Protection Demand Decreasing

Unless I am hallucinating, I think I see a descending triangle pattern on the VIX. This is a bearish chart pattern that connects a series of lower highs and a second trendline that has historically been a strong level of support. What the market may be telling me is demand for downside protection may be abating, in which case you want to cover your shorts and go long the market now. I'll sell you some bear funds here, do you want them?

Bank Breakdown...

I am growing increasingly concerned about the price action of the BKX (Philly KBW Banking Index). It has failed to hold its July 2008 low. This sector may point to lower general market levels in the near to intermediate term.

Test Then Massive Rally (Hopefully)

The market is acting like it wants to test the low's here hopefully successfully, and then there will be a massive rally caused by appropriate SEC/Treasury appointments by Obama. We would get an even larger rally if Obama leaves taxes alone, ontop of great appointments to these posts.

When things stop going down on bad news...

This is a classic sign of a bottom. I am seeing terrible, awful, and downright omninous news in cyclicals, retail, and transports yet they are going up (today and the past week or so). I am pretty excited about this observation. Lets see if it holds true, shall we? I am so glad this awful October is over.....

Getting Back Into Commodities

By far, my best trade this year was short gold/long US dollar. I think this trade may have run its course as the fed lowers rates to stimulate the economy. The dollar should go down on this, and as result, commodities will go up. I think the coast is clear to dip my toe back into commodities. It should be noted that commodities and energy are late cycle plays, and are usually the last to go up. Furthermore, deflation is rampant and commodities are usually good inflation hedges. But as the fed lowers rates, the only choice is to inflate our way out of this crisis. These are my only qualms getting back into this sector.

Overpaying for downside protection...

Is it just me, or are people paying WAYYYY too much for downside protection? The time to pay up for downside protection was in August, not now.... I'm actually quite willing to sell downside protection to others right now.

Once the dust settles...

I think the government bailout of AIG, while letting the largest dealer of commercial paper die (Lehman Brothers) is going to be viewed as a big mistake. I worked on a commercial paper desk many moons ago and I realize how it is the lifeblood of commerce. This panic is worse than it could have been by this error of judgement.

Banks, Transports, Retail

In addition to banks and small caps exhibiting bullish chart formations, I am liking the charts of transports and retailers. Both of these sectors are early cycle recovery plays, and may just follow the new market leader. All hail banks....Transports and Retail may just follow you soon.

The Golden Cross

The Russell 2000 index is exhibiting a very bullish chart formation. Not only are there higher lows and higher highs, but I see an impending "golden cross" whereby the 50 day moving average is about to pierce its 200 day moving average on the upside. This tells me to buy and add to my small cap stocks now. I prefer to buy in the 680's, but waiting for this level may prove to be an expensive hesitation. All aboard!


Ok, I was early here, rut is a 518 as I write, October 22nd. I hate it when golden crosses fall down. Live and learn.

Answers to quell market panic...

1) Public Company Accounting Oversight Board has dropped the ball on Sarbanes-Oxley. We need to enforce this act ASAP. Many companies' books are completely opaque.

2) Bring back the short-sale uptick rule ASAP. Shorts can short indiscriminately causing market volatility.

3)Ban naked short sales. Shorts MUST borrow shares sold short.

4)Create a SWAP exchange via a consortium of banks which will enable clearing, settlement, and marking of swap positions.

5)Allow employees to sell or hedge company stock. Many people lost their savings because of this inability to diversify their future.

Banks are the market's engine....

An old adage on Wall Street, as goes financials, so goes the market. I think of big money center banks as the engine on the train that is the market. They were the first to go down and will be the first to come back up again. We are currently seeing money center bank strength as evidenced by the recent strength in the BKX (PHLX KBW Banking index). Whether this is massive short covering or real buying, I do think that this sector points to higher market levels in the future. If it is simply massive short covering, maybe its duration will be long enough to get us through the other side. I guess its always darkest before the dawn.

What About Deflation?

The financial media is all about inflation, but actually we have seen the forces of deflation in action. Houses, stocks, and now commodities are crashing in value. Wages are probably next on the list. Inflation makes these go up, not down. Maybe we are simply seeing a decline in the standard of living instead of inflation. I am starting to rethink my bearishness on the long bond. The long bond has been the place to be of late, as the forces of deflation creep into our lives. A rate cut would keep the forces of deflation at bay.

Pullback into a double bottom? Maybe....

A double bottom is a chart pattern that technical analysts use and it is usually a bullish sign. I am hoping this recent pullback in the market will form one of these. In which case, I will deploy more long positions, especially if the vix continues it's upwards march. C'mon double bottom.....

7 Reasons I'm a Little Bit Bullish

1) Fannie Mae / Freddie Mac just set higher loan limits which should be good for the mortgage/housing market.

