Thursday, April 9, 2009


After a day like today, heading into a long weekend, there are many that were on the wrong side of the trade today. You are not alone. This is not the end of the world. If you played it smart, you were hedged. You should always be hedged whether it be via options or playing a leveraged ETF. If not, chalk it up to experience. It is just money and sometimes money grows, sometimes it doesn't.

But, there are those that are out there who played one side and perhaps had a bigger loss than they feel comfortable with. There are others that took a hit but were not too heavily invested.

For many of those, they will make the retail investor mistake by making a move that will make it worse. DON'T DO IT!!!!

There are 4 moves you can make if you took a hit today.
  1. Double up to average cost down.
  2. Sell and swing to the other side
  3. Sell and go cry to mommy
  4. Do nothing.
Depending on your situation, the worst thing to do is to make moves 1, 2 or 3. Lets assume you were 40% invested in short positions. If you double up on some investments you are probably adding to your stress. Any additional move down and you will panic sell and just take a bigger hit. Do not add to your stress. If you can't sleep at night you are over invested.

If you sell and swing to the long side, you have a similar situation. Any move down in the market and you will probably quickly swing back and then if it is a head fake, you will probably swing again. Your head will be spinning.

If you give up and just take your losses now, you could miss a big rebound and then you would probably buy right back on any move down in the market and then you would be in the same situation as above. Another retail investor mistake.

Today is a great example of why you have to have stops in place or be hedged. If you go naked with too much invested, you are asking for trouble. If you are margined, well, I have no advice for you other than you were asking for it.

The best thing to do after a day like today, if you were on the wrong side, is to enjoy the 3 day weekend, and set a strategy for the upcoming week. Remember why you put your money into something in the first place. What do you think will happen in 10 days, 30 days, 90 days?

To me, if you felt really good about your moves earlier in the week, did something change that now? If it didn't, sit tight. Don't double up, don't panic sell and swing to the other side. You just missed a run up and you may miss a correction. If you believe the market is going to head straight up then do what you need to do and make the retail investor move.

Also, try to focus on the positives. There are many positives out of the market today, if you were short. First, I think today is a good sign we are not headed to a depression. I think that is great news. There is more likelihood, perhaps that job losses will slow down and your job is safe for now. We are still in a bad global recession but today the world doesn't seem as dark as it has been.

Second, perhaps you have a 401K or retirement account which is invested in mutual funds. Today helped that cause. For example, while I own SRS and some puts on various stocks in my trading account, in both my kids college accounts and my retirement account, I am 50% cash and 50% invested in funds. So those all moved up nicely today and over the last month. I am grateful for that.

Third, there are many avenues out there right now where you can save money.
  1. Renegotiate with your landlord on your lease. You will be surprised that they are willing to come down $100 or $200 a month. Be firm though. It would be better if you have another aparment somewhere else that you would be willing to move to if they don't renegotiate.
  2. Refinance that house at 4.5% and save hundreds a month.
  3. Renegotiate with service companies. I was able to get my lawn company and my pest control company both to reduce their rates in half.
  4. And last but certainly not least, you have investments that can still make you money and perhaps today you were just caught in the wrong place at the wrong time. That is how I feel about SRS.
Moving forward, as I said this past week, betting on financials to either side is just that. A bet. A gamble. I luckily did not pull the trigger on any puts on BAC or JPM yet but at these prices, how can I not? I see this as opportunity. I won't invest too much into them but will certainly play the odds and I think the odds are that BAC and JPM will correct very soon. I will stick with my SRS even though I am hurting with the rest of you but again, I was not over extended and had a hedge by playing FAS calls.

All in all it was not a good week for me but it sure could have been worse without a solid hedge. Look for news out of AAI on Monday. ;)


Lets think about it. If banks are having record earnings, why have TARP? Why have TALP? Why have PPIP? Why has Geithner said the banks will need a lot more funding? Why has the Fed said it is a bigger problem than we all know?

Think about it people! PAY ATTENTION!!! WFC had a great day and a great report. But it is hiding behind the M2M changes. The paper losses not being reported will allow all the banks to report record earnings because they have never had the freedom to report as they wish. Meridith Whitney tried to warn us that the banks will capitalize, short term, on the changes to M2M but in the long run, they will have to sell those assets and then take the losses. WFC make $3B but it is likely their losses in assets is around $15B or more. But we will never hear about that.

