3B in equity on futures then the world is lucky he only lost $7.2B, this could have been a major calamity
  • The timing of the event and news is rather convenient for the bulls, suggesting the recent decline was due to a French guy
  • He may have affected fed policy which is pretty pathetic
  • Banks take on highly leveraged risky bets
  • A single person can make a difference
  • Rogue trading sounds like fun
*Update: French trader hacked computers and "combined several fraudulent methods" to cover his tracks

**Update: French trader charged with "breach of trust" and released until hearing

***Update: SocGen had been warned about rogue trader's activity

Saturday Rock Blogging: Helter Skelter

Wednesday, January 23, 2008

Bear Market Rallies

Wow. I figured we would see a big bounce soon but jesus, that rally today was insane. The US market looked into the abyss and did not like what it saw. The dow jones industrial average climbed 632 points in 3 hrs to close strongly positive after having been down over 300 (see DIA above). But the party was not limited to the large caps. After dropping 24.4% since Halloween, the QQQQ traders decided they had seen enough and bought the nasdaq 100 etf up 6.1% in 3 hours (see chart below). I had been suspecting a big bounce and in fact was early to start buying tech stocks. But the move today was far more intense than I would have imagined and I think we have a classic panic bottom in place:

The intensity of this move is characteristic of a bear market rally. When stocks began to firm up this afternoon bears started to cover, panic sellers decided they wanted back in and long term investors bought stocks on the "cheap." The buying fed on itself and we got this massive bounce. Now that everyone thinks we are in a bear market, even my mom informed me that we are officially in a bear market, it is time to squeeze all the newly short till they are stopped out. The responsible investors out there have seen this bear market/recession coming for a long time and we got short last year. All the people who were late to the bear party are now in big trouble. This rally is going to go far higher than anyone expects and many will be suckered into thinking the bears are dead and the bull is back. I expect the major indexes to retrace at least back up to their 50 day moving averages, probably more. As you know, I am convinced that we are in fact in a bear market and I will be using this rally to re-enter puts, but not for at least a week or two. There will be a tremendous opportunity to short, buy cheap puts or get the hell out of this market if you still own any stocks but wait and let this rally blow your mind first. For now I am extremely bullish on this market and very happy with all of my positions. I own calls on FXI, SIGM, WFR, JASO, ICE and NYX, no puts.

If you are feeling as good about this rally as I am then I thought you might enjoy some more Paul McCartney...

Who's that knocking at the door, oh my its a bull!

Biggest rally ever?

Stocks staged the biggest rally in years in a massive reversal, it was pure euphoria watching it. More on this incredible move later.

Better Headline: US Stock Market Collapsing

Is it just me or is the mainstream media in the US a complete scam. From watching TV or reading google news, yahoo, etc it would appear that they are trying to get investors to buy or at least hold stocks. They have been telling us to buy stocks for months as the markets kept going lower and lower then I saw this headline on yahoo. Its sad but the truth is, wallstreet profits greatly from the US public buying stocks at the top and sell them at the bottom. Most average joe investors will hold stocks here because they think the market is already down alot, and look we are off the lows! Meanwhile wallstreet continues to dump their positions and get short. If I had a penny for every time cnbc said "off the lows" I'd be rich, it makes me sick. Trying to "ride out" a bear market is just about the silliest thing I have ever heard of but thats what the media wants people to think they should do. Sure this market will bounce but it is going to go much, much lower in my humble opinion.

Tuesday, January 22, 2008

NYX chart

Here is that chart I promised and to be honest it doesn't look very bullish. Certainly NYX was oversold and is due for a meaningful bounce, but there is quite a bit of resistance above. Resistance starts at $75.84 followed by the moving averages around $81 then theres a downtrend line at about $88. I will give NYX credit for having a huge intraday gain from the opening gap down. Sure the whole market came back from the lows but the dow closed down 128 points while NYX managed to finish with a gain. Volumes surged all around and this volatility must bode well for NYSE and AMEX volumes. I will try and exit my newly acquired NYX calls near the 50 dma.

