THE WALKING DEAD
I can see myself going through a dead period of sorts over the next several weeks. There are a convergence of factors at play that have led to a drought in terms of potential activity. Among them: - The markets are, I believe, in the process of putting together a top of some magnitude. My short-term trend indicator has already flipped to SELL. My intermediate and long-term indicators are beginning to look like they would like to put on the gas face as well. - The potential for new long positions has dried up terribly. I run through my scans of the market daily, after the close, without fail. There are fundamental opportunities, as there always will be. What has changed rather dramatically is the price structure of the opportunities. The current price structures among not only small-cap, but mid to large cap stocks, as well, has become encumbered by risk. Low risk price patterns are simply nonexistent in fundamentally viable companies. This prohibits me from taking on new positions in the portfolio, as I put price structure first. - The symmetrical tendencies of the market have shifted over the past few weeks. Put in simplified terms or rather to paint a picture that makes this concept easier to understand: Every bull and bear market has a set of laws by which price movement abides. A proper, healthy and vibrant bull market will remain symmetrical, in line with trajectory points of all time frames, that alert the astute investor that the trend is healthy in nature. It is when that trend towards symmetry breaks and then reverses that an investor should take note. Recently, the Dow and the Nasdaq have been viewing their respective generational trajectory points as a point of great stress, instead of accelerating up through these points. The symmetry of the market, with respect to these points of interest, has changed. This is important. With all of that said, I am happy with my current positioning that has the portfolios sitting net neutral in terms of equity exposure via the TZA hedge I put on last week. I am sitting on a growing cash position, as I am almost done with liquidating portions of each position, with the exception of WMIH. I don't see exposure moving too far away from neutral for the foreseeable future. I am simply more interested in stabilizing things here, rather than going for a home run of any sort. That is where I stand on this...
4 CHARTS THAT CAN’T BE ANY MORE CLEAR IN THE MESSAGE THEY ARE SENDING TO INVESTORS
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FINANCIALS: 4 STRIKES AND YOU ARE OUT
During last weekend's chart review, I discussed the negative attributes that were plaguing financials. It was painfully obvious by looking at the price action during that week that the financial sector was leaking beneath the surface without a majority of investors realizing it. I detailed the fact that there were three strikes against financials that were an obvious sign of weakness. This past week that leak was actually recognized. Recognition of that leak led to a powerful Friday selloff. The financials are now potentially facing strike four as detailed in the chart below. The greatest worry for the bulls, at this stage, should be determining how the market will stay on its feet with an obviously broken semiconductor sector (SOX) and an almost broken financial sector. Two walls that the bulls surely don't want to see crumble. click chart to...
PORTFOLIO UPDATE: HITTING THE EMERGENCY BUTTON…..TWICE
During the trading day, I tweeted the following: Any good risk manager (and that is what any of you who have interest in the markets are) should have multiple layers of risk control. I often find that instead of focusing on these layers, investors will focus too much on reward. There are all kinds of contingencies and plans made for rewarding trades, but very few, other than your run of the mill stop protection, for the risk. True professionals, who outperform over the long-term, are risk managers. All others are reward managers. The market will quickly call you out for what you are if you play the game on a consistent basis. I used to be a reward manager. I am very familiar with the practice of focusing squarely on reward and accepting drawdowns as a necessary part of the game. The primary issue with being a reward manager is that you can have multiple years of winning streaks, but it will only take one small miscalculation to take back all those years and then some. You can never slip. Keep in mind, that the financial markets, at some point or another, will create an abusive environment for every strategy ever developed by man or machine. The reward manager, therefore, won't survive over the long-term by design. The risk manager, on the other hand, controls the environment by having multiple layers of risk control, as I mentioned earlier. When one defensive wall fails, the other springs up to stop the onslaught. The risk manager realizes that the key to prospering in the game is to remain viable. You remain viable by never suffering a drawdown that will be too cumbersome for your strategy to overcome. The risk manager is good enough at their craft to know that large sums of money can be made when the environment is favorable. There is no need to risk the entire portfolio in an environment that is questionable when patience is the only thing required to reach a point when a significant streak of profitability can occur. I have mentioned my tactical asset allocation strategy that utilizes a short, intermediate and long-term trend following/reversal system to dictate my long exposure to the market many times. What I haven't mentioned is the other layers I utilize to control risk. One of those layers is a mandatory performance stop that slices positions in half when a certain performance threshold is breached. For me, that threshold is a 5% performance decline during any month. I haven't had to mention this risk control measure because I haven't suffered anything close to a 5% down month at anytime...
TWO CHARTS ILLUSTRATING HOW BEARISH TUESDAY’S ACTION REALLY WAS
Two illustrations of the importance of today's breakdown in technology. The first chart will show how symmetrical the breakdown was, with respect to the "thrust" that occurred off of the key trajectory point on the Nasdaq. The thrust was further validated by a close on the lows. This is fairly classic behavior for a market is set to experience a change in trend. The second chart will show how the breakdown in technology was accompanied by a significant volume uptick in the QQQ. This further validates the breakdown. I have been speaking of the various warning signs that the market has been exhibiting for two weeks now, mainly in my weekly chart reviews. What the markets experienced today was no longer a warning, but rather a direct shot into the headquarters of the bulls. This means we are no longer sitting in a peaceful stage of existence in the financial markets. There will be some very serious sideways volatility over the next several weeks. That is a best case scenario. I believe a sudden reversal back up is out of the question for the remainder of October. The worst case scenario is a rather severe drop in the coming weeks. For the first time this year, I am willing to entertain the possibility of a waterfall decline or even a crash. I don't like using such words, as they stir up emotional reactions in investors that are often times unwarranted. All I am saying is that the possibility, in my analysis, has gone from being basically nonexistent to having some remote probability. Be extremely careful initiating long positions. Time to be defensive. click chart to...
4 CHARTS DEMONSTRATING A MARKET THAT IS BEGINNING TO SHOW SOME CRACKS
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AAPL: WARNING SHOTS HAVE BEEN FIRED
Despite it being contrary to my nature, existence and philosophy about the very soul of the financial markets, I have admitted for sometime now that the price structure in AAPL left nowhere to go in the stock but up. This belief is contrary to my nature because the core of my philosophy with respect to the financial markets is that they hate you, me and every single person who attempts to pick fruit from its tree. Therefore, it would make sense that the most popular company in the history of modern man would not qualify as an investment. It runs contrary to the market's modus operandi for investors to consistently be able to make money in a stock that everybody, whether institutional or retail, loves to death. It goes without saying then that over the very long-term individuals and institutions will lose more money on AAPL than they have made. It will be THE stock that hurts investors the most due to the unwavering, cult like love that has developed for the company. When the tide does inevitably turn, investors will be so blinded by that love that it won't matter how many times they get kicked in the stomach, slapped across the face or raped by a pack of wild dogs, they will keep coming back for more. Let's look at the here and now.: click chart to...
A JASON VOORHEES MARKET
The month of October is off to an inauspicious start for the portfolios. 2012 has been a year marked with such consistent success that short-term negative fluctuations tend to make me think more than they usually would. It has become difficult to tell, from one day to the next, whether my head will be on the chopping block or if I'll run away with the bikini clad girl as a hero. The type of uncertainty I am facing recently is part of the reason I have chosen to move to little more than 30% cash position. Where does my uncertainty stem from? Here is what has been running through my mind as of late. I'll have further details, through illustrations of price movement, in the weekly chart review to be posted tomorrow: - AAPL is bothersome here. The pullback has been somewhat more volatile than I would have liked. Volume has been above average. I won't get really nervous for the market (since AAPL is now like an index unto itself) until 645 is broken to the downside. As a timid bull, I don't want to see that event. - Financials are being overly-cognizant of their trajectory points. The high for the BKX on Friday was exactly on the nose of its trajectory from the 2011 lows. What followed after hitting this point was a steep reversal, meaning that the trajectory is exerting more influence over this key index than it should. Not an Armageddon type emergency, just a small fire that bears watching. - The Nasdaq Composite registered an "outside day" on Friday. I don't care how traditional technical analysis interprets this. What I care about is that it is a sign of excessive volatility at a point when the market needs to pipe down and be on its best behavior. - I watch the Aussie Dollar closely because of its enormous relevance to the commodity market. The fact that the Aussie is now plunging makes me feel like Jason is breathing down the neck of this market, but participants just don't realize it yet. If commodities die, the market rally will follow suit. This is perhaps the most troubling sign of all. - The NDX stalled right at its trajectory from the 1990 lows, like it has multiple times over the past few years. I'll have illustrations of what Jason Voorhees looks like posted...
WHEN 70% LONG BECOMES A PIECE OF CELERY WITH DRY TOAST
In a sudden act of bravado, the market has caused those who are underexposed to be humiliated in front of an audience of cheering bulls, wearing funny hats and chanting loudly. I am, unfortunately, one of those who has had my underwear pulled over my head, while "real" bulls dance around, kicking me in my ass. It wouldn't be nearly as despicable a circumstance if the portfolio was performing well. Needless to say, it is basically flat. A flat line of equity gains, indicating a clear lack of momentum amongst all four of the names in the portfolio. Let me tell you what you don't do if you are facing a similar circumstance to mine: You don't rush out, buying into names simply because you feel you are missing out. You don't sulk in your piss until you have no choice but to act irrationally in some bullish explosion of asset allocation in order to play catch up. You simply stick to your method of investment, without feeling forced into any single action because the market is moving. This is, of course, assuming that your method is a competent one. With this piece of instructive elegance out of the way, I am free to go back to my screen and fret about being flat on the month, while the market runs away to the upside. Additionally, I am looking forward to pounding my fists as I scan the environment surrounding me, unable to find one piece of meat worthy of having a meeting with teeth. Opportunity is sparse. I'm 70% long and it is as unsatisfying as a piece of celery with dry...
PORTFOLIO UPDATE: CASH IS BECOMING KING
During the trading day, I tweeted the following: A pretty active day of liquidations relative to last few months when I was actively building positions. There is clear reasoning behind this that I hope I have communicated effectively over the past several days. The market simply isn't behaving properly, contrary to what I expected after this sixth break of the generational trajectory. It is disappointing, frankly. This doesn't mean that I cut and run like a badger being smoked out of his hole. Just as I was systematic and deliberate in my entry, the exit strategy is very much systematic and deliberate in nature. In other words, you won't find me in 100% cash by the end of this week simply because I have a potpourri of warning signs being sprinkled onto my general, overall bullish thesis. I have, however, started the liquidation process, building up to more than 30% cash today. I am also fairly close to initiating a TZA hedge that will command a 25% overall portfolio allocation, with a notional value that will effectively put me into a net neutral position. As for the reasons that I cut SPRT and ATNY specifically, here is the individual reasoning: - SPRT - I have had immense success trading in 2012. This is now my third round turn in the stock since the original research report published in January. I have had gains of 21%, 15% and now 35%. My average hold time has been two months for the stock. I will be looking for an area to reinitiate the position if I am lucky enough to be given a favorable point. - ATNY - A complete disappointment. The restructuring that I was counting on being completed in an efficient manner, as detailed in the research report, seems to have run over in more than one way. It doesn't help that the budgetary situation with the US government has made defense spending one giant question mark. It is simply a bad combination of events for ATNY. While I believe that company is an extreme value here, I have experienced more than one value trap in my career. There is no such thing as a value unless it is going up in price. Lost about 25% on this investment. Moving on. The holdings as of the close today are as follows: PXLW, WMIH, SPNS, UPIP and 30%+...