CONFUSED? HERE’S SOME CLARITY
The market action today was downright confusing. Not because of the fact that the Dow was down 200 plus points. I won't claim to have been looking for this pullback, as it was the last thing on my mind. But we've had a big up month (nearly 10%) and some profit taking in the final days of such a month isn't anything too out of the ordinary. Especially when you consider how jaded fund managers are about giving up profits or generating more losses. What confused me today was the manner in which relationships between asset classes dissolved. Gold and silver moving inverse to the market was not on my radar screen for this week. Copper and emerging markets held up remarkably well in the face of the all selling. And most importantly, if today was really about the fear of an agreement not being hatched in Europe, why was the Euro barely changed and still sitting right below 1.40? The move today in gold and silver was more important than what occurred in the equity markets by far. It could mean one of two things: 1. Either gold and silver are telling us that we are about to enter economic Armageddon phase part deux. Remember that both gold and silver were soaring when all of this kicked off in early August. OR 2. They are factoring in a prolonged resumption of the downtrend in the US Dollar. And the massive injection of liquidity that is about to unleashed in Europe. For reasons that I have explained on this website since September, I can't see us going down the path of scenario #1. Therefore, I have to assume that it is going to be scenario #2. The selloff today had more to do with beating each other to a sell on the news reaction out of Europe than a legitimate chance of a deal not being announced sometime in the next couple of days. If the Euro had fallen back significantly, I'd be singing another tune entirely. However, the Euro is the king of the indicators for the Europe disinformation trade. I trust what it is saying more than any reporter or website or analyst. I remain 120% long in FAS and QQQ. I'll update if any changes are...
THE RAMIFICATIONS OF “EARLY”
The move made on Friday was on the earliest side of the scale when it comes to breaking out of the range and embarking on the second leg of this renewed bull market. There are very few moves the markets make that don't have some level of significance attached to them, especially when you look at the timetable the market is working with. The fact that the market decided to make its move up so quickly is a sign of strength. Powerful 4th quarter rallies, such as the rally of 1998, don't pause to catch their breath for more than 5-7 days at a time. I mentioned on October 12th that I was expecting a 5-7 day pause. This week, I came to the conclusion that the pause would last into next week possibly. I was wrong in changing my original assessment. I underestimated the markets strength. The realization that the market is working on an accelerated schedule is what made me add exposure late Friday. Just as I piled into the market during the last hour of trading on October 4th in anticipation of the first leg up from the bottom. I am now adding exposure in anticipation of the second leg up off of a significant market bottom. This second leg will be much more steady. It will be frustrating for those who choose to ignore it and doubt it, as it should be a steady move up with very little in the way of choppiness going forward. With that said, my plan as of this moment is to hold onto a 120% invested position well into November. I may increase going forward, depending on opportunities and circumstances. The ramifications of "early" are important to note. This market is way early. It is a sign of an abundance of strength and significant upside...
PORTFOLIO CHANGES
During the last hour yesterday, I doubled the portfolio position in QQQ. The Nasdaq 100 now represents 60% of the portfolio. I also doubled the position in FAS. Making it 20% of the portfolio. Since FAS is a triple leveraged ETF it brings total portfolio exposure to 120% long. The portfolio consists of QQQ and FAS. Clean, simple and concentrated. The last hour surge was fund managers realizing that this rally is for real and wanting to participate. There is a lot more underallocation out there that needs to be resolved if guys with a lot of hair gel want to keep their jobs. We have quite a bit of upside remaining through...
