HOUSTON, WE HAVE A PROBLEM
I have spoken about the fact that during certain periods of market stress, the deception mechanism of the market simply breaks. The trend towards one side becomes so overwhelmingly powerful that the market keeps rewarding either the lucky bears or lucky bulls who manage to stick with the trend, without regard for technical indicators, sentiment indicators, macro indicators, measures of valuation or anything else that takes rational markets into account. On July 31st, I published this study: http://www.zenpenny.com/?p=2146 to both this website and Forbes. The most important paragraph of the article reads: The most interesting aspect of this study into the results of excessive pessimism meeting oversold markets is that the last 4 times we have experienced such a dynamic the markets have declined by double digit percentage within the 3 month period each and every time. This is followed, in most cases, by a snap move right back up following a short period of downside volatility. Just several days after I published the study, the S&P had already fallen by a double digit percentages as the study suggested. And in October we saw the snap back up that the study also said would occur within a 3 month period to complete the cycle. Well, we have a problem. A big problem actually. The study triggered again today. I'm obviously not prepared for it as I am 45% net long. Not nearly where I am when I am up to my ears in long positions with leverage. However, I am still not comfortable with 45% given the accuracy of this study. I really encourage you to go back and read the stats from study. They, of course, do not take into account the most recent occurrence that triggered during the last week of July. This leaves me with a series of conflicting studies. I presented the study into 4th quarter rallies during the weekend. It paints a decidedly bullish picture for the remainder of 2011. My only choice then is to remain with high levels of cash and perhaps raise more cash, taking my net long exposure down, over the next few days. There will be opportunities on the periphery and short-term trades in the major averages. Today's triggering of the study from July, however, forces me to pull back my guns. The deception mechanism of the market is breaking. The study has just been too accurate to ignore. Futures down 125. It's a hard knock...
NOV 21st: PORTFOLIO POSITIONING
I tweeted two allocations to the long side. One right at the open. One during the last half hour of trading. Here they are: This brings my cost basis on QQQ to roughly 55 and IWM to 71.20 counting the initial positions I took on Friday. I'm current 45% invested on the long side. I am looking to add further weakness, with the possibility of taking smaller positions in some leveraged ETFs. I have very obviously picked which sectors I think will outperform in the coming weeks. Small caps and tech have a tendency to do well in the December-January time frame. No reason to deviate from the seasonal tendencies of sectors as they seem to be working well...
HOW GOLD INVESTORS HAVE ACCURATELY PICKED EVERY MARKET BOTTOM THUS FAR IN 2011
Earlier this year I posted an article about what I term "Phase 4 Investor Theory". To give the cliff notes version of the article: It basically states that when bull markets are reaching an intermediate to long-term top, a certain group of investors will appear and inevitably rotate their funds into the most speculative names. These are the investors you want to bet against, as they wrong more often than not. The full article is here. Looking at the price movement in certain asset classes has always been one of my favorite methods of gauging investor sentiment. Inevitably at important turning points in the market, groups of investors will react to fear (or greed) in a certain way that informs the astute investor of the possibility that fear (or greed) has reached its apex and the market will soon reverse trend. The most difficult part is identifying which asset class is attracting "Phase 4 Investors". It is constantly shifting with the times. The speculative stocks of one period are the conservative stocks of another. In the current market environment gold and silver continue to attract the attention of speculative and conservative investor alike. The tech newsletters of the 90's have been replaced by newsletters focusing on gold and silver stocks. Investing in metals has become the trade of the global apocalyptic, Zerohedge obsessed, modern day investor. It is only natural then that gold investors deploying their life boats would become a reliable indicator of market bottoms throughout 2011. Let's look at the examples from 2011 of gold selling coinciding with intermediate term market bottoms: click chart to...
5 CHARTS THAT WILL HELP YOU GAIN PERSPECTIVE AMIDST THE FIREBOMBING
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A REMINDER: CHARTS ARE BEING USED TO KILL YOU
There is a disease that has been unleashed amongst the investment community. It doesn't discriminate along the lines of experience level, income or how nice of a person you feel you are. It's the garbage disposal of the investment business. Sucking capital in, chopping it up and sending it into the sewer system to serve as a floatation device for rodents. Charts or technical analysis are turning otherwise decent fund managers and investors into mouth breathing, hyperactive reptilian creatures who cannot get out of their own way. Consistently being wrong on Wall Street has been known to lead to shape shifting, sudden outbursts and uncontrollable twitching. All of which can be witnessed on any street in Manhattan or Greenwich several times a day. There's a very simple rule on Wall Street. It goes into the DNA of the financial markets. When a majority of market participants use the same methods in an attempt to extract a short to intermediate term profit, not only will that methodology cease to function properly. Rather, the methodology will begin a process of self-cannibalization of sorts. It will turn into a tool for the devouring of market participants rather than a tool for profit. It is no secret that nearly every active market participant is looking at the same technical levels, same moving averages and same patterns. Drawing the same conclusions from the charts they observe. This won't work. It will hurt you. In fact, it will kill you. And we're all guilty of it. A reminder along with some illustrations of the fact that technical analysis alone will kill you. There are three recent examples of death by chart below. Before and after images provided for clarity: STUDY #1 - THE DEATH STAR STUDY #2 - THE AVALANCHE STUDY #3 - THE P.T....
NOV. 19th: CURRENT PORTFOLIO POSITIONING
On Friday I tweeted the following: The risk/reward at these levels, along with a variety of other factors I discussed earlier, make this point in the markets a favorable place to put cash back to work. I won't be as aggressive on the long side as I was in early October. The picture is simply not clear enough to put on leverage here. Being that I was in 100% cash, the levels we are trading at along with the pervasive doubt that has resurfaced, warrants taking on some long exposure. I wouldn't at all mind adding on further weakness in the coming week, with a target of 75% exposure. My plan is to hold IWM and QQQ into the end of the...
