Saturday, February 28, 2009

Worst February since 1933

The Wall Street Journal has an article about the brutal start to 2009 (link).

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The Dow Jones Industrial Average dropped 119.15 points, or 1.7%, to end at 7062.93. The blue-chip benchmark ended down 937.93 points, or 11.72% on the month -- the worst percentage drop for February since 1933, when it fell 15.62%. The Dow industrials have fallen six months in a row and are now more than 50% off their record highs hit in October of 2007.
>>

Investor sentiment remains relatively complacent given this kind of tape action. The stock market tries to look ahead six months.

I like to tell the story about when my dad first started investing. The stock market was near a top in 1967, it went sideways for a while before spiraling down in 1973/74.

After losing 60% to 70% of his money, dad wanted to sell all his stocks and mutual funds near the bottom. My mom, who had been against the entire idea of investing in the first place, told my dad that he was an idiot. That after a 70% decline it wasn't time to sell, that it was time to buy. My dad ended up doubling his monthly mutual fund purchases. In hindsight, we all know things did turn out okay, and increasing the stock allocation was a smart move.

I'm not saying we are anywhere near a bottom. In fact, I don't think anything more than a short term trading bottom is close in price or in time. The stock market did recover from the 1974 lows, as it did in the 1930s. However, the ride was bumpy and had a lot of false starts before a new long term bull market came to Wall Street. There is also the case of Japan, where demographics and other factors might mean that their stock market may take another 50 years to reach their old 1980s bull market peak. The long run, might turn out to be very long here in the U. S. as well. No one knows for sure.

There are no guarantees in the stock market. Only a few lucky people will buy at the bottom. For the masses, age appropriate asset allocation, right sizing of positions, still seem the best way to go. I would like to believe that I am some kind of financial genius, but the record shows that I am not. For the average person, average results, or slightly above average, are a fine target.

Friday, February 27, 2009

Another shoe drops

2008 Q4 GDP (Gross Domestic product) comes in weak. The stock market drops at the open and SPY breaks its November lows. We will see if there is a close below the lows.

It is not time to be the hero. Sentiment remains relatively complacent. The decline remains orderly with some stocks still showing strength. Valuation is difficult because what is reported on balance sheets is only part of the story. Liquidation value is even more difficult because of the credit environment.

For folks that have little exposure, this isn't a bad time to start edging in. For folks that never sold and are still 100% in, selling a small fraction would be a good way to go. For most people, all-in or all-out investment decisions usually turn out to be bad ones.

I rarely talk about my long term investments here because this is a trading blog. I have a small percentage of assets in stock ETFs for the long term. Like most stock investors, I am taking a terrible beating on those holdings. I am also adding more every week to a stock mutual fund in my IRA account in a steady manner. Lower prices mean I get to buy more cheaper. The dollar amounts and asset allocation percentages are relatively small.

I am looking for a sentiment fear peak to look to increase my long term exposure to stocks. It isn't here yet. Right now, it doesn't look close. I also have that gold/silver insurance policy that I believe everyone should have (a small percentage of net worth in hard assets that is never touched).

No trading positions.
Chicken sign still up (as opposed to a bull or bear)

Wednesday, February 25, 2009

Yo-yo market and Student stock blog

I skipped making an entry yesterday, title might have been "not buying Bernanke," meaning to avoid buying that rally. So far this morning, the yo-yo market is on the way back down.

I stumbled on a student stock blog (link). Sometimes that "beginners mind," can give clarity, where a veteran has too many memories, too many scars to give a clear read. This is certainly an interesting time to be starting out in the stock market.

My own history is that I made my first few trades in the summer of 1987. Many will remember what happened in October 1987 (a big stock market crash). Those early days certainly have colored my thinking, and likely have made me much more cautious than someone who cut their teeth during roaring bull markets.

As for the market, it still seems a difficult one to trade for position traders such as myself.

Monday, February 23, 2009

Jaffe on Stop loss orders

In Chuck Jaffe's ongoing column "Stupid Investment of the Week," (MarketWatch link) he opines that it is stupid for investors to forego stop-loss orders. Excuse me for pointing out the obvious, but after a 50% Dow decline is that the time to be saying this kind of thing?

Readers know I cut my losses all the time, often ruthlessly and with little emotion, even if I am convinced my trade will turn a profit in the end. Keep in mind that this blog is about short term trades, mostly selling short put options, so one big loser can snowball into epic size.

The other side to think about is value investing, buying a stock or sector, or the entire market for the long term because it is cheap based on valuation models. For value investors, bottom fishers and the like, stop losses are a poor way to proceed. Better to take a small position first, then be ready to double up, if it moves against you. For value investors, diversification and right sizing positions are more of a bulwark against losses than cutting the losers.

It is interesting to note that Warren Buffett has always been one to take big positions, from his early days to when he made huge fortunes. The caveat is that few of us are like Buffett. Most would-be Buffett's get wiped out because they turn out to be wrong, and one of their huge bets turn against them and wipes them out.

Friday, February 20, 2009

It's a Mad, Mad, Mad, Mad World

For whatever reasons, today's trading has me thinking about this old movie (Wikipedia link). The question is, "will I be able to find the big W?" Stay tuned.

The SPY Feb 75 puts I recently closed out would have been profitable had I held until expiration, but certainly would have been a scary ride. Chart support at SPY 75 held for today at least.

Gold makes another recovery high. Best case scenario for long term gold bulls would be a basing period of two months or more, followed by a parabolic up move on huge volume.

