Thursday, March 26, 2009

VIX Chart - Possible Signal

Well lookie here. Another situation with the VIX and the PCR bottoming in unison. The last 5 times this has happened in 2009, the market reversed. See my post from last week for data around this. But there are two questions:

1. Will the reversal happen immediately or delay a day like last time?
2. How big is the reversal. The last time it was must smaller than the previous 4 times.

While the chart shows them bottoming in unison, we really don't know if they are a bottom yet. Both could move down again tomorrow while market rises. Wait for confirmation. Unfortunately, confirmation would be the VIX at 43, which may be halfway done with the reversal.

Recession? What Recession

OK, I don't know about you but at this point, I can only laugh at the reports and analysts all saying the market has bottomed and we go up from here. And if you are not in now, you missed a big part of the new bull market.

OMG. It used to make me mad, now I just laugh. Yeah, OK. The gov't throws $3T at a $30T or more problem and it is fixed? Unemployment continues to rise but since it rose a little less than they expected all is good? No one is buying houses except if they are foreclosures? That' all good?

I will grant that there is some good news. Mortgage rates are indeed down. That will spur on refi's and some purchases of foreclosed properties. That gets money flowing. But that comes at the cost of hurting the housing market even more via lower priced housing, which is what the gov't is trying to avoid. Over 5 million homes are glutting the system. The only way that glut goes away is if house prices come down another 20% which, you guessed it, hurts the banks.

And who will be buying these homes? Well, I suppose people with good jobs. But that will be offset by continued higher unemployment resulting in even more foreclosures. The trend will not stop until unemployment stops, which won't happen until banks get rid of bad assets which won't happen until assets can be priced appropriately which won't happen until the housing market stabilizes which won't happen until unemployment starts heading down. Its a cycle. It has to break somewhere and sure, Timmy G. is doing his darnedest to fix it. But I think they sent a boy to do a mans job. He came to a gun fight with a knife. He needs a bigger boat.

So, onto the market. Normal behavior today as the market stayed within the bullish range as bears are still a bit cautious and more money comes into the market ready to be trapped.

There are two key indicators that this bear market rally will not sustain for a long period. First, the VIX stayed above 40. Simply amazing. Yes it has gone down but relatively little since this market began. This indicates we are going to see some big bumps ahead.

Second, metals. Gold and Copper continue to stay relatively high indicating inflation is on its way. The market does not like high inflation but the market is currently blinded by the permabears on TV telling them to come out and play because the weather is nice. Yes the sun is shinning but there may be Hurricane Bank Failure on the horizon. Cramer is now mocking Roubini. A sure sign that bad things are coming.

We are at 832 with a top side of 850 before heavy resistance. Yet we have very little resistance looking down to 750. So the odds are we head down soon. Perhaps a little more upside and the play up until close today was to buy on dips. But tomorrow, I think the play is sell on spikes. If you played a straddle, tomorrow may be a good day to close out the call side. But watch closely to see if 850 holds. I suspect we may not even get that high which means you have to make a decision on your call side of the straddle. Let it ride, exit both ends (if you are showing profit) or sell the call side.

SRS is a total and unbelievable bargain at this level. But, don't back up the truck. It may even go lower next week. Not a bad place here to enter a position though and then add more next week or weeks after depending on what m2m does. Commercial RE is almost entirely bankrupt. There is no reason REIT;s which are centered around commercial RE should be around much longer unless they are incredibly hedged and are not overextended.

Once this market reverses, SRS will lead the way and I predict it will move 50% more than any short financial ETF. I also like TBT at these prices. We are getting fooled by the stinking Fed buying treasuries. Fed has to buy them because no one else will. Amazing.

I am looking for a test of 804 either Friday or Monday. That will make for some interesting market direction. I look for the VIX to return to 43-45. But again we are news driven and sentiment is bullish. That can change in a single day if market goes down 30 pts on the S&P.

Wednesday, March 25, 2009

The End of Capitalism?

Well, here I go again on my political stump preaching about things other than the market. I will get to the market later. If you don't want to read my "political economy" rant, just scroll down to the "RANT OVER" section.


Driving home tonight, I listened to some of the financial networks and was really disgusted at what I heard. It made me sad actually. Sad at where we are headed in America. We were built on capitalism. It is what makes the U.S. so great. It is what made the U.S. the world leader in productivity, currency and freedom. Along with capitalism comes greed in the private sector. What is wrong with greed? Absolutely nothing. It is what drives capitalism. Without greed, there is no capitalism.

