PORTFOLIO RECONSTRUCTION: INTRODUCING MY NEW HOME
A complete revamping of the portfolio took place today. I exited all short positions mostly in the pre-open and then the remainder of SPXU was done shortly after the open. The equity markets are an enigma to me currently. There is massive pessimism and massive weight in terms of poor fundamentals. Over the past couple of weeks massive pessimism has won. The poor fundamentals don't seem to matter for the time being. I KNOW there is massive overhead supply in terms of anxious longs who want to get out and I KNOW there are short sellers who are waiting to pounce just a little higher. I am skeptical that the market is pulling down its pants for all these sellers. She seems a little bit too loose to take home to mom, in other words. I'm staying away from equities until we reach either an extreme on the upside (over 1300 on the S&P) or an extreme on the downside (under 1050 on the S&P). In between is no man's land for me as of today. I am currently long DZZ (double short gold ETN), long EUO (double short Euro/long Dollar ETF) and long TMV (3X long 30 year yield). Before we get to the charts, a brief fundamental explanation behind each position: - DZZ - Gold, as I mentioned in the posting from 8/21/11, is at a point where either a bullish or bearish fundamental scenario will derail the bubble. The only way it continues meaningfully higher is under a disaster bearish scenario, which I don't think will come to pass anytime soon. The elevation of gold also seems to be signalling that people are still remarkably risk averse and pessimistic. Perhaps rightfully so. I don't think the gold investors will get away unscathed before seeing the Armageddon trade go south. - EUO - there is value in the US Dollar. There is no value whatsoever in the Euro. The Dollar seems to be sitting at a point where the same scenario as gold applies. If we get a bullish economic scenario going forward, the disparity in value between the Euro and USD will narrow and the USD will appreciate in value on fundamentals. If we get a bearish scenario, real fear will show up and the USD will be the last resort of the frightened, as it always seems to be...2008 as one example. In either case, there is a substantial risk/reward play here that is worth taking. - TMV - bonds are pricing in absolute economic disaster. There is a serious divergence taking place between what bonds are saying and what equities are saying. I usually...
BOUGHT TMV
Added TMV at 22.77. More on this tonight. Short long-bond position/long yields.
ALL OUT INDEX SHORTS
Sold last of the SPXU. All out. 1225 is way more than I expected. My thesis was off...to say the least. Currently holding DZZ, EUO and large cash position.
RISK ASSESSMENT WEDNESDAY
Risk assessment Wednesday is here. On Monday, I said that I would wait until today to make a decision as to which way I would allocate the portfolio based on price action. I've decided to take down my short exposure. Continue to hold onto half of my SPXU position for the time being. I have also shorted gold here in the form of a long position in DZZ at around 4.33-4.34 in the premarket. I spoke about gold being near a top on August 21st here. A couple days after that post gold had a substantial slide on even more substantial volume. The manner in which it fell and the subsequent retracement of that move down has me thinking the opportunity for profit on the short of gold has potential to be substantial. I'll have charts tonight. As for the general markets, I don't want to see the S&P 500 move over 1220. There are a large number of traders thinking that the 1240-1250 level is a slam dunk short. There's a problem with that type of consensus thinking. I believe that the S&P has to either stall out here or the move will be above and beyond anything I suspected a couple weeks ago or even today. I'll have to move to the sidelines if the strength continues. Managing risk in a treacherous market. I'll have more later...
PUNKS JUMP UP TO GET BEAT DOWN
Today I was the punk and I got beat down. Not a pleasant day in the least bit. Comes with the territory, however. Needless to say, my recent assessment of the markets was off. It doesn't mean that one should be jumping to the bull side, thinking that we have put in a solid bottom. Wednesday I will be assessing risk in the portfolio and decide whether to reduce short positions. For now, I have held onto all inverse ETFs. I also added EUO today at 16.55. A long US Dollar play. I would like to add more to it if the opportunity allows. I talked about the USD in the weekly chart review yesterday. Today was a ripper extraordinaire. I'll now go and tend to what is left of my...
7 CHARTS THAT WILL HAVE YOU DRIVING FAST AND TAKING CHANCES IN THE WEEK AHEAD
click chart to enlarge
MISERABLE? ZOOM OUT, GET A GRIP AND BLAME THE MACHINES.
The only thing that changed with Friday's smash reversal to the upside was the near term prospects for continued upside volatility. This market isn't for the meek or emotionally fragile investor. I see a majority of financial bloggers out there who are so zoomed in short-term price movements I wonder how they make it past breakfast on a daily basis. They are literally providing small drops of noise into a sea of loud screams. It is a well known fact that we are in a market that is dominated by HFT (high frequency trading). You have powerful computers that are being programmed by that kid with glasses you sat next to in elementary school that was better than you at everything and anything that had to do with numbers. What the HFTs have done is take even the most sophisticated trading systems and turned them into mush. They know what systematic traders are going to do 20, 30 even 50 steps ahead. It makes technical traders who try to gauge every movement in the market all the more irrelevant. It is more imperative now more than ever to take the following two steps: 1. Zoom out when you look at price movements. Weekly, 9 day or monthly charts only. 2. Be emotionally stable. You have to be able to deal with the volatility. It is the new normal in the markets and it is only getting worse. If you can't, then you need to reduce your positions or get out of the market completely. All that I'm seeing out of traders in the current environment is a stance that is either market neutral with equal parts long and short positions. Or taking small 1-2 point profits here and there, without regards for the larger move in the markets. It seems that a large number of investors have simply turned to the markets as a way to satisfy their lust for entertainment Monday through Friday, while ignoring the primary purpose of the markets -- to create wealth. You don't create wealth by being market neutral and you don't create wealth by jumping in and out at the first sign of ghouls and goblins. Wealth is created with the large moves that take guts, perseverance and vision to stick to until the investment realizes its potential. Find the path of least resistance, position yourself appropriately and sit tight. That's what I have done. I may reduce some short exposure here and there, but my core positions are there to stay. Managed appropriately, I expect to be profitable in the near, intermediate and long-term. There's a lot of noise out there. Blinders...
