OptionPundit

Tag: bear market

  • Honey, It’s Your Money

    As of this writing, US stock futures are down heavily. Dow futures are off almost 200 points, S&P500 futures are off almost 25 points; almost all the indices in Europe are down 2.5%; Nikkei and Hang Seng were down 3%; India and China are also off almost 2%. What a day !!!

    You may site whatever reasons for this pullback,  but the fact remains that Markets were overbought, overstretched and overvalued before the recent sell off started. Hope you have been reading this blog for sometime. Don’t forget to carefully watch these levels that I shared on May 19th. The internals have been weakening; NYSE stocks that are above 50days moving average is 10.53%, lowest in a year; less than half of all the NYSE stocks are above 200 days moving average. All 3 major indices i.e.  Dow, S&P500, Nasdaq closed below 200 days moving average.

    Wall Street is an amazing place. As market heads in “one direction”, more and more  analysts surface who have been “right” for that direction. If Markets are facing a pull back, you will find as if you are surrounded by “dooms day” forecasters; and as soon as market makes a turn, a lot of them will make a swift change to their tone. The truth, as I think, is that no one can predict the markets. You may make intelligent guesstimates, at best. It’s only the extremes when those guesstimates can be more accurate. Bottomline, be careful and don’t overdose yourself with the news and respect the risk.

    Those who were watching market action of past few days, might have noticed that last 1 hr of trading has been very active; Dow moves almost 100 points during those hours. What happens during that 1 hr? I don’t know and would like to hear your thoughts. Sometime back, I mentioned about my suspicion of market action during major market meetings i.e. FOMC, Congress hearings, etc.

    Sometimes, like during Fed Announcements/Testimony/Major Economic news, I look at market with heightened skepticism as if market participants are playing with stock market to get the decision they want from that “meeting” but I don’t know how to write this….

    Here is what Mex Keiser, inventor of HFT, has to say–

    Remove all the buy orders that you control (since HFT traffic is 70% of the order flow, if you simply pull your HFT buy orders, you remove a huge chunk of the market – in a heartbeat – leaving a sudden price vacuum). If you wanted to scare congress to vote the way you wanted them to vote – a congress that is directly invested in stocks trading on the exchange and ETF’s tied to the prices on the exchange – just pull your buys. When they do what you want them to do – replace your buys. If you want to make the market go up – pull your sell orders. It works both ways. (It’s all detailed in my Virtual Specialist Technology patent – how to make markets in an ‘infinite inventory environment.’)

    I am linking to an article from “Gaming the Market” that covers above topic as well as two popular ETFs (GLD and SLV). I surely didn’t know that my GLD position is bet against me in a leveraged market? That my $1 in GLD can turn into $15 COMEX shorts suppressing the price of gold. So do you think you can really tame the Mr Market, Think again. You may read more about this here.

    At the end of the day, it is your money and you need to have proper risk management plans in place. Little Johnny(s) came to the Market and were caught off-guard. S&P500 is down almost 10% since then. And as of yesterday close, both Dow and S&P has erased past 6months of gains.  Trade Carefully.

    Profitable Trading, OP

  • Panic Before Everyone Else Does

    Market forecasting is one thing and profiting from it is altogether another thing. OPNewsletter subscribers know how accurate so far my warnings had been and I did panic before everyone else did but did I benefit by opening pure bearish trades? In the hindsight, I could have made a killing but did I? No! Sure it did help me in unloading my bullish positions though.

    In spite of having such an accurate forecast I couldn’t reap extra ordinary benefits from it. I thought through this and here is the part of my trading decision making. Bear markets tend to have quick and sharp rallies often ruining short sellers. Though I knew that a sell signal was triggered and I shared with OPN subscribers, I was conservative in relation to not entering the market with full fledged bearish positions. I have been thinking that any good news can move markets violently so not sure “when” will it crash. So I chose to be hedged with slightly bearish positions in stead of trading alongside bears. Results were mediocre at best in such a fast moving market, great for an option trader. Will I do better? I don’t think so for I don’t think I shall again take any large bet in such markets when rally/crash can happen in a jiffy so rather be safe than sorry.