Its a great time to be a bank. Watch for all the insurers and REITs to try to qualify as a bank so they can also fall under TARP and M2M accounting changes.

Let the bulls have their day. There is nothing wrong with that.

Good News Crushes Any Bad News

As I have been pointing out, this market is relishing the good news and brushing aside bad. It is the sentiment. And today with the WFC news of profitability and making it public as a company news release, this is certainly good news and the market is loving it.

So all is good in the economy, right? WRONG! Walmart same store sales slide. Not a good sign when the retail king shows a slow down. It could just be a one-off stat but keep a close eye.

Also, unemployment continues to rise at a staggering pace. Why isn't that a headline??? Because analysts predicted 660K lost jobs but since it was *only* 654K lost jobs, it was ... good news???? The s**t will hit the fan soon enough. Unemployment numbers at those levels are staggering and to brush that aside as meaningless is just beyond me. Maybe when unemployment hits 10% by July, when they have been predicting it maybe by December, and retail numbers go down by June, the recent optimism will be lost.

Make no mistake, this is a solid bull run in a bear market. But make no mistake, we will test the lows again. Retail numbers are up only because of great management of inventories. Now with the inventory numbers at skeletal levels, the retailers have to start showing growth in the bottom line and top line. No way that happens when unemployment is rising this much. The house of cards will fall.

The banks will benefit from the M2M changes for the short term. It is no telling what WFC would be announcing if the M2M changes were not put in place. We will never know. But just as retailers have managed inventories to have a good bottom line, banks are going to have to live up to the expectations that WFC has just set with their announcement. Any banks missing now would be a huge problem. Any banks needing significant Fed money now will be a big blow.

Market sentiment is now on the side that we are out of the worst of it. As those signs wain and the bad news starts coming in, it could get ugly. There are 4 key pillars to making the economy recover to anything close to what it was.

1. Unemployment slowing significantly
2. Real estate values bottom
3. Banks get back to more business as usual (not just short term profitability)
4. Confidence in the economy to get new small businesses growing again.

I really don't see any of these happening for 3-6 months. I will be digging into each of these in upcoming blogs.

One thing I do want to point out. I think we are headed for a short term deflationary period. With unemployment continuing to rise, people are looking for bargains and bargains only. This will drive down prices of many consumer goods. This will be good for the consumer in the short term but if and when unemployment stops rising and the economy recovers, we will move very quickly from deflation to inflation and will result in less spending and less borrowing by consumers. This is what will prevent the economy from growing much at all for the next 5-10 years. That's fine, to a degree. The problem is that with the gov't spending going on, they really will not be able to unwind the debt we are incurring right now without raising taxes at all levels. This in itself will cause a recession of sort in that the economy will not grow and will be stagnant for many years.

So, enjoy the trading while you can. By 2010, the stock market will be a very boring beast with little to no gains for many years.

Bad News Keeps Getting Brushed Aside

Once again, some key bad news in the form FOMC meeting minutes are brushed aside in favor of questionable news around a merger of home builders and a potential bail out of insurers.

Its nuts, but that is the market we currently live in. Lots of rose colored glasses being warn. I think Jon Stewart is saving a lot of clips from CNBC these last few weeks as they are all saying all is fine, we are in a recovery and market will sky-rocket from here. Mr. Mustard Seed won't listen to any bad news and will spin it positive.

If/when the market does tank again and test new lows, I have to believe there will be a mass exodus of CNBC watchers since the network has totally betrayed their watchers by hiding the reality. The morning crew is OK but the afternoon crew refuse to allow anyone to say something negative about the economy and brush it aside. Then pile all over marginally good news.

But its all good as it creates inflated stock prices which provide opportunity. Am I a perma-bear. No, I am a realist. The Fed is now on the bandwagon that banks are worse off than we realize. The Treasury is recognizing that the banks will need more help. BAC is on the verge of collapse. Yet, no one cares on CNBC.

That all said, the VIX fell under the lower resistance line. I am not sure if that is due to uptick rule changes or if it is due to market conditions. We are still facing financial earnings season. It is very hard to say what they will show. Even if they surprise to the upside via some creative accounting, stress test results are also just around the corner.

Notice the treasury said they will hold off stress test results until after earnings. Do you think they would do that if the stress test results were good?

Given the move in the market today and the VIX action, I have to believe the market will be up tomorrow, at least early. I can't see it running though. I think until a major bank or major company has a big surprise on the up or down side, the market will stay flat and in a range of 815-835. Pretty narrow range, but it is only until we start getting more earnings reports.

