Wednesday, September 9, 2009
Week One Thread
Here is the suicide pool week one thread. Everyone can post who they are thinking of taking prior to actually making picks. This may help others in deciding who to take. Or at least we can ridicule someone who wants to take the Browns.
Thursday, August 27, 2009
From Bad to Worse
I wrote on May 1 why I am a long term ultra bear. I wrote how I believe the stock market will crash in a P3 scenario sometime in the next few years based on the debt load our country has taken on. I laid the case out here:
http://top-traders.blogspot.com/2009/05/thoughts-on-my-long-term-view.html
I felt an update was in order after the CBO's updated forecast of future deficits. Well the news IMO went from horrible to gut wrenching. The numbers they throw around are nearly impossible for any human to imagine. You can try the "lay dollar bills to the moon" type analogies, but face it I have no idea how far the moon is away. Pick 'n Save OK. I can relate to that. I've been there. I have a talent for analogizing things in a way people can understand. So I will try to do the same here.
Mike Hunt makes a decent living and he is very handsome. He brings in $50k per year in a very steady job as head brewmaster at the Town of Delafield Brewhouse. He's had this job for years and for the sake of this analogy let's say he never gets a raise or gets his wages cut. Ole Mike lives within his means. He has two credit cards that he pays off monthly. Only a few times has he had to rack up debt that he could not pay back monthly and carried a balance for only several months. These purchases were for emergencies (new brakes, furnace repair, etc.)
Well for some reason Mr. Hunt decides he wants more things than he can afford. The 32" tube TV just is not the same as that 57" Plasma at Best Buy. So Mike asks his bank for a HELOC. No problem says the bank. He's got excellent credit, no debt besides his mortgage and auto loan and is not any risk at all.
Well that was so easy and only a few grand that Mike decides next year he is gonna take that trip to Cudahy he has always wanted. He'll do it on the cheap. Once again Old Mike heads to the local banker. A few grand, low interest like last time. He'll be sipping Old Style Pulaski Park in his new Packer Zubaz in no time.
For the next few years Mike Hunt gets a little bolder. Nothing too much. $2000-$2500 max. Then he has a mini emergency. Mike needs to remodel his basement. See he is so certain after two stellar preseason games that the Packers will be in the Superbowl. He wants to host a SB party. So Mike Hunt goes to the bank to borrow $30k.
The banker gives him a pause. Then he agrees that since Mike has never missed a payment he'll take the risk. Now old Mike only makes $50k per year and he has a mortgage and car payments like everyone else. This $30k will stretch him pretty thin.
During the basement remodel Mike realizes that he wants to add a porch to his house for another $30k. He just HAS to borrow for a downpayment on a second home in Cudahy since he fell in love with that city, another $15k. Pretty soon Mike has a list of ten projects each requiring $15-25k. This will last for the next 10 years at least.
What will the banker say when Mike tells him of his plan for the next decade? On top of this the banker knows Mike has two teeneage daughters (let's call them Social Security and Medicare) that will be attending college in the next five years. Mike Hunt will need thousands for this. And Mike's house may need cash for emergencies like a new roof or new kegerator.
Then Mike catches word that his hours are being cut by 5 per week and possibly more next year. What will happen to Mike when he can no longer make the monthly payments? When will the banker say "no more"? What will the banker do to Mike when the payments are not made in full each month?
Back to reality. You guys probably followed along with this analogy. The US Treasury collects about $2.5 trillion per year. We've had deficit spending almost every year since the early 80's. Nothing too much. Prior to 2009 the largest deficit was $400 billion. Compared to $2.5 trillion not much.
Then comes 2009 (note this is not an attack on the current president) and our deficit EXPLODES to $1.5 trillion! Yesterday it was announced that 2010 will also be $1.5 trillion in the red. Furthermore deficits in the $1 trillion range are predicted almost EVERY YEAR for the next 10!
It gets worse. Seriously! This is a "rosey" prediction by the CBO. To meet this estimate the economy must rebound by next summer! Like back to the bubble peak rebound. Unemployment back to 5%. Home values back to balloon prices. Second mortgage o'rama revisited! This is impossible given that the consumer is tapped out of credit. The maximum ability to service debt has been reached at already record low interest rate levels. Furthermore a much larger segment of our population will be leaving the workforce and will most likely enjoy a downsized retirement lifestyle lessening the number of those adding to the collective (taxpaying) workforce and further draining the gov through SS and Medicare.
It gets worse. Honestly! Also figured into this rosy scenario is a complete repeal of ALL of GW's tax cuts. $1000 per child tax credit. GONE! $75k depreciation for small business purchases. GONE! Lower tax rates and elimination of 10% tax bracket. GONE! Temporary raising of the limit for the AMT. GONE! IMO there is no way the Dems will not make an attempt to keep these in place. At least for those making less than $200k per year.
It gets worse. John shut up, we've heard enough! Sorry guys. The worst is saved for last. Remember Mike's daughters, Social Security and Medicare? Well guess what, they just got accepted to MIT and the older on is talking about a wedding. According to the CBO the ticking time bomb known as social security that was thought to become insolvent sometime in the 2020's will now be inslolvent as early as 2010! YIKES! See the graph on the first page.
http://www.cbo.gov/ftpdocs/104xx/doc10457/08-07-SocialSecurity_Update.pdf
Most likely sometime between 2010-2018 SS will be in the red. That means we will need to draw on the "reserves" from the last 70 years of SS. Phew! At least we have those reserves. Not so fast! We opened the "lockbox" of reserves buried in the back yard and found only IOU's. Looks like wifey borrowed the money and left IOU's in place of the cash. Guess where the money comes from to pay back the spent SS surplus. That's right, taxpayers.
It may be even worse yet! Huh? What? How? Well remember our good old buddy Ben Bernanke back in March when he announced Quanitative Easing by the Fed? Something like $1.5 trillion dollars to purchase things like bonds and mbs? Well we don't know exactly where that money went or when/if we will get it back. Here is the best I could fine representing what they own.
http://www.zerohedge.com/sites/default/files/images/Fed%20Balance%20Sheet%208.19_2.jpg
Could be yet another boat anchor around our necks.
Boy John you sound pretty gloomy. I sure do. I honestly do not see any way out without extreme pain. Perhaps in another post I will write about what I forsee as possible "solutions", but this has gotten lengthy enough already. Feedback is appreciated.
http://top-traders.blogspot.com/2009/05/thoughts-on-my-long-term-view.html
I felt an update was in order after the CBO's updated forecast of future deficits. Well the news IMO went from horrible to gut wrenching. The numbers they throw around are nearly impossible for any human to imagine. You can try the "lay dollar bills to the moon" type analogies, but face it I have no idea how far the moon is away. Pick 'n Save OK. I can relate to that. I've been there. I have a talent for analogizing things in a way people can understand. So I will try to do the same here.
Mike Hunt makes a decent living and he is very handsome. He brings in $50k per year in a very steady job as head brewmaster at the Town of Delafield Brewhouse. He's had this job for years and for the sake of this analogy let's say he never gets a raise or gets his wages cut. Ole Mike lives within his means. He has two credit cards that he pays off monthly. Only a few times has he had to rack up debt that he could not pay back monthly and carried a balance for only several months. These purchases were for emergencies (new brakes, furnace repair, etc.)
Well for some reason Mr. Hunt decides he wants more things than he can afford. The 32" tube TV just is not the same as that 57" Plasma at Best Buy. So Mike asks his bank for a HELOC. No problem says the bank. He's got excellent credit, no debt besides his mortgage and auto loan and is not any risk at all.
Well that was so easy and only a few grand that Mike decides next year he is gonna take that trip to Cudahy he has always wanted. He'll do it on the cheap. Once again Old Mike heads to the local banker. A few grand, low interest like last time. He'll be sipping Old Style Pulaski Park in his new Packer Zubaz in no time.
For the next few years Mike Hunt gets a little bolder. Nothing too much. $2000-$2500 max. Then he has a mini emergency. Mike needs to remodel his basement. See he is so certain after two stellar preseason games that the Packers will be in the Superbowl. He wants to host a SB party. So Mike Hunt goes to the bank to borrow $30k.
The banker gives him a pause. Then he agrees that since Mike has never missed a payment he'll take the risk. Now old Mike only makes $50k per year and he has a mortgage and car payments like everyone else. This $30k will stretch him pretty thin.
During the basement remodel Mike realizes that he wants to add a porch to his house for another $30k. He just HAS to borrow for a downpayment on a second home in Cudahy since he fell in love with that city, another $15k. Pretty soon Mike has a list of ten projects each requiring $15-25k. This will last for the next 10 years at least.
What will the banker say when Mike tells him of his plan for the next decade? On top of this the banker knows Mike has two teeneage daughters (let's call them Social Security and Medicare) that will be attending college in the next five years. Mike Hunt will need thousands for this. And Mike's house may need cash for emergencies like a new roof or new kegerator.
Then Mike catches word that his hours are being cut by 5 per week and possibly more next year. What will happen to Mike when he can no longer make the monthly payments? When will the banker say "no more"? What will the banker do to Mike when the payments are not made in full each month?
Back to reality. You guys probably followed along with this analogy. The US Treasury collects about $2.5 trillion per year. We've had deficit spending almost every year since the early 80's. Nothing too much. Prior to 2009 the largest deficit was $400 billion. Compared to $2.5 trillion not much.
Then comes 2009 (note this is not an attack on the current president) and our deficit EXPLODES to $1.5 trillion! Yesterday it was announced that 2010 will also be $1.5 trillion in the red. Furthermore deficits in the $1 trillion range are predicted almost EVERY YEAR for the next 10!
It gets worse. Seriously! This is a "rosey" prediction by the CBO. To meet this estimate the economy must rebound by next summer! Like back to the bubble peak rebound. Unemployment back to 5%. Home values back to balloon prices. Second mortgage o'rama revisited! This is impossible given that the consumer is tapped out of credit. The maximum ability to service debt has been reached at already record low interest rate levels. Furthermore a much larger segment of our population will be leaving the workforce and will most likely enjoy a downsized retirement lifestyle lessening the number of those adding to the collective (taxpaying) workforce and further draining the gov through SS and Medicare.
It gets worse. Honestly! Also figured into this rosy scenario is a complete repeal of ALL of GW's tax cuts. $1000 per child tax credit. GONE! $75k depreciation for small business purchases. GONE! Lower tax rates and elimination of 10% tax bracket. GONE! Temporary raising of the limit for the AMT. GONE! IMO there is no way the Dems will not make an attempt to keep these in place. At least for those making less than $200k per year.
It gets worse. John shut up, we've heard enough! Sorry guys. The worst is saved for last. Remember Mike's daughters, Social Security and Medicare? Well guess what, they just got accepted to MIT and the older on is talking about a wedding. According to the CBO the ticking time bomb known as social security that was thought to become insolvent sometime in the 2020's will now be inslolvent as early as 2010! YIKES! See the graph on the first page.
http://www.cbo.gov/ftpdocs/104xx/doc10457/08-07-SocialSecurity_Update.pdf
Most likely sometime between 2010-2018 SS will be in the red. That means we will need to draw on the "reserves" from the last 70 years of SS. Phew! At least we have those reserves. Not so fast! We opened the "lockbox" of reserves buried in the back yard and found only IOU's. Looks like wifey borrowed the money and left IOU's in place of the cash. Guess where the money comes from to pay back the spent SS surplus. That's right, taxpayers.
It may be even worse yet! Huh? What? How? Well remember our good old buddy Ben Bernanke back in March when he announced Quanitative Easing by the Fed? Something like $1.5 trillion dollars to purchase things like bonds and mbs? Well we don't know exactly where that money went or when/if we will get it back. Here is the best I could fine representing what they own.
http://www.zerohedge.com/sites/default/files/images/Fed%20Balance%20Sheet%208.19_2.jpg
Could be yet another boat anchor around our necks.
Boy John you sound pretty gloomy. I sure do. I honestly do not see any way out without extreme pain. Perhaps in another post I will write about what I forsee as possible "solutions", but this has gotten lengthy enough already. Feedback is appreciated.
Wednesday, June 3, 2009
Almost there
It's been a while since my last post. Work is getting busy so I haven't had as much time. Plus the market was pretty bring during May. June, however, is a new month and things are getting more interesting.
I have a good reason to believe that this P2 wave up is nearing completion faster than I previous thought and much faster than most think. It occured to me the other day that the P1 wave down ended earlier than most were looking for. I thought maybe this P2 rally up could also end early. Since everyone and their mothers are looking for 1000+, perhaps we could fizzle out short of that mark. Then I went to work to see if it is possible.
From an EW standpoint we've hit the minimums for price. We've also hit the minimums for shape, that is the wave structure. This is actually what gave me the confidence to make this call. The structure looks almost complete.
From a trend analysis standpoint we have three very solid trendlines all converging at the 985-900 mark. According to trend analysis (TA) whenever there exists several lines all converging in one area you can expect a reversal or at least a significant pullback. We also tagged the 200 dma this week.
The momentum indicators also jive with my thought that a top is near. We have a clear divergence on the ROC, CMF, OBV, Accum/distr, MACD, RSI, CCI and the NY$I. That's about all of the significant indicators. The stochs still have room left to the upside, but not much. What these indicators are pointing out is that the participation of buyers is waning. Prices are moving from the inertia of the previous almost 300 point advance and not from aggressive new buying.
All of the sentiment indicators are at extreme bullish readings, many of them at levels not seen since the 2007 high! The DSI for SPX futures is at 86%, last seen in Oct. of 2007. The DSI for Nasdaq is at 85%, also last seen in Oct. 2007. European bullish sentiment is at 93% with traders only at 97%! When someone answers these surveys as bullish it means they are already long. When 85% or 97% of investors are long there are no more seats left on the bull bus. As they exit prices fall.
Banks have lagged. The financial index peaked on May 8. It has not come close to breaking this despite the fact that the major indicies have continued to put in new highs. The XLF has put in a triangle shape which suggests the move upward is almost complete. It could break the May 8 high, or fall just short. Also the banking index has been even weaker than the overall financial index. The pattern made by the banking index indicates the high has been put in and will not be broken. Since the banks led this market down this past winter and up this spring I believe it is telling us we are going down again sooner rather than later.
Furthermore we are nearing 2Q reports. It is my belief that 2Q will be disappointing. Those green shoots seen after 1Q have withered. The banks led the 1Q earnings surprises through mainly manufactured earnings. Most of the banks were counterparties to AIG and received billions from AIG (via us taxpayers) in 1Q. This money went straight to the bottom line. Also with the suspension on mark-to-market these banks were allowed to "write up" billions in loans previously written off. Well guess what those "write ups" count as earnings and also went straight to the bottom line. A few other one time items such as GS moving all losses to December as they changed their fiscal year so their first quarter, amazingly enough, was profitable while their December was disasterous. WFC made $1 billion off of the stock purchase of a company they bought the previous year. It was a great investment, but guess what that stock isn't gonna deliver $1 bill per quarter. My point is that the banks made tons of money through one time items, not a surge in new loans.
From what I gather the only thing keeping this market afloat is the inflation and weak dollar trade. That is shorting bonds (raising yields) and buying commodities. Sound familiar? That was the 2007-2008 playbook that gave us $4 gas and high grocery bills. The difference this time is that the world is in a deep recession so the fundamentals do not support higher commodity prices. If investors were to get spooked by these weakening fundamentals it could begin a race to unwind these positions, just like early 2009.
This is concerning though. It could be that the trillions of dollars that the Fed has pumped into banks is making its way into commodities as the banks are tired of getting no return on treasuries. It could also be that foreign central banks (ie China) have lost confidence in the US and are in the process of unwinding their long bonds in favor of commodities. Either way if the fundamentals do not support higher commodity prices (and they don't) the higher prices at the pump and grocery store and higher mortgage rates will absolutely destroy those little green shoots that Bernanke and Obama have been smoking for the last three months.
So this has been the evidence for a top. How could this play out? What I am looking for is a slight pullback to the 925-930 area possibly today and then one last push up to new highs, possibly 985. If this push up comes on low volume and further divergences it could be the short of a lifetime as that price will not be seen for years. We should trace out a large five wave move down possibly 100 points. This will be followed by a move back up almost to the 985 top. Then we get the fastest scariest drop in prices sometime this fall or winter. I have laid out some fundamental reasons for this drop in the past. If any of this actually plays out, things will never be the same.