But these "media personalities" on the radio where more than I could handle. The quote that got me so mad I almost pulled off the side of the road just to get out and kick a tree, was the commentator saying, "there are too many stupid people on Wall Street making $10M a year, and as a capitalist, I think that has to stop!".

Uh, say what!?!? He is a Capitalist and thinks that capitalism is bad????? How does this guy get on the air? How does he have a job???? As a Capitalist, I find his comments anti-Capitalistic (is that a word?) and thus, anti-American.

Then, some blow-hard congressman looking to make a name for himself gets on and talks about regulating and limiting executive compensations for ALL corporations trading on the public stock exchanges.

SAY WHAT???? Is this the United States of America or was I transported to Russia overnight??? This was a United States Congressman!!!! Are you kidding me? This is obvious class war-fare and obviously a push to socialism. We are near the end of the capitalism era in the U.S. with leaders such as this in Washington. Taxes will go higher over the next 5-10 years and unlikely ever to go down to our current levels ever again. The more you make, they more they will take out. No incentives for starting up your own business with higher taxes and limited compensation for companies that succeed. Perhaps the beginning of the end of the public stock exchanges themselves is upon us. You think I am kidding? Consider this. What company will want to go public or stay public if they are going to be regulated and limited by the U.S. government?

I feel ill. I feel like this is a bad dream. But I hope this is all just talk and this period in our history will be forgotten. Just a bad period in our history like the '70's which gave us Disco, pet rocks, Chia pets and the Ford Pinto.


Interesting move at the end of the day. A solid sell off from 820 to 791 with high volume, and breaking through a key resistance of 804 with a little difficulty but once it got through, was a free fall to 791. Yet, it bounced right back above the 804 resistance with no problem to close in the black at 818. An obvious short squeeze.

This tells us what I was expecting at the beginning of the week. We are going to have a great trading market for awhile. There should be 3 rules of thumb in your trading day:

1. You have to take profits on any significant moves. Don't hold too long thinking this is the next big move. Take your profits and be happy.
2. Don't chase. The market will come back to you. It really will. It may not be that day, but it will come back soon.
3. Stay nimble and don't get over extended. By this I mean, doubling down when the market moves against you could overextend you and put you in a position where you are forced to sell with a big loss if the market does not come back to you for awhile. This means appropriate stops and not putting all your cash on one side or the other.

We closed above the 804 resistance so the market sentiment stays bullish. The VIX though is truly telling us that this rally is near an end, at least for a short term. With the bullish nature of the market movement, the VIX should be under 40 but instead it stays solidly above. A sure sign that volatility rules and any significant move up will be turned back due to being overbought. And likely the same goes for big moves down.

So, my belief is we are in 1 big trading range which is split into two smaller trading ranges. I believe the trading ranges we are in are from 800-850 on the bullish side and 750-800 on the bearish side. Over the next few weeks I can see where we battle through these trading ranges as a consolidation period and to weed through the mixed news the market is getting.

Tomorrow we should gap up once again based on the move today. We should have a couple of good reversals creating some good trading. But pay attention to that 804 range. The key is the market needs to close below to get into the bearish range, and above to stay in the bullish range.

And I almost forgot...

It is day 3 since Geithner plan. Still no word from the banks on their opinions.
... Crickets

Testing key resistance again

804 is being tested right now. Should be a very interesting closing 2 hours. If it breaks, many triggers will set off to sell equities. If it bounces, market has a chance to make another charge at breaking 826.

VIX remains solid and is telling us this is nothing more than a bear market rally. I am tending to believe the VIX but it does not mean market goes down today. It just means that this rally does not have much legs left.

Tuesday, March 24, 2009

A Perfect Storm

Today played out almost perfectly. A nice move down in the market at the open to test the 805-810 range, a bounce, and then some great trading opportunities during the day, only to close right at the 805-810 resistance. If you missed the opportunities today, you were not paying attention to resistance after a big move up the day before.

As stated last night, we should return back to the 805-810 range and from there, we should bounce off and probably continue the bear rally up to possibly fill the gap to 840-850. It may not happen in one day but over the next 1-3 days, TA says that should happen.

At that point, the market will clearly be overbought. Overbought does not entitle the market to go down. It means that it doesn't take much news or much change of sentiment for the marke tot correct back to a key support level.

