UpStart Trader

Thoughts about bubbles

2011-03-04T13:51:00.002-05:00

Kinda lazy day. Missed the boat this morning on getting short, so I'm a spectator. So I can use the time to clarify my thinking about all the gold or oil is in a bubble talk.

- Point #1: The so called gold/silver ratio is stupid. The corn/wheat ratio is real, because at extremes one can be substituted for the other for many uses. The oil / natural gas ratio is also real for the same reason. People who bet the family fortune on oil / ng maintaining a ratio in the historical band are now living in a cardboard box. Things change, so those historical ratios change. You can also ask the Nobel laureates at LTCM about that. Despite a lot of equations that said bond prices must converge, they don't really have to.
So my conclusion is that there is no meaning in gold / silver or gold / oil ratios, except a lot of speculators are piling into all of that and looking for excuses to buy / sell one over the other.

Point #2: Got to get objective about so called "fundamentals." Things like miners are not producing enough to meet demand, and other such BS. Even the Peak Oil argument is a problem. When you go back to basics, remember that the primary function or markets is to ration demand. At some price, everybody that wants some gold will have their coins in a drawer, or a bullion bar in the closet. Then over a weekend demand drops to essentially zero, and miners are then producing several million ounces a year more than demand. Same for oil. At some point, prices will get high enough to cut demand. Oil is different because so much or our technology depends on it. But that just means a collapse will do more harm than a collapse in tech stocks, real estate, or gold.

Point #3: The end game. A real bubble in gold, with all the leverage around now, certainly has the potential to destroy one or more economies. That said, there is ample historical precedent to suggest the government will change the rules. My view of the likely outcome is that over a weekend the gold that speculators bought at $3000/oz, now quoted on Nymex at $5000/oz, will only be redeemed at $100 /oz in the just issued "Patriot Dollars"

Point #4: What is a bubble? My view based on my interpretation of history, is that when an asset reaches a 10X increase in price, you are in a bubble. Oil passed that in 2008, but like I said oil runs the world so we're in new territory there. Gold not even close. I regard the ringing bell for gold as when Chancellor of the Exchequer Gordon Brown sold the UK's gold near $250 / oz. So my bench mark for 10x is $2500. Not even close yet.
The giant and most destructive bubbles can top 20X increase in asset prices. That puts gold at $5000 oz, and oil above $200 /barrel. There are reasonable arguments that the world comes unglued before either of those points are reached
For me, if the market gets anywhere near those levels I will be 100% in cash.

Not rocket science

2010-04-28T11:10:00.004-05:00

In the flight to safety as Greece, and maybe the Euro, starts to implode, gold seems to be the vehicle of choice.
One of my favorites and one I've held for some time now, GG is moving right along with it.

Ain't rocket science to figure this one out. Buy more if it comes back and holds support at 41.

Also put on a little SDS this morning. The S&P should bounce some here. Even so, it looks like it's due for a consolidation at a minimum, perhaps a more serious retracement. Baby size position with the idea of adding more on a bounce.
.

Spider Senses

2010-03-25T13:34:00.003-05:00

I got the heebee jeebies today, cleaned out everything except some small core positions just after 2:00.
Most likely means a parabolic melt up is coming next week, but the spider sense part of my brain was lighting up like 4th of July.

Really nothing new happening. Bond auctions the last few days have sucked, but that has been going on for some time. S&P has not reached the next target zone, which I make to be 1200-1225.

Gone are CLNE, NUE and PICO, added together they are a wash, few percent either way on all of them, and the risk does not seem to match the reward.

After the close update

Not feeling to bad about bailing early. Not liking that volume in a thin area, and at the close a bearish looking candle.

And on a 10-day 15-minute it closed right on a volume weighted support. Everything might be roses tomorrow, but I suspect that if that area gets taken out, it goes to at least 1150ish, which would a better place to look for longs.
.

New Positions

2010-03-17T08:45:00.005-05:00

The S&P has held over the January high, without conformation from volume to be sure, but holding. That suggests it keeps going to 1200 at least.
So, have to look for some additional longs.

CLNE has a nice break, solid volume, and is now consolidating. Only trouble here is a reasonable stop is a long way away. So small position to start with.

The other small position is NUE, nice break from a 7 day consolidation, not to overbought and holding above the 55 day MA.
.

Unseasonal NG Play

2010-03-10T10:27:00.004-05:00

Interesting move in PGH this morning. This is a Canadian Trust that leans toward natural gas, but has some oil. Here's the weekly chart.

The key Fibonacci level is 11 and a few ticks. That was taken out with authority this morning. Trading in the mid 11.20s (10:30EST) this morning. Seems an odd move since NG is past the winter heating cycle, and it's months before the summer demand and hurricane season.
If the move holds, first target would be 13.16, the gap down and also 50% retracement level.

I've had a long term position in this, pays a 7.28% dividend at this mornings price. This could be a place to add a little more.

Health looking Pharma Chart

2010-03-08T09:24:00.005-05:00

Like this setup for this week. BMY

Nice breakout of the recent trading range, and heading into some medium term overhead. Not terribly overbought and volume picking up.

On the weekly, a major resistance has been breached at 24, then it has pulled back to test the same level as support, which has held several attempts to take it out. A lot of volume there. Maybe some big players involved. I like the weekly volume picking up as well. And long term, the weighted average price should now work as support.

No position yet.
.

What happens in March

2010-02-25T10:14:00.004-05:00

Thought it would be a good time to look at the big picture. What happens to the S&P this time of year, on average?

Looking at the monthly SPX for the last 10 years....

2000 Big up month, followed by 5 months of very volatile trading before the big down leg.
2001 Down month, but made a low that held for 2 months before the next major down leg.
2002 Important intermediate top followed by 6 months of bearish action.
2003 Important low followed by a 12 month rally.
2004 Intermediate top followed by 6 months of sideways to lower action.
2005 Short term top that held for 3 months of consolidation.
2006 Consolidation before a leg down in May
2007 Reversal that preceeded the run to the top
2008 Up month following a reversal in February. Major leg down starts in June
2009 Major low

Now, before making a key judgment about the likely direction of a seasonal trade, let's look at another version of the same chart.

In spite of the general tendency to see prices higher in May, this time there is tremendous overhead supply right where the market is stalling. And the next level of high volume weighted prices doesn't come until around 900. And volume has been falling from last year's March lows. So the question is where would higher volume come in? I suspect it would be more likely to be on the downside. At the same time the market in not extremely over bought or over sold on a monthly basis, so that argues against a huge move either way.
.

Catch up and Profit taking

2010-02-23T09:22:00.002-05:00

Not much in the way of trading. Did a couple of dumb trades in SDS on Friday for a very small negative result. Hardly worth the effort. Bottom line is I didn't want to hold any index position over the weekend.
Yesterday I took a profit in BG. It's running into a key resistance area, running out of steam to two consecutive doji candlesticks, and the oscillator is giving overbought. So in at 59.55, out at 61.53.

With the S&P into resistance at 1111 - 1112, I feel it might be better to lean a bit to the short side. No position as yet.
.

S&P Inflection Point

2010-02-18T09:30:00.003-05:00

S&P should open lower this morning. Interesting that it's come back to a resistance level that also happens to be a 50% retracement of the sell off from the high.

It's had good sized moves in the past few days on unexceptional volume, that alone would justify a day or two pullback. In this case a lot of things are coming together. My gut is that the next few days should tell us if the pullback is done and the bull can continue, or if the first leg of a much larger pullback has been completed.

For Trades, moved the stop on BG up to breakeven. 59.55
.

A little BG today

2010-02-16T16:09:00.004-05:00

Bought a little position in BG (Bunge) today.

A lot a Ag releated stocks on the move this morning, so many similar charts. Breaking out of a 7 day range, filled the gap during the morning.
Long at 59.55, stop at 57.79 very tight. Closed today at 59.70 after sitting most of the afternoon around 59.40s-59.50s.
A 50% retracement of this monster sell off would be in the low 64s, counting from closing high of the move to closing low.
.

Short Idea

2010-02-03T11:49:00.004-05:00

Missed a few days since the end of last week. Missed the downside, and didn't get hit for the upside on Monday and Tuesday either. So just back to where we were.
Now the question is to buy the dip, or sell the rip. Maybe do both?

One short idea is AVP. First the weekly.

First is the increasing supply starting right here, and getting enormous between 38 and 40. And this stock does seem to respect Fibonacci levels. Resistance on both the chart and 61.8% level right around 34, and support on both the chart and 50% level at 30.

On the daily it looks like any move to 33 or higher could be an entry point. Any close over 34 would be the risk.
.

Fib levels in CSCO

2010-01-27T11:27:00.007-05:00

Looking through some charts this morning I noticed that CSCO seems to like Fib levels.

One problem with this analysis is the assumption that at least an intermediate top is in, and the retracement process is established. If it takes off from here and makes a new high, that thesis was just wrong.
But the levels do seem to set up rather nicely. There is solid support from 22.40, the 23.6% Fib level, to 22.60, the chart level. If that gets taken out, a run down to the 31.8% level at 20.73 seem likely. Nothing to do today, but one to watch.

Trade update:
Moved the stop on the SDS trade to 35.96. Understand this is extremely close, but it looks like today is going to be a 3rd small range day. Even if a major correction is underway, a run back to 1115-1120 is very possible, and retesting the highs not out of the question. So until the confidence level improves it makes sense to play small and tight.

Update 2:
Stopped on SDS at 35.96. Settled at 35.89 Tomorrow is another day
.

Intraday update

2010-01-26T14:38:00.004-05:00

Putting on a little protection here in the middle of the day.

Just that on the 5 minute there are 4 clean bottoms at 35.50, and the general tone of the market is weak. Position at 35.77, stop at 35.40 to limit risk.
The whole area around S&P 1090-1085 is an important support area, and over the last few months there has been a lot of volume there. No reason in the world it can't go back and test 1150, but my take is that if it breaches 1085 there will be considerable weight for a move lower. This seems a low risk way to get a little starter position going.
.

Trouble with shorting

2010-01-25T14:47:00.003-05:00

Having a look at JOYG today. This is a nice simple chart, no need to get complex here. For the second day it's trading below an important support level. The problem is that it got there quickly, so now the oscillators are at extreme oversold levels.

On the other side, the volume was high, so maybe it's already had a mini capitulation, and getting long would be the way to go. And extreme RSI or any other oscillator reading does not make a buy signal. Beside, if putting on a long, the nest support is around 44, and that's to big a hit to take. For now, this one on the watch list. If it bounces back above support, reevaluate. If it just continues lower, give up some alpha to have a higher level of confidence.

Trade Update:
The small position short SPX, via SDS, put on Thursday morning was sold Friday afternoon. Wish I had put on a bigger position, but better a small profit than to be a spectator. And while it looks smart today to have exited at the close, it didn't feel so good at the time. I just figured that with 3 consecutive down days, and kinda brutal ones at that, some of the fear would be gone by Monday and the odds slightly favored a bounce. Didn't feel strongly enough to put on a long index position though.
.

Setup in AMGN

2010-01-20T08:56:00.004-05:00

I didn't do anything yesterday. The movers were health care, all on the speculation about the GOP taking the Kennedy seat in Massachusetts. No way to tell how much a GOP win was priced in, and many of those stocks were already overbought.

The GOP did win, so now what. The big movers like WLP and UNH bid higher today, so they are just move overdone.
I don't know if the move in AMGN yesterday was on the back of the same debate, but at least it's setting up for a better risk vs reward play.

There is really solid resistance at 58 from previous highs, and lows from months back. Retracements have created a possible trend line, and the volume in the last few days has been supportive.
If it can break above 58 in the next few days, 62-64 seems like a reasonable target price.
.

Couple of tight stop charts

2010-01-13T11:13:00.006-05:00

Update to last week and my slack end of week posting. Cleared CIEN for lunch money, sold MDR and MON on Friday for nice gains. In the case of MON, missed the top by 40 cents. Sometimes you just get lucky. MDR advanced on Monday, so not such a good job there, but it has since pulled back to the low 25s. It's back at first level support, but closer to 24 would be much nicer as a reentry point.

On the watch list today...

JOYG tried to break out of it's consolidation and could not hold. A good entry point should be around 57, with a stop at 55. If that gets taken out, the stonger support area from 50.0-52.0 would be the next place to look for an entry point.

I was lucky to bail when I did on MON. On this chart 81.0 looks good. Already tested there this morning, so maybe it tries again later in the week. Stop would be at 80 on a closing basis.
With the divergence in the oscillator the pullback might be deeper. There is a case for support around 79, but I suspect mid 70s would be a better target.
.

Look at MON

2010-01-07T18:10:00.006-05:00

Took a small position in MON today. Let's look at the daily chart first.

Right at a double top, but yesterday's close on good volume was higher than the closes in this area back in July 2009. Also it was a solid break over the more recent resistance in December.
Today looked like it would be an inside day if earnings, which were due later in the morning, were not out of whack.
It traded down to a few pennies below the December high of 85 and recovered.

More interesting is the weekly chart.

What I like about this chart is the high volume at the lows back in November. The when it retests the same level in late October there is also some solid volume. I think that increases the probability that an intermediate term low is in. The rally off that low is weak, so the higher volume on the break higher could be more meaningful.
Some solid resistance ahead in the 90-95 area. How it behaves there should indicate if it stays in a consolidation area or can break higher.

