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.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPzb3iPV37LwvB8qnT6yWMIduJM1Qwl-APXZRBdHNBeWUQj59hDVV01QZVWVbNmTtXJjOtfg3nhYAzOlUNpn8TERbJuq-1Xc1LFk-akhe_u8t96FPGH4bH0rtaki2xV-JR6TBfyUuP2dNO/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.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPzb3iPV37LwvB8qnT6yWMIduJM1Qwl-APXZRBdHNBeWUQj59hDVV01QZVWVbNmTtXJjOtfg3nhYAzOlUNpn8TERbJuq-1Xc1LFk-akhe_u8t96FPGH4bH0rtaki2xV-JR6TBfyUuP2dNO/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.
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