So I see this market playing out as designed unless news changes that.

As I stated yesterday, straddles are the play right now. The market is at a key support level and can move 50 pts in either direction fairly quickly. The odds are it will go up but it could easily go down if there is significant news. So playing a straddle right now on pretty much any index or ETF is a great play. I played the FAS straddle yesterday and today sold the call side with an 80% profit mid day and bought the call side back at the end of the day at the price I bought at yesterday. So I am straddled again at a key resistance. It is grreat protection and a great way to play swings with little risk, and at the same time, insures you won't miss a huge move.

The VIX stays above the 200dma and continues to tell us this rally is not for real. It feels real. It looks real. But the VIX is staying volatility reigns and thus the expectation is for a big swing reversal sometime in the near future.

Watch the S&P tomorrow. A break below 800 is a clear sign the rally is in jeopardy. But a gap up in the morning probably will mean we are headed higher and you should not get in the way of that move until the next resistance level.

BTW, once again I ask, has anyone heard from the banks yet on the public-private toxic asset plan???? Of course not. And needless to say, that is not a sign the Timmy Plan will work.

NIce Legs

The rally definitely had legs. By mid-morning, it was obvious we were going to break through 804. It was time to play a long position at least for the rest of the day. At 804, it presented a wonderful straddle opportunity on financials and tech. These are going to swing quite dramatically. The straddle is going to give good upside potential along with protection. It avoids overextending yourself.

How about the VIX? Pretty interesting to see it fall off only a couple of points and staying close to the 20dma and over the 200dma. This is a very interesting move. It is very difficult to figure out what the VIX is trying to tell us other than that there are many still not convinced in this rally. The expectation certainly has to be for a 10-15 pt move down in the S&P on Tuesday, if not more. We can't expect more than this unless bad news comes into play. The likelihood of the rally going forward on Tuesday is low. Technicals indicate we need some sort of pullback to at least 805-810 (new support level).

I wish I could say more about the VIX but it seems to be in somewhat of a neutral position. Although it is leaning on the bearish side only because of its relative small move on a big move up in the market. There will be better entry points for both bulls and bears and there is really very little reason to risk much here. You have to lean to the bearish side for the short term only so the rally can let some air out. I will be really interesting if the VIX can cross the 20dma in any market pullback. But I don't see that happening.

I would still stay away from playing financial ETFs other than options. Way too much risk. I entered a straddle on FAS Monday morning and it has already been a nice paper profit. It gives me protection and potential large rewards with little risk.

SRS took a beating today. But I don't care. I don't suggest following me on SRS since I am a long term investor in SRS and I am not trading other than covered calls. I think SRS will be a great buy soon but you have to let some of the dust to settle.

I will be adding to my GOOG put positions tomorrow. Good time to average down with some great potential of gains. RIMM is also looking like a great opportunity now.

Now, can someone tell me why the banks still have not stepped up to give their opinion of the Golden Boys new plan which is suppose to save them???? Does anyone consider this rather surprising other than me???? You would think bank execs would be all over the TV telling us how grateful they are for this plan. I have to assume this means the banks are not prepared to endorse this plan. Investors get little risk, but that is at the cost of risk to tax payers and the banks. I think the devil is in the details and the banks are trying to understand any risk factors. That is their business. Risk management. Well, OK, that is theoretical because they sure did not practice risk management over the past 4-5 years.

The market is still a great trading market. Just don't get caught overextended in a volital market.

Monday, March 23, 2009

More News. More Opportunity

The Geithner public-private toxic asset plan presents hope but it is just another rock being thrown into the river to try to stop the water. Its a big rock, no doubt and it sits next to Bernanke's big rock, but there needs to be a lot more rocks to slow it down.

Has anyone heard the banks respond yet? Anyone? Of course not. Do you know why? Because the banks are loving the run up of their equities. They can sell shares at higher prices to build capital and to line their pockets. So why wouldn't they just come out and tell everyone they will fully participate in the plan? Obviously they would make their stock go up even higher.

But it would be a lie. And while banks would like nothing better than to say anything to bring stock prices up, there is no need to. The stocks are going up on the news driven event.

I believe banks have little intention of participating in a plan that only devalues their assets even more than M2M is doing now. They have no intention of exposing just how bad their values are. While M2M is a thorn in their side, the marks are higher than they will get via auction to private hedge funds. Likely, much higher.