I have a good reason to believe that this P2 wave up is nearing completion faster than I previous thought and much faster than most think. It occured to me the other day that the P1 wave down ended earlier than most were looking for. I thought maybe this P2 rally up could also end early. Since everyone and their mothers are looking for 1000+, perhaps we could fizzle out short of that mark. Then I went to work to see if it is possible.
From an EW standpoint we've hit the minimums for price. We've also hit the minimums for shape, that is the wave structure. This is actually what gave me the confidence to make this call. The structure looks almost complete.
From a trend analysis standpoint we have three very solid trendlines all converging at the 985-900 mark. According to trend analysis (TA) whenever there exists several lines all converging in one area you can expect a reversal or at least a significant pullback. We also tagged the 200 dma this week.
The momentum indicators also jive with my thought that a top is near. We have a clear divergence on the ROC, CMF, OBV, Accum/distr, MACD, RSI, CCI and the NY$I. That's about all of the significant indicators. The stochs still have room left to the upside, but not much. What these indicators are pointing out is that the participation of buyers is waning. Prices are moving from the inertia of the previous almost 300 point advance and not from aggressive new buying.
All of the sentiment indicators are at extreme bullish readings, many of them at levels not seen since the 2007 high! The DSI for SPX futures is at 86%, last seen in Oct. of 2007. The DSI for Nasdaq is at 85%, also last seen in Oct. 2007. European bullish sentiment is at 93% with traders only at 97%! When someone answers these surveys as bullish it means they are already long. When 85% or 97% of investors are long there are no more seats left on the bull bus. As they exit prices fall.
Banks have lagged. The financial index peaked on May 8. It has not come close to breaking this despite the fact that the major indicies have continued to put in new highs. The XLF has put in a triangle shape which suggests the move upward is almost complete. It could break the May 8 high, or fall just short. Also the banking index has been even weaker than the overall financial index. The pattern made by the banking index indicates the high has been put in and will not be broken. Since the banks led this market down this past winter and up this spring I believe it is telling us we are going down again sooner rather than later.
Furthermore we are nearing 2Q reports. It is my belief that 2Q will be disappointing. Those green shoots seen after 1Q have withered. The banks led the 1Q earnings surprises through mainly manufactured earnings. Most of the banks were counterparties to AIG and received billions from AIG (via us taxpayers) in 1Q. This money went straight to the bottom line. Also with the suspension on mark-to-market these banks were allowed to "write up" billions in loans previously written off. Well guess what those "write ups" count as earnings and also went straight to the bottom line. A few other one time items such as GS moving all losses to December as they changed their fiscal year so their first quarter, amazingly enough, was profitable while their December was disasterous. WFC made $1 billion off of the stock purchase of a company they bought the previous year. It was a great investment, but guess what that stock isn't gonna deliver $1 bill per quarter. My point is that the banks made tons of money through one time items, not a surge in new loans.
From what I gather the only thing keeping this market afloat is the inflation and weak dollar trade. That is shorting bonds (raising yields) and buying commodities. Sound familiar? That was the 2007-2008 playbook that gave us $4 gas and high grocery bills. The difference this time is that the world is in a deep recession so the fundamentals do not support higher commodity prices. If investors were to get spooked by these weakening fundamentals it could begin a race to unwind these positions, just like early 2009.
This is concerning though. It could be that the trillions of dollars that the Fed has pumped into banks is making its way into commodities as the banks are tired of getting no return on treasuries. It could also be that foreign central banks (ie China) have lost confidence in the US and are in the process of unwinding their long bonds in favor of commodities. Either way if the fundamentals do not support higher commodity prices (and they don't) the higher prices at the pump and grocery store and higher mortgage rates will absolutely destroy those little green shoots that Bernanke and Obama have been smoking for the last three months.
So this has been the evidence for a top. How could this play out? What I am looking for is a slight pullback to the 925-930 area possibly today and then one last push up to new highs, possibly 985. If this push up comes on low volume and further divergences it could be the short of a lifetime as that price will not be seen for years. We should trace out a large five wave move down possibly 100 points. This will be followed by a move back up almost to the 985 top. Then we get the fastest scariest drop in prices sometime this fall or winter. I have laid out some fundamental reasons for this drop in the past. If any of this actually plays out, things will never be the same.
Friday, May 22, 2009
It's all psychology
R. N. Elliot was the creator of the Elliot Wave Theory. He began his career as an accountant. He was forced to retire that exciting career after obtaining an illness in the early 1920's. He then dedicated his remaining 20 years to studying the stock markets.
What he discovered is that price movements are caused by natural laws based on basic human emotions. It is known in sociology that humans as individuals are capable of making many complex and unpredictable decisions. Yet when humans act as a group, their decisions become much more primative. Some call this group think. Anyway after dissecting 75 years of stock market history Elliot discovered that there existed some of these same primative recurring patterns in stock trading.
The fundamentals of his Elliot Wave Theory are based on how humans react to fear and greed as a group. These primative emotions have been played out for years in certain cycles. Some investors have used his theories to profit for decades.
If it is so easy why doesn't everyone quit there jobs and trade stocks accroding to EWT? Because EWT can ALWAYS show us why things happened, but it is difficult to predict exactly how things will play out.
The strength IMO of EWT is to give an investor a general idea of which direction is most probable for prices to trend and to give some price targets.
For example I had based my forecast of SPX prices in the 600's when the market was in the 900's in Dec and Jan based on EWT. I forecasted a bounce to 750-850 when the market's were sub-700 in early march based on EWT. As prices began to rise I was able to adjust my upper targets to well over 900 based on EWT.
What I need to improve on is trading successfully based on my price targets. It takes time and practice. One must use the EWT to look at all of the possible price movements and then set probabilities to each based on price structure and momentum indicators.
So where are we right now? According to the EWT The move from 666 to 930 was either a complete wave or the first leg of three off of 666. In EWT periods that we are in now are called "corrective" waves. These waves are the period where profits are taken off of a major move. The move from 1450 to 666 on the SPX is being consolidated, that is profits are being taken and new bull posiitions are being established. These periods can take a long time and can take many patterns. It are these periods that discourage many from using the EWT.
We should be able to determine if the move from 666 to 930 was the entire move or the first of three by how prices act in the next couple of weeks. If the move was complete then we will begin the scariest move down of the entire bear market. If not then we will get a small (100-150 point) correction and then another move back up. If prices in the coming weeks act choppy and we trade in ranges then we are preparing for another ramp up. If prices trend down steadily with little overlap then P3 has begun.
Since 930 on May 8 we've traded in a range with much choppy overlap. This is evidence for the probability of higher prices this summer.
What he discovered is that price movements are caused by natural laws based on basic human emotions. It is known in sociology that humans as individuals are capable of making many complex and unpredictable decisions. Yet when humans act as a group, their decisions become much more primative. Some call this group think. Anyway after dissecting 75 years of stock market history Elliot discovered that there existed some of these same primative recurring patterns in stock trading.
The fundamentals of his Elliot Wave Theory are based on how humans react to fear and greed as a group. These primative emotions have been played out for years in certain cycles. Some investors have used his theories to profit for decades.
If it is so easy why doesn't everyone quit there jobs and trade stocks accroding to EWT? Because EWT can ALWAYS show us why things happened, but it is difficult to predict exactly how things will play out.
The strength IMO of EWT is to give an investor a general idea of which direction is most probable for prices to trend and to give some price targets.
For example I had based my forecast of SPX prices in the 600's when the market was in the 900's in Dec and Jan based on EWT. I forecasted a bounce to 750-850 when the market's were sub-700 in early march based on EWT. As prices began to rise I was able to adjust my upper targets to well over 900 based on EWT.
What I need to improve on is trading successfully based on my price targets. It takes time and practice. One must use the EWT to look at all of the possible price movements and then set probabilities to each based on price structure and momentum indicators.
So where are we right now? According to the EWT The move from 666 to 930 was either a complete wave or the first leg of three off of 666. In EWT periods that we are in now are called "corrective" waves. These waves are the period where profits are taken off of a major move. The move from 1450 to 666 on the SPX is being consolidated, that is profits are being taken and new bull posiitions are being established. These periods can take a long time and can take many patterns. It are these periods that discourage many from using the EWT.
We should be able to determine if the move from 666 to 930 was the entire move or the first of three by how prices act in the next couple of weeks. If the move was complete then we will begin the scariest move down of the entire bear market. If not then we will get a small (100-150 point) correction and then another move back up. If prices in the coming weeks act choppy and we trade in ranges then we are preparing for another ramp up. If prices trend down steadily with little overlap then P3 has begun.
Since 930 on May 8 we've traded in a range with much choppy overlap. This is evidence for the probability of higher prices this summer.
Wednesday, May 20, 2009
Almost there
Sorry I haven't posted yet this week, but I've been extremely busy. I'll get right to it. My thoughts on Friday were wrong. It was apparent when we gapped up at the open. So the other options I had laid out on the table were now the ones to consider. I held my short positions from Friday and waited for a pullback to sell them. The pullback, as has been the case since March 6, never came. So now I will wait and add to them near SPX 930.
My current count (finally) fits great with what has unfolded in the last few weeks. The correction is nearing completion. We should move up from where we are now (910) to possibly test the highs from the other week. Once we peak near or over SPX 930 we will have one leg remaining, the C part down. I am targeting 850 for this right now.
The actions by the market over the past week is exactly why I always scale into and out of positions. No matter how confidant one is in their views, the market always seems to have its own ideas. By getting the general moves correct and scaling into and out of positions one can play without getting taken out. Staying in the game is the most important goal in trading.
Since I went about 50% short on Friday I have plenty of cash left to add to my position when I feel it has peaked. At this point I plan on going 100% short for parts/most of this C down.
My current count (finally) fits great with what has unfolded in the last few weeks. The correction is nearing completion. We should move up from where we are now (910) to possibly test the highs from the other week. Once we peak near or over SPX 930 we will have one leg remaining, the C part down. I am targeting 850 for this right now.
The actions by the market over the past week is exactly why I always scale into and out of positions. No matter how confidant one is in their views, the market always seems to have its own ideas. By getting the general moves correct and scaling into and out of positions one can play without getting taken out. Staying in the game is the most important goal in trading.
Since I went about 50% short on Friday I have plenty of cash left to add to my position when I feel it has peaked. At this point I plan on going 100% short for parts/most of this C down.
Friday, May 15, 2009
Monday could be ugly.
We are poised for a big fall on Monday. I sent out messages this week regarding my change of opinion from favoring one more push to a new high to the top was in last week. The action today added more evidence supporting this. I am now about 75% sure we're headed down sub-850 before revisiting the 900's again.
If my wave count is correct then we are perched right at the beginning of wave 3 fo this C wave down off of 930. This wave should be the longest and fastest wave of this move from 930 to 8??. I am about 65% short. If we get a flat open or small gap up I will add more shorts. If we get a large gap up then I am wrong and will reanalyze.
I have targets for this C wave of 847 and 817. We should be able to tell which will be more accurate when/if this wave 3 develops. I will, as always, keep you guys in touch.
Just to put it out there, there is a 25% chance that we are in a complex correction, which is a fancy way of saying we may test 900 again and continue this choppiness for another week. Let's hope it doesn't happen!
If my wave count is correct then we are perched right at the beginning of wave 3 fo this C wave down off of 930. This wave should be the longest and fastest wave of this move from 930 to 8??. I am about 65% short. If we get a flat open or small gap up I will add more shorts. If we get a large gap up then I am wrong and will reanalyze.
I have targets for this C wave of 847 and 817. We should be able to tell which will be more accurate when/if this wave 3 develops. I will, as always, keep you guys in touch.
Just to put it out there, there is a 25% chance that we are in a complex correction, which is a fancy way of saying we may test 900 again and continue this choppiness for another week. Let's hope it doesn't happen!
Tuesday, May 12, 2009
Three possibilites, one most probable.
From an EW perspective there are three clear possibilities right now and one is a major probability.
The most probable scenario has us putting in one more high (or at least testing the high from May 8. The EW count fits great. I have been playing this count successfully in short day trades for about a week. In this scenario we are entering wave 3 up of the last leg. Confirmation of this will be a large gap up open tomorrow or a flat to slightly down open and then a large, quick move up many points tomorrow. FWIW FAS is already up $0.27 in AH so far. This would support the wave 3 tomorrow scenario.
The other two possibilities are that we topped on May 7 AH and will (1) move down in either a shallow correction or a (2) new bear market low. If that is the case we should be in wave 3 of the first move down off of that top. Confirmation would be a quick, and powerful move DOWN tomorrow. If the SPX moves above 920 tomorrow this count would be dead.
I am playing scenario 1, but only 30%. I am confidant this is correct, but it could end at anytime so I am being cautious.
Once this last move up ends we fall significantly but the million dollar question becomes "Has the correction off of 666 completed or has just the first leg of three ended?" We will not know until the prices reveal themselves in the coming months. However I belive that we have not yet seen the top of this move off of 666.
IMO this move will end when EVERYONE thinks the bear market is history. Babyboomers will resume their plans for early retirement and begin riding their Harley's again. Obama will be hailed as the savior (again) for saving us from economic turmoil. I just don't see this yet. Don't get me wrong, I realize that the media has been drumming this beat since about SPX 700, but that is to be expected with a Democrat in the Whitehouse.
Furthermore I believe that to get a P3 drop that is forecast by EW we need another catalyst. Terrible earnings are mostly built in to the current prices. Yes I know we've climbed alot since early March, but we are still down tremendously from the 2007 high. We need an economic catastrophe like the one I laid out in my post last week.
Therefore my longer term forecast is for a pullback beginning as early as Friday back to about 800-825 and then another multi-month rally well into 4 digits. I could see us rally to 1150 before topping. THEN we begin P3 sometime in late 2009 or very early 2010 with a truly horrifying target later in 2010.
The most probable scenario has us putting in one more high (or at least testing the high from May 8. The EW count fits great. I have been playing this count successfully in short day trades for about a week. In this scenario we are entering wave 3 up of the last leg. Confirmation of this will be a large gap up open tomorrow or a flat to slightly down open and then a large, quick move up many points tomorrow. FWIW FAS is already up $0.27 in AH so far. This would support the wave 3 tomorrow scenario.
The other two possibilities are that we topped on May 7 AH and will (1) move down in either a shallow correction or a (2) new bear market low. If that is the case we should be in wave 3 of the first move down off of that top. Confirmation would be a quick, and powerful move DOWN tomorrow. If the SPX moves above 920 tomorrow this count would be dead.
I am playing scenario 1, but only 30%. I am confidant this is correct, but it could end at anytime so I am being cautious.
Once this last move up ends we fall significantly but the million dollar question becomes "Has the correction off of 666 completed or has just the first leg of three ended?" We will not know until the prices reveal themselves in the coming months. However I belive that we have not yet seen the top of this move off of 666.
IMO this move will end when EVERYONE thinks the bear market is history. Babyboomers will resume their plans for early retirement and begin riding their Harley's again. Obama will be hailed as the savior (again) for saving us from economic turmoil. I just don't see this yet. Don't get me wrong, I realize that the media has been drumming this beat since about SPX 700, but that is to be expected with a Democrat in the Whitehouse.
Furthermore I believe that to get a P3 drop that is forecast by EW we need another catalyst. Terrible earnings are mostly built in to the current prices. Yes I know we've climbed alot since early March, but we are still down tremendously from the 2007 high. We need an economic catastrophe like the one I laid out in my post last week.
Therefore my longer term forecast is for a pullback beginning as early as Friday back to about 800-825 and then another multi-month rally well into 4 digits. I could see us rally to 1150 before topping. THEN we begin P3 sometime in late 2009 or very early 2010 with a truly horrifying target later in 2010.
Friday, May 8, 2009
Use extreme caution in the coming days.
We are very close to an IT top. All of the writing is on the wall. From heavy distribution days to quickly closing opening gaps up to momentum indicators crossing over and finally an end target on the EW count. Use extreme caution in setting long positions today and into next week.
Since March 6 we've been throwing rocks on top of a house. The rockpile is so large now that we can hear creaking in the walls. It's only a matter of time.
From an EW perspective we have about another 10-30 points up from where we will open. The end is difficult to gauge in cirumstances such as we are in now. Since we are so top heavy we could roll over at anytime, but the chances for a blow off top exist also.
