Friday, April 11, 2014

4/11/14 Get Shorty

(a) I haven't really transitioned into a market bull, of course. I still think US indexes are headed south over the summer. But markets trade on varying time frames. Going into next week, I sense too many bears out having fun, and we all know the Market doesn't like to see traders having fun! 

(b) A short squeeze lies around the corner. 

(c) Not saying it necessarily unfolds Monday morning. Indeed, another high odds bet is buying into a sell off continues the Monday following a brutal week. Traders with nothing better to do on weekends will ruminate on underwater positions, and a typical comment overheard at the golf course on Sunday afternoon is, 'I'm selling it all at the open on Monday.' 

(d) Two pitches to swing at: (i) open positions in QQQ +/- EEM +/- VGK at today's close and/or during the extended hours session, and close when shorts gap prices up on a run for the exits, or (ii) take shares off the golfers' hands during a gap down Monday morning, and close positions at end of day. 

For trapped bulls, it's a great opportunity to lighten up on positions. Anyone who shorted or bought puts today? They may find themselves in a 'bear trap.'

Thursday, April 10, 2014

4/10/14 The Elevator Down

We know that 'stocks climb the stairs on the way up, and take the elevator on the way down.'  Why is that the case?

Fear trumps greed.

The best illustration I can think of actually occurs in the context of price spikes.  The most violent rallies are driven not by boarding investors, but by exiting shorts.  It's possible to argue that recent gains in stocks like TSLA and NFLX were entirely the result of successive short squeezes.

Is the (US) market headed south?  No one knows for certain, but I can outline several reasons that make a decline the high odds bet.

(a) Trapped bulls.  The percentage of assets in bullish Rydex funds (a fund family often used as a proxy for trader sentiment) hit a new high on Tuesday.  The most likely reason?  (Reflexive) buying of Monday's dip.  Below a certain psychological threshold, underwater portfolios will exhibit a 'reverse short squeeze' effect.  A -5% hit?  No worries.  -25%?  Most investors start to worry- and sell at market bids.

(b) Running stops.  You don't think market makers will run stops in order to maximize profits?  Veteran cops don't believe in coincidences, and neither do veteran traders.

(c) Profit warnings hit home.  How much longer can companies report record profit margins before mean reversion kicks in?

(d) Bad news?  It begins to matter.  In most cases, the 'news' will not have changed (and in fact, most financial 'news' is priced in long before any media prints).  The same information is simply interpreted differently (ie, in a different context).

(e) Seasonality.  Sell in May.

None of the above is a given.  But trading is based on probability, and investors tend to exhibit the same emotional patterns time and again.

Wednesday, April 9, 2014

Saturday, April 5, 2014

4/5/14 Slope of Hope

Friday's employment numbers were widely hailed as 'Goldilocks:'

http://www.businessweek.com/articles/2014-04-04/march-jobs-report-not-too-hot-not-too-cold

Not exactly how I would characterize market reaction to the news, which I take to be a warning shot across the bow.  Markets (in the US) have climbed a wall of worry for >5 years, rallying in the face of bad news.  Selling on good news represents a marked change in temperament.

(a) I've been bullish on Emerging Markets since late 2013, and remain bullish for the intermediate term.  However, traders who bought the Friday morning rally in EEM (and especially EWZ) are likely to be punished.  We'll see.
(b) Q2 earnings season begins in earnest next Tuesday.  Investors who blithely dismissed profit warnings issued in Q1 may suddenly decide that the warnings are worrisome after all.
(c) It's always hard to discern when markets transition from a 'wall of worry' to a 'slope of hope.'  However, seasonality favors a correction (2013 notwithstanding).  April tends to be strong, at least through mid-month (many investors wait for the period leading up to April 15 to fund individual retirement accounts, leading to cash inflows which must be invested).  We all know what often happens in May.  I prefer to be positioned in cash while awaiting this year's outcome.

Thursday, April 3, 2014

4/3/14 Leg Up


Good chance we sell off in the next few days in preparation for another leg up.

Closed TZA @ 14.90 premarket.  Holding HDGE + RYGBX.

Monday, March 31, 2014

3/31/14 BRIC Sublet/ US For Sale

Today's close will mark the end of Q1 2014.  Fund managers are incentivized to bid stocks higher (as bonuses are based on quarterly performance).

(a) The BRIC trade has become too crowded for my tastes (it didn't take long to attract momentum players!).  I have already closed most positions.  I have a few remaining call options on RSX which will be closed at or near the open.  Longer term, I see the BRIC train headed much higher (following a short dive into the next valley).

(b) US indexes are a concern.  I still believe a major correction is imminent, and that both the DJIA and SPX will end the year lower.  The historically high profit margins seen in 2013 are unsustainable, IMO.


(c) Brokers will never recommend 'cash' as a position.  However, cash allows you to open positions when buying opportunities arise.  I plan to hold a high cash position for most of Q2.

Saturday, March 29, 2014

3/29/14 Sold on Gold

Can't recall the last time I was bullish on gold, which represents strong support for miners.  Not quite ready to jump in, but I'm headed towards the water.