Trades:
Long MON at 85.26
Moved the stop in CRESY to 14.27
Moved the stop in MDR to 23.98
.

Nice setup in CIEN

2010-01-06T11:04:00.006-05:00

This is a nice swing trade setup.

Nice breakout on excellent volume. It blasted right through key chart resistance around 11.50, and also a lot of volume between 11.50 and 11.75. Today it's on the 55 day MA.
Bought a starter position 11.89 and will use the Parabolic SAR for the initial stop. That's at 10.59 today.

Carryover Trade

Put on a position in MDR on December 8 after the gap higher. At the time it looked like a mini bottom on higher volume, so I bought the next day pullback at 22.64. Yesterday I added to the position at 25.07. Stop today at 23.30.

Not showing signs of being overbought on the daily so far and it's on the right side of the 55 day. Key reistance is just ahead, with the top of the zone at 26.50. I expect at least a pause around that level.
.

Nobody looking at utes

2009-12-11T09:28:00.003-05:00

Daily and weekly setups look quite good. Sector no one is talking about at all.

No position here yet.
.

Nice setup on WAG

2009-12-10T09:01:00.004-05:00

Let's look at the WAG daily to start with.

Nice divergence on the oscillator. Looks like it wants to find support at the gap, now testing the 3rd time. And yesterday had an expanding range supported by better volume.
And it's not to hard to figure out where to put a stop.

Since WAG mostly follows the S&P, you have to believe it's either going to diverage here, or the S&P is done correcting. I say go with what the chart says.
.

Contrarian Apple

2009-11-16T09:26:00.004-05:00

I know that even thinking about shorts in a monster rally is dangerous. With the Fed throwing billions in stimulus at the economy every week, who knows how long the bull can continue.
But looking at some charts this morning, something just seemed wrong about AAPL.

All the volume on the big gap up is a positive for the bullish thesis. But the follow through has been week. Technically it closed the gap, back to a solid support around 185-190. Then is has moved back to the previous highs. Opened this morning around 205. That rally back has been on declining volume. Now volume is at the lower end of the normal range. Just thinking that some more fuel is going to have to be added to keep the fire going.
Not shown on this chart, but there is considerable RSI divergence as well.

When I checked the weekly, AAPL is back to the late 2007 levels. When the world was priced to perfection and it was universally believed the market could keep on going higher forever.
Now we've had the worst recession/depression since the 1930s, credit has evaporated, housing has crashed and 10 million people have lost their jobs. Yet here is Apple, right back to where it was. Just seems like something is wrong with this picture.

Think I'll have a look at some put options today.
.

TBT looking good

2009-11-05T09:45:00.002-05:00

TBT looks like it is setting up for a nice move higher. This snapshot taken just after the open this morning.

The resistance at 48 is well defined with multiple touches. There is also a good case to be made for an inverse Head and Shoulders. $6 from the neck to the low, so the upside target would be 54. That works out nicely wth upside resistance from previous highs. Also, a 161.8% move of the trading range gives a target of 51.7. Volume was good yesterday, so a close above 48 would be the buy signal.

No position yet.
.

Setup in Preferred Financials

2009-11-04T07:47:00.004-05:00

PGF is the ETF for Preferred Financials stocks. Interesting because the weekly chart seems to be hitting close to Fibonacci levels.

Interesting that is closed yesterday right on the weekly 50% line at 14.7. The whole setup is looking a little bearish to me. But if can hold above that support, a run back to 16.0-16.2 would not be out of the question.

But if it can't hold, then 14.20 would be a first target. With the weekly 38.2% level at 12.49, and chart support just below that around 12.2. So risk / reward to favor the short side.

No position in this stock.
.

Interesting setup on VNO

2009-10-27T07:38:00.005-05:00

VNO is an office property REIT. Yields 2.5% and P/E of Zero.
The chart is an interesting setup, worth going on the watch list.

Just drifting in a possible pennant. Looks like a short on a close below 60, with a possible target between 54 and 50.

No position in this stock.

Chart of the Week

2009-05-08T14:01:00.003-05:00

Got this chart from Zero Hedge today. If a picture is usually worth a thousand words, this one is worth a book. Think about it. Since 1971 you had to make 4.43% every year just to break even on purchasing power. Transaction costs and other fees on top of that.

Have a good weekend.
.

Retail Reversal

2009-05-07T09:55:00.004-05:00

Nice reversal today in Nordstrom (JWN).

This is the action at about 10:45. No support taken out yet. Target (TGT) has a lot of positive things to say this morning, which should be positive given the love-fest bull market run we're seeing. TGT gapped higher and is selling off as I write this, about 11:00 now.

The weekly is just on giving a sell signal from overbought. That chart shows the drop off in volume as the market moved higher in the last 3 weeks.
Still early in the day, but if the afternoon bull squeeze doesn't work today, this could be a short. Plenty of potential.

Disclosure
- No position in JWN
.

GS Weekly

2009-05-06T16:01:00.003-05:00

I've never traded this stock, but the 4 year weekly is starting to look interesting.

The interpretation of the Head and Shoulders pattern is a little suspect, even so, it measures to within $10 or so of the recent bottom. Getting close to resistance at 140, and weekly volume dropping off dramatically. Even if GS is back in full bull mode, looks like a setup for a significant pullback.

Disclosure
- No position in GS
.

100 to 1

2009-05-06T10:19:00.002-05:00

After an absence to take care of some personal matters, I'm starting to post again. Hopefully maintaining some continuity for awhile.

This morning I saw this piece on ZeroHedge, GM Officially Wiping Out Common Shareholders.

Aside from the obvious fact that anyone who still owns GM stock is supposed to get wiped out, that's how Darwinism works, it occured to me that this could have a big effect on the Dow Industrials. The DJI is the only major stock index that is price weighted. So GM at $185 would take it from having almost no effect on the daily DJI moves, to having an outsized importance.

So would it make sense to short the Dow, against almost any other index?
.

Loonie Parity?

2009-02-13T11:59:00.003-05:00

Dennis Gartman had a piece on the Canadian dollar a few days ago. The basic premise is that commodities in general have bottomed, so Canada should do relatively well over the next six months or so. He thinks it could get back to parity.

The weekly chart on FXC has a well defined triangle, and some decent volume recently. Think this one is worth putting on the watch list.

Sources:
Bloomberg story: Gartman bullish on the Loonie.
.

Still Range Bound

2009-02-11T11:08:00.007-05:00

Over the last few weeks I've only done a few short term trades. Everything so far has been for a wash. I had a baby position on the S&P long side going in to yesterday, and also got that stopped out for a wash.
So what's next. Look at the daily chart first.

Still trading an extended triangle, testing support on the lower trendline. Nearby support at 825 and just above 800. It's possible to get a headfake breakdown here, a test to 800 or slightly below and then a springback. For sure everyone is watching the obvious trendline, and shorts should start piling in if it gets taken out. Everyone will be expecting the obvious targets in the 750-740 range.

The weekly is all about how you draw the triangle. The flat bottom at 800 has the more bearish aspect, and point to 750 as a resting point on the way to something in the 600s. The more symetrical interpretation would work much better with a rally to 900 or so. Then we see if the next big move is a break higher or lower.

The monthly chart is a whole different animal. Massively oversold no matter how you cut it. Historic volume suggests a possible capitulation. There has also been a solid test of the 2002-2003 lows. The bear argument is that it hasn't yet spent enough time at those lows, and another test of 750 would build a much better bottom. But the volume and the deeply oversold condition warrants a substantial rally from here even if 750 is not the ultimate bottom in this cycle.
.

Quickie on the S&P

2009-01-16T08:55:00.004-05:00

S&P did hold the technical levels yesterday.

Futures are higher this morning so perhaps we get some kind of tradable pullback here. If so, the Fibonacci levels to watch are 866 and 896. An up day should also generate a stochastic buy signal.

The 30 minute charts shows that the 850 level is still important. Futures are pointing to an open above that level. The first intraday resistance levels are roughly 864 to 878, which lines up perfectly with the Fibonacci levels.
Volume yesterday was also higher than the last 10 days, and higher into the late day rally. Also supportive of a move higher for 3 to 5 days.

I have no index positions at the moment, but would be looking to get long on intraday pullbacks.
.

S&P Levels

2009-01-15T10:25:00.003-05:00

Is the S&P ready for a turn? Start with the 6 month daily chart.

Having taken out an important support at 850, it looks like the next target should be 820-815. At 10:30 as I write this the SPX is trading at 822.5. This is now the 7th day of decline as well. The 6-month daily is getting oversold on stochastics. No buy signal yet but getting into the range where some kind of relief seems likely.
Another interesting point is that from the high volume bottom put in on October 10, to the index lows on November 20-21 there were 30 trading days. From that low to the recent high that marked the beginning of the current sell off was also 30 days. That may or may not have meaning, just something to watch.
Looking at a 3 month chart for a bit more short term clarity...

The Fibonacci retracement levels agree rather well with support levels. The 38.2% level works better for closing prices rather than highs and lows, but at the 815-820 level there are only very small extensions from closing prices.
My interpretation is that if the 815-820 level doesn't hold we retest the previous lows around 740, and beyond that the Fibonacci extension points to 620. That would certainly be a panic and despair level. The oversold stochastic would indicate some kind of pullback before even an attack to 740, but this bear market has had other times when oscillators went to extreme levels and stayed there for some time.
.

Silver

2009-01-13T11:14:00.009-05:00

When it appears that everyone and his dog is predicting hyperinflation and a bull market in precious metals a look at silver would be appropriate.

The monthly chart shows a classic pattern in that open interest peaked well before the high in prices, and volume did the same. Also the monthly chart showed no respect for Fibonacci levels. It blew through them all on the way down. The first leg of the collapse was 75% and stopped close to a long term support line. The bull move consisted of 3 textbook parabolic moves up, with collapses and lengthy consolidations before making new highs.

The first leg peaked in early 2004, and didn't make a new high until 21 months later.
The second leg peaked in mid 2006, and didn't make a new high on a monthly closing basis until 20 months later. There were two false breakouts before that.
The final leg peaked in the spring of 2008 and took 8 months to make a low, far longer than the previous moves. We are now in month 3 of the consolidation after the low. And 11 months from the top. This leg has had a far deeper pullback at 75% suggesting a major phase is complete.

The weekly chart of front month silver is a whole different animal. Again I see little respect for traditional support and resistance levels once this sell off began. Open interest and volume again show this was a liquidation event.

The bear phase looks like a 3 leg decline. The first leg lost 500 points. My reading is that the second leg "B" went from about 1950 to 850 for a loss of 1100 points. The alternate interpretation would be "B1" for a 900 point leg. I would have liked more than a 2 week pullback to accept this view. But in support of that view, the volume and open interest have washed out, suggesting the move lower may be exhausted. But if the final leg is just starting, it would be expected to be similar to "A", and that would point to an ultimate low closer to 600.

We can see on both the monthly and weekly that pullbacks during the bull run failed to reach previous lows, much less take them out. Even so, an optimistic bull would expect a pullback to 1000 or a little lower before being a buyer.
.

Catching up on Trades

2009-01-13T09:38:00.002-05:00

Yesterday took down the TBT trade on a stop. Most likely early on this, but discipline trumps conviction every time. And never let a profit get away. In at 39.60, out at 40.16 for lunch money.
All the SDS gone to stops as well. Made lunch money, including the add-on position that was closed flat. Sloppy trading on the 2nd SDS position, got 1% of a move, not even remotely good enough.
.

Upside down cake

2009-01-08T10:16:00.004-05:00

Looking at SDS this morning. It's the ProShares ETF that replicates 200% of the inverse S&P 500.
Sometimes looking at a chart upside down can be helpful, the mystery of human perception.

As mentioned in the previous post, I put on a baby position yesterday at 68.20. Added to it this morning to take it up to a very small position. Stops on the entire position at 68.20 under the rule of never let a profit turn into a loss, at least for the first part of the position.
Support for being long SDS, or short the S&P is a deeply oversold stochastic, and bouncing off a very strong support at 65.
Risk is that it comes back to 65, which is where I would take a second look. Target is in the range of 77.50 to 80.00. Seems reasonable to risk a couple couple of points to make 8.
.

S&P Support

2009-01-07T09:19:00.005-05:00

The S&P has been in rally mode since the November 20 closing low. That's 30 trading days. It has also taken out an important resistance between 918-920. The last few days have also seen closes above the 50 day moving average. That hasn't happened since August.

The rising volume which should reinforce the idea of a bullish breakout can't be trusted because the low volume days were over the Christmas / New Years break.
Futures are indicating a lower open on the ADP employment report. The numbers were down 693,000, the largest drop on record. But we have to keep in mind the ADP data set only goes back to 2000. Still, no way it be seen as a positive.

Right now I have no index positions. A short position via SDS would be the right thing to do below 918.

Update:
Put on small postion in SDS this morning. Hit at 68.20, last trade at 69.55
.

Starting a New Year

2009-01-05T18:52:00.006-05:00

Back after taking some time off. 2008 was an exciting year. Finished down a small amount, in single digits. Considering all the high profile hedge fund operators that went broke, I'm going to be OK with that.

But this is a new year, and the first trade is a sweet looking technical setup. TBT is a ProShares ETF that replicates 200% short the 20 year Treasury.

