Articles from Jan 2008

Fed induced volatility

  • Fed decision days tend to be volatile and more so in bear market. Yesterday was classic example of that.
  • The market had a full up and down cycle within hours of the decision.
  • Normally the real impact of Fed decision manifests itself by 3rd day.
  • With lot of stimulus in pipeline , it should impact the market positively in the long run.
  • However in the short run, this market is still tricky.
  • When leaders breakdown severely, like we have seen in past few days, it is not easy to put together a rally. It takes time. Plus the old leaders are not necessarily going to come back, a new leadership will emerge. The new leadership becomes apparent only after the selling phase stabilizes.
  • As of now in this market the fast selling phase ended on 1/23/2008 with a 900 plus day. Since then market has attempted to put together a small rally, now we will see if the market holds up well. As of now it is the line in sand. A long side way move or a volatile range might be better for the longevity of next bull phase. However markets do not always act as per expectations.
  • The bottom-line is that this market phase as indicated by Market Monitor is not ideal for growth or momentum based strategies on long side if your holding periods are more than few hours or days.
  • Bear markets are essential. In fact they are very good for growth investors. From the gloom of bear market when a new bull market starts, you find several straight up growth stock rockets.

America Still Works

Newspapers and popular bloggers make a career out of scaring the shit out of you. Bearishness always sells. It is more popular. It can always be packaged as more intellectual stuff or as contrariness.
The average person is also more attracted to bearishness and negativity because it allows them to justify their lack of achievement in life. The common hypothesis which is sold by the pessimist is that America is doomed and there is no way the problems in America can be solved.
Here is a real contrarian take on America. A bullish argument for America.

Anyone who reads the serious press about the condition of the US might be excused for believing that the country is headed towards a series of deep crises. This impression is exacerbated by economic slowdown and by the presidential primaries, in which candidates announce bold plans to rescue the country from disaster. But even in more normal times there are three ubiquitous myths about America that make the country seem weaker and more chaotic than it really is. The first myth, which is mainly a conservative one, is that racial and ethnic rivalries are tearing America apart. The second myth, which is mainly a liberal one, is that America will soon be overwhelmed by religious fundamentalists. The third myth, an economic one beloved of centrists, is that the retirement of the baby boomers will bankrupt the country because of runaway social security entitlement costs.

America does, of course, have many problems, such as spiralling healthcare costs and a decline in social mobility. Yet the truth is that apart from the temporary frictions caused by current immigration from Latin America, the US is more integrated than ever. Racial and cultural diversity is in long-term decline, as a result of the success of the melting pot in merging groups through assimilation and intermarriage—and many of the country's infamous social pathologies, from violent crime to teenage drug use, are also seeing improvements. Americans are far more religious than Europeans, but the "religious right" is concentrated among white southern Protestants. And there is no genuine long-term entitlement problem in the US. The US suffers from healthcare cost inflation, a problem that will be solved one way or another in the near future, long before it cripples the economy as a whole. And the long-term costs of social security, America's public pension programme, could be met by moderate benefit cuts or a moderate growth in the US government share of GDP. With a linguistically united, increasingly racially mixed supermajority and a solvent system of middle-class entitlements, the US will remain first among equals for generations to come, even in a multipolar world with several great powers.

Home Builders and home improvement retailers lead the bounce

Market Monitor: Bearish

  • A low volume bounce after Friday negativity saved the day.
  • Retail and banks are the major beneficiary of the bounce so far. Residential construction is the number two performing industry on monthly basis followed by home improvement stores at number 3. Such laggard sectors are not going to lead the market higher for long.
  • All these rallies in interest sensitive sectors are likely to fail in few days or week as the actual news of Fed rate cuts arrive.
  • This is what IBD has to say about the market

The market has scored gains in three of the past four sessions, snapping a long losing streak that whacked stocks for much of January. A few medical and energy stocks have rebounded, moving back above key support lines such as the 50-day moving average.

With that said, it's too early to get excited about such a short, modest run. The broad market indexes are still on pace for one of their worst months ever. Leading stocks have been battered. Few institutional-quality stocks have formed anything resembling a proper base.

Above all, the market remains in a clear correction. In that climate, it's best to stay on the sidelines and conserve your cash. Monitor the market from a distance, without fretting over potential trades.

A severe bear market will be better

Market Monitor: Bearish

  • Two days of rally attempt petered out on Friday. Even a catalyst like good earnings from Microsoft could not get the market to rally. Sellers hit the tape from word go.
  • This is typical of bear market rallies. They tempt you to disappoint. Those who keep playing such rallies at some stage get whipsawed so many times that they lose confidence. Also when you start playing for small moves, it becomes part of you and when the market turns for real and big moves emerge , you are still conditioned by bear market to capture small moves.Besides that your account slowly bleeds. So at least in my scheme of things, sideline is best strategy till we see enough proof of a turn.
  • This week will have even more volatility as the Fed decision on interest rate is due on Wednesday.
  • Once this bearish trend ends there will be lot of opportunities. In fact it will be very good, if this bearish trend persist for another 6 to 9 months and this correction becomes deeper. After that kind of phase, when markets rally, it is the easiest money you can ever make. However the market may not necessarily follow the ideal script and go down much from this level.

