PORTFOLIO UPDATE
I announced the initiation of a short position in MOO at 50.95 during the first half hour of trading. Later in the trading day I posted on Twitter that I added to the position making it a large short position within the portfolio. MOO is a play on a weak commodities sector that I went over in the chart review this weekend. The fact that the Euro is weakening again does not help this already struggling sector. I also announced the initiation of ZSL in the morning. I am keeping this a small position until I see silver fall further. Today was a good first...
TODAY’S MARKET WAS A LESSON IN “NOT SUPPOSED TO HAPPEN”
Today a myriad of events took place that plain and simply were not supposed to occur at this juncture of the uptrend. It's similar to when you are standing in the line at the bank and the guy in front of you puts on a ski mask. You know right away that a ski mask inside of a bank is not supposed to happen. There are no slopes nearby and you know that the man isn't there because he forgot his gloves. Similar to a ski mask inside of a bank, the market can give clues that you are about to get robbed. Today the market gave a host of clues. Here they are: 1. The second leg of this uptrend that kicked off on October 21st was supposed to see a reduction in volatility. Instead we have seen an increase of volatility with the second leg. Today's retracement of a majority of the "We saved Europe" rally was not supposed to happen. Furthermore, an increase in volatility should not be occurring at these levels. 2. The Euro has fully retraced the "We saved Europe" rally. It is the Euro that has been leading both the advances and the declines in the market. The fact that is has fully retraced what happened last week is not a good sign for the bulls in the market. A full retracement of that rally was not supposed to happen. 3. A powerful move up in the long-dated US Treasuries occurred today. Such a powerful move down in long-term rates, at this juncture of the recovery, was not supposed to happen. The S&P 500, the Euro and US Treasuries are the primary tells. All three of them together pulled a hat trick of not supposed to happen moves today. If the S&P 500 was down as it was today while the Euro was only down slightly and bonds were more or less unchanged, I would not give the move as much credibility. The fact that all three of these asset classes experienced violent reversals today in unison is worrisome. It tells of yet another shift in the psychology of market participants taking place here. I am not ready to say that the rally we experienced since October 4th was the devil posing as an angel just yet. I am, however, much more suspicious than I was late last week. My spidey senses are tingling. Bulls: You need to see the market begin holding by Thursday at the latest. You do not want another 200 point plus down day on the Dow. The Euro needs to hold he 1.38 level. TLT should stay under...
TRADE UPDATE – MOO & ZSL
Sold short MOO at 50.95-50.97. Small position to start. I am willing to add if it moves lower. This is a commodities related short. Bought ZSL at 11.64-11.65. Back in silver short. Small position to start. I am will to add if silver moves lower (ZSL moves higher). More on these trades tonight.
SEVEN CHARTS TO KEEP YOU IN PEACE AND NOT IN PIECES DURING THE WEEK AHEAD
click charts to enlarge
PORTFOLIO UPDATE
I updated on Twitter late in the trading day Friday that I did take a roughly 2 point profit on the QQQ long I initiated on October 20th. This puts the portfolio back into 100% cash. I'm keeping my eye on a couple different short opportunities in commodity related issues. I don't see any new long opportunities on the horizon until late in the week or possibly next week. As usual, I'll update once positions are...
ANTICIPATION VERSUS REACTION
*This is the weekly email sent to investors. I will publish this on the website from time to time. There is no reason to deviate from something that has been working brilliantly well since the beginning of October. It has allowed me to look far smarter than I really am in anticipating and capturing a majority of this historic rally since October 4th. The correlation between the bottom and subsequent rally of 1998 and the current bottom/rally of 2011 continues to prove noteworthy. The study confirmed that the second leg of the rally kicked off on Friday of last week. Also confirming that we would rally through this week. The second leg of the rally gained roughly 4.5% in 1998. For this week we have gained 3.8%. The study tells us that we are about to embark on a sideways consolidation with a hint of weakness over the next week. In my experience with these studies, I have found that they are prone to breaking down during periods of market consolidation or pullbacks more than any other time. There will come a time when this study stops working completely. The market cannot remain so highly correlated to any previous period for very long until it begins moving down a completely different path that forces us to search out a new road map for profit. The last few days of the month have had a tendency to be strong during 2011. The month of October has not deviated from that path. The opposite is true, however, for the first few days of a new month. The tendency during 2011 has been to see the new month bring in the desire to take profits or further sell positions off. I don't expect November to deviate from that trend. From a psychological standpoint, we have seen a significant change in the mentality of investors as the markets are beginning to force people away from their preconceived tendencies towards bearishness. What we have currently is a cautiously bullish outlook for the markets. This outlook has been created purely out of reactive behavior to prices rising. The markets often times punish reactive behavior. They will, however, reward anticipatory behavior. Anticipatory behavior involves investors looking for points in the market when the lights are off, the room is dark and the only sound that can heard is that of frightening screams and terror. October 4th was one such instance. There was no perceived security in buying that point. In fact, it was the most frightening time of all. Anticipation of a bullish outcome in the face of absolute fear was indeed rewarded. Reactive behavior involves...