The opening this morning was a gap up, creating an island bottom with a nice wide base. Since the initial gap down on high volume, activity slowed down and then started ramping up. Today's volume was unexpectedly explosive.
On the fundamental side, the easy explanation is the market showing more appetite for risk. And anyone buying the long bond in the last few weeks should already be feeling some pain, so it's possible liquidation could follow.
I was a bit fortunate getting in close to the low for the day at 39.45. My position is at 39.56.
.

Historical Perspective

2008-12-01T09:03:00.004-05:00

Seems a good idea to get the month off to a good start with some chart porn and a little historical perspective. This chart comes from DShort.com Link to an interactive version here.

Trying to predict the future is a guessing game. No period in history is like any other. In this bear market the starting inbalances are as bad or worse than any other, but central bank intervention has been relatively swift and large. Whether that makes things better or worse is yet to be determined. Having said all that, my take aways would be...

Not likely we've seen the ultimate bottom just yet.
We are probably not even halfway through in terms of time. It may be that we're only 10% into the time line.
There will be multiple rallies that will look like a secular bull market has returned.
We haven't seen the last scary downdraft in prices.
Cramer and/or Kudlow will call bottoms at least 10 times before we have another secular bull.

Fibonacci Trades

2008-11-21T10:01:00.003-05:00

Taking down my short S&P position this morning. Based on nothing more than some Fibonacci numbers. Here's a 3 month daily chart.

The price projection based on the last rally has been fulfilled. Also it's day 13 since the last high.
From the low made on Oct 27, it took 8 days to reverse. The big bounce was 8 days after that, and today is the 13th day from the high.
Not putting on any longs here yet. If 750 is taken out later in the day, I'll put the shorts back on.
.

S&P Target

2008-11-20T09:58:00.005-05:00

Let's start with the daily S&P chart.

This is about as simple a chart setup as we ever see. Market comes down, puts in a bottom on solid volume with a nice intra day reversal. There are minor turns on day 5 and 8, and on day 13 there is a retest and strong reversal. 13 days after that, another retest and strong reversal.
That one is weak and fails immeditately. Now it's taken out the key850 level and this morning it's trading in the mid 780s. A rule of thumb is that the target should be about the height of the consolidation range, which was 150 points. So the target should be the low 700s.
.

Is housing near a bottom?

2008-11-17T09:23:00.005-05:00

Not even remotely close according to chart porn provided by Traders Narrative. Data is from a recent OECD report on price to rent and price to income ratios.
Here's the charts...

Again, the Trader's Narrative post, the conclusions.

The data is normalized with 100 being the long term average. Here are some quick take aways:

Japan’s real estate continues to slide into an abyss
US housing market doesn’t seem so bad now, does it?
not surprised to see Spain at the top but am surprised at Canada being second
data hides a lot of regional disparities - for example, within the US, Florida and California would trump Spain
Ireland is ahead of other markets in correcting - but it also started earlier
Mr. Greenspan, what happened around 2000? seems to have been an inflection point there

Yes, Japan continues to slide into the abyss. The surprising thing is that 18 years, massive devaluation, huge deficits spent on infrastructure projects have not been able to turn the real estate market around. And let's not forget that Japan's problems were about commercial real estate. They had punitive anti-flipping taxes that prevented the condo and vacation home bubble we had here.
.

Big picture look at oil

2008-11-05T10:13:00.006-05:00

This year has seen a huge sell off in crude oil. It's always dangerous to try and catch a falling knife, but some signs that the oil market could finally be bottoming are finally appearing. Let's start by taking a look at the big picture, the monthly perpetual in crude oil.

It may be that the bottom is in, but with the strongest support just under $60, we have to allow that we're not quite there yet. At the same time, there should be considerable resistance at 80. All this is confirmed by the decline in open interest during the whole run from 60 just under 150. When a fundamental and fungible commodity nearly doubles in 12 months without a major supply shock, there is something seriously wrong with the system. In my view the technicals support the idea that we're now back in an area where there is viable fundamental support.

The weekly perpetual chart has some interesting features. Two big gaps down, something rarely seen on a weekly chart. Week 8 in the downturn was the first gap, and week 13 saw the second gap. The bear market is now in it's 17th week, so I would want to be alert to the idea that week 21 might be a turning point of some kind.

On the daily chart the technicals make a good case for a 5 leg decline. And open interest appears to be picking up at just the right place. It would be better to see some more volume to be convinced that real accumulation is taking place. A case can be made for an island bottoml. I discount that because there has been so much volatility and many gaps along the way.

My view is that major corrections seldom result in a "V" bottom. A more likely scenario is that there is a lengthy consolidation phase ahead. Multiple retests are certainly possible. No need to rush in just yet.
.

DIG'ing for oil

2008-10-31T10:36:00.003-05:00

Here's a chart that's looking good for a mini bull run... DIG. It's the Dow Jones Oil and Gas Index times 2. Here's the link to it's holdings. http://www.proshares.com/funds/dig.html?Index

On the technical side, gotta love the huge volume as it put's in a triple volume. Looks like some folks giving up the ghost, and some folks doing some accumulating. I make 37 as the key resistance level to get taken out. Somewhere between 57-59 as a possible target.
Have a bid out below the low of the day at 32.55. Take that if it gets hit, or wait for a real deal breakout.
.

Is the bottom in?

2008-10-30T13:53:00.003-05:00

Found this great chart on Seeking Alpha, using data from Robert Shiller. Shiller's data goes further back that this chart, all the way to 1881. The long term PE ratio for the broad market over that time is 16.3. Recently PEs for the S&P 500 have been in the low 15s, cheap compared to the peak of bullish enthusiasm last year, but no where near where it needs to go. Secular bull markets start from annual PE in the single digits. And this market is not even close.

The market is a very long way from a bottom in both time and price. Doesn't mean there won't be stunning cyclical bull rallies, and likely some equally stunning crashes before a real bottom is in. Great for traders and several years, maybe a decade before buy and hold will work again.
.

Here we are

2008-10-24T08:50:00.003-05:00

Did all the bears turning bullish qualify as a bell ringing that another leg down was due? Could be, and I think how the market plays out today and Monday will tell the tale.
The daily S&P as of 9:45 this morning tells the whole story.

The triangle is clearly defined, and the market should bounce from here, or if we get a close below 850, the height of the triangle base gives us a downside target. Depending on how you measure, that could be 150 or 200 S&P points. That gives us a target of 650-700.
For me, I'm hedged and small enough to ride it out. Expecting extreme volatility along the way.
.

Bullish Bears

2008-10-22T08:37:00.003-05:00

Lot of talk recently about the extreme pessimism. With good reason in my view. Things are bad, and there is little sign the fundamentals are going to improve.
The Big Picture has a post yesterday on all the bears turning bullish.

Here's his list...

Paul (Kedrosky) includes:

Jeremy Grantham (Quarterly letter)

Doug Kass (Real Money)

Barry Ritholtz (October 10)

To that I would add:

Warren Buffett (you don't amass $46 billion in cash if you are bullish)

Ned Davis (Barron's)

John Hussman (commentary)

Bill Fleckenstein

Mike Panzner (over dinner last week, and just for a trade)

Todd Harrison, Minyanville.com

Note that Roubini, Peter Schiff and a few others are notably absent.
The comment from Warren Buffett that he's buying stocks now has received huge coverage in the press.
I have just one comment: How many historical bottoms have been made when all the pundits we calling the bottom?

Mr Market must be listening, because in it's perverse way, it took the S&P down big yesterday, and this morning opened down big again, 24 points at 9:45.
The technicals are saying a big move is coming, but it's unclear which way.

Kind of a ratty looking formation. It qualifies as a pennant with extreme volatility. This morning took it to the support line defined by closes. Need to get down below 900 to find the support defined by the extreme moves. Below 850 would be a true test.

For my own trades, I put on a short yesteday, got stopped out for a couple hundred bucks, only to see it fall apart into the close. My remaining hedged position is still in force, with nothing to convince me to lean hard either way. But with all the bears turning bullish, I suspect the risk is more to the downside.
.

Where we are

2008-10-16T08:37:00.005-05:00

Nice graphic from the Wall Street Journal on bear markets in the last 100 years.

There have been many similar charts over the last few years, but this one is interesting because the show the annualized change in growth.

First thing to consider is all the comments recently from pundits, Treasury Secretary Paulson, Ben Bernanke and various economists. All are making comparisons and dire warnings about how bad things are compared to the Great Depression. In the very next breath, all of them say that the "worst is behind us", "we're near a bottom" and that the fundamentals of America are great and stocks are cheap.
In fact, the real drivers of the current economic downturn, total consumer and government debt, and the leverage on that debt, are far worse than the Great Depression or the Japanese market in 1990. So in what bizzaro universe does, the "worst is behind us" comment make any sense at all?

The other point about this chart is that all similar graphics, it does not take lost purchasing power into account. The 1966-1982 period shows the annualized change is 1.5%. In fact, over that time period we had persistent high inflation and the purchasing power of the dollar declined by 30%. That's a sixteen year period where nominal values went nowhere, and you lost 30% of the value of your savings.

So calling a bottom right here, market down ~40% and the bear just one year old, is just plain dumb. Doesn't mean there can't be rallies, the recent 1000 point move in the Dow should make that clear, but I doubt that we've seen any ultimate low yet.
.

Worst Week Ever

2008-10-15T08:54:00.006-05:00

Been awhile since the last post. I've been nothing less than stunned but the events of the last week. The Black Monday scenario played out. Followed by a Black Friday that was the real deal. One of the worst weeks in Wall Street history. And then over the weekend the Fed and Paulson comes to the rescue and the market has it's biggest up day ever.

So after the biggest bailout in history, where are we? As I write this the S&P is trading at 970. In spite of global coordinated action to rescue the banking system the key lending rate, Libor, has come in a bit, but is still at historic levels. That means levels the banking system cannot tolerate for long. Maybe three days is to little to call the plan a failure, let's give it another week. In the meantime we have to consider the possibility that the biggest, baddest bailout in the history could only manage a rally that lasted a day and a half. If that turns out to be the case, the economy is in deep shit.

All the pundits are saying Libor and the TED spread is the key, and the world Central Banks have injected hundreds of billions of dollars into the system to enhance liquidity and get the banks lending again. I think they have it completely backwards.

Let's do a thought experiment. Say you find a bank ready to loan you a million dollars to build some McMansions in Phoenix, or Florida, in California's Inland Empire. You of course have to put up everything you own as collateral. Or maybe investing in a couple of boatloads of shoes with little wheels on the heel. Or maybe some nail salons in deserted strip malls in Detroit. Who would be insane enough to take that risk? And what bank would be insane enough to lend you the money?
I'm not sure the problem is lending at all. If you have money to lend now, and have to keep the loan on your bank's balance sheet, the problem is finding a loan where there is some minimal chance of getting the money back. With over capacity in everything, who want's to build new nail salons, Pizza Huts, or Chevy dealerships?

The psychology has changed. People are in savings mode now, and investment managers are not going to take any risk for an extra 5 basis points.
And you can't even call it a brave new world. We're really just going back to values from the 1950s. Will that be such a horror? Slow growth and stability?

Trading:
I put on some index longs on Thursday, that got my index short positions hedged. I missed taking off the shorts Friday, and didn't take off any longs yesterday. Did put on some DDM late Friday, and made enough in 15 minutes to take the money and run.
Tried to write calls against a few of the small positions I have in PICO and PGH yesterday but didn't get hit. With the market down today, I won't pursue that today.
With the S&P opening 30 sticks up or down on any give day it's crazy to take any positions you expect to hold longer than a day right now. The bottom line here is that having been through the worst week in my lifetime, with all time record volatility, and having survived with minimal damage, it seems like a good idea to pick entry and exit spots very carefully.
.

Black Monday Scenario

2008-10-03T08:21:00.005-05:00

Let's hope is doesn't happen, but events are setting up perfectly.
The setup is this: Big down day Thursday on essentially no news. The rumor about an insurance company going bust which was blamed just shows how ready to panic the market is.
This morning the futures were higher after a terrible Non Farm Payroll report. That might mean the market was expecting something much worse than merely horrible, or it could mean the market is looking past that number to the Bailout Bill which come to a vote today.

My thesis is that if the bill passes, and the market cannot finish sharply higher, we're setup for some really big down moves next week. A no vote, is obvious, market will sell off. A postponed vote is nearly as bad. A yes vote and a market that closes lower is the worst of all. That suggests to me that the market believes there is nothing congress can do that results in a positive outcome. That would be the Wile E. Coyote moment.

Trades:
Stopped out of XTO yesterday.
No index positions, had orders in the morning to short any pullbacks but there were none.

Gaming the Vote

2008-10-02T08:32:00.002-05:00

This bailout bill has taken over everything, all agreed on that. But this week we've had DPI and PCE numbers which sucked. Case/Shiller numbers which completely sucked. Builders still building more houses than they're selling. Auto sales that sucked, and today's first time unemployment claims up 1000 to 497,000, that sucks to. All this make me think the the NFP numbers coming Friday, with consensus around 100K, are way off base. Could be much worse.
That number comes in before any bailout vote.

Trying to game this as best I can. Hearing from some sides that the tax breaks put into the bill are pissing off as many dems as it's bringing in the GOP votes. And those that voted yes are getting heat from constituents at home. On the other hand, some business folks are likely to be begging for it. On balance, the odds may not have changed at all, and may be worse.
Could be the DJI will be down 500 or more points by the time this thing comes to a vote. If the vote is yes, maybe it comes back half or even two thirds. Even if it comes back all the way, shorts will have time to cover.
The other possibility is that the house leadership realizes it's to close, and puts the vote off untill next week. Market reaction is the same as another no vote.

