Panic buying

Wow, another wild day, with a sharply lower open followed by steady buying. AMZN's earnings report gave the market a good excuse to go down if that is what it wanted to do. Instead, AMZN closed higher after a -12% reading after-hours on Wednesday.

If the bottom is already in, and only time will tell if that is true, for many stocks experienced that rare V-shaped bottom. While the gains off the lows are startling, in terms of percentages, it was a very small window for folks to get in near the lows.

Two losers include GDX, and GLD, this even while physical silver broke thru $17 an ounce for another new recovery high.

Fed does the expected 1/2 point cut

Fed does the expected half point cut. I am a bit stunned at the buying frenzy. Couldn't pull the trigger on shorts. It is not a high percentage play for position traders to step into the swift running water. Bonds sold off. Gold rallied. Then news of ratings cuts at bond insurers seemed to be like a bell ringing and everyone wanted out all at once. This might be considered classic bear market rally type of action--short, sharp rallies with very narrow time windows to get out.

Old timers will remember the old adages: "Don't Fight the Fed," and "Don't fight the tape." The Fed's moves will make a real difference for those with good credit. The tape is another matter. With the recent volatility, would be shorters need to pick their spots carefully. With these wide swings the temptation is to over trade, instead of being selective.

Consumer non-durable stocks

The old school conventional wisdom is that consumer non-durable stocks, in industries such as soda, razor blades, tobacco, are a good place to be when the economy tips into recession. The past couple of weeks has seen heavy selling in names such as Pepsi, and Merck. McDonald's had a tough day after earnings. Today Pepsi Bottling PBG got hit. While this has been going on, banks and airlines have continued their large bounces off their lows.

The overall market has rallied into the Fed meeting. The funny thing is that with Bernanke, it seems like the weaker the stock market is, the greater the chance of surprise rate cuts. If the rally continues strong tomorrow, it increases the chance that the Fed will think they have done enough and only cut 1/4 point, or do nothing. Traders playing the Fed Fund futures are currently favoring a half point cut.

Sell GE (buy back short puts)

Sell GE (buy back short puts)
I was disappointed that GE didn't rally along with many other stocks. Getting out with a break even profit. "Never let a profit turn into a loss."

Still long SNE

Bear market rallies (Barron's)

Randall Forsyth at Barrons online has an article about bear market rallies. It focuses on the wild swing that took place on Wednesday. These sharp rallies are one reason it can be difficult to trade on the short side.

In the immediate aftermath of the Fed emergency rate cut, Treasury bonds went up in price (lower in yields). Now that the news is being digested, bonds are coming back down. It is an interesting thought process to be buying 30 year bonds, yielding less than 5%. Those that are doing so, seem confident that inflation is unlikely to be a major problem. Today, precious metals are jumping, so these two sides seem at odds. The bond market is the much bigger fish as compared to precious metals markets. In most stare downs the bigger fish will each the smaller fish. It will be interesting to watch.

Readers may remember that I see the long bond as a bellwether that often leads other markets. The Federal Reserve pushes the noodle on long term interest rates with the Fed Funds and discount rate. Sometimes, the Fed gets painted into a corner, when the long bond yield goes up in the face of rate cuts. So far that isn't happening, so for now the Fed still has room to manuever.

Buy GE (sell puts)

Buy GE (General Electric), sell Feb 32.5 puts

Another dip into the water on the bullish side, GE earnings already out and good.

Buy SNE (sell puts)

Buy SNE (Sony), sell the Jan 40 puts

Fed saves day, but is it behind the curve?

Fed saves the U. S. stock market day with a surprise emergency rate cut of 3/4 of a point.

The hindsight trade was to buy the open and get out when the Dow got close to break even. I did nothing today. I did not follow the markets that closely. The spreads on options were very wide during the opening 10 minutes. Fast markets are not the place for position traders, looking for low risk entry points.

As for the rate cut, my personal opinion is that the Fed is behind the curve, reacting instead of getting out in front and being proactive. The worrisome thought is that the Fed has used up a lot of ammo and the economy isn't yet in recession. Is it worth the long term consequences, just to avoid one business cycle recession? It seems like Bernanke is acting like he will lose his job if a recession occurs. There are far worse fates for the economy in the long term than a mild recession.

If the Fed is low on ammo and a major external economic shock occurs what then? I am thinking in terms of plausible events such as another 9-11 style terrorist attack, a shooting war between India and Pakistan, China invading Taiwan. Perhaps subprime and the unwinding of subprime is the be all and end all. However, most folks that have been around a decade or more, understand that subprime, while significant, isn't the worst case economic scenario by any means.

Technically, a retest of today's opening lows on the indexes or on individual stocks might be a good place to look to go long.

Interesting times

There is an old curse, "may you live in interesting times." With overseas markets down 3% to 7%, and U. S. stock futures down about 4%, Tuesday looks to be an interesting day.

Support on SPY (2-year-chart) is about 123. Futures already are down to about 127. As I have always written, calling top or bottom is rarely a profitable game. Almost always there is a lower risk entry on a retest or pullback against the main trend.

Precious metals also getting hit with silver down about 3% overnight and gold down 2%. Margin calls may force some punters to liquidate their metals holdings.

