My thoughts on the S&P and overall market (SPX)
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This daily video shows what’s happened in the SPX for the past couple of weeks and what I expect to see moving forward. |
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Its Tuesday morning and the media around the world is in a frenzy of euphoria over the ‘Asian miracle’. Oh what was the ‘Asian miracle’?? It was the fact that the Asian markets reached a 26 year low only to catch a 6% bounce overnight.
I think a 26 year low with a bounce (can anyone say Dead Cat?) is clearly a bullish market and we should all buy (NOT). Of course only after watching many, many more hours of the (whats that word again? No, not wealthy people. No, not the doctors, attorneys, accountants, or engineers. No, not the business school grads or financiers. No what’s the word for all of the folks that wanted to do that but weren’t smart enough?? Oh yeah, now I remember!) JOURNALISTS spill forth more dead brain ideas and analysis that passes for news. Then and only then will you be smart enough to load up on hundreds of bullish positions just to be impaled on the rocks below.
So, what am I doing this morning? Using this time to capture some profits on my bullish positions, selling out-of-the-money covered calls on long positions, and looking for new bearish positions on sale cheap (ie. bear hunting).
Here’s the only big question:
Is the Obama election (oops, sorry I meant the “Presidential Election”) so obviously lopsided as to have become a fait accompli leading to a sustained rally starting today?
Hmmm…. I don’t think so. But what do you think?
Mojo
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I got asked this question:
“If there is one lesson you could teach a beginning trader what would it be?”
It would be to understand the psychology of the market. I really resisted learning that lesson because it was boring, I couldn’t draw a connection to profitability, and it just wasn’t sexy.
So, let’s talk about George. George is your average father and husband working at a job he’s not too happy with, concerned about life, and being careful to save enough to put his kids through college.
Richard (who is an occasional friend of yours that you secretly envy because he has more money than you) whispers to you at a dinner party that he is killing it; absolutely killing it, investing in tulips. “Tulips??” you ask. He says “yes” and goes on to explain how there is limited good land, the market is growing at 10% a month (which you quickly extrapolate and note smugly that its doubling every 8 months), and that he (and only he) has a good inside connection if your interested. You reply “Nothing can grow at 10% a month for long. This must be a fad. I invested in roses 6 years ago and lost a bundle.” “Yeah, but this time its different.” You walk away promising to take a look at it the market and do something about it.
Three months later you see Richard again at a soccer field but only this time he’s got a nice tan, new watch, and a new BMW. You cringed and try to hide but he spots you and comes over just to say “hello”. He somehow works into the conversation (6 or 7 times) that he is doing extremely well and “Gee did you ever get into tulips??”. In truth you forgot about Richard and his damn tulips but you say “No, I didn’t have time to look at the market”. “That’s a shame. Our growth rate is now 20% month!!” You walk away mad at yourself for not doing anything and wondering how the world can be so unjust as to award a butthead like Richard when you are clearly smarter, harder working, more noble, etc.
Six months after that you are at birthday party with your son talking to another Dad (who is a good person because he isn’t tan, isn’t wearing an $80,000 watch, and doesn’t drive a BMW) and he says “Did you see on CNBC Smart Money how they were talking about the emerging markets in tulips? Apparently all of the hedge funds and private equity guys (ie. “the smart guys”) are just printing money! I called my mutual fund manager to see if they have a tulip fund opening up soon. I want in but I just don’t have enough money to be an investor outside of mutual funds.” On the way home you talk with you wife about what a jerk Richard is (you’re still mad!) and whether or not you should invest in tulips. She shrugs non-committally and says “If you think its a good investment we sure could use those extra returns in the kid’s college funds to make up for those losses six years ago.” You cringe, knowing that these funds are down, college costs are up, and she’s talking about the money you lost in roses.
A couple of weeks later you are running late for work, stressed out, just heard on the radio that there is a 45 minute backup and as you are sprinting through the living room what do you see on Today show? Yep, Matt Laurer talking about the extraordinary investment returns in tulips!!! Complete with a spokeswoman from the TPSA (Tulip Processing and Shipping Association) fawning all over Matt talking about how with the limited good land, fast growth demand, and limited investment opportunities that this time its different.
