Friday, October 31, 2008

Some treats at the end of ghastly October

The stock market drops a few small treats in the bags of the bulls after one of the worst months in stock market history. For October, SPY is down about 24%.
//edit: actual decline was more like 17%, 24% was the decline down to the low for the month.

It is easy to second guess my non-action since October expiration on the 17th. What is more useful is to think about what comes next. My best guess is that the rally has a bit more to go in the short term, but the that new lows are on the menu later in the year.

A couple of days ago, Bill Luby at Vix and More (link) wrote about "The Fear Bubble Bursting." An interesting concept, a bubble of fear, that manifested itself in huge option premiums and high VIX readings.

No current trading positions.

Wednesday, October 29, 2008

SPY to 104

The near-record rally on Tuesday was about ten points on SPY. One scenario is another ten points of upside, taking SPY to about 104 as a low risk place to go short. The breakdown gap from October 7th, at 110 is resistance. What if something else happens? Again, I will wait for another low risk opportunity to present itself.

I missed the big rally. I looked at a lot of stocks, but couldn't move fast enough, or get the price I wanted. The stock market is still moving too fast for my trading style (positions traders are quite slow compared to day traders).

Tuesday, October 28, 2008

Post election decline?

A lot of folks are thinking that there will be a relief rally once the uncertainty of the U. S. election is resolved. However, at Barrons Online (link) there is this bit:

>>
presidential elections in bear markets, while rare, invariably foreshadow further declines once the shouting is over and the ballots are counted.

Since 1928, Mr. Harris reports, there have been four times when a bear market's reign encompassed Election Day and year's end: 1932, 1948, 1956, 2000. (The 1940 bear market started after the election.) The average decline in the Standard & Poor's 500 was 5.89%, but during that relatively brief span, the index at its low was off, on average, by more than 10%.

So no matter who wins, if history's any guide, for investors the rest of the year stacks up as something less than exhilarating. (We know, what else is new?)

>>

Friday, October 24, 2008

10,000 Maniacs

This song seems appropriate for a limit down open, Youtube link to song video.

I don't have any great wisdom to offer, other than the same stuff that I've been writing. Oversold can become oversold-er, cheap can become cheaper. Fast markets are not a place for position traders (or novices). For my trading style and position size, I cut losses ruthlessly, even if I think they will come back. It sometimes only takes one or two runaway losses to change the game, or take out an entire account. When I am trading poorly, I trade smaller, and take longer breaks from trading.

Wednesday, October 22, 2008

New low for GLD

GLD breaks below the old low at 72.51. I wrote that I might go long GLD on this retest. However, I didn't like the way it got there, so stayed away. Stocks also look like they are going to break their recent lows, though I may look at the long side at SPY 84.

Earnings are pouring out. I am looking at a lot of stocks, trying to see if there is any pattern to the movements. So far, all I have been doing is looking, not trading. Given my recent spate of losing trades, I remind myself that looking doesn't cost money, making mistakes does.

Flat - no positions.

Tuesday, October 21, 2008

Blast from the past: Value Line MAP

Old timers might remember going to the library or the brokerage office to look at the binders for the Value Line Investment Survey.

With the Internet, much of the same information can be accessed with a few mouse clicks. In the old days, Value Line was one of the few easily accessible information sources for would-be stock investors.

Value Line publishes a number for the Median-Appreciation-Potential (MAP). This represents a long term valuation view for the overall stock market.

Mark Hulbert writes about Value Line Median Appreciation Potential at MarketWatch (link)
>>
Value Line's Median Appreciation Potential currently stands at 135, which means that the median Value Line analyst is projecting that the stocks he follows will be 135% higher in four years.
...
The last time it was as bullish as it is now was in late 1990

>>

Saturday, October 18, 2008

Dow 30 ranked by cash percentage

The table is at the end of this post. The five highest are financial type companies, plus GM. GM has obligations in terms of retirement and union contracts. That leaves the most interest group as:

KO, IBM, AA, MSFT, XOM, INTC, HPQ, MRK, BA, PFE

None of these ten have huge, huge cash positions, but enough to do acquisitions without additional financing. The cash per share figure is taken from Yahoo. As always there may be errors in the data, so do your own homework.

Another big cap stock that has lots of cash is IP. Of course, with the housing slow down demand for lumber is down. However, IP has cash on hand to weather the storm.