    This brings me to an important point about trader’s psychology. A trader, not all, tends to compare the performance with respect to decision not taken in hindsight. If only I had picked up during intraday low of Oct 10th, or I knew markets are oversold and will reverse, etc and I could have made so much. And that’s a dangerous thought. Test yourself in the present moment, see what decision will you make in the current conditions, note it down and refer to it later no matter if you put real money for it or not.

    Moving to markets- Times Online reports as much as $100 bln was wiped off the value of hedge fund assets last month as investors rushed to withdraw their capital and the worst markets in living memory blew a giant hole in performance. Investors redeemed about $60 bln of funds in October, while see-sawing market conditions accounted for the remaining $40 bln fall, according to EurekaHedge, the Singapore based industry research firm.

    The news is getting gloomier day by day. China’s industrial output grew at a slower pace than any economist forecast in October, stoking concern that the biggest contributor to global growth is running out of steam. Germany is officially in recession. The O.E.C.D. forecast that gross domestic product for its 30 member countries would decline 0.3 percent in 2009 from 2008, before recovering slightly to grow by 1.5 percent in 2010.

    The Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers. It is the worst possible scenario to have a “bad strategy” and an “excellent execution” and hence it’s fine to change strtaegy. But what kind of signals are we sending to the world? Are these assets so toxic? I guess it’s about the priorities for limited resources. I haven’t yet analyzed the magnitude of announcement, but Mr Market already spoke what it thinks of it (Don’t forget Mr Market is an emotional person). And see what’s happening now? It seems like everyone wants a pie of this bail-out money. Just show them grim picture, compare with great depression and consequences of not saving them, etc. You got what I mean. Confusion is reigning. TED spread rose yesterday, and so is the LIBOR spread.

    I shall repeat my latest reading of markets, I think, most likely, markets may NOT hold Oct lows. It might test the 2002 lows and oh BTW, I know even if my forecast is correct, I am not going to reap extraordinary profits from it. That’s my psychology. What’s yours?

    Profitable Trading, OP

  • OPNewsletter and Markets Ahead

    What a week. US Markets almost collapsed, bounced and then again dumped in the last 6minutes of trading of last Friday. The news of the last week was and still is, Nikkei, which is at 25 year low. As of this writing, Nikkei closed, again, down by another 6.3%, talk about the fears, bears!!!

    While losing less than markets comforts, there shouldn’t be any complacence in protecting trading capital. For OPNewsletter Nov’08 portfolios, We did so with our miniportfolio and have locked our loss to 2.75% only regardless of the extent and direction of the US Market. We are down 3.81% x-comissions and -5.2% including commissions and we have over 95% uninvested capital. It is a good situation to be in based on the current market scenario. We have few weeks till Nov expiration and I hope to convert these trades to profitable one while funding other trades at the same time.

    Moving on to markets, at current levels, markets should be rising but those are not. The fact that this is one of most oversold level (based on simple MACD and RSI), it is bound for a rebound, but so far rebounds have been weak and weaker. Just look at the attached chart for the sickness of the market, from a MACD standpoint, it is the most oversold level including the great depression (based on prophet charts) and from RSI standpoint, this is the 2nd most oversold level (very close to 1970s bear market) including great depression…

    Even though this is a bear market, I have not yet seen the “Panic”, real panic to sell which generally precedes bottoming, and the fact that most are saying that this is bottom, also makes me skeptical that we haven’t yet reached the bottom. Bottom is generally the point (for a massive bear market) when there seems no future in equity, there is no hope, news is all gloomy, no one cares for fundamentals, media is overblown with scary news…But right now, there is still hope and a plenty of hope in the media and markets….