Once stress test results are out, watch what happens. Many of the large banks will sell or spin off divisions. They will become smaller banks over the next 3-6 months. I think this includes BAC, WFC and JPM. Yes, I am adding JPM on my list of banks that are shortable.

Two key things about BAC and JPM. Look at the percentage of shorted shares. A month ago, there were 49M shares of JPM shorted. Now it is just 6000. Thats right. only 6K shares shorted of JPM. No chance of a short squeeze, so very little chance for JPM to go up. BAC in the same situation. a month ago, 111M BAC shares were shorted. Now only 53K. That is a huge difference and again, no chance for a short squeeze on BAC.

So, there ya have it. Watch for the market to go up tomorrow but probably good to sell long positions at the 835 area or go short at that time.

Shorts I like are BAC, JPM, AAI, VMW (may). I think transports are due for a pullback. Tech may get a hit if Intel or GOOG miss.

Good luck.

Wednesday, April 8, 2009

Dead Cat Bounce?

It is interesting that over the past few days, buying on dips really has not been done with any conviction. Yes, the market has had a runup and this is a correction. But I would expect a bit more volume on the movement ups if this rally had any legs.

Also, since the uptick decisions have at least 4-6 weeks before they are installed, VIX is not effected so ignore anything regarding possible odd VIX movements for the rest of this month.

BTW, I think this little guys in the picture are a couple of cyber-bears.

Tuesday, April 7, 2009

Ignore The VIX For Now

What happened to the VIX today? Fear. Yep, fear prevented the fear index from rising in a market that slid. Not fear of the economy. Not fear of a market rally.

The VIX dropped today due to fear of the uptick reinstatement ruling. The VIX will be the most affected by this ruling since it will reduce market volatility to some degree. I don't think the uptick rule will have a huge affect on stock movement or market movement. But what it could do is slow down how quickly the market or a stock can move up or down. Thus, market volatility itself falls due to less money being put in out-of-the-money options.

So, do not play the market according to the VIX until the dust settles with the uptick rule. Throw away the charts. These next few days will be meaningless other than perhaps lowering the VIX range in the upcoming weeks and months.

I think the ruling will be to not reinstate the uptick rule, but instead, have a decision to require shorts to settle up in a shorter time than they do today. That will prevent shorts from being so aggressive in market declines. It won't prevent the market from going down, but it may slow down how quickly it can go down.

As I mentioned yesterday, the market should see 820 (it did) and if you have to play long, Health Care is probably the place to be (which it was). Health Care was somewhat under performing lately so it was just a cyclical trade. I also said GLD may be a good short term play (which it was) but I don't play gold for the short term.

The market should continue its downturn going into the uptick ruling. I think we see 805 tomorrow and then a real struggle. Probably a bounce from there but not a big one. So not a big move in the market tomorrow but I don't see it going up unless some huge news driven event happens.

I obviously still like SRS. I own it in my charitable trust (ah, just checking to see if you are still paying attention). Commercial RE is still a mess and will continue to be a mess no matter how many secondary offerings the REITs offer which will just make their stock go down faster than if they had not created a secondary offering.

AAI April 5 puts are a steal. Hardly any premium and on a volatile stock that just went up almost 100%. Even if we miss this, the odds are in our favor. But we won't miss. Shorting transports may be a good play in general right now after its recent run up on the belief the hard times are over.

I am thinking of a GOOG straddle going into earnings but they report after OPEX so it has to be May and the premiums are just too high.

After today, I also think treasuries may have some difficulty. So TBT is a solid play for a long term hold.


Take a look at AAI April 5 puts. Very small premiums. AAI has made a big move up recently going up almost 100%. Any bad news in the market or with AAI will bring it back down to 4 or 3.50. Seems like a good value.

I sold my VIX calls this morning. I don't like the action on the VIX today given a market up day. We may get impacted by the uptick ruling tomorrow which will directly impact the VIX. VIX options are too risky right now.

Monday, April 6, 2009

Interesting Charts

A couple of charts as promised. I am not a chartist but I do like to look for certain indicators. In the first chart, I am showing the recurring theme of a dual bottom for the VIX and the VIX PCR. The VIX seems to always move up about 8-15% when this happens and market tends to move down anywhere from 6-15% when this situation occurs. But, in this case, it really is not a bottom on the VIX but it is pretty damn close. I will wait for a bit of confirmation tomorrow. If VIX moves up in the morning, I will tend to want to play short positions in the market. If the VIX opens flat or down, I will probably hold off for further confirmation.

