Market Thread for Jan. 2010

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Market Thread for Jan. 2010

I'm not sure there are many people left in this community that follow the stock market, (which is in itself an excellent market sentiment indicator) but I continue to believe that this month will mark a significant shift in the stock market.

This thread is simply to serve as a place to document stock market related news for the month of January,

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We haven’t seen this few bears in 22 years!

We are seeing unbelievable market sentiment extremes right now. Perhaps its because everybody thinks the stock market is fixed, but nobody (and I mean statistically nobody) is bearish. This could be the greatest shorting opportunity of our lifetimes.

From Mish:

Reflections On Market Sentiment

Both of the popular weekly sentiment surveys are in agreement showing an extremely bullish mood, which should make any contrarian stand up and take notice. It now stands two standard deviations below its 1 year average. The AAII weekly sentiment survey of retail investors in the US has only 23% bears and a whopping 49% bulls. The AAII ratio hasn’t been this lopsided since May 2008 when the S&P 500 topped out at 1440.

Similarly, the Investors Intelligence survey of newsletter editors has plumbed new depths from last week and reached a new record. We haven’t seen this few bears in 22 years! The II finished off the year with only 15.6% of editors looking forward to lower stock market prices and 51.1% optimistically looking forward to the continuation of the rally.

I've been waiting for an opportunity to short the indexes all by myself and I think that day has arrived.....Ye Hah, this is going to be fun!

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Re: We haven’t seen this few bears in 22 years!
JAG wrote:

I've been waiting for an opportunity to short the indexes all by myself and I think that day has arrived.....Ye Hah, this is going to be fun!

Oh, I'm still on that train, brother (what's left of me...ehrm...left of my ETF, that is...).  But there's plenty of room...

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Re: We haven’t seen this few bears in 22 years!
JAG wrote:

We are seeing unbelievable market sentiment extremes right now. Perhaps its because everybody thinks the stock market is fixed, but nobody (and I mean statistically nobody) is bearish. This could be the greatest shorting opportunity of our lifetimes.

What kind of statement is that for Captain Sheeple to make!

Seriously though, I don't know if I can go along with that contention.  Most of the folks that I know that have independent and functioning brains and guts are decidedly bearish, at least in terms of real rather than nominal gains.  I'd consider shorting the indices but I just don't want to get whipsawed to smithereens (hint, hint to Sager here).  I'm sitting tight on my cash and PMs and just sitting back and watching the show.  It's dangeorus out there.  The sharks are feeding on the sardines and this sardine has decided to hole up in a rocky crevice until the red washes out of the water.

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Re: Market Thread for Jan. 2010

You don't have to be faster out than everybody,  just faster out than the last guy out.   Money mouth

 

I always look at the gap between the Vix and the Baltic Dry as an indicator.  Right now both are low - a clear indicator of insanity on Wall Street to me,  but I still believe an economy is supposed to make something and support the people who live in it, so I am clearly not "getting" the whole stock rally.    Thinking it a fools rally does not make it less of a rally,  just one that you can expect to be short lived.  

But, I thought we were going to have the crash of 08 in 06.  This economy is a dead man walking,  but I would not put it past the money men to prop it up for far longer than any of us think is wise  ... or sane.

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Re: Market Thread for Jan. 2010

The Plunge Protection Team is doing it's dirty work.

The question is "How long can they keep it up?"

That's the million dollar question.

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Re: Market Thread for Jan. 2010

 

After having my head handed to me shorting the """market""" too many times to count in the last 14 months I have taken refuge on the sidelines. Is there a PPT? I most certainly believe there is after watching huge S and P futures buying mysteriously materialize just when the market was ready to enter the world of price discovery....as in crash.

 

However.... Could the crazy demand for stocks represent a flight to all things tangible? As The US and other powers try and solve their problems caused by too much debt with more debt, it has become obvious the stock of America, the dollar, will suffer the consequences. The PMs, crude, and most commodities are screaming dollar implosion. Why not stocks as well? If we use history as our guide, it has happened before with imploding currencies. 

