6pm I hinted at some of the bullish psychology in the market in some of my recent posts. The action today confirmed it. There was absolutely no reason for the market to go higher today. Absolutely no reason except for the fact that the worst is probably baked in.
I was feeling bearish with this morning's post but by the afternoon, all the puts I owned were sold. I have started small long positions in the index ETF's I had been bearish on. I will wait for some pullbacks (we WILL have some) but I will continue to add.
Hang on for some wild action this coming week. Look to get a bullish bias from me for the forseeable future. Why? Because the trend has changed. I like to invest in trends. Hence the name of the blog. Until next time, stay low risk..
Friday, December 5, 2008
WOW and The Paradox of Wall St.
8:45am That jobs report was worse than I expected. 533k? I think I have been clear with all my short positions on the indexes exactly where I stood on how the jobs report was going to be. If you had to pin me to a number, I would have guessed 500k. That is not an independent economic analysis. Although I have a degree in economics, there were PhD's out there who were forecasting 300k in losses. My guess would have been based on some of the worst numbers out there that truly smart people (not me) were forecasting.
I have been short and will continue to be short for the time being.
Here is the paradox of Wall St. right now:
The vast majority of people are only sophisticated enough to make money when stocks go up. Therefore, they have only half the tools to make money in the market. Most are also either confused by, or entirely uninterested in, the market in general. These factors have made Wall St. trillions (literally) of dollars over the decades.
The brokers prey on the lack of sophistication and lack of interest in the markets. It is an easy sell because they can trot out all the statistics about stocks being the best performing asset over long periods of time. While the stats are true and correct, there are these economic anomalies - like the one we are currently experiencing - that simply throw their logic out the window. Someone who invested in the S&P index 10 years ago is now essentially back to where they started if you strip out the effects of dividends. That is a lot of wealth to evaporate in the space of a couple of months. That is a lot of credibility that needs to be restored.
So here is the problem. It goes back to some of Nash's work at Princeton. He argues that economies work most effectively when people act in their own self interest AND the interest of the good of the group. So here we are. For everyone to get wealthy via the stock market again, trust needs to be restored. People will need to act in a self-interested way by having faith in the markets again. This will be of ultimate benefit to the group (all investors) because asset values begin to rise as people begin to buy again. We just need to get to that point. And I am not sure we have gotten there yet.
The psychology of the market is such that most of the bad news is already expected but there needs to be some faith that it isn't going to get even worse. I am not sure we are at that point yet. Is the psychology better? Yes. Are we back to having full faith in the market yet? Not so much.
Yes, there are going to be people that will shun the market forever because of some of the losses they have endured. That is unfortunate. But, at the end of the day, to paraphrase Dr. Jeremy Siegel, "Where else are you going to go?" Do you put your money in treasuries that yield less than 3%? Do you put your money into real estate? Do you try to catch the falling knife of commodities? Do you stuff cash under the mattress and lose out to inflation?
Ultimately, most of us will head back to the equity markets. But it will take a long time to get the trust back that Wall St. built its empire on. The question is when do you take that leap of faith? Until next time, stay low risk..
I have been short and will continue to be short for the time being.
Here is the paradox of Wall St. right now:
The vast majority of people are only sophisticated enough to make money when stocks go up. Therefore, they have only half the tools to make money in the market. Most are also either confused by, or entirely uninterested in, the market in general. These factors have made Wall St. trillions (literally) of dollars over the decades.
The brokers prey on the lack of sophistication and lack of interest in the markets. It is an easy sell because they can trot out all the statistics about stocks being the best performing asset over long periods of time. While the stats are true and correct, there are these economic anomalies - like the one we are currently experiencing - that simply throw their logic out the window. Someone who invested in the S&P index 10 years ago is now essentially back to where they started if you strip out the effects of dividends. That is a lot of wealth to evaporate in the space of a couple of months. That is a lot of credibility that needs to be restored.