On a side note, FXP is another creative ETF that trades on the AMEX, now owned by NYX. From yahoo, the FXP "seeks daily investment results, before fees and expense that correspond to twice (200%) the inverse of the daily performance of the FTSE/Xinhua China 25 index. The fund normally invests at least 80% of assets to investment that, in combination, have economic characteristics that are inverse to those if index." ProShares just went public with this ETF a few months ago but look at how much the volume as grown (good for NYX):

I also added what looks like an inverse head and shoulders pattern with a price objective near $125. I wouldn't put much weight in this pattern because this chart doesn't have much history to go on, and also this ETF was not trading during the Asian market crash over the last few days (because the US exchanges were closed). In fact, I took a call position in the FXI today which is the opposite bet to FXP, but after this international bounce is over I would be very interested in a long term short position in the Chinese markets. I went ahead and added the pattern because I saw it, even though I am currently trading against that pattern.

Disclosure: I own FXI and NYX calls.

Monday, January 21, 2008

Volume is in an uptrend!

Well it looks like the crash you expected is finally upon us. Most of you are probably aware of the carnage in worldwide markets over the past two days and the collapse in the US futures. To be honest I don't really have a whole lot to say about it, just look at some of the archived posts. For the past year we (the SG authors) have been talking about the seriousness of the issues facing the markets. Now that bear market is hitting the world in full force, well, who is really surprised? Ok, the fact that the crash of 2008 is upon us is a very serious matter, people have been financially destroyed by this event and there will be more blood on wall street before this is all said and done. For traders who will be taking advantage of the insanely high volatility tomorrow, please take these "circuit breaker" price declines into consideration.

Instead of getting all doom and gloom I thought that tonight I would write about a more positive scenario facing the exchanges, specifically the NYSE Euronext. The argument is simple, the exchanges charge small fees for every transaction that occurs. When volumes grow so do their earnings. After looking at a number of charts I have concluded that volumes swelled in the last bear market. This makes sense somewhat because volatility increases and that goes hand in hand with higher volume. Take a look at this ten year chart of the dow jones industrial average and note the volume 2000-2002:

You see pretty much the same trend on the new york stock exchange:

Volume seems to steadily increase until the end of a bear market when it spikes which is consistent with typical technical analysis. Furthermore, this seems to add to a longer term trend in volumes increasing over time. So it appears the exchanges have long term organic growth with some acceleration during bear markets. While the examples I gave are for stocks I think its safe to say you see the same thing in commodities and futures markets. In fact, the most recent headline on ICE is that they hit an all time high in futures volumes last Friday. With all the craziness in going on right now you can bet that they will be breaking that record for a fourth day in a row tomorrow.

Some have argued that with the credit freeze up the merger and acquisition activity is done for a while, but last week the New York Stock Exchange bought out the American Stock Exchange in what looks like a sweet deal for NYX. It seems like a takeover of ICE or NMX by CME or NYX is still on the table to support valuations. As far as the nyse/amex deal, the reason why seems so good for NYX is they are getting commisions on the biggest and most heavily traded etf's in the market. Take a look at these volume trends of amex ETFs over the past year (top). Notice a trend?

All of those etfs shown and options on them are now traded on the NYX owned exchanges. NYX is benefiting from both the etf boom, including the rise of inverse market etf's like QID from proshares and the increasing volume due to volatility. Now I'm no specialist on the sector but it seems pretty straightforward that the exchanges, especially NYX, are going to see a huge windfall from all this market activity. They seem to have timed their amex acquisition perfectly.