Table: Dow 30 stocks ranked by cash per share percentage

Sym price cash/sh per
T . . . 25 . . 0.27 . . 1%
KFT . . 29 . . 0.46 . . 2%
PG .. . 62 . . 1.2 .. . 2%
CAT . . 39 . . 0.78 . . 2%
GE .. . 19 . . 0.38 . . 2%

VZ .. . 27 . . 0.72 . . 3%
HD .. . 20 . . 0.62 . . 3%
WMT . . 54 . . 1.70 . . 3%
MCD . . 54 . . 2.10 . . 4%
DD .. . 34 . . 1.6 .. . 5%

MMM . . 56 . . 2.8 .. . 5%
DIS . . 25 . . 1.4 .. . 6%
CVX . . 62 . . 4.1 .. . 7%
UTX . . 51 . . 3.6 .. . 7%
JNJ . . 63 . . 4.6 .. . 7%

KO .. . 44 . . 3.5 .. . 8%
IBM . . 91 . . 7.3 .. . 8%
AA .. . 12 . . 1.0 .. . 8%
MSFT .. 24 . . 2.3 . . 10%
XOM . . 68 . . 7.6 . . 11%

INTC .. 16 . . 2.2 . . 14%
HPQ . . 40 . . 6.0 . . 15%
MRK . . 29 . . 4.6 . . 16%
BA .. . 45 . . 9.9 . . 22%
PFE . . 17 . . 3.8 . . 22%

AXP . . 23 .. 17.9 . . 78%
BAC . . 23 .. 68.6 .. 298%
JPM . . 39 .. 226 . . 579%
GM .. . 6.4 .. 38 . . 594%
C . . . 15 .. 154 .. 1026%

Friday, October 17, 2008

1-3 for October expiration

For the trading month ending with October expiration I have one small winner, three big losers. A bad month any way you slice it. That said, my primary tactic is selling naked puts (equivalent to covered calls deep in the money). When stocks fall quickly, what is usually a low risk, low reward trade can quickly turn into disaster.

SPY was down about 25% for this trading period. My trading account down about 2% on the short term trades that I post on this blog. I am sure there are a few traders that made big money this month. I am just as sure there are likely ten times as many traders that took huge hits, with some having lost everything due to margin calls, leverage and disregard for stops.

When I am in a bad streak, I tend to trade smaller, and take longer breaks from trading. This served me well this month. All four of my trades would have been profitable if I had held until expiration. However, the drawdowns would have been hellacious, and there is never a guarantee that holding on will provide a better result. There is always a chance of a game changing loss when selling naked puts and that is what a risk averse trader must avoid.

Gold is looking interesting in here. If GLD retests the lows at 72.5 that might be a place where I look to go long again.

It may also be an interesting time for stock pickers. When there are no earnings, I like to look at sales. Others have commented that they will look for a high cash position. In a land without credit, the company with cash can be king. I may be spending some time looking for stocks with strong sales numbers and strong balance sheets. If I buy any for the long term, I won't post the buys and sells in this blog, but may mention them in list format as stocks that I find to be interesting.

Enjoy the weekend.

Thursday, October 16, 2008

Buy SPY (sell puts)

Buy SPY via selling the Oct 83 puts (11 points out)

I am not brave enough to buy when the gap on SPY is filled at 89. Instead, I decide to wait until it is near closing time. I choose the strike price below the old low. I place a limit order and it slips away as the rally continues. I adjust the limit lower, and get filled.

It is another wild, wild day in the markets with more huge swings. I was tempted to go long on the early morning rally, but the fast moving market discourages me. I wrote about going long at SPY 89, but again the fast moving market discourages me.

There is always a chance that I get pummeled again. However, each daily decline has been less than 10% for one day in the U.S. It would take more 10% that for these puts to come into the money.

Long SPY expiring tomorrow

Tuesday, October 14, 2008

SPY 84 and 105

There is a good chance that SPY will fill the gap from Monday's gap up, when SPY moved from 89 to 94. Friday's low around 84 and Monday's high around 105 define the range. This doesn't mean that those numbers will define the range, but they are the action numbers to watch.

Other bloggers have written that a gap up usually means more upside, however, most of the time the gap is filled. My thinking is that buying that retracement to the gap is the high percentage play. What if the gap isn't filled? Then I will look for some other high percentage plays.

Saturday, October 11, 2008

What next? Dow 5000?

As always, what comes next is the focus. I can glance back and see that I got out of my IBM near the lows for the day on Friday. Still, it was the plan when I bought and I followed that plan. This wasn't the first time I covered near the low, and it won't be the last. It is what happens if a trader uses stops. Traders that don't use stops will usually hedge in other ways. Those that don't use stops or hedge, tend to trade very small. If they do none of the above, they will usually go broke sooner rather than later.

I like baseball analogies, so for traders the relief pitcher mentality is a good one. After a bad outing, shake it off, forget about last night's game, and look at what is up next. After a good outing, don't get too high, because odds are you will be humbled soon enough. Position traders incur losses, just as most relief pitchers will sometimes blow saves and give up hits and runs. It happens to the best. This is not to say to forget everything, and repeating the same mistakes over and over. Keeping a blog, or a trading journal, gives it a memory boost, and the lessons sink in better.

I often will take a break from trading after a bad streak, and this month has certainly been a bad time.

As for the topic heading, the market is at extreme oversold readings, but oversold has become oversold-er time and time again. I expect a rally, but I expected that Thursday morning too and took two of my worst losses for the year. Just a few blog entries ago, I wrote about 110 and then 95 as support for SPY. SPY went to 85! Slicing through in just a few trading sessions.

