Friday, November 28, 2008

Gobble, gobble

I have spent more time eating turkey than I have on the the stock market lately. A belated Happy Thanksgiving to all. After all the eating, back on the diet.

I'm not believing this current stock rally. Even though, I believe that the Christmas shopping season will be better than many are predicting.

Sunday, November 23, 2008

Volatility up, up and away

There was a time, not too long ago, when a VIX (option volatility index) reading of 30 was a decent buy signal. Barrons is reporting (article) that VIX is recording new highs and that 5% daily moves are now priced in. The Barrons headline is "Rockier than 1929," so yet another Great Depression era analogy for the stock market.

From the article:
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"During 1929, realized volatility peaked at 68%. We will likely pass that number in short order. That will make the current market the highest sustained volatility environment in S&P 500 history," says Goldman's Krag "Buzz" Gregory, an options strategist.
...
VIX at 80 implies a Standard & Poor's 500 average daily move of about 5%
.
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Elsewhere, gold pops back up above $800. I am skeptical of the move because I think much of last week's trade was related to options expiration. Sometimes it all unwinds the other way, the week after. The last quarter of the year, and January tend to be good times for gold bulls. However, this info seems widely known now, so I don't know how useful it is anymore. Anything that is widely known, tends to already be in the price.

That is why markets are tough, everyone is looking for an edge, and when a good edge is found, the info spreads quickly. If the info is easy to find such as yearly calendar, or time of day, or day of week tendencies, it gets jumped. Because of this, I rate seasonal indicators or other time related indicators among the least reliable technical tools.

It will be interesting to see how much tax selling occurs in stocks this December. A good many folks have likely already gone over the maximum deduction of $3000 per year for capital losses, so it may be less than usual.

Friday, November 21, 2008

The apple and the chicken

What a wild ride that was for my one trade for the month. I bit into the apple of temptation, yesterday, and saw a paper loss of 250% on my puts as SPY tumbled down. By the time the market opened on Friday, most of the premium was gone and I was at a profit.

Still, I was skittish, thinking that there might be a head fake and a total collapse into the close, instead of a big rally like it was in October. I closed the position, making for a tiny profit for the trade and the month. With profits so hard to come by, I'll take whatever crumbs I can find. Count this one as a crumb for sure.

Thursday, November 20, 2008

Wednesday, November 19, 2008

Shades of 1931

The stock market may be in for it's worst yearly loss since 1931. For those that don't know any history dates that was the Great Depression. Yikes!

I would like to say the worst is over, but experience has taught me that no one knows when the worst is over. Sentiment indicators such as VIX have reached high after high, and many thought that each high would be bottom. I am not convinced. Newsletter sentiment might be the straw in the wind, so watch that, if it makes a new low reading, so far it hasn't.

Value investors are hard pressed to read balance sheets and find assets that have sure value. There are a lot of items such as real estate that are difficult to put a ready liquidation value on in a fast moving market. Momentum traders are likely either short, or out, or broke--having already been washed out with mongo margin calls.

It isn't the worst time to be thinking of buying bit-by-bit for the long term, but it may be a lot longer than a person thinks it will be. If I were to do that, I would not use stop losses. Stops don't work too well for value investing. Cheap gets cheaper, and then cheaper still.

I'm still sitting this one out. I have zero trades for the November option expiration cycle. Given my trading style and the wild swings, it seems the wise decision. Like I sometimes quote Clint Eastwood, "a man has to know his limitations."

Saturday, November 15, 2008

Deja vu the yo-yo keeps going

A week ago Friday, the title was about a yo-yo stock market. Here I am again, a week later, with the same feeling. On Thursday it was a dizzying 10% from low to high in one day. That is the typical stock market average annual return a few hours! Those trading the newish 3x leverage funds saw 25% to 35% moves intraday.

Readers know that fast moving markets are not my friend. I don't sit in front of the trading screen all day. I use mental stop losses. That combination can be deadly given the volatility.

Barrons reports that margin calls have become much more common, at all brokers. Small fish, big fish alike are being churned and being put into the fishing nets in record numbers. Quite a few are losing all the money in their accounts and will never be back to the stock market.

Many moons ago, when I started in the stock market, I knew a guy who put all his money into a single high flying stock and was so confident that he bought more on margin. As the stock declined, he got a margin call. The man borrowed money from a relative to meet the margin call. The stock continued down and not only did this person lose everything in his brokerage account, he still owed the relative the money borrowed to meet the margin call. Margin calls are not pleasant events.

Again for the average person, diversification, dollar cost averaging into age appropriate asset classes, is the way to go. Those that want to do a little passive management can follow such long term indicators as the 200 day moving average or the Value Line Mean Appreciation Potential. Those that are active, don't need advice, certainly not from me.