Now I know the sound of "stock exchange stocks could do well in a bear market" sounds somewhat suspicious but it makes sense to me. It would be a relatively simple thing to check if it weren't for the fact that every exchange traded exchange has come public in the last five years. Neither NYX, nor NDAQ, nor CME, nor ICE were publicly traded during the last bear market so we can't just go check their charts and see what happened. In fact the concept of a "for profit" exchange is relatively new in general, so maybe its the case that they will suffer materially in some unexpected (or expected?) way from a bear market. Let me know if you have any thoughts on this. If the markets go flat for a long time that will certainly be very bad for the exchange business, and thats a real possibility in my opinion. But for now volume is in an uptrend!

Disclosure: I have no position in NYX but I own some ICE calls.

Good luck out there tomorrow and be safe. I'll post an NYX chart tomorrow sometime, it doesn't make sense to do one until we see what happens in the morning. Stay tuned...

Saturday, January 19, 2008

Saturday Rock Blogging: My Life

Great song and a campy video huh? I love it.
Here's a higher quality version or you can check it out live.

If you liked that you'll love this and you'll go nuts for this.

Thursday, January 17, 2008

Volatility spikes as panic ensues...

The only indicator not pointing to a bounce in stocks has been the volatility index VIX. At the market lows in August and November the VIX spiked to 37.50 and 31.09 as seen below indicating a panic. Today the VIX climbed over 4 to hit a high of 28.51, breaking the trend line made by the two most recent VIX highs. Volatility usually spikes at turning points and it appears we are close to one in the markets with this kind of action. The VIX could spike further up into the 30's sure, but after today's 17% gain its probably time for a relief rally. I am now in some beaten down growth stocks (WFR, SIGM, JASO and ICE) and cash, it seems to risky to stay short here.

On a side note, I have very very perplexed by the VIX basically going flat since the start of 2008 while the market basically crashed (nasdaq is down more than 10%). This is quite unusual and seems to indicate a general complacency about the decline but there are other theories. It might be possible that as we enter a new regime for the market (bear mode) the usual indicators may fail to work like they used to. Specifically, in a bear market volatility may tend to decline with prices as they "trend." Whereas volatility might spike on sharp short covering rallies, it makes sense to me but this goes against the usual "volatility spikes at market bottoms" idea. I have also wondered how the put to call ratio has been able to steadily climb lately while volatility remained dormant. This is generally a rare event for markets and has been suggested to be a very bearish scenario.

Monday, January 14, 2008

Gold continues to make new all time highs...

Inflation, what inflation? Shame on the federal reserve.

All Short Here

In our daily chat sessions I sometimes often give Pythagoruz the gears about his bearish tendencies. As a matter of fact a couple of times recently I have actually traded directly against him, although with a different time-frame in mind. In my opinion this is all a part of how the markets work. It keeps our chat lively and no disrespect is ever intended. The truth is, we work quite well together.

Now having said that, I'm having fun reading his most recent post on Mixed Indicators. That post makes the writer in me cringe, because it lacks focus. That lack of focus makes the trader in me cringe, because there is no evident trade in that post. I must add my 2 euro-cents worth.

Today was a strong day for the Dow, and IBM led the way. That warms my heart, because it goes back to a conversation that Pythagoruz and I have had a couple of times, concerning the value of the dollar and export earnings. At one time he was concerned that the falling value of the dollar would hurt corporate earnings, and therefore stock valuations (silly bear...).

Companies that can export their products often see dramatic bottom line profits on the fall of their home currency. My example to Pythagoruz was KO, but IBM as a hardware and software and servicing company also clearly fits the example. They proved it today, and they carried the Dow today.

Tomorrow will be another day, and I suspect it will be a very different day. For starters, Citigroup will announce their earnings tomorrow, before the bell. The rumors are all over the place with that company, and nobody really knows what the bottom line is going to be. But it's well known that Citigroup is overly exposed to the SubPrime Lending problem and if I were a new CEO, such as they now have, I would be tempted to write off everything I could, so that nothing could come back to haunt me. This is the so-called "kitchen sink quarter" for the Citigroup.

