AAI and VIX

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.

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.

Donations

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.

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.