GOOD HOUSEKEEPING AND BOTTOMLINE FACTS
There are times when a trade is taken that goes absurdly wrong before you even get a chance to cherish the poor judgement that went into the decision to make the buy. It's at those times that I have found it better to cut and run than sit with the anxiety of knowing that your entry was so far off. EDC was a poorly planned trade that I misjudged. After one day of pain, I decided to press the reset button and look elsewhere for my risk exposure. Not to mention the fact that copper made a move down today that was last on my expectation list. In fact, it qualifies as a definite "should not be happening" move that I will be watching in the days to come. Emerging markets and copper are highly correlated. One more reason I decided to drop EDC. I believe we may have another week of sideways, rangebound movement ahead of us. I plan to slowly accumulate throughout, with an eye on S&P 1200 as the point I want to be buying. Today I added large amount of QQQ at 56.45. 30% of the portfolio went into the Nasdaq 100. On my shopping list for future longs is TNA and more FAS. I did take profits on ZSL today. It was a roughly 10% gain on the position in a week. I am keying off gold for the ZSL trade. Gold held the exact technical point that it should have today. A bounce in gold will result in a bounce in silver. I may hit silver again if the decline in ZSL takes it back into the $13 range. Generally speaking, it looks to me like all the major averages are resting near the highs of the range that started in August in preparation of a breakout to the upside. All the meanwhile, a vast majority of investors are piling into either cash or shorts expecting that we begin falling again. It's classic behavior when a market is at a major turning point, as I believe the early October bottom was. It is at points when investors cannot fathom the upside that the greatest potential for gains is possible. Wrapping minds around the bullish case has become an impossible proposition here. It is reflected in the angst we observe all around us in the form of an overall mood of depression when it comes to anything related to the economy or business. I'm not sure if the seeds have been planted fundamentally to give us a new bull market rivaling anything we saw in the 80's or 90's. But the environment is ripe...
RISK ASSESSMENT WEDNESDAY
On October 12th I moved to a 100% cash position after liquidating the longs I purchased on October 4th. I moved to cash because of the following realization that I spoke about in the blog posting from October 12th: "Bottomline: The best case scenario for the markets over the next 5-7 trading days is a sideways trading range that consolidates between 1190 and 1230. The worst case scenario for the markets over the next 5-7 trading days is a move down to 1150." Since that time the high on the S&P 500 has been 1233 and the low has been 1190. It has worked perfectly into the range that I expected. Today was the 5th trading day since moving into cash. Being that the markets are working out their overbought condition right near the highs of the range you have to assume a very bullish scenario going forward. For that reason and out of respect for my research, I bought back into the position in FAS and EDC that I liquidated on October 12th. Unfortunately, I had to pay a premium for them over what I sold them at and my timing in initiating the positions today was off. FAS was initiated at 12.90 in the pre-market. EDC was initiated at 17.35 in the first couple hours of trading. Both closed lower than where I bought them. I wasn't expecting to nail the bottom tick. I'll sleep off my disappointment tonight...don't worry. That leaves me with a roughly 50% invested position. The breakdown is as follows: 30% ZSL 10% FAS 10% EDC It has become apparent that many investors are now requesting a wax with the brain washing that they have received at the hands of the market and the manic-depressive spin cycle of information that drives their actions. A continued move up in the markets is not only possible, but in fact highly likely. The list of factors that can drive the market to S&P 1300 by late-November are numerous: 1. Seasonality - Allow me to indulge your appetite with the following facts - S&P 500 during the 4th quarter has averaged a 2.4% gain since 1928. The past 20 years the gain has been 4.6%. The gains during the 4th quarter are twice as strong as the next closest quarter. - When the market has fallen by more than 10% during the 3rd quarter, a rally in the 4th quarter has not failed since 1957. The last seven instances were: September of 1974 September of 1975 September of 1981 September of 1990 September of 1998 September of 2001 September of 2002 - The 4th quarter following a...
TRADE UPDATE – FAS
In the pre-market, bought back FAS at 12.90. Put 10% of the portfolio to work here. I'll probably keep that size. Financials look to be at a point where the willingness to lead the second leg of the rally is becoming a very real possibility. I went over some of the individual banking names last night. My second run at FAS this month. I bought it off the October 4th bottom and quickly took profits a couple days...