Throw it all out, including the kitchen sink!

In this case, the kitchen sink will probably be the dividend. Bank stocks trade in direct comparison to their dividend rates because if the dividend is low, investors will deposit (with insurance guarantees) their capital instead. Most American banks these days are in need of capital, so cutting dividends will conserve capital and perversely, attract deposits.

So where's the trade? Today I bought a small position of C Jan $30 puts, symbol CMF. But I also bought a few DIA Jan $126 puts, symbol DAWMV because I think that C will lead the Dow down tomorrow, just as IBM led the Dow higher today.

I also have a few out-of-the-money January IWM puts, just in case that index happens to lead the way. It often does lately, as somebody in chat pointed out. In other words, I'm all short here....

So, who's the silly bear now?

Sunday, January 13, 2008

Mixed Indicators

In recent days it has become increasingly difficult to predict the near term (a few weeks) direction of the markets. Clearly the longer term trend is lower, but some indicators suggest a bounce might be near while others disagree. Lets start with the Nasdaq 100 tracking etf QQQQ which makes the strongest argument for a near term bottom:

From a measured move standpoint, the Q's have completed the recent leg down by dropping an equal percentage to the fist leg (11.6%). In Elliot wave theory this could be viewed two ways, either as the end of an ABC correction or as the first three waves of the first impulse in a long term down trend. The longer term implications of which interpretation you use is dramatic since if this is just a simple ABC correction then we would now resume the long term uptrend and make new highs. Obviously, I don't think that this is just a correction in a longer term uptrend, but for the short term it doesn't really matter which interpretation you use because in either case we should move higher.

Furthermore, the QQQQ recently reached oversold levels on the RSI seen at the August and November lows. Similarly, the stochastics gave buy signals (note the blue circles above). This chart was so compelling to me that I took significant call positions in the tech leaders SIGM and WFR on Friday.

On the other hand, although the underlying economic conditions have worsened substantially, we are not seeing the level of panic or bearishness than existed at the August and November lows. This might sound like a vague claim to make but we can quantitatively look at "panic" and bearishness a few ways. The standard way to do it is with the volatility index, or VIX. Also known as the "fear gauge," the VIX is a measure of the implied volatility of the S&P 500 index options. Volatility usually peaks at turning points, especially at bottoms, as can be seen in the six month chart below:

The VIX hasn't spiked like it did at recent bottoms and remains low compared to August levels. The caveat to this is that the VIX made a higher low recently and appears to be in a longer term uptrend. This suggests that volatility will be going higher eventually whether or not it does right now. To me this chart says people are not too concerned about the markets, we are just having an orderly sell-off that could continue. In general, volatility tends to go up in declining markets because investors buy insurance on their holdings by purchasing puts. The increased demand for puts causes them to be more expensive and so the VIX rises. When people panic and start loading up on puts that can signal a bottom, we are not there yet on the VIX. I'd also note that the VIX has historically seen much higher levels than we are at now, so there is room for the "fear gauge" to increase substantially.

In addition, volume tends to spike at turning points. Looking at the QQQQ volume in August and November (in the top chart), we saw a huge volume day at the recent bottoms which tells me that people panicked and threw away stocks. We haven't had such a day yet in this decline where volume spikes and VIX pops.

Another indicator I wanted to point out was the put to call ratio seen above. Like the VIX, the put to call ratio tends to spike at market bottoms and be low at market tops. You can clearly see the extremes in the chart above which correlated well with recent market turning points. While the put to call ratio did spike to a level that would be considered high over the last six months, it only reached around 1.0. That means that there are just as many calls being held out there as puts, which is hardly bullish.

