JANUARY 6th: PORTFOLIO ALLOCATION
I got a question recently asking how the portfolio was allocated between my positions and why I haven't added to my equity related shorts since initiating the positions on December 23rd? My largest position is currently SCO (short crude oil) making up roughly 22% of the portfolio. TZA and FAZ are around 12% each. That brings my total invested position to just under 50%. While I am bearish on equities, I have to be cautious about taking my current short ETF exposure to the next level. I plan on doubling exposure in both TZA and FAZ. As well as adding in some ERY and BGZ to round things out once all the puzzle pieces fall into place. Being that short requires timing. Being that aggressively short requires precise timing. I can't afford and won't tolerate a 4% surge once I move all my chips to the middle of the table. What am I waiting for? I need a couple more pieces of the sentiment puzzle (namely with the put/call ratios) to fall into place. This should occur within the next couple weeks either via the market moving in an extended sideways range into the latter half of January OR the market may decide to shift the rally into overdrive, causing mental trepidation and anxiety amongst both short-sellers and the underallocated bulls. Either way, I think this scenario takes place within the next couple of weeks. My current inverse ETF equity exposure is at roughly 25% of the portfolio. By the time all is said an done I would like to have it up to 75%. My only job now is to make sure I'm not swinging for the fences before there is a fence to swing...
NOTHING PUTS THE MARKET IN FOCUS LIKE EMBRACING EVERY BIT OF RISK
Market tops and bottoms are tricky affairs. I've been attempting to roll along with major tops and bottoms since the late-90's. I've tried trend trading, breakout systems, fundamental trading etc. However, my greatest challenges and most substantial profits have always come from picking important tops and bottoms in the market and individual stocks. It gives me the greatest pleasure and fear, thus creating an incredible amount of focus that forces me to get better. When I am in the process of "going through it" as I am right now (by going through it I mean attempting to pick what I think will be a significant top or bottom while experiencing a drawdown as a result of being early) I literally perform exhaustive research in an attempt to solidify my hypothesis and also to disprove my hypothesis. Nothing gets me in the research zone like wanting to be right around important turning points. As a result, my attention to research hops on board a rocket and takes me to places I haven't been before. Perhaps that is why I enjoy trading around points like this with volatile instruments such as TZA and FAZ? It must be similar to what those who climb mountains, cliffs, or jump out of planes must feel. Of course, with this endeavor I am sitting in an office chair. However, the amount of focus and attention is a big reason adventurers do what they do. With every successful and unsuccessful attempt I make at points like this, I become that much better. The challenge comes with the fact that with each twist and turn in the market, it adapts to my getting better and becomes more elusive. It's like a hybrid version of the Predator that Arnold Schwarzenegger killed before he was sleeping with housekeepers. With all that said, I have found nothing in my research that is dissuading me from my positions. In fact, what I have found only creates greater confidence that I will be correct. At a maximum we are within 150 points on the Dow of consolidating, with short downside bursts for the remainder of January. That's at a maximum. The more likely scenario is a drop into February. The strength of the downside will be very informative and tell traders all they need to know about what to expect going forward. I'll play it as it comes. Look...there hasn't been an important market top in the history of the world where the charts haven't looked promising, as they do now. There hasn't been an important top where the fundamentals weren't improving in some shape or form, as they are now. There hasn't been an important...
3 ECONOMICALLY SENSITIVE AREAS THAT CONTINUE TO TELL US THAT EVERYTHING IS NOT ALRIGHT
click chart to enlarge
JANUARY 3rd: PORTFOLIO POSITIONING
During the trading day today I tweeted the following: SCO (short crude oil) is now the largest position in the portfolio. I continue to hold FAZ and TZA medium sized positions. As far as overall short exposure goes, I am getting up there. There is nothing that I like more than shorting a commodity that is seeing headline targets putting it in the $140 to $200 range should war break out due to the same posturing that has been occurring for decades. I speak, of course, of the Iranian threat that is being blamed for the spike in oil recently. This has a way of clearing out short sellers and bringing in both casual longs and those wishing to profit from perceived technical breakouts (you know, those patterns that made money a decade ago) due to the momentum created from the anticipation of such an event. The tension usually just fizzles away after some weeks. I expect this to be much the same. There is simply too much at stake during such a fragile time in the world economy to start a war with Iran. All parties are keen to this fact. From a technical basis it is moving up against enormous resistance here currently, which is why I added to the position today. I'll go over that in more detail in the coming...
PSYCHOLOGY CREATED THE OCTOBER BOTTOM AND NOW IT’S CREATING A JANUARY TOP
Significant market tops and bottoms are psychological events...nothing more. When I put a majority of my cash to work in leveraged long ETFs at the October 4th bottom it wasn't due to any fundamental data or statistical insight whatsoever. It was purely a trade that came from knowing that the market HAD to rebalance the longs and shorts before it was able to resume the downtrend. The job of the market in rebalancing the sentiment is nearly complete. Bears are diminishing in numbers and bulls are growing more bold in their conviction that the October lows are as bad as it gets. With that said, the second phase of the bear market will begin in short order. Here are two charts demonstrating the challenges and intentions of the market at this juncture: click chart to...
QUICK THOUGHTS
I continue to believe that the markets are in the process of topping here. This is a part of the process. Not happy about getting caught in this type of gap move...but if you have held positions overnight in this market, getting caught in surprise overnight gaps is inevitable as it has become how the market puts together its gains. I don't talk about the Dow much as it has been in no man's land relative to the other averages. However, on the open it will be gapping into heavy overhead resistance around 12,400. An attempt to break out of the prevailing pattern for the Nasdaq should be greeted with suspicion, as the sentiment picture doesn't support taking out such a powerful pattern. The only position I am looking to add to is my SCO (short crude oil) long. I'll see where it is later in the...
5 CHARTS THAT DEMONSTRATE THE INCREASINGLY BULLISH SENTIMENT IN THE FACE OF PRICE EROSION
The first chart is the combined put/call ratio. It is the foundation for a majority of my sentiment analysis. I use different timeframes, along with numerous indicators in an attempt to gauge if the money is flowing to the bull or bear side. Generally, it is important to see an uptrending market paired with a downtrending put/call ratio as we have in the chart below. You DO NOT want to see price erosion taking place in important, leading averages while bullish sentiment is bouncing off the walls. Why? If the market should negate the bearish patterns in the popular market averages, then the firepower simply won't be there for a sustained move higher. Instead, it will be a failed move that serves to reinforce the negative price patterns. Odds are strongly weighted towards any move up in the first couple days or weeks of January being an excellent selling opportunity if that is what the market has in mind. click chart to...