IS 300 POINTS ENOUGH TO COAX THE BEARS BACK INTO THEIR DENS?
The velocity of the lift up over the past week should be of concern to any current and/or aspiring bears. While bear market rallies are often times ferocious in their ability to run over short sellers and cause those sitting in cash to scramble in an effort to gain exposure, they also have a tendency to last longer than most would expect. The market, in its infinite wisdom, knows that it is not going to change the record amounts of bearishness we are seeing here in one weeks time. The market also, in its infinite wisdom, knows that bears will continue to take shots regardless of how far up we go. The issue is of duration. It is not velocity that changes the minds and emotions of market participants. It is duration. A sustained rally is what changes minds. A sustained rally causes people to forget about the past ills and embrace a more hopeful future. The wounds after just one week are still very raw. So now market participants must answer the most important question of all: Why then has the market rallied up so far in such a short amount of time knowing that bears are going to continue taking shots? It has more to do with future surprises than any other factor. The markets are preparing to take the most unexpected course of all. That course is a rendezvous with the upside that will perhaps even surprise those who are intermediate-term bullish, myself included. The fundamentals will become apparent in hindsight. I have not experienced one market bottom in nearly two decades of playing in this sandbox that has had a fundamental reason behind its move out of the gate. The fundamental reasoning shows up many months after. If you are to wait for the bell to ring, you will be getting in when the opportunity for profit is questionable at best. Today we saw the total put/call ratio on the CBOE close at 1.21 despite a 300 point + move in the Dow. This was confirmed by the commentary I saw during and after the market closed. Most of which centered around concerns over volume and attention to issues that the markets have already digested. You could see the eagerness with which the bears attacked any weakness during the day by the ferocity with which the market kept coming back. Attention continues to be focused on protecting or profiting from the downside as opposed to profiting from the upside. Given the seasonals, sentiment and price action, there is a high probability the worst is behind us. I will continue to look for opportunities to add...
ECONOMIC ARMAGEDDON GUY: I WANT TO MEET YOU!
Yes you! On the October 2nd, you innocently and likely fearfully typed in the following search string on Google: END OF IT ALL ECONOMIC ARMAGEDDON. I didn't know it at the time, but when you type in this search string to Google I come up as the second most qualified person in the world on the topic. Although I am flattered by Google's algorithm choosing me as a thought leader in this field and even more flattered that you chose to click on my link, I am more interested in profiting as a result of speculation in the financial markets. Your concern with respect to "END OF IT ALL ECONOMIC ARMAGEDDON" came two days before what has turned out to be a sizable rally in the financial markets and more than likely, the lows of the year. Your emotions are finely tuned to the financial markets and economy, only they are upside down. In other words, you become fearful when you should be brave and most likely brave when you should be fearful. You probably aren't aware of this flaw in your emotional makeup as it pertains to speculation in the financial markets, if you are even a speculator. Let's not worry about that for now. You are just fine the way you are. It can prove profitable, however, which is why I would like you to contact me so that we can monitor your emotions on a real-time basis. mail@zenpenny.com if you are reading...
POSITIONING GOING INTO NEW WEEK
Just wanted to give an update as to my current positioning and intentions going into the new week. I do believe we put in an important low last week. I reacted promptly on the day of the reversal putting to work 75% of the cash in the portfolio during the last hour of trading on Tuesday. This was updated on Twitter during market hours. @Zenpenny1 if you don't already follow on Twitter. I took some quick profits on Thursday in order to move my net exposure right around the 50% mark. My current positioning allows for riding out some of the rough patches that may come. I have every intention of holding onto the current portfolio positions for the intermediate term...meaning the next 4-6 weeks. Possibly longer based on market action. Going into Monday I am holding EDC, FCX and JJC. EDC and JJC are ETFs and FCX is Freeport McMoran Copper. EDC is a 3X bull emerging markets ETF. JJC is a copper ETF. Both JJC and EDC are concentrated positions. I believe that opportunity exists in emerging markets, the banking sector and technology. Emerging markets and banking possess great opportunity because of the level of dislocation that has taken place over the past several weeks. The pricing for these two sectors have moved far away from any kind of truth. It is more a product of panic, fear and unjustified concern over past boogie men more than anything else. When such dynamics exist, the opportunity for profit is substantial. I like to look for substantial areas of profit that are gloomy and dark...emerging markets and banking both qualify. Copper is a further play on emerging market reemergence as well as economic stability. The selloff in copper was based on false expectations of recessionary conditions hitting the global economy. It will become increasingly apparent going into the final months of the year that recessionary conditions just don't exist. FCX is obviously a more aggressive play on copper and remains the smallest position in the portfolio. Not comfortable owning individual stocks for the foreseeable future. I prefer ETFs for the time being. The remaining cash in the portfolio will be used to buy dips in technology and financials. Most likely in the form of TQQQ and FAS. A few positions, in a few different markets is really all you need. I'll make updates when and if things...