I plan on scaling out of my longs from yesterday as early as today if we get to the 930-935 area. We are set to open near 920 and I got in my shorts in the 900-905 area. What I am looking for in particular is a quick blast upward. This will be the wave 3 of this final move up. I think today's open will be the meat of wave 1. We will then correct sideways or downward before entering wave 3. A possible scaenario is that after today's gap up we drift down or sideways and ramp up near the highs at the close. Then we get a sizeable gap up Monday for the bulk of wave 3.
After this the wave could end at anytime. If I get signals of a blowoff top I will move all in in seconds. If not I will gladly pass up the last few points up to prepare for the next leg down.
I expect the next leg down to be shallow. A usual retrace in past recessions were deep, 50-100%. I don't expect this, although I will keep an open mind for it. It just seems that there is too much "hope and change" in the air for a deep and prolonged correction. I also believe that like a building volcano, by not relieving the upward pressure that has been building completely we set the stage for the terrifying P3 wave that the EW guys are predicting. I will blog about that at a later date since it is many months away.
So I am looking for a retrace in the 38.2% range. The move from 666 to 950? would retrace back to 842. A 50% retrace takes us back to 808. So this is my range 800-850. I look forward to enjoying the ride down and scaring the hell out of the newly rich bulls, at least temporarily.
Since March 6 we've been throwing rocks on top of a house. The rockpile is so large now that we can hear creaking in the walls. It's only a matter of time.
From an EW perspective we have about another 10-30 points up from where we will open. The end is difficult to gauge in cirumstances such as we are in now. Since we are so top heavy we could roll over at anytime, but the chances for a blow off top exist also.
I plan on scaling out of my longs from yesterday as early as today if we get to the 930-935 area. We are set to open near 920 and I got in my shorts in the 900-905 area. What I am looking for in particular is a quick blast upward. This will be the wave 3 of this final move up. I think today's open will be the meat of wave 1. We will then correct sideways or downward before entering wave 3. A possible scaenario is that after today's gap up we drift down or sideways and ramp up near the highs at the close. Then we get a sizeable gap up Monday for the bulk of wave 3.
After this the wave could end at anytime. If I get signals of a blowoff top I will move all in in seconds. If not I will gladly pass up the last few points up to prepare for the next leg down.
I expect the next leg down to be shallow. A usual retrace in past recessions were deep, 50-100%. I don't expect this, although I will keep an open mind for it. It just seems that there is too much "hope and change" in the air for a deep and prolonged correction. I also believe that like a building volcano, by not relieving the upward pressure that has been building completely we set the stage for the terrifying P3 wave that the EW guys are predicting. I will blog about that at a later date since it is many months away.
So I am looking for a retrace in the 38.2% range. The move from 666 to 950? would retrace back to 842. A 50% retrace takes us back to 808. So this is my range 800-850. I look forward to enjoying the ride down and scaring the hell out of the newly rich bulls, at least temporarily.
Wednesday, May 6, 2009
Near term and Intermediate term views have changed
I have written before (I think it was still in the email days) about what I strive to become as a trader. I strive to trade in the same manner I play poker. In poker I have no preconceived notion as to who is going to win a hand before the cards are dealt. I wait until cards are shown, bets are placed and players react to the process. I then use this information to guess at who has the best hand and if I can beat them or bluff them out.
This is how I want to evolve as a trader. Approach each day and week with no preconceived notions on how the market will move. I want to react to price and volume changes as they reveal themselves. I believe I am making strides, but have a ways to go.
A case in point is the current market situation. The facts showed me for weeks that the rally was stalling. Price appreciation slowed. Most indicators were showing exhaustion to the upside for several weeks. And thus I was short the market. Then on Monday prices rose, alot. I flipped my near term and IT views on the market at that moment.
Why? It became obvious that the prior 3 weeks were in fact NOT a topping process, but a basing process. Was this obvious before Monday's rally? I don't think so.
What became clear was that this move up was not over. We have another leg up to complete this move and Monday was just the beginning of it. It is my view now that near term we will hit prices near or over 950 SPX. I am playing this long. From here the most likely IT move is a retrace of 38% of the move off the bottom. If we top near 950 this would put us in the 850 area. This makes sense. We put in a very solid base in this area. It will take major bearishness to break it. We most likely will not get this bearishness for months.
After this shallow retrace we will being another leg up that takes us up over 1050. This could end this bear rally or we could get yet another leg down and another final leg up over 1100. If this bull ends with one more major leg up ti should go into the fall before ending. If we get a third major leg up (two more after the current leg) it should last into the end of the year and we'd begin the next bear market in Jan 2010 roughly.
This is how I want to evolve as a trader. Approach each day and week with no preconceived notions on how the market will move. I want to react to price and volume changes as they reveal themselves. I believe I am making strides, but have a ways to go.
A case in point is the current market situation. The facts showed me for weeks that the rally was stalling. Price appreciation slowed. Most indicators were showing exhaustion to the upside for several weeks. And thus I was short the market. Then on Monday prices rose, alot. I flipped my near term and IT views on the market at that moment.
Why? It became obvious that the prior 3 weeks were in fact NOT a topping process, but a basing process. Was this obvious before Monday's rally? I don't think so.
What became clear was that this move up was not over. We have another leg up to complete this move and Monday was just the beginning of it. It is my view now that near term we will hit prices near or over 950 SPX. I am playing this long. From here the most likely IT move is a retrace of 38% of the move off the bottom. If we top near 950 this would put us in the 850 area. This makes sense. We put in a very solid base in this area. It will take major bearishness to break it. We most likely will not get this bearishness for months.
After this shallow retrace we will being another leg up that takes us up over 1050. This could end this bear rally or we could get yet another leg down and another final leg up over 1100. If this bull ends with one more major leg up ti should go into the fall before ending. If we get a third major leg up (two more after the current leg) it should last into the end of the year and we'd begin the next bear market in Jan 2010 roughly.
Monday, May 4, 2009
The Healing Continues
The credit market index that I have created just had its 8th straight week of positive results (positive = getting incrementally better and negative incrementally worse). That is against a backdrop in the previous 12 weeks where the index was only positive 2/12 weeks. Additionally the weighted average score this week was a .61, the highest result since I began tracking this back in the beginning of December (0 = no change, 1 = incrementally better and 3 = incrementally much better). The average weekly total in the past 20 weeks has been -.06. Net/net the green shoots that Obama loves to talk about continue to show up in my credit market index. This supports not going back to the previous lows we hit, but I still think we are overbought. However momentum works both ways and until we get items that knock this index as well as broader market datapoins the market will remain robust. 2010 outlooks will be really thought about over the next quarter and that could be one of the bigger catalysts to push sentiment back down, but we’ll see.
Friday, May 1, 2009
Thoughts on my long term view
As you guys know I am short term (a couple of weeks) bearish, intermediate term (through summer) bullish and long term (several years) uber bearish. I believe that the deleveraging we are in has only been experienced once in this country's history. That was the Great Depression. Am I saying we are in another Great Depression? Perhaps, but perhaps not. I am saying that this bear market is not over and that in the end we could get second place.
The numbers suggest that at best an economic turnaround will take place in late '09 or early '10. That may be, it is too early for anyone to know. The equity market sure is acting like it is. In fact the equity market did the exact same thing in 1930. The INDU peaked in 1929 at a whopping 381.17. It dropped later in '29 to 198.69 for a loss of 48%. In 2007 the equity market peaked at about 1450. By early 2009 it had fallen 54% to 666.
In 1930 the stock market managed to rally 50% back up to 294.07. I believe, and have posted here, that we should encounter a similar rally. If we follow 1930's pattern we should hit 1050 to take back 50% of the losses.
In 1930 it became apparent to all that the bear was not slayed. Prices fell, and fell, and fell. Finally the low was put in in 1932 at 41.22. A whopping 86% fall from 1930's 294! If we were to suffer a similar fate, an 85% drop from 1050 (assuming we get there) would take us down to 147 on the SPX. Yikes!
This can be seen in a terrifying chart here:
http://stockcharts.com/charts/historical/djia19201940.html
Now fundamentally, from what I know which I acknowledge isn't as much as many others, the Fed was NOT accomadative in the 30's. They actually RAISED interest rates making the situation worse. Our current Fed could not be more different. Will this make a difference? Perhaps.
Lets look at some other comparisons from the GD to today. In the 1930's in order to maintain a balanced budget, President Roosevelt raised taxes on business and the wealthy. He also created many government spending programs to get people working. Sound familiar?
On a positive note the household savings rate was very high prior to the GD and as I said before the country had very little debt and a balanced budget. In contrast our savings rate had been negative for several years prior to 2009 and our budget? Not balanced. Our debt? Monstrous. In fact our national debt has exploded as seen here.
http://www.screencast.com/users/J-So/folders/Default/media/1586f4b3-db1b-4a1a-a8bd-63634469a5c6
Under the Obama administration it is expected that ANOTHER $10 trillion will be added to the debt in the next 10 years according to the CBO. (By the way this post is not a bash on Obama, it is not meant to be political at all.) On top of this it is rumored that we will institute national healthcare. And we have the social security and medicare deficits looming on the horizon.
To sum it up, the US faces a debt of a size that has never been dreamed of in the world's history. I believe that this debt load will become a problem much sooner than most would ever think. I believe that the writing is on the wall that foreigners are already beginning the march OUT of US debt. I also believe this will cause the next major downturn in our economy and the next leg of the bear market.
As the appetite for our debt decreases interest rates rise. Rising rates are what made the Great Depression worse. This time the rates will be caused not directly by a non-accomodative Fed, but indirectly through an accomodative Fed and through astronomically high debt levels.
Can you imagine what would happen to our fragile economy if 30 yr rates went back up to 7-8%? What about 8-10%?
Despite Bernanke's announcement of QE several weeks ago rates are already back OVER where they wer prior. Seen here:
http://stockcharts.com/h-sc/ui
It has been reported that China wants to diversify out of dollars. They are currently buying commodities and diversifying into other currencies. IMHO this is the beginning. It will continue as investors flee long term US debt for shorter term debt and commodities.
So this is my fundamental case for the next bear leg which may begin as early as this fall. Technically the case is already in the charts. Just look at what happened post 1929. We are tracing that same pattern.
The numbers suggest that at best an economic turnaround will take place in late '09 or early '10. That may be, it is too early for anyone to know. The equity market sure is acting like it is. In fact the equity market did the exact same thing in 1930. The INDU peaked in 1929 at a whopping 381.17. It dropped later in '29 to 198.69 for a loss of 48%. In 2007 the equity market peaked at about 1450. By early 2009 it had fallen 54% to 666.
In 1930 the stock market managed to rally 50% back up to 294.07. I believe, and have posted here, that we should encounter a similar rally. If we follow 1930's pattern we should hit 1050 to take back 50% of the losses.
In 1930 it became apparent to all that the bear was not slayed. Prices fell, and fell, and fell. Finally the low was put in in 1932 at 41.22. A whopping 86% fall from 1930's 294! If we were to suffer a similar fate, an 85% drop from 1050 (assuming we get there) would take us down to 147 on the SPX. Yikes!
This can be seen in a terrifying chart here:
http://stockcharts.com/charts/historical/djia19201940.html
Now fundamentally, from what I know which I acknowledge isn't as much as many others, the Fed was NOT accomadative in the 30's. They actually RAISED interest rates making the situation worse. Our current Fed could not be more different. Will this make a difference? Perhaps.
Lets look at some other comparisons from the GD to today. In the 1930's in order to maintain a balanced budget, President Roosevelt raised taxes on business and the wealthy. He also created many government spending programs to get people working. Sound familiar?
On a positive note the household savings rate was very high prior to the GD and as I said before the country had very little debt and a balanced budget. In contrast our savings rate had been negative for several years prior to 2009 and our budget? Not balanced. Our debt? Monstrous. In fact our national debt has exploded as seen here.
http://www.screencast.com/users/J-So/folders/Default/media/1586f4b3-db1b-4a1a-a8bd-63634469a5c6
Under the Obama administration it is expected that ANOTHER $10 trillion will be added to the debt in the next 10 years according to the CBO. (By the way this post is not a bash on Obama, it is not meant to be political at all.) On top of this it is rumored that we will institute national healthcare. And we have the social security and medicare deficits looming on the horizon.
To sum it up, the US faces a debt of a size that has never been dreamed of in the world's history. I believe that this debt load will become a problem much sooner than most would ever think. I believe that the writing is on the wall that foreigners are already beginning the march OUT of US debt. I also believe this will cause the next major downturn in our economy and the next leg of the bear market.
As the appetite for our debt decreases interest rates rise. Rising rates are what made the Great Depression worse. This time the rates will be caused not directly by a non-accomodative Fed, but indirectly through an accomodative Fed and through astronomically high debt levels.
Can you imagine what would happen to our fragile economy if 30 yr rates went back up to 7-8%? What about 8-10%?
Despite Bernanke's announcement of QE several weeks ago rates are already back OVER where they wer prior. Seen here:
http://stockcharts.com/h-sc/ui
It has been reported that China wants to diversify out of dollars. They are currently buying commodities and diversifying into other currencies. IMHO this is the beginning. It will continue as investors flee long term US debt for shorter term debt and commodities.
So this is my fundamental case for the next bear leg which may begin as early as this fall. Technically the case is already in the charts. Just look at what happened post 1929. We are tracing that same pattern.
Thursday, April 30, 2009
Making my point...
Here is a chart graphically showing what I posted about yesterday regarding the Fed day pattern. After 5 of the last 7 Fed days the market was significantly lower. The two that did not follow the trend still had downside. The first actually reversed ON the Fed day and the second put in a doji the following day and then moved significantly lower on the second day after the Fed.
However like I also warned yesterday it is possible that with today being EOM that we go slighly higher today and go down big on Monday.
Here is a chart that I found showing exactly what the market did after Fed day.
http://lh4.ggpht.com/_APmrYvpA45s/SfkVWK16MNI/AAAAAAAADAE/wB55_8fZ_LY/s1600-h/FOMC%5B2%5D.png
However like I also warned yesterday it is possible that with today being EOM that we go slighly higher today and go down big on Monday.
Here is a chart that I found showing exactly what the market did after Fed day.
http://lh4.ggpht.com/_APmrYvpA45s/SfkVWK16MNI/AAAAAAAADAE/wB55_8fZ_LY/s1600-h/FOMC%5B2%5D.png
Wednesday, April 29, 2009
Classic Fed day, will we get follow through?
The pattern for the Fed days have been ramp job right up to the announcement and then no follow through and prices fall for at least several days. I expect this pattern to continue. It is possible that with tomorrow being the EOM that they try to keep prices elevated. If this occurs then Friday we could be very red.
Upside remains very limited. Downside remains significant.
Upside remains very limited. Downside remains significant.
Met with Mike Mayo of CLSA yesterday (he along with Merideth Whitney are the UBER BEAR faces of banks)
Post the meeting I went back to the slide that interested me the most to compare the results from the Great Depression to what we are seeing today (most comparisons for anything go back to then and that was the last major deleveraging period). I thought the findings were pretty interesting and the net is that if this cycle follows the depression cycle, and if the banks anticipate the peak in NPA’s by three months like they did in the 1990’s cycle or coincidently like they did in the 2000’s cycle then my guess is sometime in the beginning of 2010 it will be the right time to be more bullish on banks. The movie will not follow the exact same script but I thought this was an interesting way to look at the state of the union currently.
Details:
· 1927-1930 and 1937-1941 exhibited similar net charge offs (.41% of loans) compared to the non stressed periods in the 90’s and 00’s (.45%) (ex 90/91/92/01/02/08).
· 1931-1936 is a much different story as NCOs went from .68% in 1930 to 1.29% in 1931, 2.29% in 1932, 3.14% in 1933, 3.36% in 1934, 1.57% in 1935 and .93% in 1936.
· The peak in NPAs (the leading indicator and what I think people are again watching again this cycle) was in the end of 1932/beginning of 1933 or 1-2 years ahead of the peak in NCOs in 1934.
· Here is my logic for the beginning of 2010 as being a potentially good time to be more bullish on banks. 2008 saw NCOs of 1.56% vs. the .52% seen in 2007 and the 1.29% seen in 1931. Therefore call 2008 1931, 2009 1932, 2010 1933 and 2011 1934 (Q109 largest 20 banks put up an annualized 2.13% NCO rate vs. 2.29% for 1932 so this continues to feel right). We therefore would not see a peak in NCOs until 2011 (that feels about right given where we are in the C&I and CRE credit cycles). However NPAs would peak 1-2 years ahead of that or sometime in the beginning of 2010. If you say coincidently the banks will outperform that peak in NPAs that would mean the beginning of 2010 would be the time to turn bullish.