The NYSE new highs - new lows index (seen below), NYHL, paints a more bearish picture being far above August levels. While it did make a recent low, this index is clearly declining and seems headed lower. This index would be zero if an equal number of NYSE stocks were making new highs as were making new lows and it becomes increasingly negative as more stocks make new lows. The fact that the 50 dma is below the 200 dma and both are declining tells me this market is sick:

The last indicator I wanted to throw out there is kind of obscure but I thought I'd mention it because it suggests that we are at a very extreme condition right now. Its called the NYSE short term trading arms index, the ticker is TRIN. "A number of TRIN interpretations have evolved over the years. Richard Arms, the originator, uses the TRIN to detect extreme conditions in the market. He considers the market to be overbought when the 10-day moving average of the TRIN declines below .8 and oversold when it moves above 1.2. Other interpretations seek to use the direction and absolute level of the TRIN to determine bullish and bearish scenarios. In the momentum driven markets, the TRIN can remain oversold or overbought for extended periods of time." I have the 10 day moving average shown and the .8 and 1.2 levels marked with the oversold levels circled. Those areas should be places you want to be buying. Note that this index is saying that right now the market is the most it has been oversold in the past six months which would suggest a tremendous buying opportunity:

The point I'm trying to make here is that the market is flashing contradicting indicators on the shorter term (a few weeks) direction of the market. This could indicate that the next big move is relatively unexpected or it might indicate that there won't be a big move soon. Maybe the market will just go flat in which case a lower VIX at this "turning point" would make sense. We'll just have to see. One thing is certain, it isn't getting any easier to make money trading this market.

As a side note, all five of the above charts are of the last six months so you can scroll up and down this post and see how they are correlated.

Saturday, January 12, 2008

Saturday Rock Blogging: Coldplay

Its just one of those mornings.

Thursday, January 10, 2008

SOLF charts

Just thought I'd add my two cents on SOLF after xerxes' post tonight. First off, I don't know much about the fundamentals other than that it appears much cheaper than the solar leaders like SPWR and FSLR. Also, I have heard that there may be some issues with the company by people that have done research on it, but can't say much more than that. If you want to do some digging, I'd start with their website.

The daily chart looks pretty good, I've drawn a few trend lines on the chart above (click to enlarge). I would like to see that 50 dma catch up, but there has been a nice pullback from the highs and the RSI came in from overbought levels. One reason for concern would be that the CCI recently gave a sell signal by crossing over zero and this indicator signaled a pretty good buy back in Nov. If it can hold $25 I could see it making new highs.

On the options, they are expensive (see implied volatility above) but they have been more expensive in the past (early dec). They price in an annualized 120% move in the stock which compares to the QQQQ options which price in a 30% move. My software actually sold some puts naked earlier this week because SOLF has some of the most expensive options in the market. As far as a straddle, I like that idea because it seems unlikely to me that SOLF will stand still. It should either pop or drop, the problem is the options price that in.

As you know I am already bearish on FSLR and if it drops as big as I'm expecting SOLF won't look as cheap. Being late to the solar rally, I think SOLF carries a good deal of risk if the solar leaders like FSLR and SPWR tank. For now though, it seems like here is a low risk place to get long SOLF with a stop around $25.

Wednesday, January 09, 2008

Getting chopped up

I haven't posted a trading idea in a while, because to be honest I'm having a difficult time predicting anything lately. My suggestions and postion on the Euro-Dollar relationship were good for quite some time, and I like that sort of trend. As I noted in a post here, that trend ended with a "head and shoulders" chart formation, and there has been no consistent movement since.

Well, the rest of the market has been that way for me lately too. I am fairly risk-adverse these days and the fact that I'll soon be taking an extended scuba vacation has kept me from playing the upcoming earnings season.

That "risk-adversity" has seen me getting chopped up and out of several daytrading positions in recent days. I've taken some small losses on positions that later on the same day would have been good profits, but there was no way to foresee that. CFC is a good example. I had puts on that bankruptcy rumor, and covered quickly after their PR, and trading resumed. I'm not going to lose sleep over the few dollars lost in that trade, but looking at where the stock ended yesterday, I can't help but get frustrated.

