26 June 2008

When the Market Grabs for the 'Oh Shit' Handle, I Go Long

Today, the market reached for the 'oh shit' handles as it swerved further into bear territory. When the talking heads on CNBC panic, it's time to look at going long.

For the time being.

So what did I do today?

I sold off my ultra-short NASDAQ-100 ETF (QID) position a bit too early in the trading day at $43 even, from a cost basis of $41.49, for a gain of 3.6%

I sold off some additional shares of the ultra-short China Xinhua-25 ETF (FXP) at $86.32, from a cost basis of $90.50, for a loss of 4.6%.

I added to my ultra-long Dow ETF (DDM), bringing the cost basis down to $64.21, and to my ultra-long financials ETF (UYG), bringing the cost basis of those shares down to $23.09.

We're back to having absolutely zero Dow components trading above their 50-day moving average, as shown in the below chart. The RSI(2) for the Dow index fell below 1 today. The Dow is clearly at an extreme point, and I expect the market will rebound very shortly. I'm backing up this assertion with my growing DDM position.

As I have recently relayed repeatedly, when the number of NASDAQ-100 components trading above their 50-day moving averages falls below 15, it's a profitable time to go long. Well, the chart below shows only 14 components above their 50-DMA. I exited my QID position today; one that I made profitable by supplementing with shares at $36.89, when nearly 85 components were trading above their 50-DMA.

I may just have to pick up some QLD tomorrow.

23 June 2008

Zero Dow Components Trading above their 50-Day Moving Average

The bear growled mightily on Friday. As you can see from the chart above, zero Dow components are now trading above their 50-day moving averages. If you check out the chart below, you'll see that this has not happened since before mid-2005. I have recently asserted that it's a good time to go long with a Dow-tracking ETF when four or fewer Dow components are trading above their 50DMA.

So, what did I do on Friday? I unloaded my DXD position for a gain of 6.1%. I established that position at the early stage of the bear market rally of a month-or-so ago, which explains the decent, but unspectacular, return.

I lightened my FXP position, with a sale of a small lot of shares for a loss of 8.3%.

I established a long Dow position with a purchase of DDM at $66.93, and in UYG at $23.79. These positions are meant to be held for a few weeks at most--just long enough to see the market work off some of its overdone, oversold move.

18 June 2008

Look out! Uber Bears!

First off, RBS issued an uber-bearish call this morning. Here's some coverage of it via Ambrose Evans-Pritchard in the Telegraph:

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.


RBS expects Wall Street to rally a little further into early July before
short-lived momentum from America's fiscal boost begins to fizzle out
, and the delayed effects of the oil spike inflict their damage.

The bolded portion corresponds nicely with my near-term take on the markets.

Here's a key excerpt of a discussion of the RBS note between Neil Hume and Helen Thomas from FT's Alphaville:

NH: yep we have this very bearish RBS note
NH: actually, we have the email that Bob Janjuah sent to clients
NH: OK, we can't copy and paste all of it
NH: but we do have some highlights
NH: I am pleased with the call from last Thursday, to significantly reduceshrt stk/shrt credit bets. At that point iTraxx XO was above 500, andS&P was in the low 1330s. We are now just above 450 XO and 1360 S&P.
NH: Looking forward, nothing has changed for me. Tactically, and asmentioned above, whilst it was prudent to go from '10 out 10′ SHORTstks/credit to '2 or 3 out of 10′ SHORT at the back end of last week, Istill want to retain at least some small short interest in credit andstks, because over the course of end June and early July, we will betransitioning from the zone of my tactical call INTO the zone of myVERY BEARISH strategic call for Aug/Sept/Oct.
NH: This calls looks for S&P down at 1050 +/- 50 points during this 3 mthwindow, and whilst credit will relatively outperform stks, I still seeXO at 650/700 during this period, HiVol up at 275/300, Main up in the130s, and IG10 at/close to 200. Whilst I think August and September arethe key risky months, the reason I'd be small shrt (now) over late Juneand July, when I suspect risk assets will try to rally (1405/1420intra-day S&P, low 70s Main, mid-130s HiVol, 425ish XO, PERHAPS!) is that the risk is that the coming big sell off actually starts EARLIERrather than later.
HT: I'd add that it looks like there must be two of these uber-bearish notes flying around
HT: from RBS
NH: all of which is actually a very confusing way of saying that whilstmrkts will likely rally for the next 2/4 wks, we won't see S&P above1405 closing/1420 intra-day, and that the risks are that the Aug/Sept20/25% sell off actually begins earlier, in July. So for me, I want tobe positioned to capture the very big bear move coming over the next 3months, and am prepared to see mrkts rally a bit in my face over thenext few weeks, as a fair trade off against being positioned for a selloff that surprises by coming earlier than I expect.

And there you have it. I'm going to set up a long position to try and pick up some upside from the oversold markets. Catch some upside from a wee bear market rally. And then get back on the short side in July.

Dow Falls to 12K. Time to Go Long?

The bear has returned, setting aside the spring's bear market rally.
Sell in May and go away, indeed.

But is the market oversold in the short-term? Is there too much bad news priced into the market? Are certain indices at extreme points, ready to bounce against the bears? Is it time to put in a trade on the long side?

The Dow has 4 out of 30 components trading above their 50-day moving averages. Using the $DOWA50 chart at stockcharts.com, I found that when 4 or fewer components trade above their 50-day moving averages, it's time to look at going long.