What a wonderful rally. And it still has legs. Make no mistake, this is going to be an incredible shorting opportunity once this one runs out of steam and news of problems with the Geithner plan starts to unvale. Lets get Lewis or Dimon in a room with a reporter who will ask tough, direct questions about the plan. I bet not a single bank officer will step up and take on those questions. They want this runup to continue.

In the mean time, it is probably good to play the trend as a hedge or straddle positions on financials and tech are probably a wonderful place to be. At the end of this run, we should see some great short opportunities. The economy is not better today than it was yesterday. But this run can change in a heartbeat if news leaks that banks are not willing to participate. We probably will not hear that until Geithner makes the plan official.

Sunday, March 22, 2009

News Rules!

Make no mistake, this market is driven by news.... On a short term basis. On a longer term basis, this market is driven very much by technicals. News is driving the market on an hourly basis but the market always comes back to be driven by the tecnicals on a daily and weekly basis. Always.

Last week was no different. The VIX was a great example. On Tuesday, the VIX clearly showed the market should reverse and go down. TA also showed the market needed to fill a gap down. But news, in the form of the fed announcement of printing money, got in the way. For the short term. News drove the market on Wednesday. But Thurday and Friday, technicals took over and the market behaved as it should have technically, despite the news.

This week will be no different. News will drive short term movements, but technicals should hold the long term view. The great thing about news driven markets is it gives some really great trading opportunities for those who are patient and pick good entry points. But many day traders tend to be gamblers and can't stay out of the market so they tend to swing from one side to the other trying to time the market perfectly. The results, at best, in the long run would be 50/50 for a trader keeping most of their investment money in the market all the time make day trades. But usually traders can tend to catch a trend and get caught entering late and exiting at lower prices to avoid to large of a loss.

A better strategy would be to play the market technically when their are strong technical indicators. When the technical indicators are not strong, perhaps take profits or set tight stops, then wait for some news and play the back end of the "buy on the rumor, sell on the news" scenario, if you can react quick enough.

This week, it appears Tiny Timmie has a plan and wants to tell everyone. It's actually a good concept, but the execution of the plan has some major hurdles. The public/private toxic asset plan will work if the following 4 things happen.

1. Private hedge funds and investment firms have interest in participating and working together with the government, despite what has happened to AIG and other banks.

2. Banks have to be willing to offload their assets at discount prices. They will probably do that for their worthless assets (good luck finding buyers), but anything of value, they probably are not going to be interested in selling at discount prices.

3. Taxpayers do not voice negative opinion, in volume, about the plan. Taxpayers will take on the biggest burden of the plan and have the most to lose. Are they willing to accept this in hopes it turns the economy around?

4. Congress passes the bill which outlines this plan. This may be the biggest hurdle. Republicans will lobby against it, mostly for political reasons. But democrates have a lot to consider. They have been screaming there will be no new taxes but this plan would present a situation where, either the tax payer will get taxed directly or indirectly, or inflation will effect them so deeply they will feel the pain due to the plan. Democrates have to consider the impact of the plan to the taxpayer and decide if they can vote for a plan which is bullish for wall street but bearish for main street.

The VIX itself is in an upward trend just below the 20dma. Theoretically, the VIX would pass the 20dma here as it almost always done on a trend. Also, TA tells us the gap to 750 needs to be filled. But neither are strong indicators. Don't worry that the VIX dropped 2 pts in the last hour of trading on Friday. That was all due to OPEX. The VIX is calculated based on options trading and many traders exit their options positions late friday to avoid them being exercised. So the VIX will naturally fall late on OPEX.

This week appears to be setup for some excellent trading. I don't see the market making a big move in either direction, at least early in the week. I think we will see some great trading opportunities especially as the talking heads give their opinions on the financial networks. We will probably see some pretty good swings on Monday and Tuesday. If there is a gap up on Monday, you have to believe there will be an equal and opposite reaction later in the day. I will be playing this as though we have to fill the gap to 750 so on any move up, I will be trading via short ETFs or puts. It would not be a good idea to bet too much on financials since the swings on financials can be quick and significant. Financials present a lot of risk/reward right now. If you are willing to accept the risk, go for it, but don't expect to be on the right side of the trade each time.

Do your own research and make sure you do not over extend yourself in this uncertain market. Watch key support levels at 804 and 750. Moves above or below should indicate additional moves in that direction.