I've also played IWM recently, but the wild swings there have hit my stops before I would take profits, profits I could have taken just a couple of hours later. And today I stopped out of a few MDC puts, and I top-ticked that one. Ten minutes of patience would have saved me quite a bit of money. Frankly, these markets seem to know exactly what my pain tolerance is.

I've been getting chopped up, so I'm getting out for a while, and going on vacation. I'll be back in February, when hopefully the markets will be a little more sane, and a little more predictable.

Tuesday, January 08, 2008

The Dow Jones and S&P 500 are in Bear Markets

A few months back I drew a line in the sand and suggested an area that if the markets moved below I would declare bear markets. Well, sadly the dow jones industrial average and the S&P 500 have closed below those levels with conviction and volume. Both major indexes have followed the small caps in establishing clear downtrends by making lower lows and having negatively sloped moving averages among other bearish indications like the crosses of death (50 dma crossing over the 200 dma).

I wouldn't go initiating short positions here because the markets are getting oversold and are due for a bounce, but any bounces should be shorted. Don't buy into this media hype about a 10% "correction," now that the primary trend is down any move to the upside is a correction. Holding stocks for the long term in this environment is a suckers game. I would suggest looking to enter shorts or add to existing positions when markets bounce back up to the 50 dma's which could happen as early as next week. The one saving grace for these indexes is that August lows have not yet been broken and may provide some support below in the near term. My guess is that they will be broken tomorrow, everyone panics, there will be alot of talk about our new bear market, then we see a power rally. That is what you want to wait for before selling longs and entering shorts, in my humble opinion.

Let me just say this one more time to be clear. It is risky to try and enter short positions here when the markets are oversold and are down significantly from recent levels, but we are now in a long term down trend now. That means sell on any strength.

Brain over at alpha trends makes some good points:

Monday, January 07, 2008

More recent Jim Rogers video

This was from the middle of December.

Some interesting links:

The Five Stages of Grief

First Solar Update

Amazing chart, everything about this stock makes me want to growl like a grizzly. I posted last night (btb also noted) that FSLR looked like a great short and fortunately for those who wanted in it gapped up when Morgan Stanley upgraded the most expensive stock in the entire market this morning. "Morgan Stanley, now sees FSLR reaching (maintaining) $275 a share saying the company should benefit from the weaker dollar." Huh?, thats funny because FSLR currently sports market cap of $18.5B yet in the last year they only brought in $356M in revenue, $107M of which was net income (PE of 173). Ok, revenues quadrupled last year but the stock went up 900% in 2007. And besides, FSLR was just above $275 and it could not maintain. If an upgrade can't keep this drunk climber going I don't know what can. Click on the chart above, still looks great.

Here's a FSLR chart I posted back in July just to give you a feel for how its parabolic move began last year. Note how crazy it looked back then and think about it more than doubling from there before 2008:

Disclosure: I took some profits on FSLR puts today, added some new ones.

Sunday, January 06, 2008

Places to dig in your claws

In the midst of this market meltdown almost every stock looks like a great short. Tonight I just want to throw out some specific 6 month charts that I think demonstrate the scale of the collapse and offer big opportunities on the downside. I will start with charts that look the worst and then show you better looking situations. The result will be that the more conservative (lower risk, lower reward) plays are first then I'll get to the really aggressive (higher risk, huge reward potential) ideas. Be sure to click on each chart to see the details of my thoughts on the charts including support, resistance and targets. These are the days that bears wait years for, enjoy!

Sears Holdings/ Kmart (SHLD):

Home Depot (HD):

Fannie Mae (FNM):

Bank of America (BAC):

Intel (INTC):
Google (GOOG):

And my favorite of all shorts in the entire market right now is FSLR. Not only do I think that wallstreet has this stock fundamentally wrong, its also gone up a ton with few pullbacks to create support. I'm looking for a $100 drop in this stock in a short period of time.