All of the above being said I shorted FITB today and went long PBCT in a pairs trade. There is no way FITB's equity looks next week like it does this week. That bank needs to be shot. The government will either force them to raise private capital or force them to sell assets to others or the PPIP and there is no way it will be at a premium. There are 3 buckets of banks in the stress test. Bucket A are the survivors with little or no need for additional capital from where we sit today (JPM and GS fit this bill). Bucket B are the survivors that will need additional capital (WFC, STI, BAC fit this bill). Then there is Bucket C which is those that should have already died and FITB is in that camp IMHO, maybe even Citi. The reports have gone from saying only 1 bank needs capital this weekend, to 3 by Monday, 3-4 by yesterday and now 6 today. My guess is that it moves to 8-10 when the results are released next week. Maybe I am wrong but FITB is a dead horse nonetheless. I used PBCT as the long offset as they have something like a 20% TCE ratio, which is rediculous. The major banks are around 4% and the regionals that have yet to go through the C&I and CRE cycle are around 6%. PBCT will 1) be around, 2) not have to raise capital and 3) will be able to buy loans/securities from others. I view them as a way to buy a piece of the 1990's RTC or a play on this cycle's RTC, the PPIP. Would love to hear what you all think of the above. Like Pink Floyd said is there anyone out there (other than Solwold)?
Details:
· 1927-1930 and 1937-1941 exhibited similar net charge offs (.41% of loans) compared to the non stressed periods in the 90’s and 00’s (.45%) (ex 90/91/92/01/02/08).
· 1931-1936 is a much different story as NCOs went from .68% in 1930 to 1.29% in 1931, 2.29% in 1932, 3.14% in 1933, 3.36% in 1934, 1.57% in 1935 and .93% in 1936.
· The peak in NPAs (the leading indicator and what I think people are again watching again this cycle) was in the end of 1932/beginning of 1933 or 1-2 years ahead of the peak in NCOs in 1934.
· Here is my logic for the beginning of 2010 as being a potentially good time to be more bullish on banks. 2008 saw NCOs of 1.56% vs. the .52% seen in 2007 and the 1.29% seen in 1931. Therefore call 2008 1931, 2009 1932, 2010 1933 and 2011 1934 (Q109 largest 20 banks put up an annualized 2.13% NCO rate vs. 2.29% for 1932 so this continues to feel right). We therefore would not see a peak in NCOs until 2011 (that feels about right given where we are in the C&I and CRE credit cycles). However NPAs would peak 1-2 years ahead of that or sometime in the beginning of 2010. If you say coincidently the banks will outperform that peak in NPAs that would mean the beginning of 2010 would be the time to turn bullish.
All of the above being said I shorted FITB today and went long PBCT in a pairs trade. There is no way FITB's equity looks next week like it does this week. That bank needs to be shot. The government will either force them to raise private capital or force them to sell assets to others or the PPIP and there is no way it will be at a premium. There are 3 buckets of banks in the stress test. Bucket A are the survivors with little or no need for additional capital from where we sit today (JPM and GS fit this bill). Bucket B are the survivors that will need additional capital (WFC, STI, BAC fit this bill). Then there is Bucket C which is those that should have already died and FITB is in that camp IMHO, maybe even Citi. The reports have gone from saying only 1 bank needs capital this weekend, to 3 by Monday, 3-4 by yesterday and now 6 today. My guess is that it moves to 8-10 when the results are released next week. Maybe I am wrong but FITB is a dead horse nonetheless. I used PBCT as the long offset as they have something like a 20% TCE ratio, which is rediculous. The major banks are around 4% and the regionals that have yet to go through the C&I and CRE cycle are around 6%. PBCT will 1) be around, 2) not have to raise capital and 3) will be able to buy loans/securities from others. I view them as a way to buy a piece of the 1990's RTC or a play on this cycle's RTC, the PPIP. Would love to hear what you all think of the above. Like Pink Floyd said is there anyone out there (other than Solwold)?
Tuesday, April 28, 2009
NTRS capital raise today
We will look back next week and realize that the capital raise by NTRS today was brilliant! They are using the proceeds to pay back the TARP that they did not need in the first place. The reason why it was a brilliant move is they now move out of underneath the gubment, which will allow them to be a share taker going forward as they don't have to put up with a bunch of bunk (can pay people what they want, can run their business and take risks how they see fit and they can hire people whereever in the world they want). Secondly since they are not part of the stress test they did not have a disclosure hurdle that needed to be made before this capital raise, like BAC or C would have since they currently know the results of the stress test. Next week it will come out that the banks need to raise capital and there will be a lot of supply on the market. You tell me which hedge fund or private equity fund will step up and buy a crappy bank on the bank's terms. Didn't work too well for TPG with Wamu last year and that was on TPG's terms. Net I continue expect this to be a negative catalyst for the entire market. Solwold would love to talk to you on your shorts of JPM, BIDU and AMZN. BIDU and AMZN have high multiples fo shizzle, but investors are paying up for growth right now so how do you know when that party will stop (BIDU's fundamentals last night actually made me less negative on them given that I thought they would have a few quarter hickey from having to take advertisers off of their site).
The trend has finally changed.
I believe that after 3 weeks of trading in a 50 point range we are finally poised to break out downward. Momentum has clearly been moving from the bulls to the bears. There is a legitimate EW count that puts us in the early stages of a move downward. Rumors are swirling that both C and BAC failed the stress test and several other banks, including WFC, did not do well. The whole swine flu thing, although terrible, is just noise. It is an excuse for the headline writers. It is easier to blame the weakness on the flu than on the fact that we are overbought and overdue for a correction.
Anyway if we open below 845 today could be VERY ugly. If we open over this price we may fill the gap, like yesterday, before turning down again. Today should end red.
I am adjusting my IT term outlook. The tight range trading over the last 3 weeks has muddied the IT picture and to some extent the LT picture. From an EW perspective the most probable scenario is for a shallower fall in prices before a final move up that could reach 1000+. However, since we put in such a long and solid top I am wondering if 875 will be the top. We can put in a low in the 750 area in the next couple of weeks, then push back up near 875 and satisfy the EW requirements for this bear rally. It is less common than a move over 875, but it definately could happen.
Also making things less clear is the shenanigans with the shrinking liquididty. This could add massive volatility to the markets making moves more extreme or it could be much ado about nothing. We will see and react.
Therefore I am adjusting my odds for the possible scenarios. #1 - 50%, we drop to the 725-750 range and then bounce to new highs before reversing in the next bear market. This has been my favored scenario for about 3-4 weeks. #2 - 25%, we drop to about 725-750 then bounce back to test 875 and fail. Then we start with the next bear market. #3 - 25%, The top is in and the next bear has begun. Although we technically satisfied the minimum EW requirements for this bear rally it is not very "neat". I keep an open mind, though, and the top we put in could be lasting so I have increased the odds for this scenario.
All of the technical indicators and my analysis suggest that the next 100 points is down. Therefore I am short. I have 5 short positions (CHRW, QCOM, BAC, AAPL and FAS)and I am long 4 inverse etfs (FAZ, SDS, SRS, QID). I am about 66% short. I will add to my shorts if we pullback today and try to close the opening gap. On my watchlist to short are EXPD, IBM, JPM, AMZN, BBY, SMH, GS and BIDU. Other inverse etf's I am looking at are SKF, TZA and EEV.
My plan is to stay short until the evidence points to some kind of correction upward.
Anyway if we open below 845 today could be VERY ugly. If we open over this price we may fill the gap, like yesterday, before turning down again. Today should end red.
I am adjusting my IT term outlook. The tight range trading over the last 3 weeks has muddied the IT picture and to some extent the LT picture. From an EW perspective the most probable scenario is for a shallower fall in prices before a final move up that could reach 1000+. However, since we put in such a long and solid top I am wondering if 875 will be the top. We can put in a low in the 750 area in the next couple of weeks, then push back up near 875 and satisfy the EW requirements for this bear rally. It is less common than a move over 875, but it definately could happen.
Also making things less clear is the shenanigans with the shrinking liquididty. This could add massive volatility to the markets making moves more extreme or it could be much ado about nothing. We will see and react.
Therefore I am adjusting my odds for the possible scenarios. #1 - 50%, we drop to the 725-750 range and then bounce to new highs before reversing in the next bear market. This has been my favored scenario for about 3-4 weeks. #2 - 25%, we drop to about 725-750 then bounce back to test 875 and fail. Then we start with the next bear market. #3 - 25%, The top is in and the next bear has begun. Although we technically satisfied the minimum EW requirements for this bear rally it is not very "neat". I keep an open mind, though, and the top we put in could be lasting so I have increased the odds for this scenario.
All of the technical indicators and my analysis suggest that the next 100 points is down. Therefore I am short. I have 5 short positions (CHRW, QCOM, BAC, AAPL and FAS)and I am long 4 inverse etfs (FAZ, SDS, SRS, QID). I am about 66% short. I will add to my shorts if we pullback today and try to close the opening gap. On my watchlist to short are EXPD, IBM, JPM, AMZN, BBY, SMH, GS and BIDU. Other inverse etf's I am looking at are SKF, TZA and EEV.
My plan is to stay short until the evidence points to some kind of correction upward.
Friday, April 24, 2009
BAC is a good Short here
Jay's analysis shows the deteriorating fundamentals for BAC. Now is a technically safe entry for a short position. It just broke through a line of support and tested it from the bottom. The line is now resistence. The next line of support is about $0.20 below and the next support under this is $0.60 below. Set a stop over the resistence.
http://www.screencast.com/users/J-So/folders/Default/media/06f6b2fd-a742-4a8e-98ab-04865cf35c2d
http://www.screencast.com/users/J-So/folders/Default/media/06f6b2fd-a742-4a8e-98ab-04865cf35c2d
Wednesday, April 22, 2009
Follow up
This is a follow up to the "Tick tock" post from a few days ago. More evidence is pouring in regarding extreme market inconsistencies. Accoring to data directly obtained from the NYSE Goldman Sachs has become the only force left in the game. Their program trades have accounted for 1/3 of ALL program trades in the entire market, that's 850 million shares PER DAY just for GS! Furthermore their principal trades are 81% of all of these trades. Principal trades are trades for GS and not for a client. To put things in perspective GS is trading more shares per day than all of the other top 15 brokers COMBINED!
Couple this fact with the continuation of the dissappearing market liquidity and this trend will not end anytime soon.
According to a report from Matt Rothman of Lehman, this rally has been a historic outlier. He writes "The previous rally was driven primarily by beaten down, cheap, low priced stocks of questionable quality. An equally weighted portfolio of stocks that had prices under $5 as of close on March 9th had generated a positive return of 128.5% through April 17th, outperforming Russell 1000 by almost 2.5 times (Russell 1000 return for the same period was up 52.6%). Similarly, an equally weighted portfolio of 100 stocks with the lowest Market Sentiment score as of March 9th, yielded 116.7% during the same period."
This market has been stretched like a rubber band. One could put together a pretty compelling case that GS has been intentionally raising the prices of the most shorted (and worst companies) stock since the bottom at 666. Through this process they have managed to force several large quants to deleverage (cover their short positions) which has raised these prices on the shitty stocks forcing more quants to deleverage. A continuing process. Their goal would be to seemingly drive the competition from the market and of course profit along the way.
The tape over the last 5+ weeks shows a series of fairly significant quick ups and downs. The trend only seems to last for one or two days. What this looks like to me is a repeat of a sell-off based mostly on short selling, then buying by the "buy the dips" crowd (and apparently GS). This buying forces all of the shorts to cover which forces prices higher until the bears try to pick another top.
Ultimately this process will end. Once all of the quants have deleveraged and all of the bears finish trying to pick the top and all of the "buy the dips" crowd has gone in on stocks this will top. When it does we are set up for what could be one of the worst drops in market history.
I have no idea how long this plays out. The evidence already shows distribution by the institutional players (GS?). They may be getting ready for a fall. However this could strecth on for another couple of weeks.
Couple this fact with the continuation of the dissappearing market liquidity and this trend will not end anytime soon.
According to a report from Matt Rothman of Lehman, this rally has been a historic outlier. He writes "The previous rally was driven primarily by beaten down, cheap, low priced stocks of questionable quality. An equally weighted portfolio of stocks that had prices under $5 as of close on March 9th had generated a positive return of 128.5% through April 17th, outperforming Russell 1000 by almost 2.5 times (Russell 1000 return for the same period was up 52.6%). Similarly, an equally weighted portfolio of 100 stocks with the lowest Market Sentiment score as of March 9th, yielded 116.7% during the same period."
This market has been stretched like a rubber band. One could put together a pretty compelling case that GS has been intentionally raising the prices of the most shorted (and worst companies) stock since the bottom at 666. Through this process they have managed to force several large quants to deleverage (cover their short positions) which has raised these prices on the shitty stocks forcing more quants to deleverage. A continuing process. Their goal would be to seemingly drive the competition from the market and of course profit along the way.
The tape over the last 5+ weeks shows a series of fairly significant quick ups and downs. The trend only seems to last for one or two days. What this looks like to me is a repeat of a sell-off based mostly on short selling, then buying by the "buy the dips" crowd (and apparently GS). This buying forces all of the shorts to cover which forces prices higher until the bears try to pick another top.
Ultimately this process will end. Once all of the quants have deleveraged and all of the bears finish trying to pick the top and all of the "buy the dips" crowd has gone in on stocks this will top. When it does we are set up for what could be one of the worst drops in market history.
I have no idea how long this plays out. The evidence already shows distribution by the institutional players (GS?). They may be getting ready for a fall. However this could strecth on for another couple of weeks.
Looking for continued weakness
The SPX halted its rebound yesterday (850)within sniffing distance of the 50% retrace (851). XLF halted its rebound right on the 62.8% retrace (10.60). These were expected. Today the move down should continue. My targets have not changed. I am still looking for 725-775, with the liklihood of the lower end of this range. As the move unfolds today I should be able to get some more clarity.
Playing countertrend moves is difficult. This move off of 875 is countertrend to the bear rally. It will not be easy to play this, so I will use more caution in closing out positions as the move can complete and reverse quickly and rapidly at anytime.
I am seeing two patterns develop on larger time frames. One seen on the 10 day chart should complete as early as today once the SPX crosses below 820-825. It may take another day or two to cross this line, but the pattern will still be valid. The target for this pattern is 785-790.
Another pattern is seen on the weekly chart. This pattern still needs another one to two months to finish forming so it may not complete. However if the market does what I am predicting it will precisely complete the pattern. We need the SPX to move down to the 725-750 range. Even a move near the 666 bottom or beneath it slightly keeps the pattern valid. Then move back up above about 825. This price may change slightly depending on how the rest of the pattern plays out. The target for this pattern is about 1130 on the SPX. This pattern is also pretty reliable.
These two patterns are very reliable and both amazingly fit with the scenarios I have laid out previously. The target for the second shape is higher than I originally thought, but still in the general neighborhood. I expect the first to hit. I am not sure about the second one yet. A lot can happen in the next couple of months.
Playing countertrend moves is difficult. This move off of 875 is countertrend to the bear rally. It will not be easy to play this, so I will use more caution in closing out positions as the move can complete and reverse quickly and rapidly at anytime.
I am seeing two patterns develop on larger time frames. One seen on the 10 day chart should complete as early as today once the SPX crosses below 820-825. It may take another day or two to cross this line, but the pattern will still be valid. The target for this pattern is 785-790.
Another pattern is seen on the weekly chart. This pattern still needs another one to two months to finish forming so it may not complete. However if the market does what I am predicting it will precisely complete the pattern. We need the SPX to move down to the 725-750 range. Even a move near the 666 bottom or beneath it slightly keeps the pattern valid. Then move back up above about 825. This price may change slightly depending on how the rest of the pattern plays out. The target for this pattern is about 1130 on the SPX. This pattern is also pretty reliable.
These two patterns are very reliable and both amazingly fit with the scenarios I have laid out previously. The target for the second shape is higher than I originally thought, but still in the general neighborhood. I expect the first to hit. I am not sure about the second one yet. A lot can happen in the next couple of months.