About a year ago, I wrote to a friend that the stock market might be in for a "big one" like the 1973/74 bear market when the indexes fell 70%. The parallel was the withdrawal from Vietnam, and what looks like will be a similar withdrawal from Iraq. Those kind of events have a big effect on national confidence and psychology. At the end of the day, confidence and perception play a large role in pricing of stocks.

This isn't a time to be aggressive. As my profile states, "live to trade another day." If we are down 40% and headed for 70% that means it will get a lot nastier. 70% off the Dow high translates into ~5000. I'm not predicting 5000, but I wouldn't rule it out. Of course, it will be easy to call the bottom in hindsight. A million paper-traders will claim they bought the bottom, in hindsight months after it occurs. However, as my foray to the long side on Thursday morning demonstrates, it is not so easy in real time. In hindsight those trades were on the foolish side, even though in real time the stock market was at support, and the news and sentiment back drop seemed ripe for a big rally.

Flat (no trading positions)

Friday, October 10, 2008

Warner: on various option strategies

Adam Warner writes about the pros and cons of some popular option strategies at his blog (link).

>>
I don't think walking in right now and slapping on buy-writes, or their Evil Twin, naked short puts, is a bad idea. I don't think it's the best idea right now either, but I mean it all depends on what you are trying to accomplish. You're locking in fat volatility sales, but the flip side is there have been a whole lot of sales that looked very fat not all that long ago. You're also at worst, buying stock at prices even lower than these, of course that too sometimes seems dubious when the stock actually gets there.
....

.... quoting Nick Perry ...
The issue with premium selling is the you have limited upside and can be subject to some big risks. That is a fine strategy if you understand that risk and have the capital to ride through a potential blow-up. However, for most of us, I think it best to keep this quote, attributed to John Maynard Keynes, in mind...

"Markets can remain irrational longer than you can remain solvent "

>>

Sell IBM (buy back puts)

Ouch. I place a limit order to cover my puts, then make it a market order as the market slides more. I get filled at a bad number and take a 250% loss on the premium amount.

Better to follow my rules, such as they are, than to hope and pray for a rebound and risk taking a game changing hit that takes years to recover from. Yes, the market may rally here, but in the first ten minutes of trading, my IBM position slipped about 80% on the premium amount. By the time I finish typing my entry here, it looks like it has rebounded all that slippage and my original limit order might have been filled. Fast markets can be death for position traders like me.

These last two trades were horrible in terms of percentage losses at 200% and 250% on the premium amount, but still relatively small in dollar amounts. For example IBM was down 8 points from my entry yesterday, the option moved 1 point. In percentage terms the one is greater than the eight, but it books as a one point loss.

Be careful out there.

No positions

Thursday, October 09, 2008

Sell SPY (buy back short puts)

Yikes! It is like stepping on a hornet's nest. I get out taking a 200% loss on the premium amount in a few hours. Oversold becomes oversold-er.

I believe this is the first time this year that I bought and got stopped out on the same day. I put my big toe in and the water was scalding hot, hot enough for a nasty burn. Ouch.

Be careful out there.

Still long IBM

Buy SPY (sell puts)

Buy SPY via selling Oct 85 puts

Like I wrote yesterday, I might try and play the next rally attempt. This is sooner than I thought, but here it is. As almost always, these are what I consider low risk, low reward trades. If the bottom continues to fall out, I will cut and run.

Positions: long IBM, SPY

Buy IBM (sell puts)

Buy IBM via selling Oct 75 puts

Good earnings and forecast from IBM. Puts are 18 points out with eight days until expiration.

Wednesday, October 08, 2008

This is the end?

This morning the Doors song, "This is the End," played in my head (YouTube link).

If you blinked you might have missed the "rally" or "rallies" that happened before the open and intra-day.

The way I think about trading these steep declines is to stay away. I would like to let a bottom to form, and then on the retest, go long. Short sharp rallies are bear market action. I have written in the past about two failed rallies and the third one taking hold. Today's action would count as #2 in my mind. The first was on the 800 point Monday plunge last week that got cut in half by the close. It generally doesn't pay to be the hero, though I might stick my big toe back into the trading pool on the next wave of selling.

No trading positions

Monday, October 06, 2008

The sky is falling (Dow below 10000)

Well, at least the Dow is, now below 10000, down 364.

I wish I could write something profound or at least witty...

Cramer was on national TV telling folks to take their hit and sell, if they will need the money during the next five years. There will be some bears, and some very nimble bulls that are making hay. However, as always, this isn't a time to be the hero or to try and call bottom. This is a high risk time to take new positions, long or short. My impulse is to step up and buy, which usually means more downside.

VIX hitting a new bear market high, above 53. Some that try and use VIX as a timing tool, got in when it was VIX hit 38.

Wednesday, October 01, 2008

SPY targets 110 and 95

It doesn't feel like a bottom to me. SPY 110 is one target, if that doesn't hold 95 looks like the next stop. These targets are from looking at the chart. As always, how the market looks when it gets to these targets is a significant piece of the puzzle.