     Above charts projects a real big picture for a bull market that started from 1932 and based on this we have dropped below the 8,790 fib level and the next level will be 7120, maybe, that’s the point this market find support. If this is broken…let me not write what is about to unfold…

    Trade very carefully and don’t yet be fooled by market rallies…capital preservation is more important than missing a potential opportunity…we, the option traders have plenty of opportunity far more than stock investors, provided we can protect capital for good days, scale-up investments, hedge and better manage the risk, and run a properly allocated portfolio…so it really doesn’t matter much whether or not it is bottom, what matters is “stability” of the markets…which is not the case currently…

    Of course this might be bottom, might be greatest of all times for stocks, might be blah blah…Have fun but be serious, this is your money, not warren buffett’s…he knows inside the companies, he can twist management’s arm, CEOs of those companies die to dine with him, while at least me, the average Joe, haveno access to what goes behind the wall street except to make some knowledgeable guess…

    Profitable Trading, OP

  • More Pain Ahead

    This is one forecast I want to be wrong. I would like to be wrong as this doesn’t paint a good picture of broader economy. If general economy is bad, it’s tough time for everyone including me and I don’t want to forecast tough times. This post is available to only those who are blog members (blog registration is free).

    Here is how the chain started- First home prices’ bubble busted (still spiraling downward), two of the 4 solid wall street pillars who weathered big crises including the great depression, are now history, corporate profits are slowing, massive job cuts are being announced in “already tough” job market due to financial plus other lagging sectors and the stock market is sinking slowly which in turn will affect the consumer spending. That’s where my concern is. I gained more confidence in my hypothesis when I read similar views by respected Richard Russell of Dow Theory Letters.

    According to him –

    And I’m very much afraid that the next phase is going to be a pull back in spending, particularly discretionary spending, by the US public. Jobs will be difficult to find, the word will spread, if you’ve lost your job, you’re not going to find another one at the same level of pay (if you find one at all). This will have an impact on retail sales, and US imports (which will have international implications for the exports of foreign companies, remember, the US is buyer to the world). In this atmosphere, the big money, as I see it, will be made by wealthy speculators who will buy up foreclosed housings at bargain prices, often below the cost of replacement. Everything now depends on people being able to finance what they own, and this takes income and cash. The two rarest items around will be just that — cash and income. The great danger as I look ahead is that the bearish trends will feed on themselves. Frightened people dump their stocks for cash, the result is a sinking stock market. A sinking stock market further frightens people and pushes them to sell (“get me out at any cost”). When I tell people that the correct posture now should be cash and gold coins, they look at me as though I was crazy. That reaction makes me worry.

    There is shortage of funds, everyone knows it and that’s one of the reasons Lehman Brothers was allowed to fail because China and others probably signaled that they wouldn’t put up money so easily especially after having their hands burned. By the way I still don’t understand why Bank of America will pay such a huge premium for Merrill Lynch? A smart business person knew that after Lehman’s failure you could have easily picked-up Merrill Lynch even cheaper than it was trading for. I can’t seem to find an intelligent answer; probably I am too naïve and they are smarter that’s why I am writing a tiny blog and they are raking millions at these companies even though their shareholder’s value is eroding day by day. Another respected fellow blogger Jim of The Kingsland report has even tougher views on this transaction-

    We now despise Bank of America (BAC) following its purchase of greatly despised (by us) Merrill Lynch. They’re liars (not a revelation, I know). The new company would be a scam. On the conference call this morning BAC’s Lewis said they went through Merrill holdings “very carefully”. Huh? Later at the news conference Thain and Lewis said the “light bulb” moment flashed in their brains on Saturday to do a deal. Fascinating that BAC could go over Merrill so carefully in less than 24 hours!

    He goes on to share Goldman’s view:

    “Bank of America’s purchase of Merrill provides long term opportunity for accretion. That said the combined entity will be thin on capital as we estimate that pro-forma tangible common could fall to about 2.5%, while Tier 1 would be about 7.3%. This compares to a peer average of 4.2% tangible common and 8.5% Tier 1. On both metrics, pro-forma BAC would have the lowest ratio among peers. Moreover, while the deal may be accretive long term it also raises the cost of capital – consider BAC’s CDS spreads have widened and S&P has downgraded BAC senior debt. In addition, the need for a BAC shareholder vote presents risk to deal closing.”