THE FUTURE OF RISK
Today was the day. It was the point in time when investors decided to shed the negative myopia that has been with us since August. It has been replaced with a reluctant acceptance that perhaps equities can go up for more than a few days at a time. An opinion that early October may have indeed been a solid enough point to see us rally through the end of the year. An admission by fund managers that in an effort to avoid risk completely for fear of driving a taxi for a paycheck, perhaps the abundance of cash in the portfolio was a bit excessive. All of these realizations were caused by the massive gap up we saw in the morning that never was retraced as most seemed to expect. Furthermore, it was the last straw for those who were holding out bearish hope of an opportunity to buy lower. You could see the market forcing the hand of both frightened buyers and short-sellers on this day. What is astounding to me about professionals in this business is that during points at which your risk is extremely well-defined and simple to quantify they are the most fearful. However, at points when the risk becomes extremely difficult to quantify and is more or less open ended, the buying begins. Often time it is driven by group think. The comfort of having a posse of investors hold your hand serves to dull the fear. The well-defined and simple to quantify point to buy was early October. This is my article from October 3rd http://www.zenpenny.com/?p=2636, one day before the bottom. It's an important read because it goes into the mentality you need to have at important turning points. It is true that at points where the vast majority of investors are most fearful are often times the best points to initiate positions. The risk/reward becomes very easy to quantify because you can set in stone EXACTLY what the market should do from that point on. Now take a look at where we are now. If you are the poor fund manager who needs to initiate exposure here, how do you quantify your risk? How do you know when you are wrong? The truth is....you don't. You are so far away from a favorable point to buy that any normal pullback within such a rapid ascent will seem like the end of the world. The end result: You get rinsed at or near the bottom. The moves the market can make from here are open ended. The risk profile has changed dramatically. With that said, I moved to a 60% invested position all...
PORTFOLIO UPDATE
Holding full position - 60% of portfolio - in QQQ. No plans of selling that. Currently 60% QQQ and 40% cash.
TRADE UPDATE – FAS
Took profits on FAS at 16.05-16.10. 25% profit since inception. Added some higher a few days after initiating. Initiated last week http://www.zenpenny.com/?p=2743
HOW OLD MEN WITH BAD BREATH AND CORNY BOW TIES ARE DRIVING THIS RALLY
Yes, we did sell the news. Only it came a day early. Last night I spoke of the fact that the selling we had witnessed on Tuesday had nothing to do with a lack of an agreement out of Europe. Rather it had everything to do with sellers attempting to beat each other to the punch in selling the news. I saw it again today. There was a general sense of nervousness all day with respect to the rally. It was a very difficult rally to buy. The sell on the news mentality paired with scars of the past few months makes it difficult for fund managers to buy into days like today. I felt it myself throughout the day. Every 20 point move down in the Dow felt like it could cascade into a drop of 100. It has just been that kind of market. And Europe has turned investors into a gang of nervous nellies who have come to the conclusion that every series of down ticks could mark the beginning of a Zerohedge led march down the road to perdition. There are only a few instruments that are worth watching in the current market environment. The US equity markets are keying 100% off of the EUR/USD. If the EUR/USD breaks out convincingly over 1.40 tomorrow, we could run hard in the equity market. If it continues to run into the close Friday, I could see us at 1300 in the S&P by Monday. The fact that gold is now running alongside a weak dollar and a bullish stock market again adds more fuel to the fire for US equities. I have been bearish on gold since August 21st. I have no problems changing my view if I come to the conclusion that the inflate or die trade is back on as it seems it is. Europe has now joined the global liquidity party in earnest and gold seems to be factoring this in. I am looking at futures and see that they are up 100 points on the Dow as a resolution out of Europe seems to be finally in place. There will be a lot of investors looking for a fade in the morning if the strength holds overnight. I think that the market may do a good acting job to lure in short sellers. I don't think we get the fade people are expecting, however. It's way too late in the month and there are way too many fund managers that are still embarrassed by their performance. The performance catch up game is still in the 4th inning. With the resolution of the EU...