Some have mentioned panic, but I have not seen much in the way of real panic as of yet. For the most part, declines have been orderly, and news is still able to drive stocks. Perhaps there will be some panic on Tuesday.

Sullivan bearish, Roger says 1/2 way down

Long time bull Dan Sullivan, writer of the top rated newsletter, The Chartist, turns bearish (article). Sullivan takes the extraordinary step of going to 100% cash. For those that don't know Sullivan, he has been around for a long time, successful for a long time (ranked 4th for the past 25 years) and most of the time is long on margin. For someone with Sullivan's track record, who often is 150% invested, the 100% cash position is something to sit up and take notice of.

Elsewhere, Random Roger (blog) adds what seems like a throwaway comment, but I find it interesting (Thursday Jan 17 entry):
At SPX 1351 we are down 13.6% from the closing high in October. If a normal bear market bottom is down 25-30% we are about half way there in magnitude but I would be surprised if we are halfway there in terms of time.

Time analysis can be as useful as price in analyzing and predicting future action.

One more: After today's close, IBM posts a decent outlook and the stock climbs $5 in after hours. Somewhere there is a bottom and some stocks have rallied on good news. The overall market hasn't shown signs of capitulation in terms of a huge volume day, or a runup in VIX. The decline remains orderly, and in a bear market that can mean a lot more downside.

Sell GDX (buy back puts)

Bad day to be selling puts. In this rare instance, I buy back the puts on the same day, taking a huge percentage loss. Ouch.

Buy GDX Jan 49 puts

Buy GDX (sell puts)

Sell GDX Jan 49 puts

/edit fixed earlier typo, trade was about 10:15 Eastern time

Wild witching Wednesday

Options expiration activity used to mostly occur on expiration Friday. With the newer products, some that expire on Friday's open, the rollover to the next month often takes place on Wednesday. Stocks, gold, silver all had a wild ride, ending lower.

Intel's earnings miss, made for a lower open. The quick rally raised hopes for a stock rally day.

GLD got hit hard, and GDX even harder. This is normal bull market action, quick, sharp selloffs. As always it is price action that defines whether this will remain a bull market.

Cover AXP short (buy back call)

I cover AXP short (buy back the Jan 45 call). The shallow rally after I entered the position makes me nervous enough to take the profit now instead of waiting until Friday expiration.

In other news, GLD break 90, a couple of days after the spot price of gold crosses $900. Gold is overbought, however, it would be foolish to short, and almost as foolish to buy in at this time. GDX confirmed a new high yesterday, but today is again lagging.

Sell AXP American Express

Sell short AXP Jan 45 calls

Ferocious rally

The cliche is that bear-market rallies are sharp and short. Today's rally certainly had the look and feel of the bear. Selected stocks went up huge percentages with United Airlines up 20%, Countrywide Financial up 60%.

Gold makes another new all time high. Silver goes up a full 5%. It is high risk to buy here for trades. That said, I believe it is still early in the bull market for precious metals. That if there are sharp and short pullbacks those will be good times to buy.

Falling knives and running with scissors

Many stock charts are breaking down. They sometimes stop and pause at technical support, then when that fails, the bottom falls out. Most are a long way from being a buy from a valuation standpoint. Some industries have a business model that doesn't bank any of the profits from good times, so when times turn bad, there is no cash on hand or liquidation value to the shares.

With each day of consecutive new lows, it becomes increasingly tempting to try and pick a bottom, or conversely to short some shares that have held up. I remind myself that these kind of plays are high risk, and in part due to an itch to get back into the action after a long time on the sidelines. Thus the running with scissors analogy.

I do not see some of the telltale signs of a selling climax such as a rocketing VIX value or a huge volume capitulation day. Even then, there is so much downside momentum right now in many stocks, the safer play looks to be to short any rallies, rather than try and play any bounces.

A few folks are making money even in the tumble down market. A few have the nimbleness to play the short side, and there still remain isolated pockets of strength in so-called defensive sectors such as main stream drug companies. Some of the cyclical industries such as airlines and housing, have seen the bottom fall out, and like I wrote, have no book value to speak of, or a dependable future earnings stream, for value investors to look at.

$1000 gold? Merrill says no. $200 oil?

Looking at the six month chart on GLD, a basic analysis is to project a second price move, that equals the run from 65 to 84. That would take gold to about $1000.
At Kitco, Jon Nadler includes this nugget (link):
Merrill Lynch & Co. is forecasting spot gold prices will average $750 an ounce in 2008, up 7.6% from 2007 and ranging between $700 and $900 an ounce,

Schaeffer's reports some activity in the $200 call options on oil (link). Keep in mind that these options may be part of a spread or other other hedging behavior. If $200 a barrel oil does come, odds are that gold will likely go much higher than $1000, even though gold has lagged oil during the past couple of years, in terms of percentage gains.

January effect, I'm back

I've been away for a while, I'm back.

The January effect: as goes January so goes the year. In particular, the first week of January gives a strong indication for the year ahead. If this holds, 2008 might be a year for the bears. As with any indicator, the January effect isn't close to 100%.

For those interested in reading more here is a link to a SeekingAlpha article
and for more of a novice view point an USAToday article