Consensus is to be leaning long. Not so sure.
Right now I have no index positions, and some stock positions on the long side. My gut is to get something on short during the day, just in case.
.

Bottom Fishing

2008-10-01T09:44:00.003-05:00

In addition to the small position in PGH I took yesterday, I picked up a small position in XTO today, both are Natural Gas plays, and always a bit of extra risk buying ahead of the weekly EIA inventory report.

XTO is about as simple a technical setup as you could ask for. Three bottoms at 44 going back to early August. In this morning at 43.91 and a stop at 42.50. Risking less than $4 for a possible target of $10, maybe more if that resistance at 54 gets taken out.

Risk here is a general market meltdown, which I give a 50-50 chance. But with the S&P touching the magic 62% retracement when it was down 100 pts , the risk seems worth the reward.
.

Look at the big picture

2008-09-30T08:49:00.004-05:00

Been slack about doing posts recently. I've gone to mostly cash and small positions. On Friday I put on some shorts, and got stopped on half the position before the end of the day. So at least I had a small short position going into yesterday. My DIS puts helped as well so by the end of the day I had a nice profit, but not enough to retire on. When things get crazy, a good idea is to step back and look at a larger frame of reference. Hence the monthly S&P chart below.

Interesting thing is that it blew right through the 50% level but closed yesterday right on retracing 62% of the whole bull market from the late 2002 bear market lows to the October 2007 highs.
So my action this morning is to close out the SDS position, take the money and run, and close out the DIS puts, same deal, take the money and run.
May trade the market on the long side if there's a good intra day setup. A bounce from an important Fibonacci level could easily take it back to Friday's close of 1215.

New Rules

2008-09-24T08:07:00.002-05:00

The last few days of trading have been tough. The rules change every day. Nothing seems to matter but the rumor or emotion of the moment.
But going into today, I'm mostly flat, zero index positions.

Took down some of the longs Friday afternoon. Didn't get the best price of the day, but a big profit anyway. Took the rest down Monday mid afternoon. That was based mostly on gut, but failure to even come back to S&P 1260 was a big factor as well. Bought a little QLD to back to somewhere near square on the close.
The QLD looked good yesterday morning, but I took it down when it came back to flat. Put put on more shorts when it broke below 1210, and wound up taking them down when they came back to flat later in the day. The rest of my shorts were stopped out in the late afternoon rally. Not exactly at the high tick of the day, but pretty damn close. Only to see it fall apart in the last half hour. So this morning, no index positions.

Also sold the DIG short calls for a profit or $1.20, and sold the DIG at 72.30, bought at 67.0

Now the question is to get long on the bailout, or just take a day off.

Time to weep

2008-09-21T17:08:00.002-05:00

Just catching up on my reading of the bailout plan.
It's enough to make one weep.
Seems to me the best, or possibly worst, outcome is that it's so controversial, so unbelievably one sided, that congress will freeze solid and postpone doing anything.

I can't even game whether the plan is better or worse than doing nothing at all. My gut says the chances of a genuine depression have gone up dramatically.

Trading during the last week.

Added a new position in DIG, rode it up and down during the week. On Friday wrote October 77 calls against it.
Missed the big down days early in the week after having been stopped out the previous week. It's not been a good plan to be short against the PPT (Plunge Protection Team) in the past. Especially heading into an options expiration.
On Thursday, I put on a small short in the morning when what should have been a rally faded in the first half hour. Later in the day put on some DDM at the lower end of the mid day consolidation, and doubled that after lunch when it broke higher. That left me more long than at any time this year.
So Friday was good for me. But I took down half the longs around 3:30 when it looked weak going into the close. The close was a few points above that point, but leaves me reasonable balanced for the open Monday so far as the indexes are concerned, and long DIG with covered calls.

Fearsome Friday

2008-09-12T09:08:00.002-05:00

Checking over the blogs and news this morning I came across this...

The end result of the global economic slowdown may be the U.S. announcing national bankruptcy as the government cannot afford the bailouts that it promised and the market will not bail out the government, Martin Hennecke, senior manager of private clients at Tyche, told CNBC on Thursday.
"We expect a depression in the United States. We expect a depression, very possibly, also in Europe," Hennecke said on "Worldwide Exchange."
The estimated $300 billion cost of the Fannie/Freddie bailout will probably be considered as a loss that the government will have to take, therefore passing it on to taxpayers, he explained.
"We already have $3 trillion of debt, as far as the U.S. government is concerned. These debt figures across the U.S. economy are rising very sharply."
When the government can no longer pass the United States' "immense debt" on to taxpayers, it will turn to the holders of U.S. dollars, leading to the eventual downfall of the currency, Hennecke said.

Personally, I doubt we'll see an official call of a depression. No matter how bad things get, the government will adjust and otherwise manipulate the statistics. And another scenario is that the US has a decade or more of rolling recessions. This is more like the Japan scenario.

The idea of the US following a similar path to Japan in the 90s is full of holes.

First, Japan had immense savings in postal savings accounts. By contrast the citizens of the US have enormous debt.
Second, the Japanese real estate bubble was more about commercial real estate than residential. Japan had tax laws that made flipping houses and condo unprofitable. That kept their consumers out of the kind of trouble the US is having.
Third, Japan had export markets for autos, electronics and other high value added products. And both the US and Europe were growing and could buy those products. That kept the current account in good shape and kept unemployment from getting out of control. The US is in exactly the opposite situation. The US exports corn and soybeans, commercial aircraft, and some hi-tech products like chips and telecom equipment. None of these industries are big employers. In more recent times the big export product has been worthless mortgage backed paper.
And one other large issue is the the US is totally dependent on foreign capital to keep things running. Japan had a strong current account and could fund stimulus packages internally. That means the US cannot reduce the Fed funds rate to zero.

The two situations are entirely different. Does that mean the US will have a depression? Not out of the question, but we're not there yet.

Trades:
Put on some more DIG yesterday morning. Very small position, and doing well today

Sources:
Bailouts will push US into Depression

About the buck

2008-09-10T09:51:00.003-05:00

In my bountiful slackness I have not been keeping up with the dollar. But when I pulled up the chart this morning it was a shocker.

Couple of items jump off the chart. First is the volume. Nearing contract rollover there is always higher volume for a week or so. But this time the volume is way up there, 50% more than a typical spike, and way above the level of Q1-2008 when the bottom was put in. But the killer is the open interest which has gone to the moon. I haven't seen or heard anything about this, so the explanation eludes me.
There there is the idea that both volume and open interest are in new territory right at the first Fibonacci retracement level.
There is near universal belief that the dollar can only go higher.
Looks a little one sided to me.

Cliff Diving

2008-09-09T11:04:00.004-05:00

Both LEH and WM are cliff diving today. Most of the other similar banks / brokers are down, but still above or near Friday's close. These two are in a whole different universe.
Looks like traders think one or both are not going to make it through the week. Credit Default Swaps on WM are at 31.5%. That means to insure $10 million of WM debt, the upfront payment would be $3.15 million and $500K for 5 years. Not positive but that may be a record, or close to it. Definitely means WaMu debt valued at essentially zero.

Lehman has the uglier chart. Apparently no buyers for even the good parts of the company. At least at a price that would allow them to survive. No proof of any of this of course, but Mr Market is giving a vote of no confidence. The volume spike tells the story.

The big question is are they both to big to fail? How many humongous banks and brokers can the Fed rescue?

Trades:
Stopped out of everything. A statistically improbable series to be sure. Thank the trading gods no big positions and all the stops hit within a few ticks, no 20% gaps. Best thing to do might be to rest the mind and take a day off.
.

Bailout Day

2008-09-08T08:47:00.003-05:00

Wow, what can you say about the bailout of Fannie & Freddie (Phoney & Fraudy).
For trading I canceled the stop on the remaining SDS, but took it out 50 cents better. Already 40 cents better than that, but saved some lunch money. Barry's blog, The Big Picture, rightly points out that we've had 6 Sunday bailouts in 14 months now, and each has failed and led to a lower low in the following weeks. Still, this could easily run back to 1300 and it's not worth holding that much no matter what you're conviction.

Also added some DIG, the ultra long Oil & Gas ProShares. Over the weekend the forecasts for Ike to move into the gulf have improved, with some computer model tracks taking it right into East Texas refinery region. May add to that later today.

Bearish Setups

2008-09-05T08:18:00.006-05:00

After the S&P taking out 1260 yesterday, the technical weight now shifts to 1200 as the next target. This morning's Non Farm Payroll report was just terrible and confirms what the charts were already telling us.
So looking for some bearish setups this morning that haven't completely run away.

DIS
Took out the intermediate term trendline yesterday, and coming off double tops both intraday and on a closing basis. Stochastic indicator just giving a sell signal on the daily chart.

AET
Entirely different business, but AET has the same setup as DIS. Trendline taken out, some weak support from an intraday close at 40.66. After that the next support is 38.50. It's had a few runs trying to close above 44 and didn't make it.

Trades:
Put on some S&P shorts via SDS yesterday. Not a big position. More later.

Trade Update:
Put on a bit more SDS at 70.52. Stop at 68.80 but may adjust this later.

Also put on some DIS puts out to January with 32.50 strike. The thesis on Disney is a hurricane play and the technicals. If Ike goes up the Florida coast, that's going to be bad for the theme park. The west coast theme park is at ground zero in the housing bust so that's not likely to help. If Ike gets into the gulf, and gasoline goes back to $4 a gallon, that's not going to be good either. The theme parks are not the major business, but in this environment changes happen at the margins.

Monday Update:
The new SDS didn't last the day. Took it down when it came back to flat, and added some DIG with a basis of 71 in the afternoon. Tried to get it lower, but never got hit.

SPX Update

2008-09-04T09:00:00.004-05:00

SPX chart is looking very interesting right here. This is the daily.

The issue here is the series of higher lows the bulls need to keep going. That has not been broken yet. The last few weeks have been sideways, but 1260 has held with very solid support. A close below 1260 and the bull thesis is pretty much gone from a technical standpoint.
The other side of the coin is that it's had four straight down days, so there should be a bounce here. And a solid support level is a good place for it to happen.
Non Farm Payrolls is out tomorrow morning, and is expected to be horrible. That would be day 5 from the recent high of 1303.
On the weekly chart, it's been 8 weeks since the low of 1200. Maybe about time for a change.
.

Nice setup in AET

2008-09-04T08:06:00.003-05:00

Chart of the day is AET. Trading anything financial these days is like taking just a taste of white arsenic. But this looks like a nice setup.

I like the volume fading as it forms the triangle as it shows indecision. The negative is that it realy should make a break today for the formation to be valid. Otherwise it just drifts. A break with a close above 44 would be a buy. Two consecutive closes above that resisatance would confirm a bullish move.
A break below the trendline would be OK for a small starter position. A close below 41.00 within 3-4 days would confirm the breakout.

Trades:
Stopped out on VLO on Sept 2. Broke the trendline, and rallied back the next day. Sometimes you're just wrong.
.

Chart Porn of the Day

2008-09-02T08:17:00.003-05:00

Post Gustav, haven't decided what to do yet. Looks like some refinery capacity, about 14%, will be shut down for the rest of the week. The VLO I bought last week looks to open a little higher this morning. My confidence level that this will last more than a few hours is near zero.
Oil is trading down to $108 this morning, I guess on the idea that Gustav was not a catastrophe. Which brings me to the chart porn for this morning. And the question, if this is even remotely accurate, why is oil in the dumper?

.

A Gustav play

2008-08-28T08:48:00.003-05:00

One way to play some possible storm damage to the Gulf oil & gas infrastructure would be through the refiners. A few ways this could work.
Some background first... Refiner's profits are based on the crack spread, the cost difference between input costs, crude oil, and finished product, gasoline or distillate. Crack spreads have sucked for most of this year, which is why stocks like VLO and TSO have been in the dumper. Demand for products has been weak as well, so refinery utilization has been low as well. Running well below capacity doesn't help margins either.
Coming in to Labor Day marks the end of summer driving season, and the beginning of heating season. Refiners change their output mix to favor heating oil / distillate over gasoline.
So at a time when supplies of heating oil should be building, hurricane Gustav might shut down some gulf capacity. That should run the crack spread higher.

VLO has been in a classic consolidation. Volume declining, prices no direction in prices and 3 tests of 31. Yesterday there was a nice move to the upside on improved volume, and it opened higher this morning. There is clear and substantial resistance at 36 which has to be taken out for this thesis to work.

I put on a small position at 35.60 this morning. See how it plays out.

New S&P Triangle Shaping Up

2008-08-26T08:45:00.003-05:00

Trading the S&P over the past few weeks has been extremely frustrating. On Friday I stopped out of my shorts on the first tick. Made a few pennies, but basically a wash trade. Only to come back on Monday for a big down day. So I missed that one completely. But the Trading Gods will cause you a world of pain when you put conviction before discipline. The stop was to prevent a winner from becoming a loser.
Today the market is opening flat to a little stronger, and the chart looks like another triangle is shaping up.

Stochastics are in the middle range and no help here. Declining volume increases the likelihood this formation is the real deal.
There is a big risk to the short side. At some point in the near future, Paulson is going to have to announce the plan for Freddie and Fannie. I monster rally can be expected. There will be much more from talking heads about the "bottom being in", and the "worst is behind us." Unlikely that either will be the case, but sentiment will take the market higher anyway.