The second chart shows the continued narrowing of the upper and lower trend lines creating quite a wedge. Also, the 20, 50 and 200 day MA's are also converging. Something will have to give eventually but with the VIX, this situation can continue in a narrow range for an extended period. Also, this situation happened in August with the breakout of the wedge on the lower side. But it was a head fake and the VIX soon marched straight up as the Lehman failure occurred.

There is not an obvious move in the market this week. But the odds favor bears right now for a couple of reasons.

  1. Volume over these past 5-6 days in a rally situation has been very low. This is telling us new money is really not moving into the market even though many are claiming this is a new bull market that you don't want to miss. With so much money on the side, if there were conviction that this was a bull market, we would be seeing heavier volume.
  2. The market appears to be a bit overbought or over extended. Even if this is a wave up, there is a correction that needs to happen. This can be a 5-10% correction.
  3. The VIX still has not fallen below the lower trend line in an obvious rally situation. This is still a bit amazing but it tells us the sentiment is still uncertain.
  4. The VIX 20 day MA is only 1.50 pts away. Passing this is relative easy and the VIX can pass the 20, 50 and 200 dma's in one day quite easily.

I would still avoid putting too much into banks on the long or short side. That sector is a mess and being propped up by the Fed and Treasury. While they may be insolvent as a whole, there is a lot of intervention that gives the perception that they may survive. I don't mind playing some puts here but not to much. There will be better indicators and better opportunities in this sector.
I like April puts on AAI a bit more today. I think we will see some interesting activity later in the week.

I like VIX short term calls here.

On the long side, Health care may be the play. I also expect a bit of a bounce back up by GOLD but I don't play that short term.

VIX Chart Tightens

I will try to put up a chart later tonight. Just no time. The VIX chart is extremely tight right now. Some key stats....
  1. 20, 50 and 200 dma's are all merging together in a flat approach. This is a sign of consolidation. The VIX did this in August as well and was followed by a steady move up in the market and then the mess known as Lehman.
  2. Lower and Upper trend lines are converging into a triangle. What will break first?
  3. VIX is close to the lower trend line and PCR is near the bottom, heavy on calls. This is normally a bearish signal.

I think the market moves slightly down going into AA earnings tomorrow. We may see 820 tomorrow. From there, it is very hard to say with no clear signals.

I do believe we see the lower 700's before the end of April based on earnings.


No, I am not begging for money and I do not expect everyone to donate. I added a donate button to the upper right. I spend a lot of time posting and replying to messages and if you feel it helps and it is worth it to you, I appreciate the donation. If it doesn't help, don't donate. Whether or not you donate or not will not change whether or not I reply to a question. I am not looking to make money on this, just looking for encouragement to keep me going on those late nights when I could easily go to bed rather than making a post. Well, OK, I am a workaholic and will probably post anyway. :) I sometimes get so lost reading and blogging I forget to get dressed.

I use this blog for my own good more than anyone else's. It is mostly a brain dump, a notepad, to remind myself why I am investing the way I am and to remember what I was thinking last week or 2 weeks ago. I share these thoughts with you but please don't base your moves on my beliefs without doing your own due diligence.

Thank you to everyone who follows this post. Your questions have been great and you keep me thinking.

VIX Bounces Off Lower Trend Line

Watching the tape today, I find it very interesting any attempt at buying on the dips is failing. VIX is slowly moving up approaching 43 now. This is a clear bounce off of the lower trend line and a temporary bearish indicator. If it can close at or near 46 today or tomorrow, I believe that will indicate the bear market rally is truly taking a breather or could even be over.

Earnings are going to be key. I can't imagine a wave of upside surprises so I think the VIX is above its lower trend line to stay for awhile.

The uptick rule decision is coming. Its' the last bullet in the chamber. I can see them changing rules on short trade delivery but not on eliminating short trades. Eliminating short trades to any degree would cause a bigger problem for brokerage institutions than they already have due to lost revenue in trades.

Monday VIX

Looks like the VIX will do what it likes to do on Mondays which is gap up off of a Friday move down. I was suspecting that it may not happen this time but thanks to real information on the future of banks, the market is doing what it should be doing.

