OptionPundit

Tag: Bear market rally

  • Is It Another Locomotive?

    I shared my thoughts time and again, about the TARP, PPIF and a lot that’s going on. You may wanna read this or this one on Banks’ windfall to review where is the interest of Tax Payers? Is the “creative accounting” meant to fulfill self-interest only?

    Here are key points I would like to bring to your attention-

    Economic Data– We are receiving all the wonderful data that convince, in general, that the “rate of decline is slowing” and it is, generally, perceived as “growth” otherwise what else could really justify such a quick turn in “confidence” also reflected via sharp market runs particularly in the emerging markets where stock markets have almost gone ballistic; over 50% in many cases. (Check out- “O-Benti trio might be winning” ). Step back for second and think of it- If, even after trillions of dollars we can’t see “green shoots’ then the whole world is very serious trouble. We will see jumps in economic activities  driven by massive spending.  The question is, is it sustainable? Is it really improving the fundamentals or just replacing spending via printing press? has the private borrowings jumped, etc.?

    We get the data, and a lot get revised downward the next month; but by that time who really cares. April Personal Spending -0.1% vs -0.2% consensus; prior revised to -0.3% from -0.2% (that’s by the way 50% downward revision); Factory orders for April rose 0.7% on a seasonally adjusted basis versus a consensus estimate that called for 0.9% increase. The prior month, meanwhile, saw a big downward revisions with orders off -1.9% versus an originally reported decline of -0.9%!!! New orders for manufactured durable goods increased 1.7% in April, which was down slightly from the previously published increase of 1.9%. New orders for manufactured nondurable goods slipped -0.1%. Overall shipments decreased -0.2%, marking the ninth straight decline. Unfilled orders fell -1.2%, which was the seventh straight decline for that category. Inventories were off -1.0%, which was the eighth straight drop there.

    An interesting insight on commodity surge, hopes and reality. And the data is out Crude up 2.87Mb, the Oil is coming in, is it going out? As of this writing Crude futures are down almost $3.

    I don’t participate in dooms day kind of theories and I sincerely wish for healthy economic recovery sooner than later, and I wish all the efforts that governments around the world have put in works out wonderfully. I, however, worry for the retail investor who might be trapped in bear rally, if it turns out to be (which so far I think is, but I may very well be wrong as “this time may be different”).

    Be careful though, the larger the rise, harder the fall. So keep your parachutes ready for just in case. I hope “Green shoots” or call it “light at the end of tunnel” is not another locomotive.

    One can’t buy his prosperity through printing press only. Take care and trade carefully, we shall not be offered a “bail-out” should something goes against our portfolios or hard earned trading capital..

    Profitable Trading, OP

  • What’s Next for Stocks Markets and Me

    So we are having a great rally. It doesn’t seem like it wants to pause. If Dow is up this week, it will be up 8 out of the last 9 weeks. Wow, what a complete reversal of a downward trend that we had been observing since last year. What an extended overbought period. The bears, including me, have been waiting for a pause or correction which seems not to take place. The stock markets are currently behaving like a shock absorber and nothing seem to discourage bulls. All well, till it is not.

    A lot of my personal holdings are up sharply over the past few weeks. There is a big margin of safety in those holding but those have risen just too fast that now I am scared of these gains and starting to book profits and probably reenter after a few weeks.

    If you are looking for what some of the prominent thinkers think, here is a good piece of advice from good experienced Richard Russell-

    What to do? I’ve done a lot of thinking on this question, and my conclusion is as follows — hold a fairly large quantity of physical gold (coins), hold cash, hang on to your house, and you might even buy a bargain-priced foreclosed home if you wish — but above all, cut back on unneeded expenses (cut back on coffee, vacations, movies, fast food, and other non-essentials). Cash is for deflation if it continues, gold is insurance against future inflation, a bargain-priced foreclosed home is good value and it’s also a tangible asset.