For me, I think the best policy is to wait for a definitive breakout one way or another. I have no index positions at the moment, so maybe a few days break won't be a bad thing.
.

Bounce in oil

2008-08-21T11:13:00.003-05:00

Oil up $6 in mid morning trading, with the S&P holding about flat, off the morning lows.

First up let's look at a weekly oil chart, using front month futures.

Oil in the range from 111 to 115 is doing exactly what it should. Whether this turns into a bottom, or is just a bounce still remains to be see. The $6 move today is to much to quickly, so I wait for it to settle down a bit before adding positions.
Oil has now pulled back 50% of the move since the recent consolidation, and 38% of the entire move from January 2007 lows. A 50% pull back from those lows would take it $100. My own feeling is that OPEC would put in a floor near that level.
Astute observers will not that open interest has been trending down since $80. So much for the theory that the run up, or down for that matter, is the result of some vast conspiracy.
Also not that as of today, no major trendlines have been violated.
On the other hand, the sell off of 2006, from $80 down to $50 took 26 weeks to complete. The current sell off is 7 weeks old by comparison. That leads me to thing the rally is more about short covering than a true trend change. The market has just not taken enough time to resolve a $95 rally.

Readers have to keep in mind I have a lot of long term positions in royalty trusts. Missing the bottom here is not such a big deal.
.

S&P Upside Down

2008-08-20T08:20:00.004-05:00

The chart to look at today is SDS, the double short of the S&P. A starter position was put on Monday morning, so now the portfolio is showing s small gain.

Yesterday's volume was a little better so that's a positive. Stochastics gave a buy signal the previous week for another good sign. But even a cursory look at the daily chart shows that recently the oscillators go to extreme overbought and oversold and stay there for a few weeks. Taking that into account, it could be very early to be getting long SDS, and short the S&P. On the weekly SDS chart, the stochastic indicator is between 40 - 60, so there is no signal to back up or confirm either side of the trade.
The chart could be viewed as breaking a trend line, but there is upside resistance at 68, so a pullback today would be reasonable. In fact, as this is written the S&P opened a few points higher.
Moving the stop up a buck to 65.18. I'm calling the first support as Monday's close of 65.63, so the stop has ample room under that. Primary objective there is not to let a profit turn into a loser.

Where's the channel

2008-08-18T16:25:00.004-05:00

The S&P turned down sharply today. Weak right from the opening tick, for yet another double digit day.
Quick look at the daily chart.

There's a couple of ways of calculating the real trend lines and support/resistance. One is to use extreme prices, another to focus on the closing quotes. In my view, closes are definitely more important, but that doesn't mean extremes should be ignored.
Either way, it's not taken out anything key yet. Could be right at a major point today, or it could be another 10-15 points lower.
The next important level is 1260. I would expect at least a pause there, even assuming a bearish scenario. But the most important level for the bears is 1235. That marks the first higher low in the bulls playbook. If that goes, the whole bullish technical case goes with it. And it's a long way from where we are now.
I put on some SDS this morning when there was no rally before 12:00. Starter position with a basis of 65.05, which does not allow much room for error.
.

The Macro Thesis

2008-08-15T11:27:00.003-05:00

I'm on the sidelines today. Been writing and watching 1297 all week, and at this minute it's a couple of ticks either side.
Stopped out yesterday on the shorts, discipline over conviction and never let a profit turn into a loss, Made lunch money and that's all.

I'm now developing a thesis that may be questionable, even dangerous, since it relies on everyone being wrong as a core assumption.
At the core is the idea we haven't seen a credit contraction at all. What's happened is that credit for home buyers, LBOs and junk paper has contracted or become more expensive, but the total amount of credit has changed very little. What's really going on is that bad credit has moved from investment banks to central banks. The Central Banks are loaning money to people that have less ability to repay than some Mexican lawn maintenance guy who bought a house in California ever did.
If you accept that thesis, then we're in the 1st or 2nd inning of the credit deflation, and not halfway or mostly through it like every economist on the planet believes.

We can use analogies, say compare the current crises to the 70s. In that case, we're in 74. After the first oil spike, the worst was over, oil and gold got cut in half. But the real problem, which was to much debt on the US balance sheet, had not been resolved at all. More oil spikes were coming, as well as the worst of the inflation. And let's not forget the political repercussions in the middle east.

Comparisons to the 30s can also be made. After the first swoosh down, banks wrote off bad loans, companies couldn't borrow to expand, unemployment was ticking up, but the core problem of debt was not resolved. Everybody took big write downs and believed the worst was behind.
The bank failures, real monetary deflation, and the collapse of trade was to come in the next few years.

But the world is not the same place it was in the 70s, or the 1930s. For a relative comparison of debt, consider this chart.

Not even the slightest hint of a turnaround.
And let's look at the macro picture of the differences. In the 1930s the US population was 1/3rd of the current value. The US had a wealth of resources, minerals, oil, water and farmland with which to rebuild. Even allowing for the dust bowl of 1933-34.
Even in the 1970s oil spikes, there was plenty of reserve capacity that could be turned back on. There was no dependency on China for manufactured goods. The US was not dependent on foreigners to finance our debt to the same extreme as today. And Paul Volker could raise interest rates to stop the collapse of the dollar.

I'm going against the whole idea that the $USD is strong, it's only less weak than the others. We're now entering the race to the bottom for currencies. The only option is to reflate with competitive devaluations. But that will raise oil and other commodity prices at a time where there is zero spare capacity. Every tick up in the general economy will be met with higher commodity prices. There is a generational change in consumer behavior from excess consumption to savings. I believe that will be reinforced by the boomer generation. They will find that their house and social security isn't going to provide for their golden years.

So my view is that the deflation cycle is just now getting serious. And the following inflation has yet to begin. When the economy finally bottoms in the next few years, the road to recovery will be long, slow and painful.
.

S&P Levels

2008-08-14T08:45:00.003-05:00

Watching some intraday S&P levels this morning.
Earlier this week I had pegged 1297 as a potential key level. Yesterday is traded lower and pulled back to within a few points before selling off into the close. So now 1297 has been validated as a resistance level.
Now looking at a 10 day chart with 15 minute bars.

This morning the S&P opened lower on jobless claims and CPI data that totally sucked, but only slightly worse than expected.
The first support level is 1275, the low from yesterday. The more important level is the low from August 7, at 1265. It has to hold that or the bullish thesis of higher lows goes down the tubes. After that, 1247.50 would be the next target.
This being an options expiration week, it may be that things swing all over the place until Monday.
I've lowered the stop on my SDS position to 64.20, giving me a small profit if it gets hit at that level.

Watching 1297

2008-08-12T09:40:00.003-05:00

Notice today that weakness is right at an area where there has been some solid intra day volume. This really should be a level for a base.

I'm vary wary, since I took off my longs to early, and got stopped out on shorts. Now I have no index position at all.

Some Long Shots

2008-08-11T13:40:00.006-05:00

Looking for some charts on the long side that haven't completely run away, and make some sense.

First up is AXP. Financials have been deadly since the bear started, and AXP has been right there, nearly getting cut in half. Close enough to not even matter. Weekly chart is a disaster, making 3 yr lows. The daily holds out some hope.

A case can be made that the downtrend has been broken, and it's already had the head fake break out. It's been consolidating for the last few weeks and looks like it's trying to make a break. The thesis is that financials have lagged in all the bullish enthusiasm and could play some catch up. It's not completely gone on the stochastic. Entry point around 39.

Another one is an entirely different space is EBAY. Look at the 3yr weekly first.

This looks like some nice divergences going back to July 2006. Stochastic and Ultimate oscillator shown on this chart. Long term bottom at 24 makes it clear where to stop out.

On the daily chart it's kind of a raggedy thing from a technical perspective.

There are a couple of different ways to define the trend, none are really textbook, and all have some faults. But the high volume gap down could be viewed as a capitulation bottom. The retest qualifies, but just barely in my view. And the break above the recent range hasn't been on exactly spectacular volume. But it hasn't run away yet. And ideal entry point would be closer to 26, but you have to be prepared for another test of 24. And some extra room for a stop.
Still, the weekly looks kinda juicy.

Trade Notes

2008-08-08T10:04:00.003-05:00

Yesterday I pulled my SPY calls, and DDM, and since I got out pretty close to the best prices of the day, I'm thinking I got one right.
Within 20 minutes of the open this morning, that idea was proven to be completely bogus.
But bottom line is that nothing has broken out of the triangle yet. The move this morning is all about a stronger dollar. Wait a minute, that's not completely correct either, nothing in the US has actually improved. In fact the horrible numbers from Fannie and AIG just prove things are still getting worse. And we haven't even seen the effects of CRE going to hell, or the Pay Option ARMs that is coming at us like a 100 ft high tsunami.
The jist of the dollar move is that Europe may be as bad or worse than the US. So on a relative basis, everyone may go down the tubes at more or less the same rate.
Cause for rejoicing, let's bid op the DJI a couple hundred points.
For me, I'm going to hang in until the technicals resolve. Now I'm a little more balanced to the short side than I would really like, but even if that whole position goes to zero, I'll survive to fight another day. Doesn't pay to try and be a hero in this environment.
.

The real thing?

2008-08-06T09:08:00.004-05:00

Was yesterday's monster move in the indexes the real deal? Have we reached the point where the Fed has saved the day?
Some of the sectors that made big moves were airlines (9.6%), banks (5.5%) and brokers (4.6%). So we have to ask the question, does oil below $120 mean it's clear sailing for airlines? Does the Fed saving Fannie and Freddie constitute a viable business model for banks and brokers?
My inclination is to think even a 3% up move is more about short covering.
Yesterday was also a 90% up day. Barry Ritholtz has a post that puts that into context.

On the other side of the ledger, we have Lowry's Selling Pressure Index at those highs. Normally, it declines well ahead of a market bottom. The new high in this Index does not equate with the thesis that we're near a market bottom.

Further, Paul Desmond tells me that since we did not have any 90% Down Days close to the mid-July low, we have not seen the required selling exhaustion for a major bottom.

Further, its been 3 weeks since the lows, and we did not have a 90% Upside Day quickly after the rally began. Paul's prior work on market bottoms suggests that almost always accompanies major market bottoms. He views the recent rallies as primarily short-covering by hedge funds rather than accumulation from investors. I agree.

Bottom line: A classic Bear Market rally, one that could run for a few more weeks. My best guess is to 12,250 - 12,500.

I would add to that there was no high volume capitulation at the recent bottom. And there hasn't been enough time spent drifting at the lows with extreme negative sentiment to put in the kind of bottom we see in the big recessions.

The next few days should provide more clarity. To get bullish the market must take out 1290 with come conviction. My thinking is 1320-1330 would be the first target in that case. But now that a trendline has been established, a break below that line would indicate a retest at 1200.

My trades: Put on some DDM ahead of the Fed announcement yesterday. I would have bet $1000 against a 200 point move in the Dow ahead of the Fed announcement. I was dead wrong and way late in hedging. Now I've bought some time, so volatility won't kill me either way. Just have to be right on the next big move. All about discipline over conviction.
.

SPX Pivot?

2008-08-04T09:54:00.004-05:00

Start by looking at the SPX weekly chart.

Some of the extreme oversold condition has been relieved, but it's not like it's moved into overbought territory at all. We've had two weeks of indecisive action after a hammer which touched 1200. From that kind of high volume bottom, a stronger upside move would seem reasonable.
But go back to the period from September 2006 to March 2007 to see now long an extreme overbought or oversold condition can persist, even on a weekly chart. For all the volatility and big moves, the S&P has not seen that kind of trending move yet. Not even close.
On this weekly chart, I would call 1260 the pivot point.

Now a look at the daily chart...

This is snapshot from 11:00 today. The index doesn't seem to be able to hold the 20 day MA, and is near a possible trend line. The action over the past few weeks has taken it well off the deeply oversold condition, but still deeply below the 200 day MA.
The trend line is not a long term support, so it may not prove to be of much importance. If it holds there it would become more important. After that, the previous week's low of 1234 becomes the number to watch.
I'm already short, so a close below 1234 would be a place to add shorts. A retest of 1200 would be probable.
On the other side, a retest of 1290 is not out of the question either. A break above that and everything changes in my view. The 1234 low gets confirmed as a higher low, and the probability of an intermediate term bottom is increased.
Since the last few months has been a persistent downtrend with no significant pullbacks, even a retest of the 200 day would not be out of the question.

Disclousure: Long SDS.
.

Trades today

2008-07-31T11:22:00.004-05:00

First thing to look at this morning is the S&P. GDP and employment data this morning completely sucked.

Q4 GDP - Revised down to -0.2% from previous level of +0.6% First quarter of negative growth.
Q1 GDP - Now called +0.9%, previously +1.0% . Likely will be revised lower.
Q2 GDP - 1.9%, against expected level of 2.3%
And consumer spending only up marginally despite the rebate checks, and consumer inflation at 4.2%.
Jobless claims were up 44,000. Now at levels not seen in years.

I had added to my short S&P position on the 25th, and instead of covering during the melt up, bought some DDM. Took that down this morning for a profit, but since I had less DDM than SDS, it leaves me uncovered and underwater on the short side. Only remaining hedge is some SPY calls that are still out of the money.