Another theory as proposed by Pimco is the feds purchase of toxic assets from various entities has created  huge amounts of fiat to plug into other """investments,""" equities being one recipient.

 

Manipulation in all financial ""markets"" is a given. As an example look no further than gold today. Very very rarely does the gold cartel allow more than a 2% move up especially during the CONex hours of operation. I have seen this hundreds of times. Yesterday golds gains were stopped cold at 2% and now today as well. As soon as the physical market in London closes the paper pm selling starts in earnest. I would estimate this happens 80% of the time. They dont try to hide it in the least way. Traders have come to expect such action and are profitting from the selling opportunity risk free thanks to JPM and friends.

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Here it comes, Consider yourself warned!

You gotta love Denninger!

Quote:

I don't know how much clear it gets than this:

By Scott Lanman and Craig Torres
Jan. 7 (Bloomberg) -- U.S. regulators including the Federal
Reserve warned banks to guard against possible losses from an
end to low interest rates and reduce exposure or raise capital
if needed.

“In the current environment of historically low short-term
interest rates, it is important for institutions to have robust
processes for measuring and, where necessary, mitigating their
exposure to potential increases in interest rates,” the Federal
Financial Institutions Examination Council, which includes the
Fed, Federal Deposit Insurance Corp. and other agencies, said in
a statement today.

 

Let me point out a few things.

  1. We have never seen a crash and rebound in US stock market history like what we have just experienced, except once. That "once" was 1929/1930. What followed next was a grueling grind - not a crash, but a grind that never ended, and in which the market lost more than 80% of it's value. Those who argue "the bigger the dive the bigger the bounce" forget that the only true comparison against what we have just seen was in fact the prelude to a grinding 90%+ overall decline.
  2. If you believe in "long wave" cycles - that is, Kondratieff cycles, we have precisely followed the several-hundred-year long pattern though its latest incarnation, with the 1982-2000ish period being "Autumn." Winter follows fall. These cycles seem to happen mostly because all (or essentially all) of the people who lived through the last cycle's horrors are dead. Unless we have found a way to break a cycle that has endured far longer than our nation, we're right where we should be - which incidentally aligns with what happened in 1929/30 as well. This means that while there may be ups and downs we have not bottomed - not by a long shot - no matter what people tell you.
  3. Interest rates can only go up from zero. That should be obvious. Rising rates are not positive for equities and multiple expansion.
  4. The Financials are getting a tremendous bid the last few days, presumably on the premise that "employment is at least somewhat stabilizing." With zero short rates and a steep yield curve, this means they make a lot of money. But rates cannot stay where they are if in fact the economy is recovering, and if the long end rises it will choke off housing.
  5. At the same time people are rotating into a sector The Fed and regulators just said will be forced to constrain its profits people are fleeing the stocks (tech) that have been on a tear. This is exactly backward based on the news flow. Are The Fed and Regulators lying or is the "optimism" incredibly misplaced (and even stupid if they're rotating out of winners for what were just announced would be losers!)
  6. P/Es are at record levels. Yes, that's on "as reported" 12 month trailing, and it is down materially since one of the two "disaster quarters" is now gone. But even with the other gone (which it will be in another month) we will be trading at somewhere around 40 or 50x earnings, an utterly unsupportable level and above where we were in 1999 - just before the entire market fell apart. Even on "operating earnings" we're trading at 24 times - outrageously overvalued from a historical perspective.

We also have the BIS calling in bankers to warn them that they've changed nothing in their behavior (gee, really?) and China making a serious attempt to pop their property bubble (must be nice to actually pay attention to such things, eh?)

For today, "party on Garth" in equities.

Let me simply remind people that what got me writing The Market Ticker was this event - something that I missed the signs of because I was overly complacent, just as people are being right now.

link

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Great Opportunity in Inverse Index ETFs and Put options

We are approaching a historic trading opportunity for a low-risk short trade of the markets. Traders a very complacent in their bullishness and are prime for a wake-up call.