No trading positions

Wednesday, November 12, 2008

Some get it right and still lose money

Mark Hulbert writes about three big name newsletter writers at Marketwatch (link): Howard Ruff, Jim Dines, Harry Schulz.

Even though the economic picture has unfolded in ways they have been predicting, they rank near the bottom for year-to-date performance.
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Of the 181 newsletters on the Hulbert Financial Digest's monitored list, these three advisers' newsletters are in 173rd, 175th, and 176th places for year-to-date performances through October 31, with losses ranging from minus 64.9% to minus 70.0%.

How can this be?

The easy answer is that these advisers didn't put into their model portfolios the securities that would benefit from the financial collapse that they envisioned.
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So while some may get macro economic predictions correct, it is not always so easy to translate that into trading profits. I learned a long time ago that in trading it is better to lucky than good. The caveat is that few folks remain as lucky the next cycle.

The stock market took another beating. As I have been writing, I am looking to go long at SPY 80 (another five points lower or so). As always this is not advice, and depending on how it gets there, my opinion may change.

No trading positions

Monday, November 10, 2008

The economy and high yield

I wandered into reading about some high yield ETFs. HYG high yield corporate bonds, and PFF high yield preferred stocks. With the long shadow being cast by a possible GM default, these funds have dropped in price and yields are 9%+.

For those that think the recession is going to be relatively shallow, these might be an interesting play.

If and when I buy these, I probably won't report that event on this blog, as I am trying to focus this on the short term trades.

Friday, November 07, 2008

A yo-yo stock market and Christmas retail

IT feels like the yo-yo is going up and down the string. Today's rally to close near the highs may give courage to the bulls, but I continue to have my doubts. The range for SPY is bound by the low at 84 and the gap at 100. Right now it is almost dead center of that range. I would be a buyer at SPY 80, and a shorter at SPY 104 or so. Of course, depending on how it gets there.

Personally, I think the fears about this Christmas are overblown. When folks get laid off, they often get severance and/or unemployment and that keeps them going for a while. If the economic conditions continue through next year, that is when the Grinch will impose his will on the holiday. Yes, sales are going to be slow, but I don't think it will be the end of the world.

No trading positions

Wednesday, November 05, 2008

KISS and Bogle

From Marketwatch interview with John Bogle (link):

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Keep it simple

Bogle's message has always been simple and straightforward, based on the belief that it's the market -- not the manager -- that rewards an investor for taking a long-term outlook. Get broad stock and bond exposure, keep costs and taxes to a minimum, and let time in the market, rather than timing the market, be your basic strategy.

He's not about to change now, no matter the beating that the stock market has taken this year, or that he sees it suffering as it works through recession -- a downturn he believes could last up to two more years.
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Bogle repeats the oft cited cliche of using a person's age as the percentage to have in bonds.

For those that want market timing without doing market timing (huh?), there are long term indicators such as following the 200 day or 195 day moving average, Dow Theory, and my recent mention of the Value Line Mean Appreciation Potential. The Random Roger Blog that is linked on the right hand margin, focuses on the long term.

I have to the same general opinion as Bogle, that for the average person keeping it simple, and dollar cost averaging into age appropriate investments is by far the best way to go. This is what I tell young people interested in investments. A very small percentage will want to get into stock picking, or technical analysis. Most of those few find the knowledge on their own terms, tend not to need advice, and are self-taught.

As for the stock market, the election came in right on the average of the popular polls with Obama at about 52%, McCain at 46%, so no one should be surprised. I had hoped the rally would get a bit higher to SPY 104, so I could get in some short positions. That may yet unfold, though I still think that new lows or a retest of the stock market lows remain the most likely scenario. The fear vanished from the stock market remarkably quickly, and that is not a good thing for would be bulls.

No trading positions.

Monday, November 03, 2008

"Stock market always looks ahead"

I mostly agree with Schannep, the news will get worse, and I believe, the stock market will make a lower low before the end of the year.

From Marketwatch (link):

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Schannep concludes: "Yes, the news will get worse for another eight-nine months or so, unemployment may well rise by another million and the unemployment rate approach 8%, and folks will wonder why the stock market has been going up, but that's the way it works. The stock market always looks ahead. By the time nonfarm payrolls hit bottom and the unemployment rate tops out, the recession will have already ended ... Next year, about the time the recession is over, the market should be 40 or 50% higher than now. You'll remember that the first year of bull markets average a 45.7% gain."

Still, Schannep is slightly more subdued than he was at the beginning of Objectionable October, He says he is looking for "a successful retest of the lows" before he goes back to 50% invested.
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