The horrible numbers from GDP have been reflected in the S&P chart, down 220 points with no significant pullbacks. A 50% retracement of that move should take us back to 1320. So if the short term double top holds up, it would be a very weak pullback. A close above 1290 and covering shorts and getting long again would be mandatory.

Barry Ritholtz at The Big Picture posted a quote the other day that sums up exactly where I am on these markets...

“Most global stock indexes have decisively broken below their 200 week moving averages, which is a major trend reversal. The intermediate term (3 month) and long term (12 month) model forecasts point down. We recommend taking advantage of every minor rally to close long positions, go short and shift out of tech and cyclicals into defensive groups. Stock indexes haven’t yet had the big surge in volatility (5% daily NASDAQ moves down and up amidst a declining market). That is probably approaching. Bear market trading is typically more productive selling into those big percentage bounces, rather than selling into big declines and then watching the market bounce back in your face.

Potential downside targets after a 200 week average breakdown are 1) the 200 month average and 2) The previous 2002-2003 lows. Those levels are 25%-47% below current levels for most stock indexes. U.S. financial indexes are already there (BKX, XLF). So don’t think it can’t happen for the broader market and other currently elevated indexes, stocks and groups.”

Michael Belkin
The Belkin Report
July 6, 2008

Doesn't you can lose a lot of money being short. These short covering rallies can destroy a trading position if you let conviction take control of discipline. After all, the government is actively trying to legislate that the market can only go higher, at least the issues like Fannie, Freddie and the banks the took the most risk and managed that same risk poorly.
.

Mother Merrill

2008-07-29T11:02:00.003-05:00

After the close yesterday Merrill announced yet another refunding. It's all over the blogs today of course, for many reasons. Barry Ritholtz had a great commentary, he's totally disgusted with them, as everyone should be. Aside from outright lying to everyone, there is no way in hell to even guess at what they might be worth. My screen on ATP this morning shows EPS at minus $22 and change. For sure they're not the only ones in this boat, but a good case study never the less.
Let's take a look at where they've been. The really big picture first, 15 years of monthly bars.

For all the morons that have been calling bottoms every few weeks, it's clear that already this "dip" is orders of magnitude worse than either 1998 or 2000-2002. And it's absolutely that it's no over yet. Today may very well be some kind of short term bottom in MER. The big sell off was yesterday ahead of the news, so a lot of people new this was coming. Today the stock is holding up, so there is a contingent that must believe it can't get any worse. It's so deeply oversold and the volume has been so extreme it would make sense to get a bounce. If it could work back to 40-45, that would be a wonderful opportunity to sell.

But what about the longer term? Mish had a post this morning about what debt is costing MER and some of the other broker dealers. MER bonds that mature in 2018 were yielding 8.15% on July 25, ahead of this news. That's more than Russian BBB rated bonds.
Other than selling assets at 22 cents on the dollar, how are they going to get income going forward? And keep in mine the 22 cents was generous, 75% of the financing taken care of.

Would anyone be dumb enough to pay Merrill for investment advice?
How about making a few hundred $billion of securitized mortgages and selling them to suckers?
Or charging enormous fees to do LBOs of overvalued companies.
Maybe some proprietary trading in derivatives? Wonder if they actually have capital to do this?

I don't see any viable business model going forward. I'm thinking a year or two down the road we see this puppy in kindergarten. If you doubt it, take another look at the monthly chart, this is what deleveraging is all about.

Sources:
Big Picture on the MER writedown

Mish on balance sheet destruction

Naked Capitalism on the effects

A couple of toppy charts

2008-07-23T14:22:00.004-05:00

First off is JNJ. This one is a favorite on the idea that it's consumer non discretionary, they make stuff most people still use in good times and bad.

As you can see from the weekly, JNJ has had a tough time getting past 69. It's had 3 runs at that level in the last 12 months, and looks like it's trying for number 4. Each met with a steep sell off. One thing to watch, if it breaks above 70 and confirms, better get out of the way.

Another to watch is Mickey D's. Different sector, more or less the same configurtaion.

There are a few different ways to define the main trend, but both amount to the same thing. No evidence as yet of a trend break in any event. If it breaks above the 62 resistance, a $10-12 move would be expected. If not, first target would be the trend line. If that get's taken out then you could add to the short position with a first target of 50.

Disclosure: No position in either of these names.
.

Quick peek at gold

2008-07-21T08:28:00.007-05:00

With all the talk about the bailouts of Fannie and Freddie last week, it seemed a good time to look at gold. The thesis is that the Fed will have to take on huge amounts of new debt as a consequence of the bailout plan. Lot of analysts have said it amounts to nearly doubling of the Fed's balance sheet. That's to simplistic. The Feds assets of Treasuries are fundamentally unsecured debt. The reason that Treasuries are considered high quality is that the government can always just print more money to pay them off. The money will get paid back, it's just a matter of purchasing power. Fannie and Freddie paper on the other hand, is back by mortgages on real estate. If the plan goes through, and the Fed provides an explicit guarantee, then the money will get paid back. The question is now what is the quality of that paper, and how much will get written off. I don't see any way for the difference to be made up other than the Treasury printing money to match the write offs. They could issue more treasuries, but out too much out there and long term rates get out of control.
Since the Fed has to print money to make up the shortfall, which is of unknown size, what does this do to the dollar?
Practically every analyst out there is has been looking for a stronger dollar. This idea is based on the idea that Europe will have to lower rates to deal with their own problems, so the relative difference between US and Euro rates should narrow. There is some evidence already that this is playing out.
We are not getting to an inflection point. Everything is based on confidence. The Fannie & Freddie bailout, while expensive, could lead to a more stable situation. If however, the foreclosure mess continues to get worse, stability could easily go to hell in a hand basket.

Let's look at the technical picture in the dollar first.

This weekly chart is amazing. The dollar has gone from 92 to 72 without a single meaningful retracement. There have been some sideways periods and a few rallies, but no sign of strength at all. Compared to equities, where we have 15% and 20% bear market rallies, the dollar has just been pathetic. And now the 72 level is shaping up to be critical.
But let's take a look at an even bigger picture.

Secular moves like this frequently take 3 primary legs down. It is possible to have a 3 leg move, with 2 legs down and one primary pullback. In that case the final leg down would be the same size or larger than the first. The first was from 120 to 80 or 40 points. The pullback was from 80 to 92, which is exceptionally weak. A 50% pullback to 100 would have been expected. If the 3rd and last down leg is equal to the first, our target would be 52 or slightly lower.
If this is a more normal 5 leg move, the eventual target would be further out in time and much lower. In that case the 2nd down leg could be smaller than the fist, so the rally could come at any time.
If we assume the more optimistic scenario, 52 as a bottom, that is still a 70% depreciation of the dollar. What does that do for gold, if anything?

Gold is still in it's secular bull mode. No sign at all of any significant weakness. There is weak support at 960, a little better level at 930, and strong support at 880 and 850. That $100 away from Friday's close. This morning it's in the low 960s.
Just a matter of picking entry points. Resistance at 1000 and 1030. Both will be important.
The key thing to note on the weekly gold is how the open interest is ramping up strongly. And this at a time of year when seasonal patterns are not especially bullish. Look how the open interest starting moving in Q3 of 2005 when gold started it's run into the 700s. And again in Q3 of 2007 when it started the run to 1000.

With the Fed making a commitment to back every piece of junk paper in the universe, bail out banks, and congress completely unable to control spending in an election year, it's hard to see how the dollar can be supported. Gold should continue to move higher.

Disclosure: Long GG

What about Fannie?

2008-07-17T07:35:00.003-05:00

My view is that they're taking the worst of all possible options.
First, they can't let Fannie or Freddie fail. That is not an option. There is no one left to provide mortgages. All the banks are too impaired, so letting them fail would bring that whole part of the economy to a standstill with no Plan 'B'.
They bondholders have to survive. They may or may not get some kind of haircut in the process. If that happens it won't be too bad for ~~the bagholders~~, bondholders. The reason there is simple. Billions upon billions are held by the central banks, and major banks of China, Russia, the middle east and others. The US is totally dependent on these banks to continue buying our debt. If they even slow down purchases of US debt significantly, the risk is a sudden dollar collapse.
It would be better to just nationalize both of them, and be done with it. GSE paper becomes Treasury paper with a small basis point premium. But this concept is completely at odds with neocon core religious belief.

The problem with not nationalizing is that Fannie and Freddie have literally trillions of dollars of mortgages, leverage somewhere near 60:1, and no backup besides the government. They are likely insolvent now. Even former member Poole has come out and said so. If the US housing market continues to deteriorate this is an unsustainable situation. But the liabilities come onto the Federal balance sheet, it could be a disaster for the dollar.

Since the government now has to back up the GSEs part of the endgame is going to be a dollar that is worth less. Paulson and Bernanke understand this, but they don't want it to happen over a weekend.

It's going to interesting watching them walk this tightrope.

Paulson through the looking glass

2008-07-15T21:37:00.004-05:00

Wonder how many traders watched the Bernanke-Paulson-Cox testimony today and had the same hallucinogenic experience I did. I mean, it was like far out.

The psychedelic part when Paulson was explaining his idea for saving Fannie Mae and Freddie Mac. He wants a blank check, to spend an undetermined amount, at an undetermined time, under an undetermined set of circumstances. If he gets it, he's pretty sure he'll never need to use it.
But he needs it to save an institution that's doing just fine and doesn't need any help at all. And if he does need to use it, he would consult with the people he's trying to save, or maybe not. He was clear that they might not even recognize that they need to be saved.
Paulson would also consult with the movers and shakers in congress, if he has time, and it's convenient.
And there can't be any limitations on the action taken, or the evil speculators would know the limits and have no fear about destroying those same institutions that are fine and don't really need any help. The idea there seems to be that if the evil speculators know you only have a squirt gun in you pants, they would not be afraid, and would wreak havoc and otherwise victimize poor Fannie and Freddie. But if they believed he had a bazooka in his pants, then they would cower in fear. That's a whole phallic image I myself fear to even contemplate.

And by the way, let's ban shorting those institutions that are explicitly not backed by the government, just in case the government would have to back their share price and debt.

Cox announced the plan to keep the evil shorts at bay. I think he wants to make it illegal to naked short those two stocks. My impression has been that's it's always been against the rule to short if you didn't have the ability to deliver the stock. So apparently what the real plan is... wait for it, to enforce the existing rules on naked shorts, but only for prime brokers and the GSEs. I mean, that's far out man!

All this talk about naked shorts, and bazookas in your pants, a human unit just has to wonder what these guys are feeding their heads.

When the men on the chessboard
Get up and tell you where to go
And you've just had some kind of mushroom
And your mind is moving low.
Go ask Hank
I think he'll know.
When logic and proportion
Have fallen softly dead,
And the White Knight is talking backwards
And the Red Queen's "off with her head!"
Remember what the dormouse said:
"Feed your head."

Monday Trading Notes

2008-07-14T07:42:00.002-05:00

Just a note ahead of the open this morning.
I'm going into the open with a baby position is SDS which is going to get hammered on the bailout or rescue of Fannie & Freddie. To cover that I have Sept 129 calls on SPY, which have sucked for the last week. Delta is still slightly bearish, but only just a bit. Toward the end of the week I had put on more shorts, but was stopped out with the volatility. Loss about $1K, so no big deal, and a testament to the exercise of discipline over conviction.
.

The Natural Gas Play

2008-07-09T11:49:00.005-05:00

With the recent pullback in the energy space, it's time to have another look. Natural Gas has been one of my favorites for some time. It has traded down hard, but even a cursory look at the weekly perpetual chart shows there's no damage to the main trend.

NG is long overdue for a correction, having moved from 7.50 to nearly 14.50 so far this year. The most critical resistance was in the low 11.20s and it pretty much blew through that. The trend is confirmed by increasing open interest as well.
Worst case, NG could make a 50% retracement, which would take it right back to that same support / resistance level at 11.00.

One to play Natural Gas is through San Juan Trust - SJT.

Being a royalty trust, SJT has a yield of 6.5%, so you get paid to wait. On the weekly chart it's come back to a support level of 40, the upper range of a band that goes down to 38. There may be further to go, but the very high volume in the last few weeks indicates the selling doesn't have much further to run.
The EIA Inventory Report for NG is tomorrow morning, so I'll be waiting to see if there are any surprises there.

Disclosure:
I have a position in SJT with a basis of 35.
.

Extreme Oversold

2008-07-08T08:51:00.003-05:00

Back from a few days off, and it seems nothing has changed. More bad news from the financial sector, warnings from Office Depot, where sales took a dive late in the quarter.
But on bubblevision and all over the press I hear the same story over and over. The market is deeply oversold and due for a bounce. Bloomberg reported that strategists from Deutsche Bank, UBS and Lehman think the second half of 2008 will be the strongest bull market in decades. Predicting the S&P will be back into the 1600s before year end. Link to the story here.

Seems to me the logic of all this is simple. The market sucks, and has sucked for some time, so it should go up.

The S&P has been straight down for 8 weeks now. Even on the weekly chart, it's into oversold territory. Since it's been going sideways for months now, just like every other major bear market in US history, many TV talking heads seem to believe that it must continue going sideways. And since it's at the bottom of the channel, the next move should be up.
The problem is that everyone wants to be on the same side. And yet, the market cannot advance. If everyone believes the market must go higher, shouldn't that be a self fulfilling prophecy?

