Market Blog

Leaning into a one way market will always turn and bite you.

Tue, 9 Aug 2011 00:38:13 -0700

As an option trader there just becomes a point where the risk reward benefit just doesn’t warrant taking the other side. When I looked at BAC trading down 20% in one day it really signaled there was blood on the streets. Hedge funds puking up positions as they race to raise cash for the impending redemptions. I’m not a big fan of BAC but many of the sellers that would have sold on the next rally have now jettison their position. There should be quite a bit of mobility on the upside of this trade now.
Most of us that traded in 2008 remember 1000 point swings in both directions. I’m not quite ready to go to a 2008 stance. As I mentioned before the debt deadline we needed to come down some because the economic data was coming in light. Normally it would take months for us to get where I thought the market was cheap again but we’ve done it in just a few weeks.
With crude at 80 dollars a barrel this should be a massive global tailwind. The difference between the decline of oil in 2008 and the decline now, is the that companies were over levered in 2008. Now they have impeccable balance sheets. Whats really funny is Bernanke told us this was going to happen with commodities in June. Even more ironic is the “cat calls” that called Bernanke clueless yet the man has his degree from Princeton, and I’m willing to bet the ones throwing jibes are lucky to have a degree at all let alone one in economics. Just like the rally in oil that Ben called short term speculation I’m betting he calls the dip in the markets a short term fluctuation, that will be self corrected by the change in commodity prices. As for the QE3 chatter, I think we’re likely to see non action. QE2 is still sitting locked down inside the banks and hasn’t even left the gate yet. Why consider QE3 until QE2 emerges.
As for gold with respect to inflation/deflation. The rise or fall of it means absolutely nothing to global corporations or their consumers. The actual price of this asset is nearly 100% speculation and therefore meaningless to economic circumstance. If the price of oil, rice, or wheat were to rise 100% then we have a problem, but the rise of the pet rock prices have absolutely no impact at all consumers or corporations.
For now gold seems to be a fear tracking gauge, but my hunch is that soon the hedge funds that need to raise capital for the massive losses they have incurred in the last week will start to take their toll. I often hear that gold is under owned by many. News flash, the people that don’t own gold never will under any circumstance, and since it has no useful industrial use, and very limited consumer use, it seems like playing with dynamite. Lots of people made money over the years investing with Bernie Madoff, it is the ones that were trying to get out near the end that got taken to the cleaners. My only point to all this is assuming gold is a safety asset is reckless, and theres not likely to be a nice clear warning light when the dance ends.

Happy Trading

--Scott.

Watch the generals

Fri, 5 Aug 2011 05:55:30 -0700

Todays jobs report felt like the pet that snuck out and has been missing for a week. You’ve looked all over put up posters and still no luck. Then magically out of the blue, sparky returns battered and hungry wagging his tail. The market, these days, is lead by emotional momentum that is fed on by media and social media. Learn to put on filters, even turn them down or off when trying to make a clear decision. Its very important when you hear or see something that you evaluate its relevance and nearly always those people spinning something to you have a vested interest in what they are peddling. (I myself am both long and short AAPL and AMZN)
One needs to be a social psychologist to try understand the erratic an non-sensical behavior the market exhibits, and even that isn’t good enough with the war on machines that have invaded our markets. It is important to position yourself in the lulls and use the emotional dips and rips to capitalize on those positions.
These jobs numbers were a sigh of relief. I think we still may have some room to run on the downside, keep an eye on the high growth power houses. These stocks play by a different set of rules. The kind stocks I’m talking about are NFLX, AAPL, GOOG and AMZN, GOOG and AAPL specifically. These stocks will be leading the charge because these are the equities that money will flow to first. We still should experience some volatility since so much damage was done technically but its time to start fishing.
Its Friday and many of these names are already up, wait for the dust to settle there will always be an opportunity. Let opportunity come to you theres never a reason to chase. If you miss something, sit on your hands. Trading to fix something never works. It appears that even as I write this opportunity is beginning to rear its head.

Happy Friday

--Scott.

Oil likely the missing catalyst for another move higher.

Wed, 3 Aug 2011 23:47:56 -0700

Uncle Ben may have nailed another prediction in June with possible deflating commodity costs. Amazingly crude has slid near 90 dollars a barrel even when unrest in Syria was/is knocking at the door. On any other day we would have been 3 points higher on oil for sure but today we actually dropped 2% during the trading day. It is unclear if this is enough to spur another leg in the market but for some companies it certainly will be.
The action today was certainly had the look and feel of a washout. The insurance I owned became so expensive I had to sell. I think many others were in the same boat judging by the market action. I took a few cheap stabs at a long in the jaws of the sell off, and it didn’t take but about an hour before I was able to grab some more insurance and be sitting on some sizable gains for the day. Even better yet the sell AMZN buy AAPL trade ended up profitable in both directions with brand new positions in both. I also dipped into a high beta AAPL put for additional hedging just in case and an extra call to protect from an over shoot of my butterfly. Regardless, I’m setting pretty good for nowhere, up, or down.
Beware of “head and shoulder” jibber jabber. For starters just because a chart has 3 bumps does not make it a head and shoulders. Look at the chart above where I circled what much closer resembles a real head and shoulders and you can see how that turned out. Everyone in the world thinks they are a chartist these days, so I’ve actually found them much less useful as a trading tool than I did 5 years ago. Charts used to measure sentiment, now that is done via Twitter(and I’m not sure how measurable that is). The 200 day, however, is important and we need to stay on or around that indicator to continue our upward climb. I think the circled pattern may hold some clues as to what things might look like if we do muddle around without loosing that 200 day average. I remember those trading days and all of them were very worrisome.
There certainly is much to worry about, the market will be the final juror of whether we are going to move higher or not. Best thing to do is stay defensive and move in when opportunity presents itself. Today will be interesting, I’m sure if you want in short or long there will be opportunities for both. Patience is a traders number 1 ally. I’ll continue to stay agnostic and not be surprised in a move in either direction.