    That advice is coming from a market veteran who has been observing markets for almost 5 decades and have first hand experienced The Great Depression. Below is what John Hussman thinks? He is one of the value investing fund managers whose market insights I read quite often-

    Are stocks in a bull market or is this still a bear market? Frankly, I don’t put much energy into that question. The S&P 500 has now corrected about one-quarter of its prior losses. Bear market corrections of about one-third are not unusual, but I wouldn’t bank on that. Having failed to do anything effective to mitigate the second wave of foreclosures that is set to begin later this year, and seeing very little sponsorship in trading volume (despite good breadth), my impression is that we most likely are in a strong correcting rally in the context of an ongoing bear market. At the same time, cash-equivalents are yielding next to nothing, so it’s unclear to what extent investors will decide that stocks are their only real alternative, which might allow a continuation of this advance.

    I am not including the bullish perspectives as I am bearishly biased. The internet, every business website, analysts sites and almost all the stock newsletters, are filled with bullish calls from tons of market analysts. Oh btw, do remember, a lot of them never saw the meltdown coming. There are stock upgrades left, right and center. An enthusiasm is on and it seems retail investors are on shopping spree aka bottom fishing.

    What do I think-

    My desire to get into this rally is getting stronger and stronger, at the same time, “hindsight bias” of missing rally, by not investing in bigger way,  is also making it irritating, at times. If it is forcing even myself to think my view again. I take this as a sign of retail public entering into the market (no co-relation and there is no statistical data to prove this). I am being requested by many if I would be willing to manage their money, including those who can’t even spell “stocks” properly (don’t worry they know English well), which I interpret as “trouble ahead”. I think of it as on-going correction in a primary bear market trend that has not run its course yet.

    I have different investment strategies in place. Separate for stocks, another one for Yield and last one for options & futures. These fall into “Stocks and Options” asset classes. Gold etc constitutes other classes.

    I am beginning to book my profits on the stock holdings and collect cash. I wanted a market turn-around but I didn’t want such a quick and violent rally. The returns are generated in such short span vs. a few years time i would expect. The rally is now overextended and I am not going to be opened to Mr. Market’s mood. All indicators say time for a turn, but guess what “Markets can remain irrational longer than I can remain solvent”.

    For Options & Futures, large portion is based on OPNewsletter strategies and I am fully invested there, as per OPN’s objective of about 60-70% investments. This was after a long time and I shall continue to remain invested using OPN strategies. However, depending upon indications of deterioration or accelerations, we might choose to add straight calls and puts. The overall strategy is bearish bias. (Sign-up for the OPN Waitlist here)

    So ladies and gentlemen, all I can say is that it is time to “stay very cautious”, the optimism is running very high, and these are times when everyone else but Buffet and a rare few more is positive, and often that is the time to off-load garbage.

    Choose the strategy that works for you. Don’t give your hard earned money to any “managers” unless they can show you that they deserve it. Ask them for their performance record of past 18months and judge yourself.

    Trade carefully, Trade Profitably

  • Fast and Furious

    “Fast and Furious” is how I can describe the rally we have been seeing so far. As I mentioned earlier that this is the most healthy rally I have observed so far in this almost 17months old bear market. Albeit, on a psychological perspective, I am not yet convinced that this is the start of a new secular bull market.

    I won’t go into tons of statistical data (The internet is filled with that). Let me keep it simple. What’s driving-up the markets?

    • Is it the fund managers/institutional money that “needs” to be in the market because You won’t get paid any performance bonus for “Zero” return?
    • Or flow of money that doesn’t want to “miss out” the rally as they missed getting out of the market crash?
    • Oh yeah, how about the “positive” news that says that rate of decline has declined?
    • Or is it the poor short seller being grabbed by the neck and held against the wall?

    Too much of bullishness, too much of intelligences and too much of love for stocks and eagerness to “pick bottom”; hardly a sign of “exhaustion” or panic” or “hate” for stocks, something that is typically associated with bear market bottoms.

    And oh btw, where is the value? If this is the deepest recession since world war-II, then shouldn’t we at least expect the stock valuation to reach equal to past bottoms of at least comparatively milder recession like 1970-74s, or the early 80s.

    Net, what’s my bottom line? I am bear but I don’t want to trade against the trend as well, which means I am delta neutral to short delta, in general.