DON’T LOSE SIGHT OF WHERE WE ARE IN THE CURRENT MARKET CYCLE
Now that fear, myopia, nausea, depression, tears and vomit have quickly resurfaced as we experience the first real correction of the Q4 rally, it is a good time to put aside emotions and focus on hard facts. I present these facts to you as an active market participant who believes the October lows will be retested, as discussed last weekend. However, it will not occur until the psychology of the market falls in line. In order for that to happen, it takes time and it takes momentum. Given the amount of persistent bearishness, there remains little possibility that the first multi-phase correction of this bull run will break the back of the market and make it humble. It will take more time and it will take more upside momentum to cause the psychological shift necessary to see the markets fall. Now that everyone has lost sight of the fact that this is a seasonally favorable time of year, it is a good time to give a refresher course as to where we are seasonally: - 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: 1974 Q3 -26.12% Q4 +7.9% 1975 Q3 -12.21% Q4 +7.54% 1981 Q3 -11.45% Q4 +5.74% 1990 Q3 – 14.52% Q4 +7.83% 1998 Q3 – 10.32% Q4 +20.85% 2001 Q3 – 15.03% Q4 +10.38% 2002 Q3 – 17.68% Q4 +7.98% 2011 Q3 – 14.38% Q4 +7.43% to date - The 4th quarter following a double digit percentage decline during the 3rd quarter averaged a gain of 9.7% since 1974 and 5.5% since 1928. The sentiment picture coming out of the abyss in early October was the most dismal of any period over the past twenty years. That kind of psychological backdrop creates time for the bulls. That's a very important point to remember. By "time" I mean that the market requires a window, often measured in months, to reconfigure the psychology to the point where it allows the market to resume its downtrend, as most expect. As of now, we remain in that window of time where the psychological backdrop and seasonal backdrop continue to favor the bulls. Furthermore, we have now pulled back to the bottom of a month long range on the S&P 500. We are positive by 7.43% thus far in Q4. By looking at...
RISK ASSESSMENT WEDNESDAY: A LESSON IN CHAOS
During the first half of the trading day I tweeted the following: The FAZ trade was initiated on Friday. Small position, small profit. At that time, I didn't think for a second that we would end the day down nearly 200 points on the Dow. I should have known at the time that this market has figured out a way to condense an entire days worth of movement into the last hour of trading. It has been happening over and over again during the second half of this year. I left some money on the table. However, I am happy to be in cash here. There simply isn't an edge to this type of trading environment. In my earlier post, I illustrated why I think the bears suddenly have developed too substantial a following to see the market plunge the way some are hoping. Chances are great that if we do break out of the current consolidation to the downside, there will be a reversal given the current pervasive fear that exists. The last hour plunge that we experienced today was simply too dramatic. It wreaked of a market that wanted to instill the maximum amount of fear while inflicting as little damage to the pricing structure as possible. If the market really wanted to instill damage it would soiled the pricing structure to a point where the bulls would be afraid to look at it tomorrow. That's how real breakdowns in important market averages take place. For all the roaring, screaming and painful moans, we are simply at the bottom end of a clear consolidation pattern. In the meanwhile, the put/call ratio experienced a mean spike. And observational sentiment today was as bad as I've seen it over the past few months. I do think that the next great bonanza in the markets will be on the downside. I am reserving most of my ammo for that opportunity. In the meantime, I would be looking for a short-term low to appear here soon. If I do take a position, I won't be allocating anymore than 10% of the portfolio max. Especially if I decide to probe the long side. Be careful on either side of the trade. This isn't a market where you are rewarded for being a...
NOV. 16th: THE TWO ILLUSTRATIONS THAT WILL MAKE A FOGGY MARKET CRYSTAL CLEAR
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NOV. 15th: THE FOUR FACTORS THAT MAKE TOMORROW’S MARKET ACTION POTENTIALLY EXPLOSIVE
According to the current mood of the futures market, it seems as though we are due for a significant burst through the bottom end of the triangle that traders seem to be fixated on currently in the S&P. Of course, it wouldn't surprise me at all to see a positive open. After all, we are in a market that is driven by Euro speak and action. Between midnight (California time) and 9am is when the anxieties shift into overdrive in today's financial world. Let's talk about what happens with a large gap down tomorrow morning, as this will be a very problematic scenario for the market. It is much too early in the bull trend for us to experience a termination of the bull. For that reason, a large gap down tomorrow morning has the potential to mark the beginning of something as opposed to the end. Four factors are at work here that make tomorrow explosive: 1. Anxiety due to end of year performance. Fund managers are sitting on a hairpin trigger. A lot of them are caught in the beta up trade and won't be able to take much weakness before hitting the sell trigger. Half of them just want to get out of this year with all limbs attached. And the other half are wishing they would have become urologists since looking at penises all day has a great deal more career stability and less volatility than the current market. 2. The number of shorts left in the market to hit the bids on a large gap down open has dwindled significantly. They are still around. Nowhere near where they used to be, however. The firepower, in fact, has reversed and now resides in the bull camp with trapped long beta fund managers. 3. It's option expiration week. 4. This isn't supposed to happen here and now. This is the most important point. Allow me to explain it: When a market begins a downtrend prematurely without the proper sentiment and structural setup, it accelerates the downside. The decline in late July/early August was a prime example of this. I outlined the potential for a double digit percentage decline in the market over a short time span on July 31st here. The decline in July-August started from an oversold condition in the market, while sentiment was decidedly bearish as measured by the put/call ratio. The deception mechanism of the market breaks in these instances and it becomes open season for one group of traders. It's like a group of soldiers beginning war on the enemy before they have set up their defenses. It becomes impossible for one...