Happy Trading

--Scott.

Ugly my stay ugly if we don’t find some good news soon.

Tue, 2 Aug 2011 22:57:44 -0700

I know other than twitter I’ve been silent of late on my market blog. I’ve been dedicating all my time to trading and coding. Up until now the market has been fairly boring, but I thought things are murky enough, that it warranted more than 144 characters. Things today went from bad to ugly and then to worse. This kind of thing happening midday with no news to speak of certainly begs to ask, “Is this going to end?” Certainly in 2007 and 2008 there were some months that had me questioning whether the selling would ever end.
Clearly the best time to sell would be when I mentioned last week that we may have already seen our rally before the debt deal was finished. Looking at the chart we can lay out a game plan that spells out what levels we might see if certain market conditions play out. Having a game plan is of utmost importance for not only traders but 401k holders and investors as well.
Sadly as I look at the charts, we’re not even down that much as I step back and look at the long term chart. There is still hope for the bulls but that stand will need to be made tomorrow. It is possible that we get good news out of the jobs number tomorrow, but highly unlikely. For now I’ll keep my shorts and longs. If we can manage to retake the 200 day tomorrow on the S&P there is hope. I circled in the chart above a pattern not so dissimilar to our current one that happened back in 2010. The 200 day moving average was violated a number of times and the S&P was very choppy for a few months during this time period. If we can manage to stay flatish here then that range bound pattern is probably what we’re looking at. I’d love to see this pattern play out but I can’t say its the one I think will play out.
It has been quite a while since we’ve had real selling panic in the market. Before when I’ve been bullish on support levels there was economic data to support those theses. Now, the economic data portends more selling and I’ve placed a blue line at the top of the base where our first support level is if we break down. Not only is the data bad, but now as we pull in our government spending horns many of the consumeristic drivers of the domestic economy are going to be cut causing even more hardship.
I’ve been a pretty vocal bull up until last week. Now I’m pretty much a bear, but could become agnostic if we manage to some how reverse course this week. I would have to see some really great jobs numbers, and currently we just aren’t getting them.
QE3 was getting tossed around like people believed that the Fed would need to keep buying treasuries after QE2. I think the surprise here to most is that Ben is likely an adult and willing to float a trial balloon and let the market come down some as well as let commodities that matter also depreciate. The only commodity going up is gold and for those willing to play with dynamite, be my guest. The sell off in crude alone is enough to put the wind in some sails eventually.
For the nimble trading in these conditions can be very profitable. I setup my shorts last week but spent most of the day purchasing longs against my new found positions of size. The beauty of trading against the herd is you get the best prices as people flee into your orders. Or as Guy Adami said on Fast Money, Feeding the ducks. My goal with my long short positions is to own as much of the cheap stuff as I can while paying for it with the devalued over priced goods. Long AAPL short AMZN is something I’m currently holding. and its working well. The sizes of these positions change intraday as I adjust to reduce risk.
The market waters are very muddy right now, tread with caution. Both long and shorts can be dangerous, cash is king when things get ugly and patience is free.

Happy Trading,

--Scott.

The end of AAPL consolidation likely rests on 200 day.

Wed, 25 May 2011 00:32:19 -0700

It seems like forever that we’ve been trapped in this consolidation pattern and it feels like a prison as we putter along sideways. Most everyone certainly thinks we deserve a better share price we’re being given, but I would point out, if we were trading at a premium, then selloffs like we have in tonights futures would seem much more worrisome. For now patience and P/E is our friend.
The problem with sideways is the longer it continues the longer your stuck to sit and conjure fears about what must be going wrong. It certainly doesn’t help when the media and every self proclaimed genius trader is prognosticating the end. I’m certainly not going to claim to genius trader, but I am a patient trader. Patience hasn’t let me down yet, and buying in scales is incredibly important for sideways markets like we are now stuck in.
I mentioned some disappointment with our AAPL rally earlier this week and that might be somewhat confusing to some, especially given my long position in the name. At this point I just want to get the pain out of the way and get our test of the 200 day moving average out of the way. Down there AAPL will be trading at single digit forward P/E and I have to believe there are giant buy orders set to kick in once we do. I generally work with spreads, but at the 200 day I’ll be looking at naked calls. I will however be waiting until the volatility and the call price are in the sweet spot where volatility has died and the call price is still cheap. Until that time, however, we seem to be stuck in limbo, or purgatory, depending on your point of view.
The 200 day game plan is by no means a foregone conclusion, and if we get the same kind of action we got the last few times we neared the moving average we’ll likely bounce just above this price, or even near current price. I’ll wait and see, again patience is the name of the game. Especially in the spring/summer doldrums. I do believe that gains will be harder to come by as the market matures. What does a mature market really mean? It means knowing what you own and I know I’ve said it so many times this article but, patience.

Happy Trading,

--Scott.