    Moving forward, here is an important piece of news that I would like you to pay some attention (though it hardly got any attention from mainstream media). According to a report from China daily, “China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars”, according to China International Capital Corp (CICC), one of the nation’s biggest investment banks. China held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said.

    There is just too much going on. If you are not sure making sense of what’s going on and can’t monitor the market close and can’t go trough the pains of losses, better stay out of the game. There will be lot of opportunities to make money again. Preserve your capital. Bear markets are not the easy ones to handle.
    As there is a saying-

    In bear markets, the winner is the one who loses the least.

    Monday was a tough day with huge volume. These days may very well be dead cat bounce along the downward move. But then again, these are hard times and 200-300points has no meaning. Markets can literally move on any “significant” news.

    Trade carefully, Trade Profitably, OP

  • 7 Ways to Survive This Market

    It was not too long ago when I mentioned that once June is gone, we may see pull back in commodities. And guess what, it’s been only a few days and DBC is hammered badly. Is it only a temporary set-back or long term, let’s see?

    Markets have been pretty tough and remaining on sidelines with cash & gold is as good as it gets. But for how long? We are challenged day in day out. How do we survive such a market scenario? let me being this by sharing that these are extra ordinary times and extra ordinary times require something “extra”.

    What are the extras-

    1. Stay “Extra” close to your trades. It’s not one of those times that you can leave a trade and forget about it. Even if it is as boring a trade as Iron Condor. This month is a pretty good example. Markets have moved over a 1std deviation on the downside.
    2. Develop “Extra” perspective of the situation. A lot is going on. I covered some of those here. In order to benefit, one needs to develop his or her own perspective of the current market environment. Don’t rely only on Technical Analysis or fundamental analysis alone. Don’t rely on gurus to tell ya what’s going to happen. Listen to them carefully but develop your own hypothesis and find data to support that. You may want to prepare a list of what’s working in the current environment and what’s not.

    3. Develop “Extra” scenarios/steps for the trading plan. Yes, I am open on this. No matter if you have subscribed to OPNewsletter or any other newsletter service. If you are relying totally on “service provider” to share the plan, it may be late or you may be late to execute the trades or may execute the trades that you are not convinced of. Huge intraday ups and downs seem to be the norm these days. I suggest running several “what if” scenarios in advance, hopefully everyday (these days), for your trades or portfolio. That way you will be prepared in advance with already identified adjustments so you make right decision during market moves. Bottom line, no one can protect your money as much as you can. Protect it.
    4. Don’t take “Extra” risks, close it. If you feel you are not comfortable with the adjustments, or don’t have full understanding, then book loss and close the trade at pre-identified levels as per your trading plans. One should expect losses in certain months. That’s the cost of running the business (trading business). Preparing in advance will take emotions out of the trading equation.

    5. Stay “Extra” Hedged. Though market have been declining, there is no certainty on what’s going to happen tomorrow and this uncertainty is also reflected in high implied volatility environment. You may want to minimize your profit targets in order to stay hedged. I shall encourage to ensure that you are as close to delta neutral positions as possible (or the bias you have about the direction).
    6. Don’t “Extra” trade: I am tempted everyday by the “opportunities” I see. Almost everyday. Those which I thought were cheap, turned even cheaper either few hours later or a day later (check out charts of my Fantastic Four). Trades where I thought I have my “bulletproof” technical set-up, faltered. Just when you thought things are about to improve, a disaster strikes. I have large portion of my capital in cash and it’s extremely hard to resist the temptation of trading the “opportunities”. I am forcibly taking myself away from the trading monitor and spending time in creating “what if” scenarios.
    7. Compose and “Extra” Discipline yourself:This is a tough market. You may have losses in spite of your wonderful risk management plan. Firstly don’t let the losses become large, 2nd, don’t let it stop you from finding and trading good opportunities. As the old saying goes, “If you ignore the past, you will lose one Eye. Live in the past and you’ll lose both”.