So here is the problem. It goes back to some of Nash's work at Princeton. He argues that economies work most effectively when people act in their own self interest AND the interest of the good of the group. So here we are. For everyone to get wealthy via the stock market again, trust needs to be restored. People will need to act in a self-interested way by having faith in the markets again. This will be of ultimate benefit to the group (all investors) because asset values begin to rise as people begin to buy again. We just need to get to that point. And I am not sure we have gotten there yet.
The psychology of the market is such that most of the bad news is already expected but there needs to be some faith that it isn't going to get even worse. I am not sure we are at that point yet. Is the psychology better? Yes. Are we back to having full faith in the market yet? Not so much.
Yes, there are going to be people that will shun the market forever because of some of the losses they have endured. That is unfortunate. But, at the end of the day, to paraphrase Dr. Jeremy Siegel, "Where else are you going to go?" Do you put your money in treasuries that yield less than 3%? Do you put your money into real estate? Do you try to catch the falling knife of commodities? Do you stuff cash under the mattress and lose out to inflation?
Ultimately, most of us will head back to the equity markets. But it will take a long time to get the trust back that Wall St. built its empire on. The question is when do you take that leap of faith? Until next time, stay low risk..
Thursday, December 4, 2008
Volatile Day
5pm The day was marked with some good sized highs and lows. This is good for the trader and very sickening for the long term investor. The interesting part was that when the market started selling off in front of the jobs report tomorrow, the cascading sales didn't really materialize. It is something that the bulls should like to see. The market stopped the freefall going into the close.
The oil market sunk like a stone again. If you are short the USO like I recommended a while back, you are still good. Oil can certainly have a 3 handle sooner than it can get back to $50.
I got long briefly this morning on the SPY when I saw the positive action in the morning. It started to break down a little and I took a smaller profit than I would have liked, but a profit is good nonetheless. I continue to hang on to the QQQQ puts I bought a while back and I will still hang on to them. They may make me more money tomorrow if the market heads lower tomorrow as I anticipate.
Here is going to be the interesting thing with the jobs number tomorrow. The last couple of weeks of jobless claims have been bad but not as bad as they could have been. Will the monthly jobless claims be better than the consensus? We will have to see. The action will be interesting. Buckle up. Until next time, stay low risk..
The oil market sunk like a stone again. If you are short the USO like I recommended a while back, you are still good. Oil can certainly have a 3 handle sooner than it can get back to $50.
I got long briefly this morning on the SPY when I saw the positive action in the morning. It started to break down a little and I took a smaller profit than I would have liked, but a profit is good nonetheless. I continue to hang on to the QQQQ puts I bought a while back and I will still hang on to them. They may make me more money tomorrow if the market heads lower tomorrow as I anticipate.
Here is going to be the interesting thing with the jobs number tomorrow. The last couple of weeks of jobless claims have been bad but not as bad as they could have been. Will the monthly jobless claims be better than the consensus? We will have to see. The action will be interesting. Buckle up. Until next time, stay low risk..
Wednesday, December 3, 2008
Solid
5pm Solid. That is what I would call the market's action today. We had a lot of things that could have sent the market dramatically lower. We had a dismal ADP report. We had a weak beige book report. We had FCX saying that business was so bad that they cannot commit to their dividend anymore. Even with all of that, the market went higher.
What does this mean? It means that there are some constructive psychological underpinnings going on in the market. That is all I can say at this point. It does not mean that there isn't another 700 point down day coming soon. It doesn't mean that the Dow goes to 12,000 in 2 months. What it does mean is that the expectations - emotional and statistical - have been lowered enough that even Great Depression-like numbers are not going to phase the market much.
How do I make money with this knowledge? I got rid of the majority of my short positions today. I haven't gotten ridiculously long, because there will still be some down days coming. What I have done is took some profits and I have a very cash heavy portfolio now. I am looking at a long position in some index funds but I haven't gotten really long yet.
