Monday, May 16, 2011

And So it Begins?

Second day of big time rain today. Only 5 more to go! The wife is getting better very slowly and of course she went to work today! Unreal. I think she may work from home tomorrow, that would be best I think. Thanks to all for asking how she was doing.

And So it Begins?
When I decided to start trading in the New Year I figured on two things:
-It would be fun to do and re-learn all kinds of stuff
-The market trend would change as soon as I came in to play

Many of my trading tricks are best used in an uptrending market (no kidding!) so I figured when it changed over I was going to have to try other things or sit on my hands. While the market action since January 2011 has been weaker than most of 2010, it was still moving well until about 7 weeks ago. The last 3 weeks have been very poor for individual stock names and now the indices are looking a little sick too.

When silver crashed everyone broke their arm patting themselves on the back for being brilliant, but oblivious that the risk trade in silver is the same risk trade in everything else; oil, other commodities, and yes stocks. There is always a time delay to be sure but first commodities were getting hit, now the financials are going lower and equities are following suit.

I was stopped out on my position in OCLR today for a -4% loss and I closed my spots in LF and SOFO at even. What's next?

I don't know. I hate shorting individual stocks, I really do. The only short I ever did was TOL (Toll Brothers, a homebuilder) back in the day! At this point I want to find some ETFs (not leveraged ETFs!) that will allow me to be short commodities, financials and the small cap stocks. Why would I want to do that?

QE 3.0.

To get to QE 3.0 there is going to have to be some relief from higher priced items like oil and food. For cover purposes, assets that have been kept "higher than they would be otherwise" will have to give some back. I know it has been some time, but please do remember the Wall Street temper tantrums of selling of stocks to register displeasure over lack of accommodation.

iBankCoin's The Fly offered this today:
One could make a very good argument for lower equity prices, in order to flush money into treasuries. The only way to build internal/domestic demand for treasuries is to take away all available options.

I would point out that a rush into bonds will push yields DOWN and this would signal DEFLATION and thus the FED would feel compelled to do another round of easing.

Now if you want to play this game, and I am not sure I do, you have to be ready for nasty action. Unless you are at home all day the volatility going against things will kill you. You have to pick your spot, your target, and ride it out unless it is so clear you are wrong.

From last year, we saw the SPY:
-Peak at 117 on May 4th 2010
-Bottom out 1st time at 103 on July 6
-Bottom again on August 31 at 105
In August the FED offered QE lite and hinted that further policy action was coming down the pipe via full blown QE 2.0. Markets priced in QE 2.0 quickly and by the time it was rolled out in early November the SPY was at 122. We topped (maybe ) May 2nd 2011 at 136.

My back of the envelope work shows the 12% drop from May 2010 to the last days of summer in August. So we just apply that 12% to the recent high of 136 right? Wrong!

I do not think markets can handle a 12% route without a real chance of a run happening.. It will not take 12%. That said a 3-5% drawdown is not going to get enough attention. I will settle on 8% or so. I also feel that the time frame will be faster, with QE 3.0 starting as trial balloons, Sunday talk show drops, and Op-Ed's in papers by the end of July. It will be in effect by September I believe.

I need to flesh this out a bit more, but it seems pretty clear. If I do play this path it will be via short ETFs for the time spans covered in this post. I am not really that excited by this idea as snap back rallies and only an 8% downside are not overly attractive as bets. Maybe I will just sit out the summer and go fishing.

Have a good night.

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