2) US dollar strength causing people to get more constructively bullish for the time being, although many think this is just the weak Euro causing the $ rally.

3)When I look at moving averages of Financials & Consumer Discretionary groups, I see 21 day averages about to pierce through the 50 day on the upside, which is indicative of an impending pop.

4) Very strong Health care action, specifically in Bio tech and Devices, in a down tape.

5) Commodities have come off their highs which can possibly put downward pressure on already high inflation going forward.

6) I have read that there are more people betting against financials now than there were people betting on Technology in 2000, and we all know what happened to Tech after Y2K. Can you spell "Short Squeeze," please?

7) This past Tuesday, a very large put trade went off betting that the Vix will decline. Someone is making a very big bet that stocks will rally.

Only time will tell if my reasoning will bear any fruit, but I am waiting patiently for them to ripen.

Rotation Continues...

Since my last post energy has sold off and healthcare has taken off. I am taking my victory lap and reducing my biotechnology exposure and have started nibbling on energy again. Biotechnology seems overdone on the upside and energy seems overdone on the downside.

Why I Like Healthcare

I really like health care investments (pharmaceuticals, biotechnology, devices) in this volatile trading environment. Inevitably, people need to re balance their sector exposure when one sector performs well and becomes overweight in their portfolio (read: energy companies). I think the petro dollars made by re balancing away from energy will eventually find their way into health care companies. I think people will shun away from the long bond (a traditional safe play) because of inflation concerns. Who wants the coupon when it won't even fill up your SUV's gas tank?!?! Health care is traditionally a defensive play so it should do well in this tape. Furthermore, demographics should support health care companies going forward with the aging of the baby boomers. Demand for artificial knees should be high starting now!

Lets sell out...and resuscitate ourselves

I have an answer to the housing crisis which will in turn revive our economy. We need to relax our nation's immigration policy to enable foreigners who want to buy houses do so. Sovereign Wealth Funds and Foreign Corporations want to buy up American companies with abandon, so I don't see why we don't let foreign real estate investors buy up our inventory of houses. This plan should at least stabilize the housing market. The US dollar has been on a free fall trajectory for many years now (in fact, if you overlay the chart of the dollar to the Ancient Roman currency, it bears a scary resemblance, and we all know what happened to the Roman Empire), making US assets extremely cheap for foreigners. Our government should put a relaxed immigration policy for the benefit of housing in place BEFORE we decide to intervene and support the dollar.

Vix is sick

The CBOE volatility index is an excellent tool to time your entries into and out of stocks. When the Vix spikes it usually is a great time to buy stocks. Vix spikes means there is much fear in the market, leading people to sell anything and everything. Vix spikes are also a good time to reduce your shorts. On the other hand, when the Vix is floundering, it means there is minimal fear in the market and an indication that investors are sticking out their neck for added return. This is a great time to short the market. One should harness the power of the Vix for alpha generation.

Position Yourself Accordingly...

Every once in a while, groups of assets fall out of favor and one needs to be able to pounce on the opportunity and commit enough capital to make a difference. One needs to set the entry low enough so one can start to dollar cost average down into the trade. Buying something is a commitment to constantly lowering the cost of a falling asset and holding it until sentiment rises. Ones ability to hold onto a falling asset over time can test ones will power to buy more, hold it, or sell it.... 

Every once in a while, groups of assets get too elevated and one needs to pounce on the opportunity and commit enough capital to make a difference. One needs to set the entry high enough so one can dollar cost average up into the trade. Selling something is a commitment to constantly raising the proceeds of a rising asset and holding onto it and hopefully being flat when sentiment falls. Ones ability to hold onto a rising asset over time can test ones will power to sell more, hold it, or buy it back...

And so it goes...

First Post - Stream of Consciousness

Wikipedia defines stream of consciousness writing as a literary technique that seeks to portray an individuals point of view by giving the written equivalent of the character's thought processes, either in a loose interior monologue, or in connection to his sensory reactions to external occurrences.

I am a mere trader in the maelstrom that is global investing, and I react to circumstances that are beyond my control. Sometimes my reactions win big and I capitalize on my intuitions, and at other times I lose the shirt off my back. I tend to be contrarian in nature, entering into a trade when others are heading for the exits, and leaving a position when others are chasing the asset that is being elevated to euphoric levels. I hate getting out of a winning position early, and nothing bugs me more than leaving money on the table, but so it goes....

I am intrigued by an honorary Samurai named Munehisa Homma who was a rice trader and most successful fund manager in history in 18th century Japan. He positioned himself bullishly when others were bearish, and bearishly when others were bullish.

This Blog will attempt to concisely and coherently chronicle my thoughts and observations on investing in the global marketplace.