Going forward, the stock market almanac leans bullish towards the end of February and early March. Some stocks such as PCLN are showing strength. The "chicken sign" (as opposed to bull or bear) is still up for this blog.

So far I've had two modest losing trades for 2009. As always, it could be better, could be worse (a lot worse). I remind myself that two small losers isn't bad considering the beating the stock market has taken, and trades I typically do. Sure there are a few folks making money by aggressively shorting and buying puts, but a much larger group of traders and investors are taking huge losses with each leg down.

One measurement would be to take the width of the recent SPY range and then project that as the move down. A look at the 3 month SPY chart (link) says 80 to 92 is the recent range, 12 points from 80 brings a target of SPY 68. An inexact target to be sure, but it is one look at it.

Wednesday, February 18, 2009

Sentiment points to lower lows

Mark Hulbert looks at sentiment and retesting of lows in this Marketwatch article (link).

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... on my reading of these four sentiment measures, the story that is most consistent with the data is that the stock market will fail its retest of the November low.
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The four sentiment measures are Investors Intelligence, American Association of Individual Investors survey, Hulbert Newsletter sentiment index, VIX. None of the four are more bearish than at the November market lows.

Tuesday, February 17, 2009

Sell SPY buy back short puts

Sell SPY buy back short Feb 75 puts
I have thoughts of doubling down because SPY 75 seems like strong support, and it would not be a bad place to take delivery of stock, if it came to that. Instead, I close my position and take my loss. It is a large percentage loss, though small in dollar terms.

Back to no positions.

Elsewhere, GLD has a nice up day. Money is reported to be flowing into the ETF. Japan reports a sharp decline in GDP. If annualized that quarterly rate would spell DEPRESSION.

Thursday, February 12, 2009

Buy SPY (sell puts)

Buy SPY via selling Feb 75 puts

Stock market manages a positive close after a steep slide. For SPY, 75 looks to be reasonable support given the time frame. ThinkorSwim analyzer gives a 5% chance that SPY goes below 75 by expiration on 2/20.

Elsewhere, GLD makes a 7-month high. If anything I lean bearish, the volume spike yesterday, is sometimes a day or two from an intermediate top. The long term fundamentals are still bullish for gold. However, after the bull run, and all the press gold is getting, it may be ready for a breather.

Positions: Long SPY

Tuesday, February 10, 2009

Market up, market down, more on Buffett

I'm reminded of the old joke, if you don't like the weather, stick around it will change soon enough.

So it is with the stock market. All the optimism from last week is washed away in a few minutes. The bulls might encouraged that the Asian markets and overnight futures seem to be hold steady. I would rather see a washout on tomorrow's open, but lately the market hasn't given me what I wanted. Some folks put a bear or bull on the page so it can be seen at a glance where they stand. I'm still stamping the page with a chicken.

I continue to read "The Snowball," the Warren Buffett bio. Buffett was a millionaire by age 30, when a million dollars was a lot of money. Buffett did a number of things that I did not know. As a kid he collected coins, stamps and bottle caps. As a teenager he liked betting on horses. As a new stockbroker he picked some stocks that did poorly. One of his early investments involved a takeover that resulted in massive layoffs. The human costs of that takeover scarred him so much that he never did that kind of thing again.

Some things did not surprise me, such as him being a tightwad with his money, that he did the taxes and kept the books by himself for his investment firm for many years, that he learned from Benjamin Graham at Columbia, and then at Graham's firm, that Buffett made a lot of money on Geico.

I am now reading about Buffett and Charles Munger. Munger taught Buffett about the value of brand names and franchises. Graham's style is more to look at a company's liquidation value. Munger was more interested in what made for great companies. This led to Buffett taking a huge stake in American Express, and later Coca Cola and Gillette.

Still no trading positions.

Monday, February 09, 2009

Dog bites man: Cramer picks not so good

I don't think any of my readers would be surprised by this bit that was in Barrons:

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Cramer's recommendations underperform the market by most measures. From May to December of last year, for example, the market lost about 30%. Heeding Cramer's Buys and Sells would have added another five percentage points to that loss, according to our latest tally.
>>

I read it on Adams Option blog

Friday, February 06, 2009

Missed the boat

I missed the boat for Friday's 200+ point Dow rally. These things happen, and are distressing not dangerous. Better to miss the boat than get on one that sinks.

Silver got back above $13.

Wednesday, February 04, 2009

The Snowball - Buffett biography

Being patient is boring, probably even more so for any readers of this blog.

Not much that looked interesting in terms of risk/reward. If I had to guess, I'd guess the stock market has another bear leg down in it, but I don't have much idea as to the time frame.

Warren Buffett increased his stake in BNI Burlington Northern, being exercised on puts sold at $75. Someone like Buffett almost has to buy on the way down, because if he tried to play the momentum game, his size would make it impossible to get in or out.

I've started reading the book "The Snowball." It is a thick book, and interesting in parts, slow in others. Buffett was a "prodigy" at business, making more at age 17 than most of his high school teachers.

Buffett's investment philosophy is real simple, look for businesses that are easy to run, that have a clear advantage that is hard to replicate, and that is selling for below its true value. Simple in theory, hard in practice, when there are thousands of other very intelligent people looking for the same ideas.

I was surprised to learn that Buffett's dad, Howard, was considered an arch-conservative and a strong supporter of the gold standard, and believed that the U. S. government was sure to default in the near future. The gold stuff obviously didn't rub off on the son.