Thursday, August 28, 2014

8/28/14 Cross Currents

Mornings like this are where it gets ‘tricky.’

(a)    I plan to close RYWYX (Rydex 2x Inverse Emerging Markets) at the 1030 est window.  Based on current bids for EEM, the position would close with a +2.4% gain.
(b)   On the other hand, the long bond continues to climb.  TLT +0.5% pre-market.
(c)    I ‘should have’ held RYTPX (Rydex 2x Inverse SPX) overnight (now looking at a +0.7% move based on early pricing for SDS), but I closed yesterday partly as a hedge against being ‘wrong’ on RYWYX.  Since SPX closed flat, and EEM closed up +0.51%, I decided shorting emerging markets was the higher-odds play.
(d)   The $USD continues to climb.  Normally this places pressure on gold/commodities in general.  Early indications show gold +10.  Why?
(e)   Russian troops have ‘reportedly’ entered East Ukraine.  That's the 'news,' anyway.
(f)     RSX (Russia) trading down -3% pre-market.  I think a buying opp sets up today.

Potential setups today: RSX (Russia), EEM/RYWVX (ie, making a quick ‘U’ on my emerging markets short), GDX/RYPMX (miners on an intraday pullback), RYWBX (Rydex 2x Weakening Dollar), FXE (a bet on a reversal in the Euro), and RYMBX (Rydex Commodities, which will benefit from a decline in the $USD).

Sunday, August 24, 2014

8/24/14 Reading the next play

(a) Note the spectacular dive in commodities since early summer:;range=

(b) Sentiment in the commodities sector?  If you've been following crude, NGas, and gold (or simply watching prices at the pump), it's no surprise we're at a low.

(c) On the other hand, emerging markets (notable producers and consumers of commodities) have been on a tear.

Gretkzy liked setting up behind opponents' nets, and so do I.  The reversion-to-the-mean play here appears to be DBC/RYMBX (Rydex Commodities) off the sentiment low/ EEM high.

Thursday, August 21, 2014

8/21/14 Einstein's Greatest Hits

This has to be his number one hit:

'Save from [age] 21 to 30, then stop. You will have a bigger pension than a saver who starts at [age] 30 and stops at 70. The miracle of compound interest, Einstein's 'eighth wonder of the world.’ 

If you have the maturity and discipline (I didn't get there 'til my mid-thirties) to begin saving immediately upon graduation, do it.

Sunday, August 17, 2014

8/17/17 Stop Making Sense

Traditional inter-market relationships appear to have entered a turbulent patch this week.  However, there is no 'fuzzy math' in human nature- and I derive my entire trading philosophy from an understanding of crowd behavior.  Investors haven't changed, so we need to look elsewhere for explanations.  Here's my take:

(a) Bond yields have trended lower for six weeks, almost irregardless of market direction.  Why?  Bond players are smart dudes- they don't buy bonds without a good reason.  ATACX fund managers argue that the lower yields presage lower equity prices.  Those guys are smart dudes as well, but after notching a +6% lead in late January (a result of a contrarian bet on Treasurys) they've fumbled every trade since (and given back the +6%).  My take?  With Japanese bonds yielding 0.6% and now German bond yields sprinting lower as well, what's the alternative?  US bonds at 2% and change look good!

(b) Are US equities about to resume a 5 1/2 year bull following the latest -5% correction?  I doubt it.  We're more likely in the midst of a traditional topping process, marked by a series of breakdowns and throwbacks that ultimately take the indexes lower.  Friday's sharp plunge (an 'expected' decline for which the Ukraine response was less a 'reason' than an 'excuse') sets up a positive scenario for Monday.  Beyond that, I'll take it one day at a time.

I'm positioned for an overnight rally in equities + a retrace in bond yields (ie, a move lower in the long bond).  Price movements may on the surface appear to 'stop making sense,' but investor behavior always makes sense.