If the VIX starts approaching 43 or 44, I think we could see a pretty strong pull back in the market. But look for buying on the dips so I don't see a market slide all day. Bulls still have the upper hand. May be a good day to make some swing trades with good timing.

Sunday, April 5, 2009

Winning The Race

When I was in high school, our cross country team was pretty bad but we had a runner on our team (lets call him Joe) who was a good athlete and won or was usually at the front of the pack when the race ended. But in his senior year, he had difficulty finishing in the top 10 in any race. He was still running at his normal pace and normal times, but what he found was many of the other teams used strategies to run together, to draft and save energy giving lessor runners an advantage over a runner like him. Unfortunately, no one else on the team could keep up with him so he had no way to use a similar strategy. He was by himself running against a system.

But the state meet was coming up and he had a plan. Rather than trying to race against the system, he would use the system to his advantage. He was the better athlete and needed to use that to his advantage.

He knew which team was the best team since he had run against them just a couple of months before. Usually he would head for the lead at the beginning of the race and try to define the pace. But that no longer worked. So at the beginning of this race, he tucked right behind the 4 runners from the team he was targeting. The 4 ran in a straight line and at every mile marker, they would rotate. The lead runner would fall back to the back of the pack of 4 and the 2nd runner would lead the charge.

Joe stayed behind all 4 the entire race, drafting the entire time. With one mile to go, Joe made his move and accelerated past the 4 and into the lead. He easily won the race and was state champ.

So, what they hell does this have to do with the market and where we are now? The reality of where the economy is has been lost. Its been lost by a system of media hype, lies by banks, Fed intervention, and politicians covering their ass. These 4, along with others are piling on create a euphoric atmosphere of bullishness while the world economy is barely hanging on.

This bullishness may last awhile, who knows, but the smart money for the longer term is the economy will continue to suffer through the year with GDP falling, unemployment rising, and real estate plummeting. So you have to use patience and caution but you must be ready to pounce at the right time. If you go too early, it can hurt you. Joe waited until the last mile and knew he could get a lead that no could catch him. He was well rested.

You have to be well rested (cash on the sideline) when the timing is right. If you pull too early (as I did last Friday doubling up on SRS) it can burn you. Look for the signals and confirmation of the signals.

While I may have been burnt on Friday, I am not overextended. I actually feel very good about my position in SRS for the longer term. I am not in fear of the uptick rule and I am not in fear of REIT's hiding debt via secondary offerings anymore. I am comfortably drafting behind the bulls knowing they will tire and knowing I have cash in reserve to pounce and take the lead.

I know many of you label me as a perma-bear. I really don't like that tag at all. I am not a perma-bear. I am a realist and unfortunately the economy has some tougher times ahead. The markets will pull back and eventually retest the lows. Might not be until Q3 but in the mean time, the market will correct to the downside. I also will play the bull side once in awhile when I see the opportunity. Last week was that opportunity. I just changed back to the bearish side a tad too quickly.

What I see now is a situation where a bubble is being built. More and more shorts are giving up. More bulls are coming forward. This will and is leading to an imbalance of bulls to bears. In February, there was a heavy imbalance of bears to bulls creating a bubble which lead to the March rally.

Time it right and you will catch the bigger move down. As for now, you really can't jump on the rally bandwagon. That would be a rookie mistake. Yes it is the momentum play and perhaps you can play it on the dips, but not right now, not on Monday.

Erik posted a key chart which shows that the VIX is at a decision point. Hitting the lower trend line yet again in a narrowing wedge pattern. If the VIX falls through that, the trend is broken and I have to believe we are going to go steadily higher in the market for the next week or so. If the VIX bounces off the lower trend line, I believe we see some correction, but we will not see more than a slight pull back unless the VIX can go above the 20dma.

So, these are cautious times right now. Playing long term and playing for safety, I have to believe the non-leveraged ETF's would be the way to go. Perhaps playing puts 2 or 3 months out on some levered ETFs could be a good play as well.

Straddles are going to be a really good play on individual stocks that are entering earnings. GOOG is interesting because their current price prices in good earnings. So I believe if they beat numbers, the move up will be minimal. But a miss and they would fall hard. Straddling GOOG would be tough and may require on imbalanced straddle which I am not a fan of at all.

Tech stocks are all priced where earnings expectations are high. Watch for the semi's to miss though. No big earnings are this week though so I will revisit this next week.