“GEEEZ!!!! Alright, when I get to work I’m calling my broker…” You get to work, call your broker, liquidate your Blue Chips and buy in $100 a share. At lunch you mention it to one of your co-workers named Bob.
For the next few weeks you continue to see different hard hitting journalistic shops (like the Today Show, CNN Money, CNBC, Suze Orman, even NPR) doing essentially the same puff pieces on tulips. The share price moves up to $110 which you casually mention to your wife at dinner. “That’s great honey! How high will you let it go before you sell some?”
“Well, we need to reach $132 in order to make up for the past losses so I’ll probably sell some at that point, lock in some profits, and move my stop up.”
“That’s a good idea. Where’s your stop right now?” she says remembering your rule to ALWAYS USE STOPS.
“Its at $90″ you lie and pledge to put it in.
Several weeks later the price is at $135 and Bob (your co-worker) tells you that he finally got in and thanks for the great tip! Everyone is talking about tulips. Heck, tulips are even on the front page of Time and you’ve seen several recent college dropouts who are now 22 year old multi-millionaires obnoxiousnessly derided the “old school” thinking of Blue Chips and dividends wondering why the waiting list for a custom Bently is 8 months long. You haven’t sold any yet or put in a stop loss but you are thinking about being able to send your son to an Ivy League school instead of state (all but ignoring his grades and lack of academic potential).
The price moves up to $140 a share on news that a large broker came out with an upgrade and a new target price of $162 (and they should know since they underwrote the original IPO and their clients hold the most shares).
You are absolutely estatic and calculating that, at $162 a share, you could send both kids to Ivy League schools. You mention the price to your wife and she asks you “How much have you sold?”
“Nothing yet. I put in my order (above the market) but it wasn’t hit yet. I’ll do it tomorrow.”
“OK, honey, I love you. Thanks for doing such a good job taking care of us.”
She kisses you good night…
[The end of part 1. Any ideas where this is going? Do you see yourself in George? Shoot me some comments.]
Mojo
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Its Thursday morning and last night during our trading team meeting we were talking about market internals. One of the market internal measurements I use throughout the day to measure sentiment (along with $TICK and price action) is the $TRIN or ARMS Index. The TRIN is a measurement of the relative rate of volume of declining stocks divided by the relative rate of volume volume of advancing stocks. This is an inverse indicator so a high reading (above 1.50) is generally considered bearish and a low reading (below 1.0) is generally considered bullish. A good place to read more about the TRIN and more importantly about to properly read the TRIN can be found in the excellent John Carter book “Master the Market” (sorry his website is Trade the Markets). Its a great book for many things so I recommend it!
One of the items that John Carter talks about is that if the TRIN closes above 2.0 at the end of the day, there is an 80% chance that the market will rally the next day. Last night we closed at a TRIN reading of 3.34. I’m not sure how valid that is for this market and during expiration week but its usually pretty accurate. He goes on to say that if we don’t get a rally (even a small one) after a high reading like this then look out below!!
One final item, three times in the past six months the Fed has made some crazy announcement that dramatically moved the market Thursday evening all but screwing anyone holding expiring positions in the RUT, SPX, NDX, etc. So be sure to close your October positions before the market closes today.
All the best,
Mojo
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I’m blessed with access to many friends in many parts of the country. These folks range from the very financially savvy to hard working salt-of-the-earth types. This is what I’m hearing:
- Properties in nice neighborhoods with ocean views in San Diego County that were selling for 1.7 to 2.1 million a few years ago are now selling for 850K.
- There are so many foreclosures in Southern California that the renters are lined up to find rental properties and land lords are doing pretty well. (Looks like a great time to buy and rent.)
- A sommelier (wine expert) tells me private collectors have dried up and even the high end of the market is collapsing. Very few big parties and even a little place called Fannie Mae isn’t spending hundreds of thousands of dollars a quarter on wine.
- A couple went out to their favorite French restaurant (I know, I know one of those places you need to eat before you go) on the anniversary. Its usually packed but this time no one else was there.
- A young lady in Madrid (Spain) had here mortgage reset to 15% because of the tripling of the LIBOR rate overnight. Looks like she will have to abandon the property and move out.
- Available office rental space in my small town are at an all time high even while market rates have dropped.
- Again the British and European Union banking systems have injected billions of Pounds and Euros into the fray with narry a whisper of a result.