I FORGOT……..
In the article I posted just a bit ago entitled "What is Obvious is Now Obviously Right? You Bet" I failed to answer the question of whether the S&P is headed to 1200 or 1250 as a lot of traders seem to be waiting for. My answer is: NO. I believe the high of the day today was as far as it will go. In fact, I will go a step further and say that today's high on the S&P 500 of 1190 won't be seen again for the remainder of 2011. August low of 1101 on the S&P 500 should be taken out in the next few trading...
THE ANSWERS TO MY 7 “WHAT-IF?” QUESTIONS BECOMING CLEARER BY THE DAY
On August 11th, I asked 7 "what if?" questions. The answers are become a little more clear. Let's revisit: What if the rally we experienced since the 2009 lows was simply a standard retracement of the initial leg down within a multi-year bear market? It is beginning to look more and more like this is the case everyday. The next month or two will make this point abundantly clear. What if we are in a period in time where range expansions become the norm? What I mean by that is what if all the normalized ranges of highs and lows on every indicator, gauge and expectation you have for market volatility going forward are undergoing a dramatic shift towards expansion? We are. It's just that people don't realize it yet and are still using the same parameters without realizing that those parameters are shifting. What if the market wants to force the hand of the Fed into decisive monetary stimulus? It does. This will become abundantly clear to the Fed at the next FOMC meeting in late September. I don't think QE3 will be announced tomorrow or even hinted at. As the market falls, basically nonstop into the September Fed meeting, it will force the hand of the Fed towards, at a minimum, hinting that QE3 is on the way if not announcing it outright. What if the market wants to force the hand of government to face up to the myriad of problems that we are currently facing? We're a long ways from this happening. I'll come back to this one in 12 months. What if the unprecedented volatility of this week is a warning signal that the markets are unstable? I asked all of these questions on August 11th. Since that time the markets are essentially unchanged, despite enormous volatility over the past couple of weeks. They are unstable. That will become obvious over the next month. What if a major European or US bank go under? Will the system be able to absorb such an event? Inevitable. I don't know the answer to the second question. Why does EVERYBODY see this as a buying opportunity, Donald Trump included? There is not nearly the amount of pessimism out there that most traders think there is. Steve Jobs resigned as CEO of AAPL and it closed down 2%. If this was 2008, when real pessimism existed, it would have fallen 15% at a minimum. Real pessimism will come one month from now. Currently, we are nowhere near as pessimistic as people think. Leave your indicators at home. They are...
WHAT IS OBVIOUS IS NOW OBVIOUSLY RIGHT? YOU BET
My observation of aspiring bears and fearful bulls is that a lot of investors seem to be waiting for the S&P to move to 1200 or possibly 1250 before initiating short positions or liquidating longs. There is this square minded, vanilla perception that since the markets have fallen at such a substantial pace that they must have an equally substantial bounce. There are circumstances where this type of thinking is warranted. This, however, is not one of them. I have been saying for the past couple of weeks that the ferocity of this push down since the beginning of August has effectively broken the deception mechanism of the market. Participants in the financial markets will have a difficult time with this since every single investor out there is a contrarian. If what is obvious suddenly becomes obviously right instead of wrong, then confusion will ensue. That is exactly what we have here. What is obvious at present is that the markets are in a fairly serious downtrend. Fixed income markets and commodities are doing more than their fair share of confirming that the downtrend is very real. It is being led by financials and semiconductors. The same two sectors, by the way, that led the 2008 market debacle. These are all obvious facts. Don't try to get fancy and bring in a dose of contrarianism. As I said, the deception mechanism in the markets is not functioning like it did in say June of this year when I said to buy the dip in the markets. Put/call ratios, oscillators, sentiment surveys, volatility readings are all in a state of an expansion in their perceived normalized trading range. That means that the standard thought of XYZ indicator flashing a contrarian buy signal if it moves above 35 is in the process of being adjusted upward by 30-40 percent. Anomalous behavior now that is setting the stage for the evolution of what we see as being normal behavior in the markets. We're in a period of statistical anomalies. How many times over the past few weeks have you heard of moves in both indicators and the general market being the greatest of the past several decades? Nature seems to be in an uproar as well, with earthquakes in places that rarely experience them and hurricanes headed for regions that aren't used to this type of event. A statistically anomalous period in every way possible. Tomorrow should be interesting. Seats belts and barf bags are...