    And oh yeah, here is my comment on Goldmand Sachs going into earnings-

    GS May find a temporary resistance at 129-130 area…may look for temp intraday… They do have one of the best run since lows below 50 last year. But too soon to fast Smiley..they are announcing earnings tomorrow morning and my bias is that they will beat it..and guess what no one can really estimate the impact of mark-to-market relaxation so quickly (was it intentional???)..so chances are that will be upward surprise…and oh btw, banks have been told to keep mum on stress test results…

    Times for being cautious.

    Trade Carefully, Trade Profitably, OP

  • Get Ready for Next Bear Leg and Start Hedging

    As of yesterday’s close, the DJIA has gained 21% since establishing the March 9 low. The S&P 500 and NASDAQ have gained 23% and 25%, respectively, over the same time period. Wow, we have had wonderful rally so far, >20% gains in matter of less than 3 weeks; and probably one of the strongest rally that we have seen in this bear market. To make the bullish case even stronger, the rally continues to extend despite overbought conditions showing solid strength.

    dow-great-depression-pix-1But, is this short covering or real buying? During great depression, there were almost 8 to 9 rallies depending upon what you consider rally. Market topped out on Sept 3, 1929 @ 386.10 and then it dropped 18% fairly quickly (almost 1 month) and recouped 50% of losses in few sessions. Then it dropped again from 358 to 212 i.e. (60%) in about a month’s time (Mid Oct’29 to Mid Nov’29) and it recouped slightly less than 50% of this fall in next few weeks then there was another correction before indices marched upward to regain 50% of losses from all the way from Sept’29 top. The rally continued till Mid April’30. There so many sharp snap back rallies till Jul 8,32 when Dow bottomed at 40.60 never to see that level again.

    In the current scenario, from a 14,198 top to Mar 9 low 6470 for Dow,  the 50% target will be around 10,334. So there is all likelihood for indices to go those sort of levels in extreme cases before resuming any downward trend assuming the economy continue to deteriorate. But before Dow even touches 50% level, there will be minor resistance at 8,000 followed by strong 8,900-9000 band.

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  • Bullish Monday

    So we had a good rally, and two 90% up days along the way. An excellent week for Bulls. There are two schools of thoughts. One, it may feel like,oops..I missed the rally. Probably “that” was the bottom and since I don’t want to miss the “value”, I better get on-board quickly. While other thought is, Nah, this is one of those bear market rallies, it was due to short covering and it is bound to fall back.

    Which side are you? What to do? For me personally, I took advantage of rally and closed most of the bullish positions on our OPNewsletter. In hindsight we may say, gosh, that was a bad decision? Or we may walk to the bank smiling on our decision. We’ll see.

    Generally, I mean generally, bull markets starts in the midst of deep pessimism. When retail public has already suffered big losses, lost interest in markets and is left with no money, the bulls find no resistance, no sellers and it marches to its own beats.

    Last week’s rally possessed one thing different from rest of the rallies so far, it was driven by demand. Albeit, I am not sure whether demand was short covering or bottom fishing; I am not sure (Though I did pick a few value plays). So let Mr. Market guide me by his actions, by the committed money of its participants and whether it can cross 7,500 supported by continuous increase in demand and supported by strong volumes.

    This week is filled with lot of data. Industrial production today at 9:15am, Housing starts and Producer’s Price Index (PPI) tomorrow at 8:30am, Consumer Price Index (CPI) at 8:30am tomorrow followed by FOMC announcement at 2:15am ET (is there anything left for Fed to announce?). Then we have jobless claims on Thursday 8:30am, Cash settled index option expiration on Thursday as well, followed by Uncle Ben speaking on Friday and the March US equity options expiration day, on Friday. Possibly Goldman Sachs (GS) will be announcing earning this week and Fedex will also share a glimpse of economy’s move.

    Net, any day can reverse Mr. Market’s mood in either direction. So trade very carefully.

    This week has some interesting plays to offer that I shall keep sharing time to time, so stay tuned.

    Profitable trading, OP