- The world is fleeing to cash and the US dollar.
- The almighty DOW is down almost 33% in the past year. The NASDAQ (and most of the tech stocks) is down 40% in the past year.
- Joe average investor (and maybe even the media) are finally recognizing that the BRIC nations (Brazil, Russia, India, and China) are not going to supplant the Western world in consumption and economic power within the next three years and those markets are collapsing.
- Several members of my family asked for advice only to ignore it and moved theirs funds out to the emerging markets just in time to ride a 50% draw down.
In the face of all of this, Cramer is telling everyone that they should ‘Go to cash’. The media is railing against him for insighting panic all the while they have been doing the same or worst for most of their careers. The big difference?? Cramer is right, go to cash and wait for a bit. What you might give up in opportunity is more than covered by the risk of falling another 100 points.
Remember - A good investor isn’t first in or last out. Wait until the signs are clear and then dip a toe.
Mojo
- The NIKKEI closed down 9.4% in one day. Biggest drop in 21 years.
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A wealthy friend of mine was telling me today that he spoke with a local manager of a large national bank. That manager told him that he was receiving phone calls from his HQ every 30 minutes on whether or not to continue operations and allow for withdrawals. Further he said that credit card limits and advances could be severely curtailed. I don’t know if this is really true but my friend is reliable. Obviously this isn’t good…
He was at the bank to withdraw a month’s worth of cash so that if there is a larger crisis he will still be able to eat, get gas, etc. I don’t believe that anything like that is going to happen but I’m now hearing similar scary tales from multiple sources. :( Sort of like the market my opinion doesn’t matter. What matters is whether or not I should go to the bank and withdraw next months expenses. Even if I don’t believe the sky is falling (and I do seem more bullish than the rest of the market today) as a husand / father / leader of my family its I have the responsibility to at least examine the possibility.
So, will the banking system collapse and limit credit and cash? And if so, should I head off to the bank and withdraw a chunk of change? Honestly, I don’t know. In the face of unknown circumstances its good to ask the following “What’s the downside if the worst case does happen?”:
What is the downside if the banking system collapses and I’m without credit or cash?
- I’m left with the food in my cabinets, fridge, and freezer.
- My transportation may be severely limited.
- Paying for medical care will be difficult.
- If the checking system goes down as well I won’t be able to pay for my utilities.
What should I do to prepare for this possibility?
Pretty simple really: Get a month’s worth of cash on hand, gas up the vehicles including the big mower and spare cans, check the kerosene heaters for operations and fuel, check the cold blast lamps for operations and fuel, check the generator for operations and fuel, get additional medicines and food.
This is another area where I really admire my Mormon friends. The Church recommends that each family have a year’s supply of food, water, and savings on hand in case of an emergency. Seems like a pretty smart system.
What is the downside if I do all of this and nothing happens?
Other than embarrassing myself in front of my friends and family (check!)… nothing. I can always redeposit the cash, use the food and fuel, and resume my normal lifestyle.
I know, I know, I’m Henny Penny and the sky-is-falling. But at least I will have an umbrella!
Mojo
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I received a lot of overnight emails asking the question “What’s next?”… For me I think it comes down to a couple of things.
1) The market liquidity crisis isn’t going to get better overnight. The same assanine decisions that brought us here haven’t been undone and 700 billion dollars won’t even begin to change that.
2) The House and its members will extract a toll from the American public in order to pass this bill. That toll will be in the billions of dollars in pork barrel and special interest spending thrown onto the Bailout Bill.
3) Once passed we will have a quick run up and then return to a downward trend.
4) The actual cost of the Bailout Bill will exceed 3 trillion dollars. There are many, many banks, brokerages, and investment firms that have yet to write down their assets to their true levels for fear of being sued or fired.
5) Once the dust begins to settle the attorneys will come out in packs of wild dogs to sign up clients for class action lawsuits under the guise of “protecting the little guy”. In end we will pass some impotent legislation, the clients will get a pittance settlement (like a .20 off coupon) and the attorneys will bank hundreds of millions of dollars in fees.
6) Obama will win the election, hope will reign, and we will finally seem some light coming into the market and the economy late in the year. (And remember I’m a Republican!)
Thoughts??
Mojo
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