Waiting for leadership

  • This bounce is only for extremely nimble and short term traders. Day to day action is choppy and news driven.
  • Breakouts are happening on gaps and are prone to next day reversal. Several examples of that you will find from Episodic Pivots (EP) breakouts in last two days.
  • When market dipped in July- August period, leading stocks were not badly damaged and hence when the market rebounded they could rally. Many sectors like Solar, Shipping, Fertilizers, Agricultural Machinery etc had mild corrections during that phase and they bounced back vigorously post correction. As against that currently most of the leading stocks are down more than 25% from recent high. Many have reversed their trends and are unlikely to revisit their old high.
  • So till new leadership emerges bounces will be for mostly day trades and extremely short term trades. It will take time for the leadership sectors and stocks to set up.

Reflex Bounce

  • It was a impressive reflex bounce. With readings of 900 plus on long side. There is a high probability that this bounce might last for few weeks. Too early to say it is the bottom, and such big moves are common in bear markets. But in the short run for nimble traders there will be opportunities in heavily shorted stocks.
  • We were witnessing 300 plus days for many weeks on downside. Lot of selling is out of the way. Against that backdrop when market did not go down much in reaction to the worldwide selloff, it seemed like sellers were not aggressive and short sellers were covering positions. Lot of what has gone up yesterday is beaten down, heavily shorted stuff.
  • For a meaningful rally to develop and a bull market to start you need to see leadership group emerge. They are unlikely to emerge from sectors in which almost all stocks are trading around their 52 week lows. From a leadership perspective Medical/biotech is still best positioned. If you look at the top 30 stocks in MDT scan , they are mostly biotech and medical stocks.
  • A rally here will allow trapped longs to escape and create good shorting opportunities in the long run if it fails after few weeks.

Muddled Action

Market Monitor: Bearish

  • As expected it was a wild action. The panic was averted by significant interest rate cut by Fed. However we still had lot of selling and we had 5th consecutive 300 plus day on downside.
  • Because there was no high volume capitulation, the muddle continues and there is no clear washout of sellers.
  • Bulk of the buying was concentrated in heavily shorted sectors and interest rate sensitive sectors. Any bull move up is not going to be lead by such laggard sectors.
  • Any rally here will offer trapped longs another opportunity to reduce their exposure and will be good for putting in new shorts.
  • We are now officially in bear market in some indices with 20% plus down move, so any rally is shorting opportunity till proven otherwise.
  • The moves will be volatile and capital preservation is number one priority.

Methodology trumps the market

There is lot of blame game going around today. It is human tendency to blame others and government and policy makers for the market action. But that view misses the crux of trading. As I have said before the most important starting point for successful trading is methodology and methodology trumps markets.
Market is ever changing. Market is not predictable. Market is complex. Market offers too many choices. Market is not controllable. But methods are controllable. Methods can be constant irrespective of the market situations. Methods are under traders control. Your trading mix is completely controllable and that is the key to profitability.
If you have a well defined market direction determining system, you would not be long in this market or would have had some downside protection. Putting together such system well in advance and thinking through all elements of trading ahead of time is what methodology like Market Monitor is all about.
Staying in the game is extremely critical in the speculation game. If you stay in the game you can convert your small stakes in to millions.

Market Roundup

Market Monitor: Bearish

  • It will be a tricky day on Tuesday after such a major carnage in the worldwide markets.
  • There will be some Fed reaction and possible emergency cut.
  • So it will be volatile session.
  • Because of Market Monitor being bearish for many weeks now, the only open positions are short positions, so it will not be a bad day for those following our methodology.
  • The entire objective of Market Monitor is to avoid such risky periods and only trade good periods on long side.
  • Existing shorts will do very well. But protecting open profits on them will be the key.
  • Many times the key thing during such time is holding on to nerves.
  • There will be lot of noise, I remember coming in to September 11 week I was heavily short and then when the market opened post many days of closure, there were all kinds of people on TV saying it is time to buy. Buffett was on CNBC saying he will be a buyer and so on. They were saying there will a patriotic rally and so on. What happened was market sold off hard for few days and then it rallied. Those who listened to all the CNBC bullshit and bought on first day were left holding the bag.
  • So unless you have to trade or know what you are doing, you should stay out .
  • Even if the market turns, it will not be one day rally, there will be many opportunities down the road.

Market Roundup

Market Monitor= Bearish

  • Another day with 500 plus stocks down 4% plus.
  • With series of 300 plus days in last 15 days, we still are not at extreme levels on most indicators.
  • Only 11 stocks are down 50% plus so far.
  • The only indicator reaching near bullish level is the # of stocks up >100% in 260days
  • In a typical bear market pattern we see green open which gets sold.
  • With lot of selling in last 3 session if we open lower day and continue lower, we may reach a short term capitulation stage. Which does not seem to be happening, going by the likely up open today.