GETTING DEEP INTO THE FINANCIAL SECTOR
It's time to take a very hard look at what has transpired this month in the financial sector. Earnings of the major occupants in the banking and investment banking sectors have been released. Lo and behold we're all still here, with all major limbs attached and functional. Once earnings season is out of the way here shortly, there will come a point of realization and enlightenment by market participants. I feel that the realization and enlightenment phase has already started in financials. You can see it in the price patterns and the way companies are avoiding the worst case scenarios on the downside by running away to the upside. The charts below will explain the concept in further detail. In a market where things change so drastically on a day to day basis, financials suddenly seem like they may be setting up to take the lead heading into November. The action today was very constructive. Let's look at the major financial...
IT’S THE FINANCIALS DUMMY
Bulls: You want the sector that is going to turn your dreams of an unlimited budget for a holiday shopping spree into roadkill? Look towards financials. Bears: You want the sector that will allow you to buy your mistress a Bentley? Look towards financials. Following today's action in the market - led by financials to the downside - you have to start worrying if you are a bull. The patterns in companies like BAC and JPM remain uninspired. And meanwhile, even the iron men of the financial sector are beginning to see weakness and it's as a result of earnings. Case in point: WFC today. In the meantime, technology is the Lone Ranger of the current market. What it all adds up to in the end is the high probability of continued sideways action until either financials begin picking it up and takeover the leadership role to the upside. Or technology succumbs to the bear-mower run of the past couple of weeks and sinks alongside financials. There is a reason why I remain with only a position in ZSL and the remainder of the portfolio in cash. It is out of an understanding that I lack understanding as to how this will play out. I said last week that the best case scenario going forward would be a sideways trading range. I have no desire to sit through a sideways trading range in the type of environment where slow torture is passed around the table like a bowl of Stove Top stuffing. What will turn me bearish? A close below 1180 on the S&P 500 would begin the process. What will make me bullish? A continued range bound pattern that stays inside of the 1190-1230 range for the majority of this week. There really isn't much more to consider. Overthinking is always your enemy. Genius always hides in...
SHOW AND TELL: MY WEEKEND EMAIL TO INVESTORS
_________________________________________________________________________________________ The last time we experienced a sovereign debt crisis that managed to roil the markets in a similar manner to what we have experiencing recently was 1998. I pointed out the similarity in the structure of the decline between 1998 and 2011 several weeks ago. It is fair to say we have now exited from the depressed portion of reaction to the crisis and moved into the acceptance phase of dealing with various ills - all related to debt - that plague the global economy. The question now becomes twofold: 1. Has the market kept with the structure of the 1998 sovereign debt crisis in exiting the depressed phase and moving into the acceptance phase? 2. What has happened in the past when the market has succumbed to negative fundamental developments and then put together a rally of greater than 10% in just a nine day period as we have recently experienced? The similarities between the 1998 Russian crisis and the 2011 European crisis continue to be impressive from purely a price action standpoint. The Russian crisis bottomed on October 8th, 1998. The European crisis bottomed on October 4th, 2011. The rally experienced in the nine day period following the bottom on October 8th, 1998 was 14.84%. The rally experienced during the nine day period following the bottom on October 4th, 2011 to this past Friday is 14.06%. It is rare to see a market rally in excess of 10% during a two week time frame. Rarer still is for that rally to be born within four days of the anniversary of the resolution to the last major sovereign debt crisis experienced 13 years ago. It is important to now take a look at what has happened when we have experienced rallies in excess of 10% during the 4th quarter when the psychological foundation was as depressed as what we saw earlier this month. To tell of how rare such a rally has been in the past it has only occurred three other times in the 4th quarter over the past 15 years. I chose the to isolate the 4th quarter being that it has characteristics that are much different than the remainder of the year. To measure depressed psychological moods I used the 50 day moving average of the put/call ratio to be within 5% of a 52 week high. The only other qualifier was that the market rallied greater than 10% during a 9 trading day period. Here is how the markets have done 1 month, 3 months and 6 months following such a rare event: October 8, 1998 - S&P 500 bottomed at 923 intraday...