Monday, April 20, 2009
Longer term forecast
FWIW I have slightly revised my longer term forecast. Short term we are going down still so don't worry. Still targeting 725-750 range.
The charts off the bottom clearly have an ABC shape. So we have several scenarios on the table right now. Most likely is we are going to get a complex shape for this bear rally. I give this 80% liklihood. We should get our big correction down that probably began today. Then another complicated pattern back up to new highs.
Another scenario (15% liklihood) is that we completed wave A up and I am just not labeling the waves correctly. The result of this is a leg down like I have been talking about and then a simple five wave pattern up to new highs. This means no complx pattern.
Last scenario (5%) is that the ABC we experienced IS the bear rally. It is over and we are now down to new lows. The only thing that gives this scenario creedance is that we already met the minimum rise in price. The thing holding this scenario back is that its only been about 6 weeks since bottom. These usually last 4-18 months.
What I am looking for is a 5 wave structure down. We appear to have one nice wave down off of Friday's high. Wave 2 up would be the test of the bottom of the wedge. Then wave 3 down. Based on the lengths of the wave 1 and 3 I can better gauge the chances of the scenario's listed above.
BTW the black swan event is still a viable scenario. It would be the 5% option to new lows. The pieces are in place, but it is still highly unlikely at this point.
The charts off the bottom clearly have an ABC shape. So we have several scenarios on the table right now. Most likely is we are going to get a complex shape for this bear rally. I give this 80% liklihood. We should get our big correction down that probably began today. Then another complicated pattern back up to new highs.
Another scenario (15% liklihood) is that we completed wave A up and I am just not labeling the waves correctly. The result of this is a leg down like I have been talking about and then a simple five wave pattern up to new highs. This means no complx pattern.
Last scenario (5%) is that the ABC we experienced IS the bear rally. It is over and we are now down to new lows. The only thing that gives this scenario creedance is that we already met the minimum rise in price. The thing holding this scenario back is that its only been about 6 weeks since bottom. These usually last 4-18 months.
What I am looking for is a 5 wave structure down. We appear to have one nice wave down off of Friday's high. Wave 2 up would be the test of the bottom of the wedge. Then wave 3 down. Based on the lengths of the wave 1 and 3 I can better gauge the chances of the scenario's listed above.
BTW the black swan event is still a viable scenario. It would be the 5% option to new lows. The pieces are in place, but it is still highly unlikely at this point.
According to plan...so far.
So far we bounced off the top of the ascending wedge pattern Friday late. This morning we opened right at the bottom of the wedge. We drifted lower and ae now sit about 10 points under this line. I am waiting for us to test the line again from the bottom and get rejected. That is when I feel another perfect spot to open up new positions or add to existing ones.
My gut tells me that every bear in the world is looking for the same scenario. This tells me we may not get it. The bears have been kicked in the ass for weeks trying to pick tops. Now we are scared and waiting for the sure thing. I am quite sure the market will not be so kind.
Going forward I expect selling to accelerate over the coming weeks and volume to build. Right now prices are falling on a lack of buyers. Sellers have not stepped in yet cuz of what I just said about picking tops. Once the sellers step in, volume will pick up and the "buy the dips" crowd will run for the exits. It should be beautiful.
My gut tells me that every bear in the world is looking for the same scenario. This tells me we may not get it. The bears have been kicked in the ass for weeks trying to pick tops. Now we are scared and waiting for the sure thing. I am quite sure the market will not be so kind.
Going forward I expect selling to accelerate over the coming weeks and volume to build. Right now prices are falling on a lack of buyers. Sellers have not stepped in yet cuz of what I just said about picking tops. Once the sellers step in, volume will pick up and the "buy the dips" crowd will run for the exits. It should be beautiful.
BAC's results
Bank of America’s results just scream to be shorted, see below. And if that is not enough to get bearish on the financials then comments by Senior Presidential advisor Axelrod this weekend should (they are similar to what Guithner had said a couple weekends back). Axelrod said “some banks will show serious problems and will likely need substantially more federal financial assistance, but the government doesn’t foresee a scenario whereby an institution will be seized entirely by regulators. We're confident that, yes, some are going to have very serious problems, but we feel that the tools are available to address these problems.” Can you say Citi like preferred to common conversion, more government infusion or having to come with hat in hand to the public markets. Any way you slice it the call option of the capital structure, common stock, should get hammered at BAC and WFC over the next month. JPM and GS should be safe and I don’t have a specific call on the other 15 institutions going through the stress tests.
BAC’s results. On the surface a $.44 number vs. $.04E looks pretty good. However if you strip out the gains from their China Construction Bank sale (-$.15), Security Gains (-$.12), Merrill Mark to Market gains on MER structured notes because of a widening in credit spreads (-$.17) and then add back merger related charges from MER (+$.06) then you get $.06 vs. $.04E. Okay so that is better than expectations, but BAC’s loan loss reserve currently stands at 3.00% of loans. That compares to JPM at 4.5% and C at 4.1%. JPM is the most conservative of the group in terms of reserving, is the best positioned in terms of their loan mix and was much less aggressive in terms of underwriting on a relative basis over the past few years. So you tell me where BAC should be relative to JPM? HIGHER is the answer. If BAC were to reserve like it should their results this quarter or over the past year should not have been anywhere near what they were = equity value lower than where it is now. BAC saw Net Charge Offs of 2.85% of loans vs. 2.35% last quarter, which was worse than expected, and they saw Non Performing Assets of 2.65% vs. 1.96% last quarter, also worse than expected. Doesn’t that also call for a greater loan loss reserve? To put the 2.85% net charge offs in perspective, the worst period ever for the banking industry was the 3.4% charge off rate in 1934 during the GREAT DEPRESSION! Lastly 50% of the NPAs was due to resi construction, no surprise, but 25% was from commercial real estate. That is an area to really watch over the next 1-2 years. Solwold is there a double/triple short commercial real estate play? I know you have mentioned the triple short real estate name before but I want to make sure that is all commercial and no residential. I can argue we are much closer to a bottom in resi vs. CRE.
BAC’s results. On the surface a $.44 number vs. $.04E looks pretty good. However if you strip out the gains from their China Construction Bank sale (-$.15), Security Gains (-$.12), Merrill Mark to Market gains on MER structured notes because of a widening in credit spreads (-$.17) and then add back merger related charges from MER (+$.06) then you get $.06 vs. $.04E. Okay so that is better than expectations, but BAC’s loan loss reserve currently stands at 3.00% of loans. That compares to JPM at 4.5% and C at 4.1%. JPM is the most conservative of the group in terms of reserving, is the best positioned in terms of their loan mix and was much less aggressive in terms of underwriting on a relative basis over the past few years. So you tell me where BAC should be relative to JPM? HIGHER is the answer. If BAC were to reserve like it should their results this quarter or over the past year should not have been anywhere near what they were = equity value lower than where it is now. BAC saw Net Charge Offs of 2.85% of loans vs. 2.35% last quarter, which was worse than expected, and they saw Non Performing Assets of 2.65% vs. 1.96% last quarter, also worse than expected. Doesn’t that also call for a greater loan loss reserve? To put the 2.85% net charge offs in perspective, the worst period ever for the banking industry was the 3.4% charge off rate in 1934 during the GREAT DEPRESSION! Lastly 50% of the NPAs was due to resi construction, no surprise, but 25% was from commercial real estate. That is an area to really watch over the next 1-2 years. Solwold is there a double/triple short commercial real estate play? I know you have mentioned the triple short real estate name before but I want to make sure that is all commercial and no residential. I can argue we are much closer to a bottom in resi vs. CRE.
Friday, April 17, 2009
Tick tock, tick tock, tick tock.......BOOOM!
We are slowly approaching the brick wall known as the trendline that was support for most of Jan and Feb. I still expect this line to hold and expect us to have a sizeable retrace from here.
The blogs have been full of stories regarding dark clouds on the horizon. Nothing you read in a blog can be considered the concrete truth unless it can be backed up with fact. Usually the stories have links to stories from reputable news agencies. If it doesn't then I don't pay much attention to them. This time is no exception.
Yesterday the one year treasury note hit a yield of 0.01%. This means that bond investors are willing to take almost no return for their investment. There is only one reason this happens. Massive FEAR. Fear of substantial loss in other investments. The last time the treasury hit yields this low was in Nov. Take a look at what equities did in November! In other words the bond boys know something that the equitiy guys don't....yet.
More interesting related news. I have read in several places backed by documentation that several large quants have blown up this week. What are quants? Maybe Jay can provise some input on this. In my research I have found that they are large investment companies that rely on various mathematical formulas to buy and sell stock. Their goal is to be equally long and short. They hope to break even on their investments and make their money on rebates from the stock exchanges. They get these rebates because they provide an extremely important job for the markets. They provide liquidity on a massive scale. This liquidity provides a floor or ceiling on share prices and prevents extreme temporary swings in share prices.
For instance if a stock suddenly feels selling pressure and the share price drops the quants' computers tell them to buy. This purchasing action prevents a crash in that equity by buying the shares that are being sold.
What has happened to several large quants this past week is that they have been forced to unload massive positions on certain equities due to their own personal loss limits. The quants purchased short positions against many low priced equities with poor fundamentals as these equities prices increased off the bottom. Many of these equities have doubled off the bottom or more and forced the quants to take massive losses. This has forced several to shut their doors and forced others yet to step aside and avoid the trainwreck.
Basically many quants did not see the bear rally coming and got caught short. The effect has been lack of liquidity and artificial demand due to short covering which has caused the rally to drag on and go higher. Coincidentally as prices rose and this dragged on more quants got pinched.
Now what does this all mean? Possibly, not probably, there will be a black swan type event.
We are overdue for a pullback. If the market does not have the proper liquidity due to the disappearing quant funds the pullback could escalate into something larger. I have noted in this blog yesterday that evidence suggests that this rally has been led by retail mostly and recently the institutions have become bearish. If prices begin to fall and fall quicker than normal, the retail investors could panic and the race will be on for the exits. I am talking a market crash.
Furthermore the market has created a pattern called a rising wedge. This pattern has a very reliable outcome of extreme and sudden reversal. Once this pattern resolves and prices begin to fall we could get our black swan type event. It would be a day that would go down in history. I am not predicting it, but I just wanted you all to know that many pieces are in place for this type of event.
Edit: I'll add to this with some information that did not have any link to an article, but was reported by several hedge funds. The strategy taken by these funds has been to short the inverse etf's and go long the small crappy stocks. This has forced the quants to cover at massive losses and resulted in huge profits for the hedgies.
The administration and Jim Cramer and all the talking heads on TV and even the United Nations has called for regulation of the hedgies because they shorted the financials into the abyss last fall. I wonder what they will say now that there may be evidence that most of this rally has been manufactured by the hedge funds. I am sure Obama will not speak up for any bears out there who have been ass pounded for the last six weeks. He still thinks there are "green shoots" of recovery visible.
Have a great weekend guys.
The blogs have been full of stories regarding dark clouds on the horizon. Nothing you read in a blog can be considered the concrete truth unless it can be backed up with fact. Usually the stories have links to stories from reputable news agencies. If it doesn't then I don't pay much attention to them. This time is no exception.
Yesterday the one year treasury note hit a yield of 0.01%. This means that bond investors are willing to take almost no return for their investment. There is only one reason this happens. Massive FEAR. Fear of substantial loss in other investments. The last time the treasury hit yields this low was in Nov. Take a look at what equities did in November! In other words the bond boys know something that the equitiy guys don't....yet.
More interesting related news. I have read in several places backed by documentation that several large quants have blown up this week. What are quants? Maybe Jay can provise some input on this. In my research I have found that they are large investment companies that rely on various mathematical formulas to buy and sell stock. Their goal is to be equally long and short. They hope to break even on their investments and make their money on rebates from the stock exchanges. They get these rebates because they provide an extremely important job for the markets. They provide liquidity on a massive scale. This liquidity provides a floor or ceiling on share prices and prevents extreme temporary swings in share prices.
For instance if a stock suddenly feels selling pressure and the share price drops the quants' computers tell them to buy. This purchasing action prevents a crash in that equity by buying the shares that are being sold.
What has happened to several large quants this past week is that they have been forced to unload massive positions on certain equities due to their own personal loss limits. The quants purchased short positions against many low priced equities with poor fundamentals as these equities prices increased off the bottom. Many of these equities have doubled off the bottom or more and forced the quants to take massive losses. This has forced several to shut their doors and forced others yet to step aside and avoid the trainwreck.
Basically many quants did not see the bear rally coming and got caught short. The effect has been lack of liquidity and artificial demand due to short covering which has caused the rally to drag on and go higher. Coincidentally as prices rose and this dragged on more quants got pinched.
Now what does this all mean? Possibly, not probably, there will be a black swan type event.
We are overdue for a pullback. If the market does not have the proper liquidity due to the disappearing quant funds the pullback could escalate into something larger. I have noted in this blog yesterday that evidence suggests that this rally has been led by retail mostly and recently the institutions have become bearish. If prices begin to fall and fall quicker than normal, the retail investors could panic and the race will be on for the exits. I am talking a market crash.
Furthermore the market has created a pattern called a rising wedge. This pattern has a very reliable outcome of extreme and sudden reversal. Once this pattern resolves and prices begin to fall we could get our black swan type event. It would be a day that would go down in history. I am not predicting it, but I just wanted you all to know that many pieces are in place for this type of event.
Edit: I'll add to this with some information that did not have any link to an article, but was reported by several hedge funds. The strategy taken by these funds has been to short the inverse etf's and go long the small crappy stocks. This has forced the quants to cover at massive losses and resulted in huge profits for the hedgies.
The administration and Jim Cramer and all the talking heads on TV and even the United Nations has called for regulation of the hedgies because they shorted the financials into the abyss last fall. I wonder what they will say now that there may be evidence that most of this rally has been manufactured by the hedge funds. I am sure Obama will not speak up for any bears out there who have been ass pounded for the last six weeks. He still thinks there are "green shoots" of recovery visible.
Have a great weekend guys.
Thursday, April 16, 2009
This could last until Monday
I wrote yesterday that since we failed to breakout of the pattern we were in we may get another test of Monday's highs. Upon reviewing lots of research last night I have an idea of how this might play out.
JPM announced higher than expected earnings this morning(no surprise) as the banks continue their streak of "nothing to see behind the curtain, the recession is over" 1Q earnings "surprises". The last two major financials to report are C (tomorrow) and BAC (Monday). I believe that Friday's close will mark the top. I believe that the banks earnings are a "buy the rumor, sell the news" type event.
I have seen data of extreme selling into strength over the last 1.5 weeks. The COT data two weeks ago marked a swing in institutional buying of calls to buying of puts and in large quantity. This data tells me that the big boys are unloading the positions they bought sub-700. They are using the same process that Livermore wrote about in his book over 60 years ago that I have discussed before.
Combining the data mentioned above with the overbought signals across many timeframes gives me the confidence to predict a top is imminent. I have been expecting it for over a week. I posted yesterday that the market seems to be artificially propped up. I believe that this will end when the last of the banks release earnings.
Here is a chart that I found detailing the current pattern.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVJakpB_q6UpdP2QvD6DidM6QKuS3dCW8m20ab0Pinpb8Dsg8ujDjbklR6l2ji_Uxreu0-TPgVuIesYU5emSWfiCm0YnKGOqnXI7xkRhFjBp3GL5Xg0e2Xk5Q9Sb2QG5C3vOZw0ndOFRE/s1600-h/PROPHETMinor+1.png
It clearly shows that it should peak on Friday's close. I will be looking for higher prices through most of Friday and a last five minute before close rush to the exit. That is how it played out on Feb 13. It may do the same thing this Friday.
That dark line was a line of support that withstood 11 out of 12 tries at penetration. It was a line of support that connected the Nov. 19 low with all of the lows through Jan and Feb. When it finally gave way with a gap down open after MLK day we dropped 160 points in less than one month. We do not have the momentum to break this resistence until we have a decent retrace. Interestingly when we revisit this line after the expected correction it should be over 900. It will give us some trouble to break, but when we do we will accelerate upward. But that is months away.
I predict a gap lower on Monday or a flat to slightly up open and then a crap out. I am hoping that my new account will be funded by Friday's market close so I can get in on some low risk high reward short positions.