Which four companies are fighting the tape? Alcoa, Chevron, IBM, and Wal-Mart. However, IBM is trading only $.04 above its 50DMA; WMT is $.56 above its 50DMA. Only AA and CVX have a cushion of more than 1% above their 50DMA. If tomorrow's a down day, then the $DOWA50 chart will scream "go long." I'll try to follow through by closing out my DXD position, and shifting those proceeds into a position in DDM.

The Dow is at a tradeable extreme. How about the Nazz and S&P 500?

The broader NASDAQ 100 has 39 out of 100 components trading above their 50-day moving averages. I have previously discussed that when this indicator ($NDXA50 at stockcharts.com) falls below 20, or even 15, then I'll look at going long the NASDAQ via picking up shares of QLD or QQQQ.

The even-broader S&P 500 has 168 components trading above their 50-day moving averages. I won't be interested in the $SPXA50 indicator until it falls below the 75-100 range.

16 June 2008

Jim Cramer Contrary Indicator for Financials

Is Cramer's new column in New York magazine a contrary indicator for the financials? No, not a magazine cover indicator, since it's Hillary's mug, not Jim's on the cover of the current issue.

Is his sky-is-falling lament about massive I-bank layoffs and wilting profits mean it's time to give the financials some serious consideration?

As if all that weren't bad enough, news came last week that Lehman Brothers is fighting for its corporate life. As someone who has great respect for Lehman CEO Dick Fuld, I'm stunned at the size of the reported $2.8 billion loss for the quarter just finished, especially considering how confident the company was about its prospects for that quarter a couple of months ago. They just raised $6 billion in capital at what I thought were fire-sale prices, but immediately the stock went below the $28 offering price, even though that figure already represented a hefty discount versus the previous week's price. The people who bought into this deal have to feel like they just leased an apartment in Dresden after the first 400 bombers hit, not realizing that there were another 900 behind them.

Back in April, Cramer seemed almost-optimistic about Lehman Brothers. Guess he changed his mind...again, and thought invoking the late-WWII firebombing of Dresden would really bring the point home.

After Cramer's big bad boo-boo of a call on Bear Stearns, he seems to be all over the place regarding the financials, often describing the sector's rough action while at the same time, looking for a bottom.

The awfully drab chart of XLF below does show signs that we have seen a double-bottom, with two tests of almost $22-per-share.

I can't say I pay all that much attention to Cramer's shtick anymore, but perhaps it's time to pay heed to his histrionics, and pick up some shares of XLF or UYG.

13 June 2008

Throwing a Meat Dumpling to Hit a Dog

It's a line from page 215 of James Kynge's book, China Shakes the World, offering up a Chinese expression on the futility of protesting the government.

Knowing dogs as I do, however maliciously-intentioned the dumpling toss is, the dog will never take offence. He may not even waste time to cock his head and quizzically look askance at you. He'll simply scamper over to the offending dumpling, devour it, and hope there's more where that came from.

I guess the line doesn't fully encompass how the Chinese government deals with protest, but it's amusing nonetheless.

I recently read this book poolside while vacationing in Maui, to get some broader insight into the rise of China and potential stumbling blocks along its path to becoming an economic juggernaut. I thought I'd offer up the book's thesis, and some other excerpts that caught my attention. After reading them, perhaps you'll want to find your own bit of paradise and read all 240 pages.

China is no different from the EU or the United States in that "no country can enjoy a competitive edge over everywhere else in everything that it does and makes."

That insight is fundamental to China's situation today because much of the country's prowess in manufacturing has been caused by a strenuous, state-sponsored skewing of domestic economic inputs. The aim of this orchestration of advantage has been to resolve China's most fundamental problem: the creation of jobs. So it keeps the cost of electricity artificially low, prices water at a fraction of its real value, puts a cap on the price of some categories of coal, subsidizes oil to make it cheaper to industry and transport, ensures that workers cannot form independent unions so they have little power to bargain wages upward, barely implements its own environmental law so as not to hobble industry with extra costs, promotes savings so its banks are always flush with capital to lend, and provides generous tax rebates to any company that exports its goods. (p.127)

Kynge then says that China's desire to be the world's leading manufacturer has exposed some weaknesses, namely the outsized need "for energy, resources, education, and respect, which the Chinese are obliged to buy from other parts of the planet."

China has a surplus of human capital, but is lacking the capability for significant domestic oil production and the production of other necessary commodities. Apart from the supposed evil of "speculators", China's ever-expanding thirst for oil is often used to explain the rising cost of oil.

China has significant problems with its brand, whether it's lead in toys, its treatment of the Dalai Lama and Tibetans, or Tiananmen Square circa 1989:

Chinese companies that try to build their own brands...bump up against a series of barriers, not least of which are the associations that go along with their national identity. It is not easy to create an aura of quality, consistency, or "cool" among overseas consumers if the news coverage from your country centers on repression, corruption scandals, worker exploitation, and, for many people, a vague and menacing presence called communism. Thus Chinese firms are condemned to surrender much of the value that comes from making and selling things to foreign companies. (p.171)

Then there are the issues with governmental control of publicly-traded companies:

In the West, stock markets function by allowing the investing public to supervise the actions of corporate decision makers. If investors do not like the strategy of a CEO, they can "vote" against it by selling their shares. But in China the system has been turned on its head, so the bosses of publicly traded companies do not have to suffer the indignity of listening to the opinions of minority shareholders. In fact, every aspect of the system has been designed to extract a maximum of public money while surrendering a minimum of accountability. (p.196)