Hang tight if you are really long in your portfolio. Look to add some longs with some more constructive action. Until next time, stay low risk..
What does this mean? It means that there are some constructive psychological underpinnings going on in the market. That is all I can say at this point. It does not mean that there isn't another 700 point down day coming soon. It doesn't mean that the Dow goes to 12,000 in 2 months. What it does mean is that the expectations - emotional and statistical - have been lowered enough that even Great Depression-like numbers are not going to phase the market much.
How do I make money with this knowledge? I got rid of the majority of my short positions today. I haven't gotten ridiculously long, because there will still be some down days coming. What I have done is took some profits and I have a very cash heavy portfolio now. I am looking at a long position in some index funds but I haven't gotten really long yet.
Hang tight if you are really long in your portfolio. Look to add some longs with some more constructive action. Until next time, stay low risk..
Bottoming?
8am We continue to see some encouraging action in the market. That isn't to say there isn't some pain ahead for long investors. There is. But we are moving in a constructive direction. I mentioned in my last post that the jobs number will be an indicator of how the psychology of the market is holding up. I can't imagine a number that will shock the market at this point, although it is very difficult to fully trust anything coming from the government.
I care about two things when looking at the jobs number Friday. I care about what the actual number is in relation to the expectation. The average expectation is for a drop of 320,000. I want to see where the number comes out. Then, knowing what the actual number is, I want to see how the market reacts to it.
If we get, say, a loss of 500,000 on Friday, will the market drop off dramatically? Or will the market take it as something we were kind of expecting? If we get something close to expectations, will the market take it in stride? Or will the market use the number as a reason to rally higher?
All of this is an indication of how the market feels about the outlook for stocks.
The ADP report came out a couple of minutes ago and the market reacted negatively. If this is any indication of what we will see Friday, we might be in for another leg lower. I have not taken off my short postions or anything I have mentioned before like gold or the UDN trade. We will see how the market shakes out today. Until next time, stay low risk..
I care about two things when looking at the jobs number Friday. I care about what the actual number is in relation to the expectation. The average expectation is for a drop of 320,000. I want to see where the number comes out. Then, knowing what the actual number is, I want to see how the market reacts to it.
If we get, say, a loss of 500,000 on Friday, will the market drop off dramatically? Or will the market take it as something we were kind of expecting? If we get something close to expectations, will the market take it in stride? Or will the market use the number as a reason to rally higher?
All of this is an indication of how the market feels about the outlook for stocks.
The ADP report came out a couple of minutes ago and the market reacted negatively. If this is any indication of what we will see Friday, we might be in for another leg lower. I have not taken off my short postions or anything I have mentioned before like gold or the UDN trade. We will see how the market shakes out today. Until next time, stay low risk..
Tuesday, December 2, 2008
Little bounce today...
5pm The market ended the day higher as I expected. The market is starting to look a little more bullish as I mentioned in the last couple of posts. We won't see 15k on the Dow in a while, but things are starting to look a little more bullish. Going back to the moving-from-uncertainty-to-certainty perception, we seem to have priced in a weak jobs number coming on Friday. I can't imagine a number that will make the market tank.
That said, we need to probably pull back tomorrow and Thursday. That will set up a nice sized rally on a not-armageddon jobs number.
Sears (SHLD) reported awful numbers this morning and the stock rocketed higher. Go Figure. Glad I was not a part of that one. It goes along with the same theme of cash not being a bad thing. I could have told you that the numbers were going to suck. I had no idea where the stock was going to go with the earnings report. In a normal market, I would have been short (buying puts) going into the earnings report. In this case. Cash was nice.
The dollar will continue to weaken long term. I still have the (UDN) trade on. I think that one will be in the portfolio for a little while.
The big news in the markets today was the bailout of the auto makers. All I have to say about that is Chapter 11. Last time I checked, we bailed out Chrysler once before. That clearly hasn't worked. Why give them more? Besides, Ford is forecasting 14 million in auto sales in 2011 when it projects it will finally turn a profit. I have heard of no one who thinks 14 million cars will be sold in 2011. The most aggressive projections I have heard is 11.5 million or 12 million. No way. Let em file. Until next time, stay low risk.