From a more technical perspective, the market is oversold, but there is nothing even remotely like a buy signal either. Worse, it has closed below key support on the daily chart. Unless the market can advance this week, it will close below key support on the weekly chart as well.
Just looking at the chart, the expectation after an 8 week down move, would be 3-5 weeks of consolidation.
But the devastating down moves don't come from overbought or record highs. They come from deeply oversold. And a precondition of that is everybody thinking the worst is over and it's due for a bounce.

Limit down on bad news

2008-06-30T21:00:00.004-05:00

USDA Crop Report hit this morning. Here's what Agriculture.com had to say.

Monday's USDA Crop Progress report shows a two-percent rise in corn conditions and a one-percent rise in soybean conditions. Now, 61% of the nation's corn and 58% of the nation's soybeans are in good-to-excellent condition. That's down, however, from 73% and 68% from a year ago, respectively.

So the news was not as horrible as the worst case scenario, and the bulls cut and run.
Here's the chart on the December contract.

From April to June December corn traded a range with one head-fake breakout. At least 4 tests at 6.00, which will now be super strong support. On June 11 there was a gap up from 702, opening that morning at 715 and never looking back.
The contract topped up just shy of 8.00, actually the high tick as 796. Let's call it near enough an 2 buck run. As luck would have it, a 50% pullback would put it right in the range of covering the gap. Also note that the big reversal day from the first top marked the high point in open interest. Makes me suspect the pros were taking their money to the bank, and a good part of the activity after that was specs.
Corn also has a long history of taking out key support and resistance levels, and then reversing. So I'm thinking we see a a 6 handle before thinking about getting long.
The other possibility is that the weather is perfect from hear on out. It's conceivable that it could come all the way back to 6.00. That would be amazing. Not cheap but a long way from the potential disaster the $8.00 plus corn would be.
Having missed the run up, I have no position, and not likely to short on a limit down day even if there was a chance of getting filled. I've seen these limits reverse to many times. And there is nothing at all to suggest the bull market is over.

Trades:
Took profits on the SDS position today. Not even close to the best price of the day, but not the worse either. In hindsight it would have been better to wait fot the selloff at the end of the day. Discipline being most important than being right or wrong, it was time to take the substantial profit and run.
I still think the market will take out 1270, likely on this move. But the risk/reward is not there with the extreme oversold condition of the market.
My 12 month target for the S&P remains at 800. In a perfect world, the S&P could bounce back to 1320, that would be the place to rebuild the shorts.

Agriculture.com on USDA report

Bushel of bad choices

2008-06-27T13:23:00.003-05:00

That's where the Fed is. Tim Duy, via the Economist's View blog, had a great summary of a range of bad choices the Fed is faced with.

Dollar bloc nations are effectively tied to Fed policy, and that policy is simply too easy for the those economies. But not to easy for the US, which puts the Fed in something of an untenable position, to say the least. Kohn is making an obvious effort to shift the blame for rising commodity prices away from the Fed, because, as is well know, it is never the Fed’s fault, whatever the problem

My comment:
He also makes the comment that it would be great if those emerging economies tied to the dollar were to do some of the heavy lifting to control inflation.
The heart of the matter is whether the increase in prices for commodities, especially food and oil are the result of weakness in the dollar, or rising global demand. In my view, rising global demand is the prime culprit. China and other emerging markets are simply growing faster than new supplies of corn, soybeans and oil can be created. Since the US is a debtor nation, and relies on those same economies to continue buying our treasuries and junk paper, it makes sense that rising prices of real things everyone needs to survive would make the dollar weaker. After all, it's a lot easier to create a billion dollars of mortgage derivatives than it is to find a billion barrels of oil, or a billion bushels or corn.

In other words, the US has benefited by the foreign willingness to accumulate Dollar assets; it allows the US to consume well beyond productive capacities without, until recently, inflationary consequences. If the rest of the world is implored to tighten policy and weaken the Dollar, then I suspect those positive inflation dynamics will be reversed. The Fed effectively replaces one inflation concern with another by advocating what amounts to a Dollar drop.

My comment:
I think the Fed understands completely that the dollar has to drop, and drop a lot. They just don't want it to happen over a weekend. The Fed knows that fiscal stimulus will be needed for some time to come, and that stimulus has to come from even more debt.

The US needs the rest of the world to buy that debt necessary to support the stimulus. If not China and the rest of the Dollar bloc nations, then who? Is it any wonder that financial markets are in disarray?

Here are the conclusions

This is a no win situation...which way will the Fed turn? The Fed will hold the current policy in place until policymakers becomes sufficiently distressed by the impact of energy price inflation (September, October, next year; just not August). Note that market participants are increasingly aware that the Fed’s default policy for the time being is higher inflation, as evidenced by the rise in 10 year TIPS breakeven levels to 254bp today.

In theory, the best outcome is to find is a sweet spot that allows global growth outside of the US to decelerate while avoiding a free fall in the Dollar. In the absence of such equilibrium, the US economy can hobble along only as long as the following three conditions hold:

1. The Federal Reserve can maintain easy monetary policy.

2. The US government can sustain repeated fiscal stimulus measures.

3. China and the rest of the dollar bloc continue to be willing to accumulate US assets, primarily the Treasury debt needed for fiscal stimulus.

When these conditions no longer hold – such as the Fed needs to tighten to counter energy inflation, or the demand for US debt drops sharply – then I suspect the US economic environment will shift decisively toward higher inflation or significant recession.

I have to agree with Mr. Duy about the 3 points that need to be maintained to avoid a Wile E. Coyote moment for the US economy. But the idea that the Fed can tighten to avoid energy inflation doesn't make sense. Higher prices will at some point reduce demand no matter what the Fed Funds rate is. If the rest of the world continues to want a US or European standard of living, something will have to give somewhere. There just isn't enough oil, copper, soybeans or anything else for that kind of growth to continue while prices remain stable. In my universe, that means the US is going to have to trade something worth more than IOUs to pay for it's lifestyle, or the lifestyle has to come more inline with the rest of the world.
.

Trading Notes

2008-06-26T09:18:00.000-05:00

Mr Market is not looking happy this morning. Jobless numbers and GDP were inline with expectations. Normally a positive, even through they are terrible they're not getting worse. My gut is that the muddled Fed statement yesterday and just the sheer weight of bad numbers is taking it's toll.
I remain short the S&P via SDS. I had tightened my stop considerable ahead of the Fed meeting and missed getting stopped on half the position by a few ticks. But I didn't add anything either.
The market is deep in oversold territory on the daily charts, but it looks to me like it might be moving from a trading range to a trend.
Market looks like opening lower, so adding to the shorts on a pullback looks like the best strategy. But this could easily turn into a swoosh day. In which case, it's just go with the flow.
Will be watching SKF, the ultrashort financials. Looks like it might break a triple top. With Goldman putting C on it's Conviction Sell List, things could get even worse for this sector.

Fed Day Watch List

2008-06-25T08:15:00.005-05:00

Just some chart in various sectors that look interesting ahead of today's Fed meeting. These are all weekly charts that are near what looks to be an important support level.

Aetna

For AET, 40 bucks is shaping up to be a key level. Classic high volume smackdown in March, followed by a retest that held, and now a third retest on lower volume. And it's a financial is the most hated sector. At least it's clear where to stop out.

American Experss

AXP another in the hated financial sector. All we here about is how credit card debt is rising every day, and even more horrible events to come. But if it holds 40-41, could be a good bounce coming. The real question might be, is this priced for Armageddon already, or is that yet to come?

J.P. Morgan

One last one in the financials. JPM with a similar setup. A close below 36 and it's going to look very negative indeed. Question here is how much damage has the Bear Sterns deal done? Probably not the bargin many thought is was in the first few days after the rescue. The idea is that they got this marvelous clearing and prime broker business on the cheap. And the Fed covering most of any possible losses. Going forward, it's hard for me to see the Hedge Fund business being as wonderful as it has been the last several years. The world is deleveraging after all. Even so, a lot of bad news must be priced in, and even a 50% retracement of the recent leg down would be a sweet trade.

Disclosure:
No position in any stocks mentioned.

Looking in the opposite direction

2008-06-24T06:03:00.007-05:00

With the Fed meeting starting today, and the rate announcement tomorrow, I thought it would be interesting to look in the opposite direction today, the Ag stocks.
This group has been a favorite for some time, but Barron's Technical guy, Michael Kahn posted Monday about some topping patterns
Seemed worth a look.

Deere & Co Weekly

Deere has been an outstanding performer for the bulls. But even if we accept that the bullish case continues, there are some issues to deal with. Since the breakout last November, it's traded sideways with some extreme volatility. After completing a double top in mid April it's sold off to support in the mid 70s. Now it's oversold and this would be a good place for a bounce.
In my view that bounce could be sold. The more solid weekly support is 70. Longer term, if that holds it could be a base for a better move. If not, it could have a long way to fall.

Archer Daniels Midland Weekly

ADM shows a similar pattern, a wide and very volatile pattern that took months to complete. Then a brutal sell off. But now a case can be made for capitulation based on the very high weekly volumes over the last few weeks. There is decent support around 32, but major changes in sentiment frequently retest, so 30 would be the level to watch in coming weeks. Below that lies the abyss.
Part of the problem with ADM may be it's exposure to ethanol. The margins there have gone from $2.75 a gallon a few years ago, to $0.11 now, if you can make any profit at all. With a potential disaster in this year's corn crop, that situation isn't going to get any better.

Bunge Ltd

Compared to the previous examples, BG lives in an alternate universe. This is interesting to me because BG and ADM have similar businesses. BG is stronger in oilseeds, and has a fertilizer business in Brazil and Argentina. ADM is bigger in ethanol.
The big engulfing, and very bearish bar on the weekly is entirely the result of yesterday's reaction to the buyout of CPO. And coming from overbought on the weekly there is more potential downside. The only recent example of an extreme volume down week was retested within a few weeks, and traded lower in very volatile action.
In the longer term, the strong business is South America provides some protection against a falling dollar the others don't have, and the CPO acquisition could easily turn out positive if the whole ethanol plan fails, as it should. That would make corn cheaper and margins higher. If 100 is tested and holds over the next few weeks, this could be an interesting play.

Disclosure:
No position in any of the names mentioned
.

Possible breakouts

2008-06-19T10:57:00.007-05:00

Got several charts worth watching today.

First up, Amazon (AMZN) . Normally I would consider this formation a bullish setup. But it's a little overbought, and the first breakout was a headfake. But it could be that it's just come back to a weaker support after breaking out. Volume says nothing to confirm.

Similar setup in Bunge (BG) . Volume dropping off, and momentum indicators flat lining. On the weekly the formation is more than 40 sticks deep, so you have to respect the possibility of a big move coming.

Cisco (CSCO) is a tough one to figure. Looks like it really should have broken higher a couple of weeks back, instead it got whacked down right away. Longer term, it's back to trading in the range it spent a lot of 2006 in. Summer volume has been weak, but at least stochastics are closer to a buy signal.

Schlumberger (SLB) also trading in a nice rectangle, near the highs over the last 3 years. Twice in the last few weeks it's run over 108, but was knocked down and finished negative each time. Yesterday it looked like it was going to try again, but couldn't even get all the way to 108.

None of these are making a decisive move today, so we'll just watch for now.
.

Trading Notes

2008-06-18T08:25:00.002-05:00

Just a few trading notes:

- Did nothing with corn, beans or crude oil. Still have my long held oil trusts, and don't see enough of a pullback in oil to do anything there either. NOAA is going to give a hurricane update on August 7. We're now 60-80 days away from seeing the first storms so it pays to wait. I was completely wrong in expecting a post Memorial Day selloff, but didn't cover any longs. All that's been lost was opportunity.

- Added a bit to my short S&P position yesterday with a tight stop. Came within 10 cents of getting stopped out but hung on. The basis for this was Goldman Sachs earnings. Just figured they would be the best and if it wasn't enough to rally the market it was worth the risk to add a little. Basis for the total position now is 60.08. Market looks to open a little weaker. Have a stop for half the position at 57.40 this morning.
.

Reversal Patterns

2008-06-17T10:03:00.006-05:00

A whole bunch of futures charts looked like reversals yesterday. Take a look at some that have been in the news recently.

Corn and soybeans have the obvious relationship. They're grown in the same part of the country, many farmers choose to grow one or the other based on which will be more profitable. They're effected by the same weather. Crude oil has no direct relationship to any of the factors that effect grains. Some people beleive all are being driven by evil speculators.

The charts on wheat showed reversals yesterday as well. But wheat is contra seasonal to corn and beans so it's nowhere near contract highs.

All these looks like perfect setups for an island top today. None are working that way, at least near 11:00 EST when I'm writing this. All opened near or slightly below the previous pit close, but are gaining ground.

My conclusion: Even though corn and beans often make the yearly highs in May or June, it's still to risky to put on a short position in any size.
With the excessive rains and flooding, time has run out for replanting of corn, and close to running out for beans. It's to early to say how much damage has been done, but the possiblity of a large, above trend yield crop is gone. With perfect conditions for the rest of the growing season, a normal or slightly below normal crop is possible. Any heat stress in July and August has the potential to create major problems.

Bottom near in LA housing?

2008-06-16T10:47:00.003-05:00

Came across this little gem of Santa Monica real estate this morning. A freeway forclosure in Santa Monica.
Quick calculation reveals that works out to around $550 sq ft. Let's see, a tiny little house with a view of a noisy, busy freeway, and a gourmet kitchen. Imagine cooking up a delightful meal with diesel fumes wafting through the window.
I have to wonder about what universe paying $550 per square foot for that house makes any sense at all. Maybe we'll see a bottom in Southern California home prices when this little gem gets cut in half, and then cut in half again. For now, don't think so.
.