    Trade carefully, Trade Profitably, OP

  • Where Are We Heading Now?

    Tough Markets, the worst June for Dow since the great depression of early 30s. The Dow is down nearly 9.5%, S&P500 nearly 8%, RUT nearly 5.5% and Nasdaq nearly 7.5% for the month of June so far and we still have one more trading day left. Dow Jones industrial average is down nearly 20% since it’s all time of 14,198 in Mid Oct’07. Clearly we are, at least, in the short term bear markets.

    Goldman Sachs said “Conviction Sell” for Citibank. The most brilliant bankers on the street are saying this “now” when Citibank has already lost 2/3 of its market value since the peak just about a year ago, impressive! Isn’t it? is that what you expect from the top notch professionals to realize this so late, the same guys who were betting against the subprime and made fortunes. I still have a long way to go to learn what goes on the Wallstreet. Even yours truly, on this site, as early as November had openly mentioned his bearish stand on Citibank and to the extent that he doesn’t want to keep much cash there. I talked about CFC, FRE, and FNM when those were still high fliers.

    Coming back to Markets, I am looking at the big picture for both Dow and S&P500 and there are are a few things that I would like to share with you.

    Attached is a 20Year, Monthly chart of Dow. I generally, not necessarily always, look at 12month, 60months and 120month moving average to develop one of the big pictures. As you will notice, Dow briefly touched the 60 months MA @11,300 and is sitting almost there. The previous significant bottom was around 2003 (Just before the Iraq War) and the peak was Oct’07. If we use these two as data points, you will notice that Dow has fallen below 61.8% fib retracement, not a good sign. Another support area, that I consider to be a major support is 50% retracement i.e. 10,697 which is almost in the same vicinity as 120months moving average a very solid support area that has been touched only once in last 20years. Another worrisome part is that MACD monthly histograms have not yet completed it’s cycle and RSI is not in the oversold area. Though on daily charts basis, it’s in the oversold reason and we may see dead cat bounce, but I will be very cautious as markets may still have way to go before finding any meaningful bottom. 11,300, followed by 11,000 and finally 10,700 are the area I would be watching closely.

    The story is almost similar on S&P500 but it has some other twists its story. S&P 500’s 61.8% retracement since Mar’03 bottoms is 1270 and that’s where it bounced back on Friday. It is sitting right there AND it is also sitting on 60months moving average that I mentioned above for Dow. But what’s keeping me awake on S&P500 is the VIX. There hasn’t been any panic reflected by high VIX so far. I am attaching a chart for SPX vis-à-vis VIX and you’ll find VIX is nowhere near the last highs when markets sold off. S&P500 is also in the same territory as far as MACD and RSI is concerned. So, same story, on daily basis, it is oversold, but on long term basis, it is not. I shall be careful of 1270, 1225 and finally 1172.

    There are a lot of other things going on in the equities market. India is down, China is down, people have lost lot of money in these markets as many of the “investors” are for first time experiencing bear markets in their recent “prosperous” life time , Japan is down, Hong Kong is down, Europe is down and heading for worst 1st half in last 20 years, Dollar is down, Oil is up, short-selling interest is amongst the highest level, banks are most down, Baltic dry index is slowing, new lows on NYSE is increasing, commodities are rising leaving less money for spending and in fact in some parts of the world it is triggering riots, and many more things to come.

    No one can manage your money better than yourself, and hence preserve the capital as much as possible. Cash will return much better returns than being fully invested, how? Because you will be able to buy things at much lower prices if markets were to fall further. There is no harm in missing an “opportunity” as one can always participate in bull rallies but panic selling doesn’t give time to get out. Panic selling doesn’t let one think straight and therefore may result in decisions that may be even worst.

    And I wonder if “The day” is still ahead. Let me remind you of the old saying, In the bear markets, the winner is the one who loses the least. Choose your asset classes right, if you were to still remain invested.

    For OPNewsletter, we are 65% in cash for the month and we shall take advantage of the upcoming bounce that we may see.

    Stay cautious, stay profitable