That said, we need to probably pull back tomorrow and Thursday. That will set up a nice sized rally on a not-armageddon jobs number.
Sears (SHLD) reported awful numbers this morning and the stock rocketed higher. Go Figure. Glad I was not a part of that one. It goes along with the same theme of cash not being a bad thing. I could have told you that the numbers were going to suck. I had no idea where the stock was going to go with the earnings report. In a normal market, I would have been short (buying puts) going into the earnings report. In this case. Cash was nice.
The dollar will continue to weaken long term. I still have the (UDN) trade on. I think that one will be in the portfolio for a little while.
The big news in the markets today was the bailout of the auto makers. All I have to say about that is Chapter 11. Last time I checked, we bailed out Chrysler once before. That clearly hasn't worked. Why give them more? Besides, Ford is forecasting 14 million in auto sales in 2011 when it projects it will finally turn a profit. I have heard of no one who thinks 14 million cars will be sold in 2011. The most aggressive projections I have heard is 11.5 million or 12 million. No way. Let em file. Until next time, stay low risk.
Nice Pullback
The market headed much lower as expected yesterday. It was a good time to buy into the solid blue chips I mentioned yesterday. You should continue to be cautious as you pick up some of the beaten down names. Continue to buy very small positions and add to them on days like yesterday.
The encouraging sign for the bulls is that today looks like it will move a little higher at the open. After a bloodbath like yesterday, one would expect to see another lower day. The encouraging sign is that the market is starting to move more toward an area of more perceived certainty. That is why you are seeing the market head for a little bounce today. If we were in a really uncertain time like we were 6 weeks ago, the market would have headed for a lower open again today. Overall, the market is continuing to bounce along the bottom but some of the action is encouraging.
I still think we have to go lower again in the medium term, but it is starting to look like a market trying to find its legs.
A quick note on the gold GLD trade I set you up with a while back. The action over the last couple of days is exactly why you sell half of the position when you get a quick double like you did. Your entire original investment is safe and when it pulls back like it has recently, you don't have to worry about losing everything.
Overall, continue to stay in the trades that present low risk opportunities. Cash is not a bad thing in a market like this. Doing nothing is always a good option if you have nothing compelling out there. Until next time, stay low risk.
The encouraging sign for the bulls is that today looks like it will move a little higher at the open. After a bloodbath like yesterday, one would expect to see another lower day. The encouraging sign is that the market is starting to move more toward an area of more perceived certainty. That is why you are seeing the market head for a little bounce today. If we were in a really uncertain time like we were 6 weeks ago, the market would have headed for a lower open again today. Overall, the market is continuing to bounce along the bottom but some of the action is encouraging.
I still think we have to go lower again in the medium term, but it is starting to look like a market trying to find its legs.
A quick note on the gold GLD trade I set you up with a while back. The action over the last couple of days is exactly why you sell half of the position when you get a quick double like you did. Your entire original investment is safe and when it pulls back like it has recently, you don't have to worry about losing everything.
Overall, continue to stay in the trades that present low risk opportunities. Cash is not a bad thing in a market like this. Doing nothing is always a good option if you have nothing compelling out there. Until next time, stay low risk.
Monday, December 1, 2008
We're back...
Hope everyone had a great holiday weekend. After a little break for thanksgiving I am back with some insight into last week. Do NOT think that the bulls are going to be out and running this week. Just because we were up last week does not mean that the bottom is in. It is not time to be outrageously bullish thinking we do nothing but go up from here.