JPM announced higher than expected earnings this morning(no surprise) as the banks continue their streak of "nothing to see behind the curtain, the recession is over" 1Q earnings "surprises". The last two major financials to report are C (tomorrow) and BAC (Monday). I believe that Friday's close will mark the top. I believe that the banks earnings are a "buy the rumor, sell the news" type event.
I have seen data of extreme selling into strength over the last 1.5 weeks. The COT data two weeks ago marked a swing in institutional buying of calls to buying of puts and in large quantity. This data tells me that the big boys are unloading the positions they bought sub-700. They are using the same process that Livermore wrote about in his book over 60 years ago that I have discussed before.
Combining the data mentioned above with the overbought signals across many timeframes gives me the confidence to predict a top is imminent. I have been expecting it for over a week. I posted yesterday that the market seems to be artificially propped up. I believe that this will end when the last of the banks release earnings.
Here is a chart that I found detailing the current pattern.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVJakpB_q6UpdP2QvD6DidM6QKuS3dCW8m20ab0Pinpb8Dsg8ujDjbklR6l2ji_Uxreu0-TPgVuIesYU5emSWfiCm0YnKGOqnXI7xkRhFjBp3GL5Xg0e2Xk5Q9Sb2QG5C3vOZw0ndOFRE/s1600-h/PROPHETMinor+1.png
It clearly shows that it should peak on Friday's close. I will be looking for higher prices through most of Friday and a last five minute before close rush to the exit. That is how it played out on Feb 13. It may do the same thing this Friday.
That dark line was a line of support that withstood 11 out of 12 tries at penetration. It was a line of support that connected the Nov. 19 low with all of the lows through Jan and Feb. When it finally gave way with a gap down open after MLK day we dropped 160 points in less than one month. We do not have the momentum to break this resistence until we have a decent retrace. Interestingly when we revisit this line after the expected correction it should be over 900. It will give us some trouble to break, but when we do we will accelerate upward. But that is months away.
I predict a gap lower on Monday or a flat to slightly up open and then a crap out. I am hoping that my new account will be funded by Friday's market close so I can get in on some low risk high reward short positions.
Wednesday, April 15, 2009
Tuesday Recap
I had sent out an email this morning stating that the chances were good for a very red day. Well it did not happen. We were on the verge of breaking out of a very reliable pattern, but it failed the backtest. Since we failed the backtest we now have good odds at testing the highs from Monday possibly tomorrow.
This is OPEX week so we should expect extreme swings in price. Often times we'll whipshaw back and forth for most of the week and end the week close to where we began. I will use a retest of the high as an opportunity to load up the short bus. Nothing that happened today has changed my outlook for lows in the near term.
I get the impression that there are forces keeping this market elevated. I posted some thoughts in a reply to Jay the other day regarding GS. This may be part of what is happening. I have talked before about Livermore's process for selling large volumes of stocks. This may be going on as well. Ultimately the market will correct. The longer they keep it elevated the deeper the retrace. In fact the odds increase of us actually testing the 666 bottom.
Ever since we hit a high on March 20 over 800 we've had a vicious tape. Gap opens almost everyday. Fast moves intraday often back and forth ending where we gapped open. We've been trading in a 50 point range almost exclusively for almost four weeks. I can't wait to break out of this. JPM releases earnings I think tomorrow. After this C is the last major financial to report. Perhaps it is these earnings announcements that the prices are being helpd up for. Once we put them in the rearview mirror we can finally move on.
This is OPEX week so we should expect extreme swings in price. Often times we'll whipshaw back and forth for most of the week and end the week close to where we began. I will use a retest of the high as an opportunity to load up the short bus. Nothing that happened today has changed my outlook for lows in the near term.
I get the impression that there are forces keeping this market elevated. I posted some thoughts in a reply to Jay the other day regarding GS. This may be part of what is happening. I have talked before about Livermore's process for selling large volumes of stocks. This may be going on as well. Ultimately the market will correct. The longer they keep it elevated the deeper the retrace. In fact the odds increase of us actually testing the 666 bottom.
Ever since we hit a high on March 20 over 800 we've had a vicious tape. Gap opens almost everyday. Fast moves intraday often back and forth ending where we gapped open. We've been trading in a 50 point range almost exclusively for almost four weeks. I can't wait to break out of this. JPM releases earnings I think tomorrow. After this C is the last major financial to report. Perhaps it is these earnings announcements that the prices are being helpd up for. Once we put them in the rearview mirror we can finally move on.
Regional Banks Starting to Crap Down Their Legs
The oft worried about Commercial Real Estate issues are finally starting to creep up. RJF last night, MBWM this morning and CBSH yesterday all announced their earnings would miss expectations and all cited CRE as one of the contributing factors to the weakness. CRE losses/NCOs are currently around 25bps for the largest 50 banks in the US and Non performing CRE loans are about 150bps. That compares to the early 90's peak of 212bps in NCOs and 600bps in NPAs respectively. Add to that C&I lending, really just a catch all investment class that has virtually no collateral, is currently at 100bps in NCOs and 100bps in NPAs compared to the prior peaks in the early 90's of 250bps/500bps respectively. You get the picture, painful, painful things ahead that I don't think people can look past until we are at least 50% of the way through the pain and this is really the first of maybe 8 quarters of pain. (RJF and MBWM are underperforming the SP500 financials index today by -1800bps and CBSH has underperformed by -1100bps yesterday and today).
Tuesday, April 14, 2009
Fundamental Thoughts on the Credit Markets support Solwold's technical analysis
See the end of this post for the conculsion if you don't want to read how I construct my credit market index.
I am going to start posting the results of my weekly look at the credit markets on Fridays or Mondays. It is an index I created a few months back to look at the health of the credit markets. It looks at 58 datapoints, some of which happen weekly, some monthly and some quarterly. It is broken down as 28% RISK, 18% RETURN, 30% CONSUMER HEALTH, 18% BUSINESS HEALTH and 6% INFLATION. The thinking goes risk/return is the leading indicator for overall health of the markets so it carries 46% of the index or as much as consumer/business consumption ability of 48%. 60% of the risk/return weight is in risk given that the market is focussed so much on risk right now and will be for some time and 60% of the consumer/business health is weight is in consumer given the larger importance of consumer on consumption. The remaining 6% is inflation with deflation a negative as it shows policy steps are not working as intended. The index is a weighted average result of these 58 datapoints based on 3, 1, 0, -1 and -3 or incrementally getting much better, incrementally getting better, no change, incrementally getting worse and incrementally getting much worse. It is not based on levels or vs. expectations rather the second derivative move in the underlying datapoint.
Net, net the index has been positive for the past 5 weeks meaning things are getting better vs. getting worse. That compares to only 2 positive results in the prior 14 weeks! So even though it feels really bad out there things like issuance of debt, terms of that debt, the Ted Spread, Libor/OIS Spread, VIX, Yield Curve, trading of derivatives on the CME, $ to Yen, $ to Euro, Returns in China, Brazil and South Korea, performance of early cycle stocks vs. late cycle and vs. defensive stocks, consumer confidence, all the housing stats (affordability, mortgage rates, mortgage applications, new and existing home sales and supply & Freddie Mac Delinquencies), gas prices are all getting incrementally better. Unless we start to see these metrics crater and move the other way again heading to where we were post Lehman I don't think that we re-test cycle lows. That being said as you have seen from my prior posts we are definitely going lower from here over the short term.
I am going to start posting the results of my weekly look at the credit markets on Fridays or Mondays. It is an index I created a few months back to look at the health of the credit markets. It looks at 58 datapoints, some of which happen weekly, some monthly and some quarterly. It is broken down as 28% RISK, 18% RETURN, 30% CONSUMER HEALTH, 18% BUSINESS HEALTH and 6% INFLATION. The thinking goes risk/return is the leading indicator for overall health of the markets so it carries 46% of the index or as much as consumer/business consumption ability of 48%. 60% of the risk/return weight is in risk given that the market is focussed so much on risk right now and will be for some time and 60% of the consumer/business health is weight is in consumer given the larger importance of consumer on consumption. The remaining 6% is inflation with deflation a negative as it shows policy steps are not working as intended. The index is a weighted average result of these 58 datapoints based on 3, 1, 0, -1 and -3 or incrementally getting much better, incrementally getting better, no change, incrementally getting worse and incrementally getting much worse. It is not based on levels or vs. expectations rather the second derivative move in the underlying datapoint.
Net, net the index has been positive for the past 5 weeks meaning things are getting better vs. getting worse. That compares to only 2 positive results in the prior 14 weeks! So even though it feels really bad out there things like issuance of debt, terms of that debt, the Ted Spread, Libor/OIS Spread, VIX, Yield Curve, trading of derivatives on the CME, $ to Yen, $ to Euro, Returns in China, Brazil and South Korea, performance of early cycle stocks vs. late cycle and vs. defensive stocks, consumer confidence, all the housing stats (affordability, mortgage rates, mortgage applications, new and existing home sales and supply & Freddie Mac Delinquencies), gas prices are all getting incrementally better. Unless we start to see these metrics crater and move the other way again heading to where we were post Lehman I don't think that we re-test cycle lows. That being said as you have seen from my prior posts we are definitely going lower from here over the short term.
Wave 2 Down is Underway
At this point I am 99% certain that the wave 2 correction is underway. As stated several times on this blog my targets for the wave 2 bottom is in the 725-750 range. This wave 2 should take an ABC shape. That is a five wave structure down, followed by a 3 wave B up and finally another 5 waves down for C. Time frame should be 2-3 weeks, but this is really just a guess.
Going short from here is a low risk-high reward play. The inverse leveraged etf's will be porfitable, but caution should be used in exiting the positions near the top end of the range listed above.
There are several signs that the bottom of this wave may be closer to the 750, even 765 range than the 725. I'll keep monitoring these signs. I am playing this by shorting mostly the financials and RE. I will begin scaling out of my positions near 775 unless I get signals that the retrace should be deeper. I will keep all of you informed of course.
Once wave 2 down completes we will begin wave 3. Tentative targets for this are over 1000. This wave will be the easiest wave to play in the next several years. This is the period in which one can literally throw a dart at a list of stocks and make money. However by choosing the right plays one can make MORE money! This is still several weeks away and most of the major moves will be in late spring or early summer.
Going short from here is a low risk-high reward play. The inverse leveraged etf's will be porfitable, but caution should be used in exiting the positions near the top end of the range listed above.
There are several signs that the bottom of this wave may be closer to the 750, even 765 range than the 725. I'll keep monitoring these signs. I am playing this by shorting mostly the financials and RE. I will begin scaling out of my positions near 775 unless I get signals that the retrace should be deeper. I will keep all of you informed of course.
Once wave 2 down completes we will begin wave 3. Tentative targets for this are over 1000. This wave will be the easiest wave to play in the next several years. This is the period in which one can literally throw a dart at a list of stocks and make money. However by choosing the right plays one can make MORE money! This is still several weeks away and most of the major moves will be in late spring or early summer.
GS Earnings
It will be interesting to watch how GS and the rest of the financials trade today. GS had a blowout quarter on revenues and earnings because of trading in their fixed income, currency and commodities book. However the rest of the statement was just okay and people were looking for more there. In addition GS just switched to a calendar quarter so these results are for Jan-Mar, leaving December in no man's land because that was after their last quarter of November 2008. Results in December were worse than what people were looking for and so book value, the key metric to value financials, did not grow sequentially even with these good results. Net, net these results are not enough to keep people in place in GS in the short term. However I would go long the financials that can and will pay back the TARP and short those that will not be able to do that. The reason is those that pay back the gubment will be able to 1) pay fair market value for talent and will therefore see an inflow of talent, 2) not have to run their business with the government over their shoulder telling them what to do and therefore will be able to take appropriate risks and earn an appropriate return and 3) will be able to participate in the PPIP program to buy distressed securities while using the government as the prime broker to let you lever up. So go long GS and JPM and maybe even MS and short BAC, C and WFC. I still think slight upward bias to the market through earnings season but early to mid May when the government requires many banks to riase capital will be the start of a retrace of some of the recent gains.
Monday, April 13, 2009
Topping Process
SPX hit the range of a high confidence top for wave 1 up of this bear rally on Friday. I had been looking for 850-860 since the week before. XLF hit it's high probability top today at $11. I had not posted a target for XLF since I had not applied the EW principles to it. I ran across someone this weekend that had and they had an $11 price target.
Since SPX topped Friday and XLF today early, both appear to be making moves down that are consistent with a new wave down. If this is true we should see some acceleration downward later this afternoon on both SPX and XLF.
The wildcard out there right now is the GS earnings scheduled to be released tomorrow before the market open. It is possible that we trade in a tight range for the rest of today and tomorrow the GS earnings (which are rumored to be atronomical) is the catalyst for the selloff. A "buy the rumor, sell the news" type selloff.
One thing is certain from last Friday's surge. Record profits are now ALREADY PRICED INTO ALL FINANCIALS. When WFC announced their fake record earnings all of the other financials rose along with them near the 30% range (with the expection of C which only rose 10%). So anything short of record profits will take the finnies DOWN. Record profits just keeps them where they are now. This also fits well with the EW forecast.
Now would be an ideal time to open up short positions against the financials, real estate and the SPX. It is a very high reward, low risk setup. I would suggest FAZ, SRS, SDS and SKF. My target for the SPX is in the 725-750 range and my target for XLF is 7.80-8.45 range. If XLF hit this target FAZ would more than triple from it's current price. This wave 2 down should take about 1-2 weeks to play out.
Since SPX topped Friday and XLF today early, both appear to be making moves down that are consistent with a new wave down. If this is true we should see some acceleration downward later this afternoon on both SPX and XLF.
The wildcard out there right now is the GS earnings scheduled to be released tomorrow before the market open. It is possible that we trade in a tight range for the rest of today and tomorrow the GS earnings (which are rumored to be atronomical) is the catalyst for the selloff. A "buy the rumor, sell the news" type selloff.
One thing is certain from last Friday's surge. Record profits are now ALREADY PRICED INTO ALL FINANCIALS. When WFC announced their fake record earnings all of the other financials rose along with them near the 30% range (with the expection of C which only rose 10%). So anything short of record profits will take the finnies DOWN. Record profits just keeps them where they are now. This also fits well with the EW forecast.
Now would be an ideal time to open up short positions against the financials, real estate and the SPX. It is a very high reward, low risk setup. I would suggest FAZ, SRS, SDS and SKF. My target for the SPX is in the 725-750 range and my target for XLF is 7.80-8.45 range. If XLF hit this target FAZ would more than triple from it's current price. This wave 2 down should take about 1-2 weeks to play out.
Thursday, April 9, 2009
Thursday Market Analysis
I finally had a chance to digest today's market action so far. The SPX hit the target I had been expecting for a few weeks (850-860). Market volume remains light as it has all week.
The structure now looks complete for an EW wave 1 off of the 666 bottom. I now expect a retrace of 50%-62.8% minimum. Running the numbers puts us in the 734-758 range. The momentum indicators are running on the overbought side on most time frames now. We are also going to put in our fifth straight up week in a row. to put this into perspective we only had ONE strecth of five or more down weeks in the entire bear market. June to July of '08 had six straight down weeks.
The price structure on XLF looks even better. A retrace from today's high of $10.10 takes us down to $7.41-7.96.
I studied the market action during the period off of the Nov. 23 low to the high on Jan 6. I looked at this period because the time frame matched the time frame from the March 6 bottom to today (a little over a month), both periods started with a bear market low and ended with a 3 day weekend. You can see this in the following chart:
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3095409&cmd=show[s155003437]&disp=P
Jan 5 and 6 were the first two days after the New Year holiday period. We put in back-to-back doji candles. We also put in a top and went down 280 points in the next two months.
If this scenario were to play out again, then next week Monday and Tuesday will be narrow range trading days and give us a top slightly higher than today. Which would still fit with my expected top in the 850-860 range.
Also note in the chart above that we are close to hitting a major resistence line. I believe we test the line and fail there. Then we pull back to the next resistence line that connects the tops on jan 6 and Feb 13. This line conveniently sits right in the range of the expected pullback (734-758).
Once my new brokerage account is funded I will go heavily short for the expected pullback. I will scale out of shorts as we approach the 750 area and then scale into longs when it is apparent we are near a bottom.
The most difficult time to be short is at the top. The most difficult time to be long is at the bottom. Yet these are the times to be a contrarian. Going short now will pay handsomely in the next few months.
