Saturday, March 7, 2009

Why M2M rumors will cause Capitulation

I am hearing and reading a lot about Mark to Market (M2M) being suspended, modified, revoked, whatever you want to imagine. Most of what I read are from people who do not understand what it is, it's intent or ramifications of suspending. You got these talking heads on CNBC saying ridiculous things like bank stocks will double or triple within hours if M2M were suspended. I find statements like that to be unethical if these people truly call themselves professionals. Where does CNBC find these cartoon characters???

Lets be clear people, M2M will not just go away. It can't. Can it be modified? Yes, absolutely. But don't kid yourselves. The latest rumors on M2M are really the only reason we have not seen the S&P at 640 or lower right now. Bulls and speculators are holding on and buying into stocks and ETF's hoping some news comes out of the House meetings around M2M.

Will the market rally with rumors and news? It could certainly rally. And any sort of rally is another short opportunity for bears. The results of the House subcommittee meeting around M2M will result in the capitulation we need to get this wave of the bear market over. If nothing comes out of the meetings, the market will tank. If M2M is modified, the market will tank. Suspension or modifications of the M2M can only lead to more clarity of where the banks are. And I assure you, they are a mess. It would be like wiping the frost off of your window on a cold winter morning and realizing how ugly it is outside.

So, play the M2M rumor cycle if you like, just don't get burned by holding long positions for too long. You are better off having a cash reserve and waiting for the right moment to add to your short positions.

Good luck and have a great weekend.

Friday, March 6, 2009

VIX Continues Bear Movement - no BS

This is my first blog on this board. Many of you know me as bsenright on the yahoo boards and many have asked I post here since I have been on a pretty incredible run using the VIX as a tool to manage my trades.

I love it when the VIX is actually telling us something. 40% the time the VIX is "NEUTRAL" telling us nothing and sitting in neutral territory, suggesting the market has not determined a direction. 40% of the time the VIX is "SUGGESTIVE", telling us there is a likely direction but it is not a strong sentiment. 15% of the time the VIX is "CLEAR" telling us their is a pretty clear direction or trend forming. And then 5% of the time the VIX is "SCREAMING" at us that the market is about to make a big correction.

What is great about when it is in the CLEAR catagory is, the CLEAR catagory almost always ends by entering the SCREAMING catagory.

This week we have been in CLEAR catagory the entire week. It's been a great week to read the VIX and trade against it. It is not always like this. But after today, it has now spent 14 straight days at or above the 20 day moving avg. This is significant for the VIX. Heck it is significant for a stock but the VIX seldome behaves like this, usually correcting across the 20dma after a big move up or down.

But 14 straight days is clearly telling us we are in a trend that will not end until we hit SCREAMING, meaning the VIX and the market, really need to capitulate. When that happens is hard to determine.

The chart below combines the VIX chart with the VIX PCR chart along with each of their 20dma's. The PCR helps identify those SCREAMING situations and combined with the VIX can show over optimism or over pessimism. OK, enough of explaining things.

The VIX remains very bearish and PCR suggests the market is expecting the market to have increased volatility. These two are very bearish but represent that we are not oversold since there are still bulls hanging around.

As long as the VIX remains above the 20dma, we are headed for a lower market. If VIX crosses the 20dma, we are likely entering NEUTRAL territory which could lead to a correction.