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.
Friday, May 8, 2009
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)?
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