The structure now looks complete for an EW wave 1 off of the 666 bottom. I now expect a retrace of 50%-62.8% minimum. Running the numbers puts us in the 734-758 range. The momentum indicators are running on the overbought side on most time frames now. We are also going to put in our fifth straight up week in a row. to put this into perspective we only had ONE strecth of five or more down weeks in the entire bear market. June to July of '08 had six straight down weeks.
The price structure on XLF looks even better. A retrace from today's high of $10.10 takes us down to $7.41-7.96.
I studied the market action during the period off of the Nov. 23 low to the high on Jan 6. I looked at this period because the time frame matched the time frame from the March 6 bottom to today (a little over a month), both periods started with a bear market low and ended with a 3 day weekend. You can see this in the following chart:
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3095409&cmd=show[s155003437]&disp=P
Jan 5 and 6 were the first two days after the New Year holiday period. We put in back-to-back doji candles. We also put in a top and went down 280 points in the next two months.
If this scenario were to play out again, then next week Monday and Tuesday will be narrow range trading days and give us a top slightly higher than today. Which would still fit with my expected top in the 850-860 range.
Also note in the chart above that we are close to hitting a major resistence line. I believe we test the line and fail there. Then we pull back to the next resistence line that connects the tops on jan 6 and Feb 13. This line conveniently sits right in the range of the expected pullback (734-758).
Once my new brokerage account is funded I will go heavily short for the expected pullback. I will scale out of shorts as we approach the 750 area and then scale into longs when it is apparent we are near a bottom.
The most difficult time to be short is at the top. The most difficult time to be long is at the bottom. Yet these are the times to be a contrarian. Going short now will pay handsomely in the next few months.
WFC announcement
Credit markets have generally been decent over the past few weeks and it sounds like the 19 banks under the "stress" test (not that much of a stress) will pass the test. Add to that the news from WFC today that they will blow away consensus expectations for Q109 and the short covering rally is on today. Liquidity will be low in the market given the holiday tomorrow so it will be more extreme than it should be. It will be tough to be short the financials group through earnings season given that this WFC trend should also benefit JPM, BAC and PNC. This should give a general lift to financials overall since this is one of the most hated and therefore underowned groups out there. This should be a broad positive for the markets overall as well. However once earnings season is done (mid May) I think we are in for a market pullback given that the Fed/FDIC will push the banks that need more capital to get it and we may have another GM like boot out of a bank CEO, Pandit at Citi? The push for more capital means the conversion of government preferred to common and that will dilute the heck out of the common shareholders. In addition there will be arbing to short the stock of the bank who will have preferred converted into common like we saw with Citi. I would ease up on WFC, BAC and C here and then come in after earnings season to put the shorts back on them. Good pair trade is to use JPM as the long.
Wednesday, April 8, 2009
Critical Error in my Long Term Outlook
I must admit I am a little embarrassed. I made a critical error in my long term outlook. As you may have known I have been reading a book on EW theory. Anyway I got to the section regarding corrective periods like we are currently in. The critcal idea is that market corrections of ALL magnitudes contain three wave structures. So the expected wave pattern for the current bear rally is a THREE wave NOT FIVE wave structure. This will significantly lower my IT target from over 1000SPX to most likely under 1000SPX.
In the short term nothing is changed. I am still expecting the second wave of this rally (which is now called B and not 2) to retrace to 750 or lower. The change is now the next wave up will be the end of the bear rally. Corrections are very difficult to play and to predict with much confidence where they will end. This C wave up could go higher than the top of the A wave, or it could not reach that high. It should take a five wave structure though which will help tremendously in setting a target for the top. The problem is we will not have much warning for this. We'll have to set the targets as the wave C moves up.
If I had to guess, which of course I will, I would say that the C wave traces to at least the top of A (currently is about 845). It will probably go beyond A to the 900-950 area.
Corrections in general can be messy complicated structures that tend to stay in a trading range. The reason for this is that these periods are when most investors take profits. Once the profits have all been taken then the larger trend (down in this case) can continue. They can take much more time to complete than impulsive waves. I have referenced the period between December and early February as an example.
I expect this correction to last throughout the earnings period. This is the rest of April. I also expect prices to remain mostly in the 800-850 area. I may take a more active trading approach during this period going long near 800 and short near 850. I will use trading stops as a safety net to avoid becoming trapped in a position. I probably won't make much money doing this, but I'll probably learn alot and use this period to become acquainted with my new broker.
In the short term nothing is changed. I am still expecting the second wave of this rally (which is now called B and not 2) to retrace to 750 or lower. The change is now the next wave up will be the end of the bear rally. Corrections are very difficult to play and to predict with much confidence where they will end. This C wave up could go higher than the top of the A wave, or it could not reach that high. It should take a five wave structure though which will help tremendously in setting a target for the top. The problem is we will not have much warning for this. We'll have to set the targets as the wave C moves up.
If I had to guess, which of course I will, I would say that the C wave traces to at least the top of A (currently is about 845). It will probably go beyond A to the 900-950 area.
Corrections in general can be messy complicated structures that tend to stay in a trading range. The reason for this is that these periods are when most investors take profits. Once the profits have all been taken then the larger trend (down in this case) can continue. They can take much more time to complete than impulsive waves. I have referenced the period between December and early February as an example.
I expect this correction to last throughout the earnings period. This is the rest of April. I also expect prices to remain mostly in the 800-850 area. I may take a more active trading approach during this period going long near 800 and short near 850. I will use trading stops as a safety net to avoid becoming trapped in a position. I probably won't make much money doing this, but I'll probably learn alot and use this period to become acquainted with my new broker.
Tuesday, April 7, 2009
Everything Falling Into Place
Yesterday was an important day in the worldwide markets. There were signs that many important worldwide markets have topped in unison. This is possibly a very powerful indicator that we are at an IT top.
The EUR stocks opened with a gap up, traded above the IT high from last Friday, then reversed and closed at the LOD on volume. Also yesterday the EUR, GBP and CHF all had similar topping patterns. At a minimum I expect these currencies to test the lows set earlier this year. Our own stock market failed to set higher highs than Friday.
As you guys have known I have been expecting a top in the 850-860 area. We have not gotten there, but we got close. Overnight trading on Sunday night reached 848. It is possible that the fifth wave of our fist bear rally leg up will end short. However keep in mind that this is a holiday shortened week. The markets are closed and volume on Wed and Thurs will be light. Because of this it is possible that the mostly retail crowd will push prices into the area I have been expecting.
There is a very good possibility that next Monday's open is down significantly similar to the last threeday weekend we had at MLK day.
Looking forward I still have my target at 750, which is roughly the 50% retrace of the move off the bottom. Just as likely is a 62.8% retrace (732). Less likely is a 38.2% retrace (777). I am reducing the odds for this due to the worldwide market activity yesterday. That was a powerful signal that this correction will be significant, as most wave 2 retraces are. I am also moving up a small notch the possibility that the retrace is 100% or even over 100%. At this point I am only keeping these possibilities in the back of my mind. As prices fall I will get a better indication of where prices are likely to fall to.
The way I am going to play this is similar to the plan I have had in the last few weeks, except that I will not begin scaling out of my shorts until closer to the 750 area, not the 775 area.
The EUR stocks opened with a gap up, traded above the IT high from last Friday, then reversed and closed at the LOD on volume. Also yesterday the EUR, GBP and CHF all had similar topping patterns. At a minimum I expect these currencies to test the lows set earlier this year. Our own stock market failed to set higher highs than Friday.
As you guys have known I have been expecting a top in the 850-860 area. We have not gotten there, but we got close. Overnight trading on Sunday night reached 848. It is possible that the fifth wave of our fist bear rally leg up will end short. However keep in mind that this is a holiday shortened week. The markets are closed and volume on Wed and Thurs will be light. Because of this it is possible that the mostly retail crowd will push prices into the area I have been expecting.
There is a very good possibility that next Monday's open is down significantly similar to the last threeday weekend we had at MLK day.
Looking forward I still have my target at 750, which is roughly the 50% retrace of the move off the bottom. Just as likely is a 62.8% retrace (732). Less likely is a 38.2% retrace (777). I am reducing the odds for this due to the worldwide market activity yesterday. That was a powerful signal that this correction will be significant, as most wave 2 retraces are. I am also moving up a small notch the possibility that the retrace is 100% or even over 100%. At this point I am only keeping these possibilities in the back of my mind. As prices fall I will get a better indication of where prices are likely to fall to.
The way I am going to play this is similar to the plan I have had in the last few weeks, except that I will not begin scaling out of my shorts until closer to the 750 area, not the 775 area.
Monday, April 6, 2009
Holding Frim
My post on Friday is still my primary view. I thought we'd get to 850-860 as a high, we actually hit 848 in overnight trading last night. It appears today that the bears are in control, for awhile anyway.
The prices today suggest we are now in wave 2 down. The targets I posted last week are still valid.
I am feeling much better today than last week so hopefully I am finally kicking this bug out of me. You can expect more frequent posting when I am fully recovered.
The prices today suggest we are now in wave 2 down. The targets I posted last week are still valid.
I am feeling much better today than last week so hopefully I am finally kicking this bug out of me. You can expect more frequent posting when I am fully recovered.
Friday, April 3, 2009
New Wave Targets
I think I was a bit rpemature in ending wave 1 when I did. It is looking to me like we may get one more push up to new highs before ending this wave 1. EW target would be 860. Could end sooner, could end later, but most probable is 860. Gauging the length of the beginning of a new trend is difficult. Once the first leg is clear then a true EW'er can set high probable targets for the rest of the waves.
As it stands now My targets are ending this wave 1 in the 850-860 range. Wave 2 down goes to near 750. Wave 3 then will go to a minimum target of 950 to 1050. Wave 4's are usually long and boring. (the wave 4 from the past bear market lasted from late Oct to mid Feb and spent most of that time in a 150 point range.) Wave 5 could take us 100 points higher than wave 3. Kind of early to project wave 5 since it is possible that wave 1 extended.
The way I am trading this is per my previous plan. Stay short until the end of wave 2. i will scale out as we approach the wave 2 down target.
If I am wrong about where we are in the wave count, it will become apparent that we are in wave 3 already if we push up past 860 towards 900 in a steep, fast line. I highly doubt this since there is so much resistence above from a trend analysis. I really think we need lower prices to "refuel" the momentum gauges as we are currently oversold.
As it stands now My targets are ending this wave 1 in the 850-860 range. Wave 2 down goes to near 750. Wave 3 then will go to a minimum target of 950 to 1050. Wave 4's are usually long and boring. (the wave 4 from the past bear market lasted from late Oct to mid Feb and spent most of that time in a 150 point range.) Wave 5 could take us 100 points higher than wave 3. Kind of early to project wave 5 since it is possible that wave 1 extended.
The way I am trading this is per my previous plan. Stay short until the end of wave 2. i will scale out as we approach the wave 2 down target.
If I am wrong about where we are in the wave count, it will become apparent that we are in wave 3 already if we push up past 860 towards 900 in a steep, fast line. I highly doubt this since there is so much resistence above from a trend analysis. I really think we need lower prices to "refuel" the momentum gauges as we are currently oversold.
Tuesday, March 31, 2009
Mojo, mojo, mojo.....
Does 810 count as a touch over 800? I admit it is a stretch, I was thinking of closer to 806, but I'll take it. We clearly moved down in the last 15 minutes of the day. All of the momentum indicators are now pointing down. I am watching for a five wave structure for this move down. I am looking for a low in the neighborhood of 750. It is possible we end the move at 775 and it is also possible the move extends towards 725. As the move unfolds the actual target will become clearer.
I remain fully short and will scale out on the way down beginning possibly in the 775 area. It depends how the move down takes place.
One important thing to note. Both the SPX AND the XLF closed today under EXTREMELY important prices. Both closed on a quarterly basis under the lows of the 2002 bear market. In trend analysis the closing and opening prices on the larger timeframes are of extreme importance. This close does not jive entirely with my views for a multi-month rally.
Due to this I will use more caution in playing the wave 3 up until it appears safe that it is indeed taking place. That is I will most likely scale into long positions and become fully long at higher prices than I anticipated earlier today. For example if we finish the next wave down at 750, I will not be 100% long until we close over 830. If I am correct this should not matter too much since I expect this move up to go well into the 900's.
I remain fully short and will scale out on the way down beginning possibly in the 775 area. It depends how the move down takes place.
One important thing to note. Both the SPX AND the XLF closed today under EXTREMELY important prices. Both closed on a quarterly basis under the lows of the 2002 bear market. In trend analysis the closing and opening prices on the larger timeframes are of extreme importance. This close does not jive entirely with my views for a multi-month rally.
Due to this I will use more caution in playing the wave 3 up until it appears safe that it is indeed taking place. That is I will most likely scale into long positions and become fully long at higher prices than I anticipated earlier today. For example if we finish the next wave down at 750, I will not be 100% long until we close over 830. If I am correct this should not matter too much since I expect this move up to go well into the 900's.
Getting Ready for the last Little Push Down
I feel like I am getting my mojo back. We should be close to ending this little move up. I am still shooting for a touch over 800. Technicals suggest we are running out of juice on the very short term up move. After this we should make one more move down. This move should take a five wave structure similar to the move from Friday's open to yesterday's close. This move could take several days and maybe the rest of the week. This should take us to 750+/-. When we are approaching this area I will watch closely the technicals for exhaustion for the downward movement.
I believe still and very strongly that when this next move up begins it will be very strong in both price and speed. It will take us up around 200 SPX points over several weeks to months. I will be using my nightime research over the next several nights to find some good long candidates. I will most likely purchase a large basket of stocks that I feel have the potential to triple or more in the upcoming move. some of these will be short squeeze plays and others will be institutional favorites. I will also put some cash into long etf's. I will post all of these names on this blog.
I believe still and very strongly that when this next move up begins it will be very strong in both price and speed. It will take us up around 200 SPX points over several weeks to months. I will be using my nightime research over the next several nights to find some good long candidates. I will most likely purchase a large basket of stocks that I feel have the potential to triple or more in the upcoming move. some of these will be short squeeze plays and others will be institutional favorites. I will also put some cash into long etf's. I will post all of these names on this blog.
Monday, March 30, 2009
Expecting Clarity This Week
I expect some clarity this week in regards to the two scenarios I laid out last week. The large drop in the markets were not a surprise. This drop should continue for a few days and end with the SPX in the neighborhood of 750.
In reflecting this past weekend I have reduced the chances for the bearish scenario. I am now 75% behind the bear rally scenario and will be playing this. I expect that prices will reaffirm this view later this week and into next giving me clarity and confidence to play the long side going forward.
Also as we complete this wave we will begin to get some relationships that can provide us with likely targets for this bear makret rally. As is stands right now, I am targeting anywhere from 950 to 1150 and a time frame lasting through the end of the summer. Since the first wave became extended in price, I lean toward the lower end of the targets. I am leaning toward somewhere in the 975-1050 range. This will become more clear as we complete wave 2. Also note that we have major resistence near 950, 1000 and 1050. So these price levels are all logical ending points.
Keep in mind that according to EWT wave 3 is the most profitable and easiest wave to play. If this is the case we need to be properly positioned once the current wave down ends. It could be as early as next week that we begin wave 3. During this week I will be making a list of long candidates to ride up in wave 3. I will post this list when I make it.
In reflecting this past weekend I have reduced the chances for the bearish scenario. I am now 75% behind the bear rally scenario and will be playing this. I expect that prices will reaffirm this view later this week and into next giving me clarity and confidence to play the long side going forward.
Also as we complete this wave we will begin to get some relationships that can provide us with likely targets for this bear makret rally. As is stands right now, I am targeting anywhere from 950 to 1150 and a time frame lasting through the end of the summer. Since the first wave became extended in price, I lean toward the lower end of the targets. I am leaning toward somewhere in the 975-1050 range. This will become more clear as we complete wave 2. Also note that we have major resistence near 950, 1000 and 1050. So these price levels are all logical ending points.
Keep in mind that according to EWT wave 3 is the most profitable and easiest wave to play. If this is the case we need to be properly positioned once the current wave down ends. It could be as early as next week that we begin wave 3. During this week I will be making a list of long candidates to ride up in wave 3. I will post this list when I make it.
I hope you took my buy recommendations last week.
These were the stocks I recommended and their prices and their current prices.