That said, we are seeing some things that appear to be constructive. Here's why. Every bull market is where we move from a time of perceived uncertainty to a time of perceived certainty. The tech bubble was a time where we just KNEW that any stock with .com at the end was going to do nothing but make a ton of money. We KNEW that the mall was dead and that everyone was going to magically switch over shopping exclusively on line. Remember? That was a bull market. No one thought that the reality was going to be somewhere in the middle of shopping on line and shopping at the mall. It was a time of perceived certainty. It wasn't true certainty about the future, but it felt like it.
Flash forward to September-October 2008. We didn't have a clue what these financials had on their balance sheets. We still don't in some cases. We had no idea what was the next financial company to implode. We weren't sure of the consequences. We weren't sure that we were going to have a financial system. We weren't sure if we were looking at an economic slowdown that makes the Great Depression look like the good ol' days. The list goes on but you get my point.
Now here we are in December. We have seen some companies collapse. We have seen a complete seizure of the credit markets. We have seen the effects of government capital injections and other inverventions. We are feeling more sure that things are not going to be financial and economic armageddon. But we are not in rip roaring bull market territory. Now is probably the time to buy some stock positions that you feel comfortable owning for a long time in companies that you feel will last at least another 10 years.
You might want to consider financials that the government will not let fail under any circumstances. BAC, C, WFC, JPM, USB, are some names you can add in very small chunks. Look at some of the geographically diversified blue chippers. JNJ, BA, MCD, CAT, to name a few. They have been beaten down a lot with this market. With a very long time frame - 5 years or so - you will be fine. Buy the stocks. Sell covered calls in the meantime. Set up long term calendar spreads. There are quite a few things a long, long term constructive investor can do in this market.
Overall, we will definitely head lower short term. We moved up too far too fast. The moves lower should be constructive times for a longer term investor. Remember I said we might see 7,000 on the Dow but probably not 5,000? I am sticking with that. 7,400 is the short term low. Look to that level or around there for support. If we head much lower after a retest, look out below. The 5,000 Dow might be on the table. Until next time, stay low risk.
That said, we are seeing some things that appear to be constructive. Here's why. Every bull market is where we move from a time of perceived uncertainty to a time of perceived certainty. The tech bubble was a time where we just KNEW that any stock with .com at the end was going to do nothing but make a ton of money. We KNEW that the mall was dead and that everyone was going to magically switch over shopping exclusively on line. Remember? That was a bull market. No one thought that the reality was going to be somewhere in the middle of shopping on line and shopping at the mall. It was a time of perceived certainty. It wasn't true certainty about the future, but it felt like it.
Flash forward to September-October 2008. We didn't have a clue what these financials had on their balance sheets. We still don't in some cases. We had no idea what was the next financial company to implode. We weren't sure of the consequences. We weren't sure that we were going to have a financial system. We weren't sure if we were looking at an economic slowdown that makes the Great Depression look like the good ol' days. The list goes on but you get my point.
Now here we are in December. We have seen some companies collapse. We have seen a complete seizure of the credit markets. We have seen the effects of government capital injections and other inverventions. We are feeling more sure that things are not going to be financial and economic armageddon. But we are not in rip roaring bull market territory. Now is probably the time to buy some stock positions that you feel comfortable owning for a long time in companies that you feel will last at least another 10 years.
You might want to consider financials that the government will not let fail under any circumstances. BAC, C, WFC, JPM, USB, are some names you can add in very small chunks. Look at some of the geographically diversified blue chippers. JNJ, BA, MCD, CAT, to name a few. They have been beaten down a lot with this market. With a very long time frame - 5 years or so - you will be fine. Buy the stocks. Sell covered calls in the meantime. Set up long term calendar spreads. There are quite a few things a long, long term constructive investor can do in this market.
Overall, we will definitely head lower short term. We moved up too far too fast. The moves lower should be constructive times for a longer term investor. Remember I said we might see 7,000 on the Dow but probably not 5,000? I am sticking with that. 7,400 is the short term low. Look to that level or around there for support. If we head much lower after a retest, look out below. The 5,000 Dow might be on the table. Until next time, stay low risk.
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