Thursday, August 14, 2014

8/14/14 The Next Pitch

(a) JCP spiked up as much as +10% after hours on a better-than-expected earnings report.  Unfortunately, I wasn't around to see it.  The short squeeze has subsided, and I'm taking the position off @ 10.05 for a +5% gain on the trade.  It may well be headed back up, but I'm not an investor at current market levels.

(b) The SPX closed on the cusp of the Khrushchev era today (1955).  Should I have held another day or two based on my original thesis?  Not in my opinion.  First, the risk wasn't worth it (to me).  Second, I had positions in leveraged funds when entries presented lower risk- I'd rather swing at a fat pitch for a double than hope for two singles.  Finally, let's examine how a multi-day hold in RYJUX (Rydex Inverse Long Bond) would have worked out:  Day 1 +0.73% (that's when I exited the position).  Day 2 -0.7% (would have given it all back).  Day 3 (today) -0.9% (a +0.73% gain would have turned into a -0.87% loss).  I can't have it both ways.  I prefer the low risk plays.

(c) If we accept the thesis that inter-relationships between asset classes have become distorted, what does that leave us with?  Sentiment and reversion to the mean.  On that basis, I decided to open three positions at the close: RYJUX (Rydex Inverse Long Bond), RYTPX (Rydex 2x Inverse SPX), and RYIRX (Rydex 2x Inverse Russell 2000).  Why?  The bond rally is stretched.  The SPX has now rallied +60 points from its recent low of 1890 (based on futures pricing).  The IWM (Russell 2000) continues to act weak.  The three plays are related only in the sense that prices appear ready to reverse.  However, they are higher-risk trades, and I sized down accordingly.  The first scenario I consider when opening a trade?  What if I'm wrong?  In this case, I'm sized/stopped so that being wrong on all three plays should result in minimal damage.  The gains will be small as well, but I'm also prepared to hold one or more of the three into Monday should the trades move my way.

(d) Dave Landry repeats one of the most enduring axioms re the markets in today's commentary: 'The market will often do what it has to do to cause the most pain to the most amount of people. It’ll often do the obvious but in the most un-obvious manner.'  After almost thirty years of following the markets, I can vouch for that observation.

Wednesday, August 13, 2014

8/13/14 When you're wrong you're right

Michael Gayed of ATACX recently pointed out that trading is the only game where it's possible to be right in your thesis and lose money, or to be wrong and make money.  (Of course, he has every incentive to make that statement!)  That certainly seems to be 'more true' than usual lately.

(a) On Monday, I went long the US indexes + shorted bonds on the premise the markets would rally.
(b) On Tuesday, the markets flatlined, but bonds sold off hard.  I took the bond short off the table for a +0.7% gain.
(c) This morning, the markets gapped up.  The long ETFs did fine, of course.  The rally also led me to regret closing the bond short...not!  Surprisingly, the long bond (TLT) rallied just as hard as the SPX- both closed up about +0.65%.  RYJUX closed down -0.7% today.
(d) My takeaway?  The current market is not so much about being right or wrong- it's about taking gains when you have them, because overnight action will otherwise cause them to vanish.

Friday, August 8, 2014

8/8/14 The Markdown

My retrospective take on today's market action (I was preoccupied with other matters during the regular session):

(a) Last night's 1890 print in SPX futures probably marked a 'wash out' short-term low.  Note that US traders without futures accounts would have had no opportunity to buy.
(b) Against that backdrop, buying this morning's gap up would have required strong conviction.  That conviction would have been tested twice in the first hour of trading.
(c) An oversold rally finally emerged mid-session, undoubtedly fueled further by short-covering.
(d) In hindsight (always 20/20), I should have reopened the 'throwback rally' trade at yesterday's close.  An even more nimble move would have been to short the markets @ 1030 am Thursday, simultaneously upon closing my longs-> then to have executed the reverse trades at 1030 am today.  All missed opps.
(e) I did open a small position in RYTPX (Rydex 2x Inverse SPX) at today's close.  Why?  I'm pretty sure today's buyers will be tested Monday morning.  I'm also open to being wrong, but closing exuberance and proper sizing provides a decent buffer.