In the options market last week, traders paid a premium of 1.9 billion to bet on a rising market, while only purchasing 499 million in puts (bets on a declining market). Thats almost 11 million call options to 4.3 million put options. This ratio hasn't bee this skewed to the bulls since 2000.

And in case you thought that traders had shifted into inverse-index funds to bet on a market decline rather than options you would be wrong. In December, volume in these inverse funds has reached its lowest level in 2 years. 

Bottomline: This in an excellent low-risk opportunity to short the markets if your so inclined. I know I am.

PS: Rog, thanks for that Denninger, I loved it.

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Is The VIX Dead?

Is The VIX Dead? Tweak the Parameters for Better Signals by Christopher P. Hendrix, CMT

Into late 2004 (as of December at this writing), equity market action has been very choppy. The low VIX readings have triggered speculation among many traders and analysts that almost every price retreat was the beginning of a major decline to correct the high degree of greed and complacency. The anticipated market meltdowns did not occur, and that prompted many to throw out the VIX as a useful indicator. In Figure 3, however, the usefulness of the daily VIX during 2004 is seen as the Bollinger bands marked the relative extremes. The S&P 500 broke to a new low for the pattern in May and again in August. However, the relative VIX extreme (setup and signal) should have led to the assumption that SPX was likely to rebound versus accelerate lower. No indicator has a perfect record, and this method did not mark all the highs and lows, but the accuracy of the indicator is high enough that it is the first one I check each day.

Take a Fresh View
Indicators and methodologies need to evolve. The argument that the VIX is unreliable is only correct in that its traditional extremes may no longer be useful. Those on the other side, warning of over-optimism and an impending major correction, also may be correct some time in the future. However, opportunity costs are too great for many investors to be bearish during multiweek to multimonth rallies while waiting for a price breakdown. Adding Bollinger bands into the mix breathes new life into the volatility indicators and could propel them to the forefront of one’s technical analysis arsenal.

 

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Re: Market Thread for Jan. 2010

What are some good ways to short the market?Thanks for this thread. Terri

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Re: Market Thread for Jan. 2010

Short list: http://tradermike.net/2007/03/list_of_inverse_short_bear_etfs

 

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Re: Market Thread for Jan. 2010

Thanks for the short list, Terri

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Oopsie

FWIW, my Eliot-Wave buddy in VT thinks that today's selloff is likely the start of a big downleg.  He thought DXD was not a bad place to be.  I wrote back saying, 'dude, I've been in DXD since July.'  He said, 'ouch.'  Tongue out

It'll be interesting to see where this goes, although I would've preferred no downleg until June-ish, myself...

Viva -- Sager

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Re: Market Thread for Jan. 2010

I have a few shorts I put on a month ago. Little ouch at the moment since it is 10% of total. I still think CM maybe right with the liquidity flood keeping the Ponzi up til March or April. That is when I look to short some more, Depends on how inflation starts to take off & jobs. Charts are still bullish.

Tough times as they will try to take out both the shorts & longs. Need to be nimble & quick.

My quess is they will rescue this market on Monday.

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Re: Market Thread for Jan. 2010

Sager,

I just noticed that you were in an ultra short ETF. If your looking to hold a long-term short against an index, use the non-leveraged inverse ETFs to do it. Leveraged ETFs are typically used for one to two day trades. If you hold it longer than that, your capital will erode very quickly. 

A non-leveraged inverse ETF like SH (Proshares' Short S&P 500) would allow you to buy and hold over a long period without much worry about compounded returns eroding your gains.

All the best Bro.....Jeff

 

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Re: Market Thread for Jan. 2010

CHA-CHING!!!!!

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Re: Market Thread for Jan. 2010

This was the first day in a long time that the market failed to rally when it was this oversold. It could be the beginnings of a trend change, though market tops usually take months to roll over. 

Did anyone else play this pullback?

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Re: Market Thread for Jan. 2010

If you check the market graph, it tried to rally (looking at the DJ here) around 11 a.m., but then just stumbled downdowndown till the close.  