Covering a bit into the close

2008-06-12T17:24:00.003-05:00

I covered half the short S&P, via SDS, position into the close today. The technicals are overdone on the short side, at least on the daily chart. On the weekly there is still a long way to go before any kind of buy signal.
Tomorrow we have CPI being reported before the open, and Consumer Sentiment at 10:00. My thought is that horrible numbers must be baked into the cake, and anything less could fuel short covering if not some buying. There will more calls from TV Talking Heads that the bottom is in and other silliness.
Oil prices have also been extremely volatile this week, and it's not beyond imagining some end of week profit taking could help things along.

If I'm completely wrong and we have a swoosh down, at least I'm in the game with shorts at a much higher level.

Trades:
Sold SDS at 61.50. These were bought at 60 earlier this week. The remaining portion has a basis of 57.03

Demand destruction in the UK

2008-06-12T09:05:00.003-05:00

Interesting story from the Telegraph about petrol sales dropping 20%.

Petrol retailers have disclosed that fuel sales dropped sharply over the past few weeks and the latest figures appear to show that demand for petrol in Britain has slumped by as much as 20 per cent over the past 12 months.

Speaking to The Daily Telegraph on Tuesday, Eduardo Lopez, the IEA's chief oil analyst, said: "British motorists are clearly driving less. "They are switching to public transport, which is much easier to do in Britain than in America, where people living in the suburbs often have to drive whether or not they want to."

What's interesting is that this kind of demand destruction is impossible in the US. Here's we have built a system where there really are no viable options such as public transport.

Or have we? Keep in mind that petrol (gasoline) priced in US dollars would be around $8.50, and diesel is well above $9.00 / gallon.
At $4.00 / gallon in the US, people complain, but on the highway I still see people zooming by at 80 mph, one person per car. There is anecdotal evidence of organizing shopping trips a little better, but I would argue that no serious change of behavior is happening.

My thesis is that when all the wives on the block get together and carpool to the grocery store, we are seeing a major change in behavior. We're a long way from that in my view.

Sources:
Petrol sales fall 20pc as drivers feel the pinch
.

Ahead of the Beige Book

2008-06-11T09:50:00.004-05:00

I added to my S&P shorts yesterday. This was intended as a short term trade based on the intra day charts.
The most important data point was today's Beige Book report from the Fed due out at 2:00. From Tuesday afternoon and Wednesday morning the S&P put in a nice bottom at 1352. I would have expected a decent rally as a result. 1370 would have been the most logical resistance. As it faded later in the day it seemed the market psychology was at odds with the technicals.

Can't say I expected the market behavior seen this morning. The rumor being reported is a big write down from Goldman Sachs. Got to take that with a grain of salt since Lehman is the one getting taken to the woodshed.
Having taken out 1352, that area will become overhead resistance now. I expect that if the Beige Book does not actually foretell the End of Days, it may be viewed positively and we could blow right through the low 1350. Market is getting a little oversold on the daily charts, but still in selling territory on the weekly.
One thing not helping is the EIA oil inventory report this morning. Another big draw in crude, and tiny build in gasoline and a more meaningful build in distillate.

Thursday will have Jobless Claims and Retail Sales before the market opens. Friday is CPI. No one expecting really bullish news on any of those fronts, so any positive surprise will be reason to cover the shorts.
.

Evil portent for DJI

2008-06-10T11:02:00.003-05:00

The major indexes are into moderately oversold status now, but only on the daily charts. The way those technical oscillators are calculated makes it possible for them to go oversold or overbought somewhat easier when the market is consolidating.
Over the last five months after the January sell off, using the oscillators has been the right way to play. Now I'm wondering if a second big leg might be coming.

Let me say right up front that this interpretation of the weekly Dow Industrials might be a bit of a stretch. It's human nature to look for patterns, and to find them where they might not exist. Like the triple crown indicator which says when a horse wins that title the market does poorly the following year. Or the similar SuperBowl indicator.

Having said that, we could interpret the DJI as a big Head and Shoulders forming up, with the head consisting of a mini H&S. Neither is a textbook case, so let's call it a bit of a stretch.
But the market psychology seems prime for a big move. There is widespread belief that the worst is behind us, and that the Fed will come to the rescue if the market gets in trouble. There is also universal belief that there will be no recession, or worst case, a very mild one. And of course high oil prices are the result of speculators who will soon be banished from the market.
But last Friday's 400 pt move down showed us how quickly fear can return.

A large formation like this portends a large move. We would be talking 2000 pts or so in this case. Since there is good support in the Dow at 10200, that measures out pretty close.
.

Blind squirrel day

2008-06-06T13:49:00.003-05:00

What a day!
Wish I could claim to be smart, but sometimes it's just as good to be lucky. Yesterday I took off my short position in the S&P on the opening tick. I virtually never do that since I regard that kind of trading to be amateur hour. While there were some technical rationalizations for the trade it was really more about spider senses. Just some unease that the action wasn't what it should be. With all the bad news about, I never expected the big rally that followed.

This morning I watched the NFP numbers come in, and nothing good could be said about that. Talking heads can rationalize all they want about teenagers skewing the data, but bottom like is that the data sucks. Employment goes down every month, in spite of monster bogus numbers from the birth/death model. My own feeling is that the reported numbers are way better than what's happening in the real world. There are no good numbers for people under employed and for those that have just given up. There are also probably millions calling themselves self employed who are anywhere from just scraping by, to making than they were even a few years ago.
To that end I put back on a small position in the ultra short S&P ETF SDS. Got in after the open with a basis of 57.03, a few ticks off the low of the day. I expected it to come back to support closer to 56.60 so only put on a bit. More good luck than good management.

This snapshot is from 3:00 as I write this. 1370 is critical. It would be reasonable on a Friday for even the super bears to call it a day and take some profits. So I'm keeping the small position and not adding to it. If it does take out 1370 before the close, I expect 1330 to be the most likely support and there's plenty of time to add to SDS.

The employment numbers are not the only thing killing the indeses today, oil is nearly limit up on the idea Israel is finally going to bomb Iran. According to the TV talking heads, the word "unavoidable" is being used.
I never took any of my oil trusts off at the top, to late to chase it. And I thought it could get down to 100-115 which would be a good place to add, wrong again. Net effect zero, which is a pretty good outcome for missing the boat twice. Still have my positions in MVO, ERF, PWE, PGH and SJT.
.

Bailing on the S&P

2008-06-05T08:36:00.004-05:00

Taking down my short position in the S&P this morning.

There are a whole bunch of reasons, strike that, rationalizations for getting out. First, I have some profits there, and the market feels like it wants to go higher on the better same store sales from Wal-Mart and Target this morning. Then the unemployment claims this morning were a bit better than expected. Most likely just college kids getting menial jobs, but if the market is looking for an excuse, that would do.
Then on a technical basis, the daily stochastic looks like it wants to make a double hook buy signal. And the volume over the last few days has improved with being able to push the market below the 1370 support.

The bear case is that a triangle is forming up which might be pointing to much lower levels. But,
discretion being the better part of valor, take the money now and see what the payroll numbers look like tomorrow. Worst case is giving up some potential profits.
.

Note on GM

2008-06-04T13:50:00.004-05:00

Barrons ran a story this weekend on GM. They seem to think GM is a marvelous opportunity here. Note that the story appeared the weekend before completely horrible sales numbers were reported yesterday. The highly profitable light Trucks and SUVs were down 38%.

The story requires some assumptions.

The shares could rise to at least 30 and maybe as much as 45 once those big cost reductions drop to the bottom line in 2010. And if the stars align perfectly -- the economy enjoys a second-half uptick and the housing market and consumer confidence turn for the better sooner than expected -- the stock's rebound could be quicker. Even a small improvement in sentiment could bring a disproportionate rise in the stock.

My comment: The stars do have on align perfectly. The idea that the housing market is going to uptick in the 2nd half is insane. A positive move would be for the rate of price depreciation to slow somewhat. I suspect gasoline prices could moderate or stay flat for awhile here, but a gulf hurricane could end that quickly, or anything going wrong in the middle east, or Nigeria, or Mexico, or Venezuela.

GM's problems stem almost entirely from North America, where its costs are still high and too many of its plants build gas-guzzling sport-utilities. But the labor deal essentially will level the playing field within 19 months. And GM is shifting its production mix toward smaller, more fuel-efficient cars while globalizing its stable of "platforms" -- the basic structures on which vehicles are built -- to increase its flexibility and react more quickly to changing consumer preferences.

My comment: I worked as a Designer for GM both in Detroit and Australia during the 70s. Back then the idea that was going to save the company was the globalization of it's stable of platforms. That was 30 years ago. Now they are trotting out the same old ideas that haven't done diddly squat for decades. If they had a clue, they would have been moving to smaller, fuel efficient cars a decade ago instead of building Hummers.

General Motors says that its spending on pension and health care will drop to $1 billion annually in 2010 from an average $7 billion over the past 15 years.

The UAW agreement allows the car maker to transfer about $46.7 billion in its future retiree health-care liabilities -- a huge albatross -- from its balance sheet to an independent GM-funded trust on Jan. 1, 2010. (There are legal challenges to this, but they're unlikely to prevail.)

This should provide $3 billion of the annual savings GM foresees. (The car maker long ago cut the costs of its white-collar workforce.) The rest will come from the more than 50% reduction in hourly wages and benefits for new hires in positions not directly related to manufacturing, such as cleaning factory floors.

Hourly wages and benefits for most of these "Tier-2" employees will be in the mid-$20s, versus up to $78 for traditional UAW workers. This should trim GM's across-the-board hourly labor average to about $55 from about $72 now, says Trust Company of the West analyst Carol Moreno. "Lower labor costs are probably the biggest advantage foreign-car companies have," she adds. "The labor deal is transformational." TCW has fattened its GM stake as the stock has slid. As of March 31, it had about 16 million shares.

The deal would narrow the gap with Toyota, whose hourly labor costs average about $47.50 to $55. Over all, it could save GM up to roughly $1,540 per vehicle, estimates Sean McAlinden, an economist for the nonprofit Center for Automotive Research in Ann Arbor, Mich.

My comment: This is all good and long, long overdue. But no auto company has ever cost saved it's way to profitability or improved market share. In order to do that you actually have to make cars that people want to own.

Ron Harbour, partner in charge of auto manufacturing at consultant Oliver Wyman, calls the company's quality improvement over the past five years or so "the most significant in history....There's no more quality gap to competitors."

In part this improvement owes to the huge styling gains the company has made under its vice chairman, Robert Lutz, and chief of design, Ed Wellburn. Rather than assign a new vehicle to one studio, GM now has several teams around the world come up with competing designs. Ironically, this has speeded up the design process, Wellburn tells Barron's, giving the engineers more time to focus on quality.

My comment: This point has a little more credibility. The question is, will it matter in time? That remains to be seen. It has taken decades of poor management to get them where they are today. Improving design and quality takes years, and convincing the public takes more years.

The bigger issue, not even mentioned in the Barron's story is that their continued survival depends on the ability to issue debt at affordable prices. A return to the credit crises, version 2.0 could scuttle that altogether. Maybe the Fed could extend the TAF to include GM and Ford. It would only mean taking another 100 billion or so of junk debt onto the balance sheet. The Fed might view this as worthwhile to avoid "systemic" problems.
If you're wishing for the stars to align perfectly, might as well go for broke.
.

Upside down cake

2008-06-03T13:15:00.003-05:00

The sales data from GM just came in, and it looks just horrid. Up until this the market was trying to stay positive, with some Bernanke speak balancing generally bad feelings about financials and Lehman (LEH) in particular.

Sometimes it's worth looking at the charts a different way, so today I'm looking at SDS, the ultra-short ETF for the S&P 500

This is nothing more than an upside down S&P chart with a little extra volatility. Still it looked like holding a trend line that could be supportive of breaking above a key resistance level. Worth the chance of putting on a little position this morning with a basis of 57.66. The real test will come if it takes out that resistance and holds.

Wish I could say I was smart putting this on ahead of the auto sales, but this one falls more into the "Even a blind hog finds an acorn now and then" category.

CNBC reported the GM and Ford sales numbers like this...

GM [GM 17.43 -0.01 (-0.06%%) ] reported its sales skidded 30 percent in May, well below what analysts had expected. The breakdown highlighted the stark reality auto makers face: Truck sales plunged 39 percent, more than double the 17-percent drop in car sales.
Rival Ford
Ford Motor Co
F

6.66 0.02 +0.3%%
NYSE

Quote | Chart | News | Profile

[F 6.66 0.02 (+0.3%%) ] reported that its sales dropped 19.1 percent in May. Truck sales plunged 29 percent, while car sales were off just 1 percent.

These are nothing less than horrible. Sales of Ford's big profit maker, Explorer were off 41%. More plant closings coming, more restructuring, and the financials that own billions of dollars of securitized auto loan paper will have more write downs. It's been widely reported that prices of used SUVs and trucks are in the dumper as well. So what do the millions of people do that own these gas monsters do. They are underwater big time, and the cost of running them gets worse every day.

Does not bode well for the consumer part of the economy. I figure that if the consumer is upside down on their biggest assets, the car and the house, might be time to look favorably at an upside down S&P chart.