FAZ - $18 - $23.50 - 30.6% gain
SKF - $90 - $107 - 18.9% gain
SRS - $51 - $60 - 17.7% gain
The good news is that I expect further upside in these stocks over the next several days. We could see the increase %'s double before the market turns up.
FAZ - $18 - $23.50 - 30.6% gain
SKF - $90 - $107 - 18.9% gain
SRS - $51 - $60 - 17.7% gain
The good news is that I expect further upside in these stocks over the next several days. We could see the increase %'s double before the market turns up.
Friday, March 27, 2009
Second less favorable possibility
I came across another possible scenario for the intermediate term that is rather intruiging. This scenario suggests we are in a complex ending pattern for this bear market. It suggests that the high for this leg up CANNOT exceed 840. If we basically drop from here we would go straight down to new lows and end the bear. I place lower odds on this than my previous post. The reason is that I am a believer of the fact that simpler is usually correct and this ending shape is very rare and usually only seen to end BULL markets, not bear. However I must acknowledge its possibilty.
This scenario certainly fits much better with the dissconnects I have previously mentioned with the bond market, no capitulation bottom and market fundamentals. This acenario also fits better with the fact that this rally has been led by retail investors and NOT institutions and the fact that it appears that institutions are trying to prop this market up until the end of Q1 which is next Tuesday. However I give this only about a 25% chance. If we breach 840 than this scenario is dead.
Fortunately both scenarios have prices falling from where we are now. So I can initially play them both the same and hopefully get clarity as we go down.
I really like this new scenario as it fits better with the environment, however DO NOT underestimate the power of "hope and change". It is "hope and change" that have propelled us off the bottom and it is "hope and change" that could lead us to a mini bull market sooner than it could have.
The markets during the Great Depression killed many bears AND bulls with its many rises and falls that "should not" have happened. Just play the market that presents itself rather than the market that makes the most sense.
This scenario certainly fits much better with the dissconnects I have previously mentioned with the bond market, no capitulation bottom and market fundamentals. This acenario also fits better with the fact that this rally has been led by retail investors and NOT institutions and the fact that it appears that institutions are trying to prop this market up until the end of Q1 which is next Tuesday. However I give this only about a 25% chance. If we breach 840 than this scenario is dead.
Fortunately both scenarios have prices falling from where we are now. So I can initially play them both the same and hopefully get clarity as we go down.
I really like this new scenario as it fits better with the environment, however DO NOT underestimate the power of "hope and change". It is "hope and change" that have propelled us off the bottom and it is "hope and change" that could lead us to a mini bull market sooner than it could have.
The markets during the Great Depression killed many bears AND bulls with its many rises and falls that "should not" have happened. Just play the market that presents itself rather than the market that makes the most sense.
Two Possibilities
I was out sick again yesterday and did not spend much time watching the market. However I am on lunch and kinda caught up.
The most probable scenario for the upcoming months is the following: 858 max is the high for this wave. Then a wave down to 750, then another wave up, then wave down, then finally wave 5 up to end this bull market.
We might not hit 858. Yesterday's high could have been it. Either way the top of the first wave is almost in. The next wave down could retrace 38.2%, 50%, 62.8% or even 100%. I rule out the 100% cuz that would mean a double bottom and those tend to be long lasting (many years). I think we'll set new lows within 12-24 months. With a large move like we had usually the retraces are more significant so I am shooting for the 50%. 830-666=167, 830-167*.5=746 which is pretty close to 750. That is where I get my target.
Interestingly you can project approximate lenghts for the remaining waves based on the length of wave 1. They are only targets of course, but give you some idea. Based on this the minimum high for this bull market is the 950 area. Most likely top is in the 1050 area. Possibly could go up to 1150, but unlikely.
The way I'm playing this will be to scale out of shorts from 775-750. Then go long. Ride it up to the 950 area (target of wave 3), then scale partially out of longs and scale back into longs when wave 4 finishes. I don't know where that will be yet. It could be months away. Then go all long for the wave 5 finish to 4 digit SPX territory.
It sucks I missed the entire first leg of this bull, but it was a sneaky bull. From what I have read over the last few days it has been a bull market led by retail, not institutions. In fact the institutions are just now trying to figure out when to join the public like we are. My guess is in the mid 700's they will hop on and push us up through a long wave 3 in both time and price.
From a fundamental stand point we did not reach any milestones of a typical bear market. The PE did not reach historic lows, the bond market did not indicate a bottom, even companies did not indicate optimism for late 2009, just the opposite in fact. The only thing telling us this bear ended was price. We ran out of sellers. The public got all bulled up on "hope and change". This will have consequences when this bull market ends as we should get a horrific crash to purge the system, but that is months away.
The most probable scenario for the upcoming months is the following: 858 max is the high for this wave. Then a wave down to 750, then another wave up, then wave down, then finally wave 5 up to end this bull market.
We might not hit 858. Yesterday's high could have been it. Either way the top of the first wave is almost in. The next wave down could retrace 38.2%, 50%, 62.8% or even 100%. I rule out the 100% cuz that would mean a double bottom and those tend to be long lasting (many years). I think we'll set new lows within 12-24 months. With a large move like we had usually the retraces are more significant so I am shooting for the 50%. 830-666=167, 830-167*.5=746 which is pretty close to 750. That is where I get my target.
Interestingly you can project approximate lenghts for the remaining waves based on the length of wave 1. They are only targets of course, but give you some idea. Based on this the minimum high for this bull market is the 950 area. Most likely top is in the 1050 area. Possibly could go up to 1150, but unlikely.
The way I'm playing this will be to scale out of shorts from 775-750. Then go long. Ride it up to the 950 area (target of wave 3), then scale partially out of longs and scale back into longs when wave 4 finishes. I don't know where that will be yet. It could be months away. Then go all long for the wave 5 finish to 4 digit SPX territory.
It sucks I missed the entire first leg of this bull, but it was a sneaky bull. From what I have read over the last few days it has been a bull market led by retail, not institutions. In fact the institutions are just now trying to figure out when to join the public like we are. My guess is in the mid 700's they will hop on and push us up through a long wave 3 in both time and price.
From a fundamental stand point we did not reach any milestones of a typical bear market. The PE did not reach historic lows, the bond market did not indicate a bottom, even companies did not indicate optimism for late 2009, just the opposite in fact. The only thing telling us this bear ended was price. We ran out of sellers. The public got all bulled up on "hope and change". This will have consequences when this bull market ends as we should get a horrific crash to purge the system, but that is months away.
Wednesday, March 25, 2009
Quick update
I think we put in a short term top. Indicators are showing divergences across many time frames. Volume was fumes compared to last couple of weeks. Also the financials did not set new highs yesterday or this morning while the indices did. Yet another divergence. This is about as good of a setup as you can get. Very high probability that you make some decent money on the short side over the next few days and possibly into next week.
I would concentrate on shorting the financials and/or realestate. Go long SKF and SRS. If you are in need of a fix then buy FAZ, the crack cocaine of etf's.
I found a shocking report. Jay you may already have read this report, but when we talked out in Vegas I thought you said most of the RE had already been written off. This report is from GS and deals with CRE. Almost nothing has been written off yet by these banks. Shocking.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSaOrL8etUvLw4WQeHgD7-fRXZLxo8RCoDEjYSezzijGkVw3fLLWGSsJ6Zb35RJSNikKw1yYVoQA2DytAmZAlFx_KOVQqL3uhyphenhyphenvjbuNoNbwzWCvFCytBlnF_6chhAAqwA5GqYdLI9jQefW/s1600-h/zero+hedge.jpg
I would concentrate on shorting the financials and/or realestate. Go long SKF and SRS. If you are in need of a fix then buy FAZ, the crack cocaine of etf's.
I found a shocking report. Jay you may already have read this report, but when we talked out in Vegas I thought you said most of the RE had already been written off. This report is from GS and deals with CRE. Almost nothing has been written off yet by these banks. Shocking.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSaOrL8etUvLw4WQeHgD7-fRXZLxo8RCoDEjYSezzijGkVw3fLLWGSsJ6Zb35RJSNikKw1yYVoQA2DytAmZAlFx_KOVQqL3uhyphenhyphenvjbuNoNbwzWCvFCytBlnF_6chhAAqwA5GqYdLI9jQefW/s1600-h/zero+hedge.jpg
Daily Post
I expect today to close in the red. Probably not much. It is possible we put in another small candle today. When we get a large move in one direction it indicates much strength and can take a few days to turn momentum. Even if we end the day slightly green would not bother me. I would be nervous if we set and close highs above yesterday's highs.
A few random notes of importance:
1 - It is becoming clear that the bad bank plan may never get off the ground. Banks need the asset prices to be very high. If the price is significantly lower than the stated prices, banks would need to write down incredible amounts. They would then need to raise cash to remain capitalized. They cannot do that. Alos investors are rumored to be not interested in paying prices that are not well into their favor. This leaves the taxpayer to hold the bag. How much political capital is the Obama administration willing to spend on this? The public is against more bailout money. I'll stay on top of this.
2 - A truly terrifying statistic: Japanese exports dropped 49.4% YOY. YIKES! That will put any exporting nation straight past economic slowdown, through recession and into depression!
3 - The UK had a failed bond auction last night. Not sure exactly what to make of it yet. I did not read any details about it, only the headline. However I do know that the US has a large bond auction at 2:00est today.
4 - Durable goods numbers came in better than expected. January's numbers were revised significantly lowered. Many believe that the lowering of Jan. numbers was intentional. Reporting of better numbers in Jan makes Jan seem better. Lowering of those numbers than comparing them to Feb numbers makes Feb look better. A little game of trickery by our friends at the FED. Will Feb #'s get lowered next month to help the March numbers? Possibly.
A few random notes of importance:
1 - It is becoming clear that the bad bank plan may never get off the ground. Banks need the asset prices to be very high. If the price is significantly lower than the stated prices, banks would need to write down incredible amounts. They would then need to raise cash to remain capitalized. They cannot do that. Alos investors are rumored to be not interested in paying prices that are not well into their favor. This leaves the taxpayer to hold the bag. How much political capital is the Obama administration willing to spend on this? The public is against more bailout money. I'll stay on top of this.
2 - A truly terrifying statistic: Japanese exports dropped 49.4% YOY. YIKES! That will put any exporting nation straight past economic slowdown, through recession and into depression!
3 - The UK had a failed bond auction last night. Not sure exactly what to make of it yet. I did not read any details about it, only the headline. However I do know that the US has a large bond auction at 2:00est today.
4 - Durable goods numbers came in better than expected. January's numbers were revised significantly lowered. Many believe that the lowering of Jan. numbers was intentional. Reporting of better numbers in Jan makes Jan seem better. Lowering of those numbers than comparing them to Feb numbers makes Feb look better. A little game of trickery by our friends at the FED. Will Feb #'s get lowered next month to help the March numbers? Possibly.
Tuesday, March 24, 2009
The Bad Bad Bank Plan
I told you guys yesterday that I'd give you my take on the Bad Bank Plan. This is one of the last ditch efforts by this administration. In summary the plan is a way to try to get the private sector to take some bad assets off of the banks balance sheets. The plan calls for the taxpayer, of course, to shoulder 93% of the risk and get none of the rewards. We've seen this before right? TARP, TALF, AIG, FNE, FRM,etc. ring a bell?
It is thought by many that that these assets are causing the banks to not lend. Therefore removing bad assets will allow them to lend. This is not true. The banks are not lending because there are very few who are looking to borrow. Who needs money to buy a new car? or a new home? or another vacation? or build a new strip mall? or open another nail salon? or another pizza hut?
Most homeowners and businesses are trying to recover from their debt induced hangover. Most of the people looking for money are already in debt up to their eyeballs and make for risky borrowers. The banks have no appetite, nor should they, to lend to these people.
All of the "solutions" involve stuffing the banks full of cash to try to get them to lend at bazooka point. Here is an exerpt from a book written by a fellow about the recent Japanese bout with deflation-
“The [Japanese] central bank's implementation of quantitative easing at a time of zero interest rates was similar to a shopkeeper who, unable to sell more than 100 apples a day at Y100 each, tries stocking his shelves with 1,000 apples, and when that has no effect, adds another 1,000. As long as the price remains the same, there is no reason consumer behaviour should change – sales will remain stuck about 100 even if the shopkeeper puts 3,000 apples on display. This is essentially the story of quantitative easing, which not only failed to bring about economic recovery, but also failed to stop asset prices from falling well into 2003.”
- Richard Koo, "The Holy Grail of Macro Economics: Lessons from Japan's Great Recession" (John Wiley 2008).
In the end I believe that there is really nothing that our government can do to solve the problem. Only time and pain will solve the problem. Government interference can make the problems worse, however, and probably last a lot longer.
On my to do list is to read the book by Richard Koo to find out exactly what Japan went through in their bout with deflation. I do know already that they never were able to beat it despite trying everything we are proposing to do.
It is thought by many that that these assets are causing the banks to not lend. Therefore removing bad assets will allow them to lend. This is not true. The banks are not lending because there are very few who are looking to borrow. Who needs money to buy a new car? or a new home? or another vacation? or build a new strip mall? or open another nail salon? or another pizza hut?
Most homeowners and businesses are trying to recover from their debt induced hangover. Most of the people looking for money are already in debt up to their eyeballs and make for risky borrowers. The banks have no appetite, nor should they, to lend to these people.
All of the "solutions" involve stuffing the banks full of cash to try to get them to lend at bazooka point. Here is an exerpt from a book written by a fellow about the recent Japanese bout with deflation-
“The [Japanese] central bank's implementation of quantitative easing at a time of zero interest rates was similar to a shopkeeper who, unable to sell more than 100 apples a day at Y100 each, tries stocking his shelves with 1,000 apples, and when that has no effect, adds another 1,000. As long as the price remains the same, there is no reason consumer behaviour should change – sales will remain stuck about 100 even if the shopkeeper puts 3,000 apples on display. This is essentially the story of quantitative easing, which not only failed to bring about economic recovery, but also failed to stop asset prices from falling well into 2003.”
- Richard Koo, "The Holy Grail of Macro Economics: Lessons from Japan's Great Recession" (John Wiley 2008).
In the end I believe that there is really nothing that our government can do to solve the problem. Only time and pain will solve the problem. Government interference can make the problems worse, however, and probably last a lot longer.
On my to do list is to read the book by Richard Koo to find out exactly what Japan went through in their bout with deflation. I do know already that they never were able to beat it despite trying everything we are proposing to do.
Today's Market Action
I must admit that yesterday's action surprised me. I did not expect so much strength. It is clear after yesterday that a trip to new lows in the near term is off the table. We will first make new highs well over 900 and possibly over 1050 before taking a trip back to new lows. The first bear run is over. 666 was the low. This low is an ominus sign for this country.
Today I expect a tight trading range as we digest yesterday's large up move. This will give us a doji candle and set us up for a few red days to end the week. I expect that by the end of the week we hit prices on the SPX under 750. It is common for the first retrace of a mini-bull to cover 50% to 100% of the total move up. I do not expect the 100% retrace as this would put in a double bottom that would be long lasting.
I put the biggest odds at the 50% retrace. This would bring us down to about 750. I am currently 100% short and will begin scaling out of my short positions near 775. I plan to switch to long positions near 750. I will closely watch the momentum indicators on the way down as they will give clues as to how far this retrace drops.
Today I expect a tight trading range as we digest yesterday's large up move. This will give us a doji candle and set us up for a few red days to end the week. I expect that by the end of the week we hit prices on the SPX under 750. It is common for the first retrace of a mini-bull to cover 50% to 100% of the total move up. I do not expect the 100% retrace as this would put in a double bottom that would be long lasting.
I put the biggest odds at the 50% retrace. This would bring us down to about 750. I am currently 100% short and will begin scaling out of my short positions near 775. I plan to switch to long positions near 750. I will closely watch the momentum indicators on the way down as they will give clues as to how far this retrace drops.
Welcome to T.O.P. Traders
Welcome to T.O.P. Traders. The hosts' intention of this blog is to provide a place where both traders and investors can exchange ideas to help enrich everyone. We offer a unique blend of both trading and investing ideas. The two hosts of this site have unique backgrounds. One is an outstanding investor with an exceptional track record of over 10 years of profitable investing. The other host is a passionate trader with about six months of trading experience. Our hope is to use both approaches to compliment each other and make profitable trades and investments. I hope you enjoy this blog.
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