4 CHARTS TO KEEP YOU IN PEACE AND NOT IN PIECES DURING THE WEEK AHEAD
click charts to enlarge
THE GUTTING OF WHALES CREATED OPPORTUNITY IN THE BANKING SECTOR
It has become quite apparent that the market has its foot on the neck of former whales who seem to now be in a state of perpetual floundering. This is to be expected after great, well publicized runs that draw the attention of those who seek to feed off excess blubber that is cultivated during such periods. At the first sign of blood, they will swarm. There is a lot of blood in the water currently and there is a lot of swarming. How much of an effect does this predatory behavior have on the markets? How much of a further dislocation in the markets can be attributed to a few great whales being stranded in shallow water while hundreds of sharks proceed to take bites of the flesh? We're in a unique time period where these types of questions need to be considered. The migration towards investment ideas amongst money managers has become extremely uniform and coordinated over the past few years. They seem to be seeking out safety in numbers, despite the fact that markets inherently target this type of disequilibrium in asset allocation just as readily as a 300 pound lineman will target a 190 pound quarterback. We have had a disproportionately large investment by fund managers into financial companies since the collapse of 2008. The analysis behind these investments may be correct on a pure fundamental basis. However, from a market predatory standpoint, such an opportunity for profit cannot occur without a dislocation taking place that challenges those who seek to experience disproportionally large returns on investment. In 2009 thru the first half of 2011, we experienced the first stage of the valuations for financial companies decompressing under what was thought to be a "worst is behind us scenario". Fund managers, such as John Paulson, picked up on the fact that the governmental support of financial institutions and record low valuations equaled an opportunity for substantial profit over the next 2,5 or 10 year time frame. Given the lack of original thought that exists on Wall Street, other fund managers decided to hop on the "limited risk to the downside" financial institution train. Suddenly Wall Street had a sector that continued to trade at historically low valuations that became quickly unbalanced as a result of small, medium and large money managers piling in. It is only natural that the markets would target an imbalance such as this, where the opportunity to take out multiple targets with only a few shots exists. The European crisis is blamed, the reality goes beyond any fundamental issues and into the functioning of the markets. The issue now becomes at...
THE TWO THINGS BULLS CANNOT ALLOW IF THEY WANT TO MAINTAIN CONTROL
It's important to remain in your comfort zone when attempting to ride an intermediate term trend. If you are overallocated then the potential exists for emotional micro-fractures, which eventually turn into raging gushers should the market fail to walk down the path you expected. That's precisely the reason I took off the QQQ and FAS position in the morning. I had a decent profit and wanted to get into my comfort zone in order to be able to ride what I believe is a developing intermediate term uptrend. I am close to 50% invested of capital. One of my holdings is a 3X leveraged ETF (EDC) so my actual exposure is quite a bit higher. What we have had over the past two days is a very real confirmation of the reversal day that took place on Tuesday. The price action is further confirmed by the sentiment picture and seasonals...both of which point to higher prices well into November. Furthermore, there seem to be few that are properly allocated to the market at present. This all changes as the month wears on and the S&P moves over 1200. The market will begin forcing buying action as the uptrend continues. Doubt will turn into belief. The first month of the rally (October) should be fairly choppy, allowing for a good deal of opportunity to buy the dips. The second leg of the rally through November should see the markets become smoother in terms of trend. The bears have had every single opportunity available to them to take the markets lower. Everything from global recessionary fears. Rumors of bank collapses. Sovereign debt crisis. Governmental crisis. Emerging economy slowdown fears. Collapsing commodity prices. CDS spikes. Reallocation into safety assets. The fact that we are more or less unchanged over the past two months despite all of these developments is a positive for the bull camp. All the meanwhile, the headlines have become gloomier. The sentiment has become downright panic stricken. I came into this week expecting to see a break of the August lows based on the setups in the major averages. I promptly got of the way on Monday morning, moving to a 95% cash position. I did this out of uncertainty as to whether the bulls would be able to withstand the type of selling pressure that would come from a break of the August lows. The potential for a waterfall type of decline was great. Crashes nearly always start from points where bearish sentiment is extreme and oversold conditions persist. The deception mechanism of the market breaks and the bears have their way. I reluctantly bought the reversal on...
TRADE UPDATE – QQQ & FAS
Took profits on QQQ and FAS. Bought late in the day on Tuesday. Holding FCX, JJC and EDC.
RUNNING FOUR DEEP
You know that fear has hit some outstanding levels when I had to force my hand to click the buy button during the last half hour of trading. Today's reversal was one of the scenarios that had me loading up on the long side. I did that out of respect for my research. I have a number of studies that were pointing to a reversal day below the August lows followed by a strong close being an ideal scenario for developing a rally through October. It didn't seem like it was a possibility until the final hour of trading. I would have preferred to see it rally from mid-day through the close. Has the market developed such a sense of vitriolic hate for its opponents that setups like today will be destroyed by Wednesday? It could be. Have the HFT systems become so in tune with how traders function that they are feeding off of tried and true reversal patterns similar to what was witnessed today? The SkyNet of the stock market, perhaps? A group of trading terminators that want to feed on everything that we've been taught, experienced and prospered with over the years. That's what it has felt like lately in the equity markets. It is only normal to question the stability and sanity of the market after such a wild two months of trading. I took on four positions today. Here is the reasoning behind each: QQQ - Simple. Strongest sector of the past couple of months should be the strongest coming out of the gates when a rally kicks off. No rocket science involved here. Your brain can hurt you. JJC - I have been speaking about the ghost of 2008 haunting global markets for the past couple of weeks. This is being reflected in copper with an abundant amount of weakness as of late. What if copper prices have become an indicator of global fear and panic instead of the reality of the fundamentals? Is any asset class immune from believing that a repeat of 2008 is upon us? What type of discount can be expect to see as a result of the fear of a repeat? How much is a strong dollar influencing copper prices to the downside? All questions that need to be considered. FAS - Financials are being assigned a substantial discount that is a small part reality and a great part fear. The reality of the situation is that earnings will decline as a result of the current credit environment. However liquidity and stability at the major financial institutions is nowhere near where we were in 2008. Financials are being...
PUTTING CASH BACK TO WORK
Invested 50% of cash during the last half hour of trading. At the close put on another 25% cash into long positions. 75% invested now. In QQQ, FAS, EDC and JJC. More on this later tonight.