First Solar (FSLR):

Just one cautionary note. When things look worst that is usually the best time to take profits on shorts and things look pretty bad right now. I am of the mind that we began a new scale of decline last Friday and things are about to look much, much worse. I have been wrong before though and I am constantly worried of some emergency move by Bush, Paulson and Bernanke to try and wipe out shorts. They have done things like emergency rate cutes before and I expect the bulls to go down kicking and screaming. So just be on your guard and take profits casually on the way down while aggressively shorting the rallies. Its time to start acting like bears!

Disclosure: I own BAC, FNM and FSLR puts and I wish I had puts on all of these.

Saturday, January 05, 2008

Friday, January 04, 2008

US Small Caps are in a Bear Market

Let me start by saying that my titled opinion is based entirely on the chart of the Russell 2000 index seen above. This is a pretty reliable measure of how growth stocks are doing, and growth is important because thats what leads the broad market. According to investopedia the Russell 2000 is:

"An index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. ... The weighted average market capitalization for companies in the Russell 2000 is about US$1 billion and the index itself is considered to be the benchmark for all small cap mutual funds."

Its a big deal and in late 2002 the small caps were the first stocks to begin climbing out of the nasty bear market early in this mellinium (2000-2002). They led the way to a recovery which turned into a powerful 5 year bull market, one that officially ended today.

I don't want to make a big long post about it, just look at the chart above. After forming what looks like a perfect double top, the Russell 2000 closed today below its major area of support around 735. There are now a series of lower highs and lower lows in place, the 50 day moving average is below the 200 day and they are both declining. By any measure the small caps are in a serious downtrend that could last for years.

What is a bear market and how bad can it get? Google has many definitions. I particularly liked:

"A falling market in which bears would prosper."
"A market in which the primary trend is down."
"A prolonged decline of stock prices usually occurring over a period of months or years. May also describe a general belief by many investors ('bears') that prices are in a falling pattern."

but the standard definition is

"Any market in which stock prices are declining for a prolonged period, usually falling by 20% or more."

At any rate, I continue to expect significant declines in the broad market from these levels based on the charts. In the 2000 to late 2002 bear market the Russell 2000 index fell almost 50% from peak to trough while the index has only fallen 15% from its all time high set in July 2007. Using the top pattern formed by the Russell 2000 you get a target of about 620 which is 14% lower and would be a 28% decline from the all time high. I suspect we will get there in a hurry then the decline will slow down and eventually we will go flat for a while.

In my view, we are clearly in an environment where owning any stocks is a bad idea. If you know a company well or there is some counter trending sector then all the power too you but the majority of stocks will decline in value, in my humble opinion. One thing I caution against is convincing yourself that big caps are ok because they have dividends and are more stable. I would certainly expect them to fall less than say tech stocks but not less than their dividend yield. Yeah the yield goes up when they fall but if the stock declines 10% then you just lost a net 4% on your 6% div yield stock. There are safe ways to return a decent yield without any risk to loss of value in the underlying.

Now I know ya'll aren't surprised by this one bit, in fact you called the top in August when 44% of you voted that the bull market was over. Congratulations! Also, it has been known for some time that the homebuilding sector, financial sector, and retail sector were already in bear markets. But now we have a major index officially in "down mode" so for those of you who want to do better than the 4-5% safe returns on savings ("cash") its time to start acting like bears. There are plenty of stocks with major downside ahead out there and I plan to find them. If you want a less aggressive way to play it just buy one of the ProShares Short ETFs like RWM or PSQ, they will increase in value as the market drops and fore all intensive purposes they are just like stocks.

Just remember, you are fully responsible for you own investment decisions. The fact that I see the stock market falling doesn't mean that it will actually happen. I'm not trying to give investment advice here, just stating some things that are on my mind in hopes of sparking some thought and dialog with the readers. Any thoughts?

Here's the most recent video from our friend Don Harold: