RISK ASSESSMENT WEDNESDAY: A LESSON IN BEING HONEST WITH MYSELF
As an investor, one of the most crucial elements in order to achieve the success you desire is to be 100%, unequivocally and without boundaries truthful with yourself. I have been doing this for some 17 years now, with a great deal of success as well as a great deal of setbacks along the path. One of my greatest weaknesses has been the inability to have an honest relationship with respect to what I understand to be truth and what is perceived as truth that ultimately ends of being undeniably false. I expect nothing out of this website. I'm not looking to make money off of subscription fees. I'm not looking to get investors. I'm not looking to connect with professionals that will connect me with a greater network of professionals. I simply want a journal to document my thoughts. A journal I can come back to and review for holes in my frame of thinking. If I happen to assist an investor or two and broaden your thinking with respect to the markets then that's a bonus for everyone involved. This frame of wanting nothing but to give allows me to be totally honest with my successes and especially my mistakes. And from that I continue my growth. With that said, it has become abundantly and painfully clear that I don't understand what is going in the bond market at present. My trade on TMV was grossly premature in its entry. I didn't observe the warning signs along the path that would have alerted me that my thesis with respect to the trade was flawed. The question now becomes what to do about the trade. The position isn't the size where I need to panic for fear of blowing up. If bonds continue to rise I won't like it, but it won't kill me either. It seems that my line of thinking with respect to Twist being factored into the fixed income markets was the line a lot of fund managers were taking. This caused a lot of short covering to take place today along with further buying into long-term bonds as the thinking is that the Fed will protect bond holders through a steady regimen of being on the bid. The downside can't be that much, right? Whenever a governmental entity becomes involved with attempting to manipulate open markets, it creates a sense of complacency amongst investors in that market. Bond investors will be under the impression that the Fed being on the bid will limit their risk over the intermediate to long-term. If the risk suddenly becomes amplified as the a result of that market taking...
THOUGHTS ON TODAY’S RALLY
A news driven trampoline of economic indecency and the prelude to a steady European diet of fiscally whorish behavior that would make Ron Jeremy blush. A break of the August lows would be my buy trigger on the downside. I'm looking for 1080 on the S&P 500 as an extremely favorable risk/reward entry. If I don't get it, I won't chase and will reassess once we break out of this range to the upside. Let's say I suddenly woke up with a bullish hair up my arse that caused me to put on long exposure in US equities tomorrow morning. My problem would be that the risk in this range is so wide and unpredictable that it would be a difficult trade to manage. The "embracing of risk" positions I am currently holding will benefit from strong equity prices without all of the volatility. So I...
RISK ASSESSMENT WEDNESDAY
Risk assessment Wednesday came and went without any action. The current portfolio consists of the following positions: TMV - Average purchase price $21.24 - Current price $19.39 - 20 year+ treasury bear ETF 3X. The aversion to risk amongst Wall Street participants has manifested itself through a pummeling in the bond yields. Anticipation of an economic slowdown and fear of the European debt crisis resulting in a repeat of 2008 have created a premium in the price of "safe" fixed income instruments that may turn out to unjustified. Risk will be put back on in the months ahead. Long TMV is a good way to play the future embracing of risk. DZZ - Average purchase price $4.34 - Current price $4.34 - Double short gold ETN. Another way to play the unwinding of risk aversion on Wall Street going into the 4th quarter. A new uptrend in the US Dollar paired with strength in US equities will be too much for an overextended gold market to take over the coming 4-6 weeks. Gold at $1800 is a bet on a financial pandemic swallowing all developed economies. Gold moving back to $1400 will reclaim its semi-legitimate status as an alternative to fiscal and monetary irresponsibility in the form of unstable reserve currencies. Cliff notes: $1800 gold = put option on the financial system of developed economies. $1400 gold = alternative to unstable reserve currencies. EUO - Average purchase price $16.55 - Current price $18.34 - Double short Euro ETF. An unstable and unpredictable future for the EU means an unstable and unpredictable future for the Euro. The only path towards a temporary fix will be through a reluctant program of monetary irresponsibility that will be Euro bearish over the long-term. I'll post the chart this weekend. If you look at it from a long-term view it looks as if a distribution pattern has been taking place over the past few years. A move below 1.20 on the EUR/USD wouldn't be a surprise in 2012. 33% cash - waiting for an opportunity to initiate a long US equity position with the remaining funds. It's not going to happen with market action similar to what we experienced today. While I have been bullish on US equities since 9-6 for an intermediate term run. I am not comfortable buying in what has turned out to be a brutal range for both bulls and bears. It's a more sensible play to look at beneficiaries that lie on the periphery of a bullish move in equities. Beneficiaries that do not possess either the volatility or news driven paranoia that equities currently do. TMV, DZZ, EUO...
6 COUNTER-TREND TRADES
Bonds - One more move down in the markets should cause the long bond to have a final gasp to the upside. It should be shorted. Safety assets will be sold over the coming weeks and months in favor of adding risk into the first half of the 4th quarter. EUR/USD - Sell the rips...do not buy the dips. I expect to see the Dollar return to its lesser of all evils reserve currency status over the coming months. The Euro is too young to facing the problems that it is currently. It won't survive in its current form. Uncertainty kills. Gold/Silver - A new uptrend in the US Dollar knocks a major leg out from underneath support of the rally in precious metals. It wouldn't be a big deal if gold was undergoing a standard bull market. However, given the price action of the past few months, the engine that is driving gold needs to function perfectly. When the engine begins to sputter, as it is now, the specter of downside volatility becomes too much to pass up for opportunistic investors. European Equities - Um, no. The world doesn't need anymore heroes. US Equities - A substantial buying opportunity is fast approaching. Next week at the latest. Crude Oil - Oil futures should see some significant selling if the panic and fear trade comes back over the next few trading days. I see $84 as a substantial long-term support area for crude oil. On a fundamental basis, it seems that the emerging economies are still hungry enough to support a premium in energy prices. A story on Bloomberg a few days ago regarding the strength in the Chinese economy emphasized this point. There is also the issue of crude seeing some substantial relative strength over the past few weeks. It is sitting near an approx. two month high currently. A dip below $85 should be...
THE VIEW FROM 50,000 FEET ON STOCKS, DOLLAR, GOLD/SILVER AND BONDS
Stocks - BULLISH - I have been bullish on equities since last week. The simple reason being that the upside risk outweighs any downside risk remaining in the market. That doesn't mean that a move to 1100 on the S&P won't hurt if you are long. I believe that there is a substantial possibility of that move occurring, which is why I have yet to initiate a long position in stocks. If you are not getting measured on your month to month or quarterly performance, then a slow regimen of accumulation may be in order. If you are measured on your performance by others or have come to expect a certain standard out of yourself, then it may be best to wait a little bit more to do the real buying. Waiting is the course I'm taking. A close below 1140 on the S&P 500 would be the first step towards a test and probable break of the August lows. US Dollar - BULLISH - The breakout on the US Dollar over the past couple of weeks is indeed a real event. The velocity behind the move is substantial. The sentiment at the bottom was dismal. Bear in mind that currencies tend to be much more trend driven than stocks. Those who believe that the US Dollar must fall in order for stocks to rally suffer from a lack of imagination that may be better suited for a game of checkers. Fundamentally the US Dollar may be telling us there will be no QE3. Or perhaps no announced QE3, with the Fed instead opting for a silent moves to bolster the markets and economy. Could it be that QE3 is indeed unnecessary, with talks of an inevitable drawdown in the economy being overblown? Or is the US Dollar simply moving up because it sucks less than all the alternative? Namely the Euro. In either case, I continue to hold my position in EUO from 8-29, with no plans of exiting in the near future. Gold/Silver - BEARISH - On 8-21 I made the argument that either way you slice up the fundamental picture going forward gold and silver are bound to fall. Thus far the thinking has been proven correct as news of further trouble in Europe has failed to drive gold higher, contrary to popular expectations. Gold/Silver at current levels are essentially CDS contracts on the implosion of the financial and governmental sector in Europe and the United States. A drop back below 1500 on gold would serve to remove that designation. Those who drove the price of gold up from 1500 to near 2000 were buying for...
REAL TALK ABOUT THE S&P 500
I've outlined my feelings about the S&P 500 in the chart that appears below. The bottom line is that a violent, chaotic pattern will resolve itself much as it has lived its life...through chaos. Chaos would be a break of the August lows. That would cause mass confusion. That would also put in a solid bottom for the markets to rally from. I'm holding 33% cash to take advantage of such an event. I can't see myself putting on equity exposure this week unless the criteria outlined in the paragraph above and in more detail, in the chart below is met. Upside from a break of 1100 on the S&P is roughly 20%. I can see that move happening in a span of roughly 2 months given the compression in prices and lopsided bearish sentiment. Think outside of the sphere of panic and defeat that is gripping everyone on Wall Street currently. That's the only way you'll come ahead going into the end of the year. Buying into group think isn't a hallmark of successful speculation. Real talk. click chart to...
RISK ASSESSMENT THURSDAY
On the 3rd trading day of each week, I like to assess the risk in the portfolio to see what positions have the chance to cause the most harm going forward. Today was risk assessment Thursday. It came and went without any action, whatsoever. I'm holding a macro portfolio currently. I feel that this will be the way to allocate funds for the near to intermediate term. Individual stock opportunities have too much individual risk with the scope of earnings warnings and uncertainty with respect to most industries. The macro picture is much clearer here. I think there will opportunities to play from both the bull side of the trade (where I am currently) and the bear side of the trade in coming months. Yes...it's going to be that kind of market. I am holding fairly concentrated positions in EUO, TMV and DZZ. This portfolio is essentially a bet on the great aversion to risk trade dissolving in the coming weeks, creating a crumbling effect for "safety" assets. Gold and long dated US Treasuries are extremely vulnerable. The trade in EUO has been working out well. I announced the trade on the day I got smashed on the short side of the market. There continues to be value in the US Dollar as I have been saying for the past couple of weeks. The breakout today was significant. I will have charts this weekend. I expect the bullish side of stocks to be THE side for the remainder of the month. I think we are in for a substantial rally as the aversion to risk amongst all of Wall Street has grown to the point of being absurd. The economy and financial system literally has to start dropping bombs in order for further downside to take shape. There are simply too many people already out of the market or short to create any significant selling. This doesn't mean that the market is done on the bear side. Over the long-term, we may just be getting started. However, a rebalancing of sentiment does need to take place before any further downside takes place. I expect to see that into the middle of October. Lots of charts and further commentary this...
OPINIONS, OPINIONS: STOCKS, BONDS, GOLD, SILVER, EURO, US DOLLAR
Stocks: Neutral. There are reliable sentiment indicators that began flashing near record amounts of bearish sentiment with respect to the equity markets last week. During Friday's decline, the put/call closed above 1.40 as we are nearing the August lows. This type of sentiment picture doesn't allow for a break of the August lows unless a surprise economic event takes place. Tomorrow's gap down is likely a buying opportunity given the vomiting sentiment that is sure to show up after Friday's decline. Bonds: Bearish. The bond market is discounted for the worst case economic scenario. Anything that makes participants feel that this worst case will not take place, will cause a substantial decline in bonds over a short timeframe. I expect bonds to decline substantially over the next 1-2 months. Long TMV Gold/Silver: Bearish. Precious metals in their current lifecycle are nothing more than an insurance policy against calamitous financial events. Gold/silver is no longer correlated with any macro asset class, be it the US Dollar, interest rates or commodity issues. Gold at 1900 is essentially a CDS contract on the European and US financial/governmental sectors. As soon as the attention to risk subsides so will gold...and perhaps dramatically. The decline a couple of weeks back was the first signs that gold is susceptible to a large run to the downside. Long DZZ. EUR/USD: Bearish Euro/Bullish USD. I remain long the EUO (short Euro ETF) from two weeks ago. The US Dollar will continue to gain as the problems with the EU become more pronounced. It is nearing some technically significant levels here around 1.40 on the EUR/USD. I'll hold this one for the time...
HALLOWEEN HAS COME EARLY THIS YEAR FOR THE STOCK MARKET
I get the sense that the market needs to eat more bears before the August lows are broken. I made the contention a couple weeks back that we are at a point where the deception mechanism in the markets is effectively broken. During one-way, maniacal bull or bear moves (think gold currently or the bear market of 2008), nothing matters except for the trend. Deception stops taking place. Sentiment numbers no longer matter. Oversold/overbought readings are useless. I was under the impression that the market had moved into its maniacal stage very early in August, I was caught off guard when the S&P moved back to above 1225. Under a "deceptionless" scenario, this type of move shouldn't have taken place. Now we see that the S&P is moving right back to the bottom end of its range (1140 on SP futures currently). If the deception mechanism is still alive and well - meaning we haven't entered the meaty phase of the decline where nothing but the trend matters - the lows of August should hold quite easily. There are simply way too many bears out there to see a sizeable decline above and beyond what we are going to get tomorrow morning. This is a shift in sentiment for me, as I was expecting these lows to fail initially. I am not going to be taking on stock exposure. However, I wouldn't mind adding to TMV (bearish bonds/bullish yields). I expect yields to continue their decline in the morning. The only way I see bond yields continuing their move down is with a fundamentally disastrous scenario of economic failure either on a large-scale corporate or governmental level. I think there is a better than even chance that the widening in CDS spreads and various other indications of fear we are experiencing here are traders looking back at 2008, making a comparison to 2011 and believing that the market is wearing the identical costume. Given all the fear the markets caused in 2008 with its most frightening costume in many years, the sight of anything similar will of course cause all the children to run home and hide under the covers. I believe over the coming weeks and months, the costume that the market is wearing will be revealed to be much more kind than what anyone is currently...
PORTFOLIO RECONSTRUCTION: INTRODUCING MY NEW HOME
A complete revamping of the portfolio took place today. I exited all short positions mostly in the pre-open and then the remainder of SPXU was done shortly after the open. The equity markets are an enigma to me currently. There is massive pessimism and massive weight in terms of poor fundamentals. Over the past couple of weeks massive pessimism has won. The poor fundamentals don't seem to matter for the time being. I KNOW there is massive overhead supply in terms of anxious longs who want to get out and I KNOW there are short sellers who are waiting to pounce just a little higher. I am skeptical that the market is pulling down its pants for all these sellers. She seems a little bit too loose to take home to mom, in other words. I'm staying away from equities until we reach either an extreme on the upside (over 1300 on the S&P) or an extreme on the downside (under 1050 on the S&P). In between is no man's land for me as of today. I am currently long DZZ (double short gold ETN), long EUO (double short Euro/long Dollar ETF) and long TMV (3X long 30 year yield). Before we get to the charts, a brief fundamental explanation behind each position: - DZZ - Gold, as I mentioned in the posting from 8/21/11, is at a point where either a bullish or bearish fundamental scenario will derail the bubble. The only way it continues meaningfully higher is under a disaster bearish scenario, which I don't think will come to pass anytime soon. The elevation of gold also seems to be signalling that people are still remarkably risk averse and pessimistic. Perhaps rightfully so. I don't think the gold investors will get away unscathed before seeing the Armageddon trade go south. - EUO - there is value in the US Dollar. There is no value whatsoever in the Euro. The Dollar seems to be sitting at a point where the same scenario as gold applies. If we get a bullish economic scenario going forward, the disparity in value between the Euro and USD will narrow and the USD will appreciate in value on fundamentals. If we get a bearish scenario, real fear will show up and the USD will be the last resort of the frightened, as it always seems to be...2008 as one example. In either case, there is a substantial risk/reward play here that is worth taking. - TMV - bonds are pricing in absolute economic disaster. There is a serious divergence taking place between what bonds are saying and what equities are saying. I usually...