My Elliot Wave buddy said this was coming (last week).  Ehrm...I've been waiting since June-July last year...Embarassed

 

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Re: Market Thread for Jan. 2010

SO:  are folks thinking that this is just a 'dumb money' correction?

Or -- is this a 'China taking the air outta the bubble' thing?

Or -- profit taking?

Or -- oh, I dunno, SHTF?

Or -- people running out of equities and into the t-bill/bond markets?

Or -- ???

Viva -- Sager

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Re: Market Thread for Jan. 2010

I've been shorting gold since 1136 the problem is that even though you are right on the direction  the huge volatility swings of hundreds of points in the DOW will wipe you out if you don't short near the high.  It will still be a fairly big rollar coaster on the way down.  For example, If you short after the 300 point fall today, you better be able to withstand a 200 pt bounce back up Monday, because if you get stopped out you will miss the 500pt plunge Tuesday -- just an example NOT a prediction (until after it happens next week Wink)

It is fun in a Vegas sort of way, but don't bet your savings, bet the vacation money.

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Re: Market Thread for Jan. 2010

Agree we turned a corner this week, JAG.  Everything else had already started a decline.  We were just waiting for Mr. DOW and Ms. SP to finish their cocktails and join the rest of the markets for their final trip into hell.

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Summary for January
SagerXX wrote:

SO:  are folks thinking that this is just a 'dumb money' correction?

Or -- is this a 'China taking the air outta the bubble' thing?

Or -- profit taking?

Or -- oh, I dunno, SHTF?

Or -- people running out of equities and into the t-bill/bond markets?

Or -- ???

Viva -- Sager

Sorry Sager for the delay in getting to this question(s).

From a market sentiment standpoint, things have turned around so quickly that I'm hesitant to be short right now. The question that remains to be answered is how bearish are the traders that recently jumped off the bullish bandwagon? Are they looking for just a correction or are they truly fearful? 

Here is some observations from that may answer those questions:

Observations that are bullish.

  • Rydex traders have stampeded into the safer, less risky funds and also into the leveraged short funds. This typically means that the decline is over for now, and a rally in the riskier assets is close at hand.
  • The Tick indicator (the number of stocks that last moved up in price minus the number of stocks that last moved down in price) hit -6000 early in the week. Readings of this extreme typically mean the market is very oversold and to expect a bounce soon.

Observations that are bearish.

  • The market has failed to rally despite dramatic shifts in sentiment and being severely oversold. This means that quite possibly the larger trend in the markets has changed. Every day that passes without an effective rally at this point means that a larger decline is in our immediate future.
  • The Investor Intelligence survey of financial newsletters shows a dramatic weekly drop in bullishness, but the newsletters are looking to play a simple correction, rather than a bear market decline. Because these advisors are not fearful of a larger decline, implies that a larger decline is still highly probable.

Personal Disclosure: In my personal trading, I still hold a prudently-sized (non-leveraged) short position against the Nasdaq. I took profits on my leveraged short position earlier in the week. If we see a large bounce that flushes out some of the insta-bears, I will re-enter my leveraged short position again, but right now there are too many traders that jumped into the leveraged short funds/ETFs.

Overall the month of January has been good to me. Now if I can just avoid getting stupid and/or greedy, maybe I can hold on to some of my capital gains. In the interest of returning to my strategy of "Get short and keep your mouth shut", I probably won't start a "Market Thread for Feb. 2010" next month. The set-up in the early part of this month was too good not to share it with others. I'm still pretty convinced that a larger trend change in the markets is occurring, but I think its going to get much more difficult to play in the months ahead.

Thanks for your interest....Jeff

 

 

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Re: Market Thread for Jan. 2010

The fed has indicated that it will stop providing currency swaps to foreign central banks this month(feb).  This has provided cheap liquidity for foreign banks by depressing LIBOR (interbank lending rates).  I think this will lead to an open market buying of dollars causing a stronger dollar and unwinding some carry trades.  Of course the fed could just continue business as usuall when their foreign central banks start whining, because we know they take care of them before the US.

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