Thursday, April 28, 2005

Bill Cara shares insights on fed rate hiking

Bill Cara is one of the few wise old men who's words give me pause. I've learned a lot from him in a short time. One of my favorite new techniques from Bill's analysis playbook is the spread between the 3-month and the 30-year US Treasury bonds. Earlier this year Cara warned that the spread has narrowed from a comfortable 300 basis points to being closer to 200 basis points. Since then, I've watched the spread narrow to where it is today: 176 basis points. This is money flowing out of US equities and into the relative safety of bonds. But anyway, the real reason I'm posting is to discuss his latest writeup on fed tightening.

Here's the link to Bill's write-up on why the fed's hand is being forced on this rate hike campaign. Bill mentions that part of the idea behind higher interest rates is to discourage nonproductive speculation with higher margin interest rates. I am one of those speculators who will be affected by higher margin interest rates because they act like a tax for maintaining large positions (I am often maxed out on margin). I think it will affect the less effective traders the most because if they cannot outperform the margin rate, they cannot sustain highly leveraged positions for any significant stretch of time. This idea is definetely congruent with a contractionary period for equities because we have a harder time saddling our old positions with the most effective traders =)

Stephen Vita on overly bearish sentiment

Stephen Vita's talking about some overly-bearish sentiment numbers over on The Alchemy of Trading. It is good for people like me to see this stuff because I'm short the Q's, I'm short the materials, and I'm short plenty of other stuff. I'm not proposing throwing in the towel on these shorts until the overall market trend changes, especially since I'm making good money, but that doesn't stop me from managing my exposure according to percieved risk, so thanks for the heads-up Stephen.

Wednesday, April 27, 2005

BOOM

"As tempting as it is to put all your money down on big bets and take it back off the table just as quick, this road leads the average speculator to mediocrity, or worse, ruin. The only way to make some real money out of wallstreet is to play the game consistently; to be there for when markets turn. Not the very bottom or absolute top, those don't matter, but when a move has legitimazed itself, ride it for all its worth whether that is months or years."

Monday, April 25, 2005

Analysis of a nasdaq downtrend, other musings


I haven't posted an update in a while and the reason is basically that nothing has changed. I look at the nasdaq chart included in this post and it is pretty clear to me that we are still in a downtrend, in all likelyhood perched up on this bear flag for another fall. The chart shows my two favorite moving averages on it: the 10-day simple moving average in blue, and the 50-day in red. What I find particularly interesting about the above chart is the way the nasdaq doesn't close above the 10-day moving average for two or more days when the 10-day is below the 50 day until the downtrend is threatened. The opposite is true when the 10-day MA is above the 50-day. The significance of my observation is this: the current downtrend is not in jeopardy until the nasdaq is able to close above its 10-day MA for two or more consecutive days.

Jacob Whitney, I'm glad you liked my list of short candidates. I have shorted a couple of them that look like they are perched to fall. If they do not fall and strength comes into them, it is clear to me that higher prices will follow and I will be forced to cover for a small loss. But through this entire bounce over the last couple of days, the only short I have covered is DECK after its post-earnings meltdown. While I would not be a buyer of the stock at its current level without seeing some strength first, I felt that buying to cover was in my best interest due to my inability to predict the behavior of that stock when it is so far from any important moving averages. The risk/reward for taking a few more points out of it is no longer tolerable in my opinion. However, that could change if I see a weak rally in the stock and it cannot retrace much of this avalanche over the next few weeks.

On the other side of the fence, my hedge on the longside is playing out quite nicely. On April 7'th, I posted here that I had bought a small position in NSI (Nutrisystems). Well the earnings came out tonite and it was a doozy. The stock is up over 20% in after hours. We'll see if the gains stick tomorrow. I plan to add to my position tomorrow at the open as the stock heads into new highs because it will undoubtedly be hitting all sorts of traders' screens. My escape plan is that if the stock cannot hold its morning gap-up, I'll dump the shares that I added in the morning for a loss no greater than 3 or 4%. What I would like to see happen in NSI tomorrow is the stock close around $10 or $11 a share on volume of 1 million shares or more. If it plays out like this, then we're seeing a scenario where interest in the stock is ballooning and it may just be the beginning of a move much higher over the next 12 months as institutions jump on board.

Friday, April 15, 2005

The conversation continues

I wanted to keep this part of the conversation on the IBD forum too since I took the time to explain more about my shorting campaign this year... and the campaign is working! Klinv I hope you don't mind me reprinting your side of the conversation.




  • ----------------
    On 4/13/2005 6:01:57 PM KLINV wrote:

    tr0p,
    I appreciate your comments...and agree with you on making the big money at the start of a new trend. I need to remind myself of that...I know it, but in the past week or so, I have put it aside. How do you screen for your shorts? Have you been going by WON's method as he lays out in his short selling book, or do you have a particular method you find successful? If you ever feel like sharing some short possibilities, chime on in on the short selling threads that are going on. One thing that really worries me on shorting ... can I get your input? That is...worrying about shorting a company that ends up getting bought out. One example is ZBRA. Chart looks like a perfect short...but this is one good company...and it could get scooped up. That would suck! Any further points or recommendations appreciated.

    I agree with ninner on the bear market theory. Definitely reads that way to me when viewing what is actually happening and reading WON's books. I hope that the SOB only drags out for a short while (ie: before years end). Oh well...we know what hope is worth...simply another 4 letter word.

    All of you that are not going 100% cash, but wanting to short...join the short selling threads and lets get some ideas going. I'll look for you there!


    ----------------


  • Klinv sorry for the late reply. I also worry about stocks that I'm short of getting acquired at a premium. Here are some precautionary measures I take: I don't pyramid into small and mid-cap shorts, and now after my fiasco in RIMM, I don't pyramid into shorts with ongoing litigation. My favorite shorts are the NYSE stocks, big caps, and the QQQQ's, I pyramid into these. Although the short yields won't be as high with big caps, they are much safer plays so they work perfectly for my goal in a down market -- to do at least slightly better than preserve my capital.

    I don't screen for shorts every day, but days like today are perfect. On the second distribution day in a row and any following distribution days I go to stockcharts.com's "stock scans". I look through all the "strong volume decliners" on the NYSE and some of the Nasdaq issues and make a list of stocks that have more than one day of distribution in a row, preferably taking the stock from its peak to below its 50 day moving average. The weaker the volume while the stock was at its peak, the better. And the stronger the volume during the sell-off, the better. These stocks make up my watch list for the next few weeks. I watch them to see how they rally. If the volume is significantly lighter on their rally and they aren't able to get above the 50-day or back up to their prior peak, then they are perfect! When I see the QQQQ's start to sell off, I'll start shorting the stocks from my list that also look like they are teetering on the edge of a cliff, possibly even starting to freefall.

    I'll share with you the list that I made tonite. Not all of these are shorts, just short-candidates that I will be studying for the next few weeks. I feel that all of these stocks are too risky to short at their current prices. You don't have enough information to short them intelligently until you see how they rally. Here's the list:

    AGP CNC ENS ETN HDI NAV PII TGI AAPL IMDC INFY SGTL CLF PD

    I didn't find the last two from the scan, just so you know. This list is more than enough new shorting ideas for me and I probably won't spend a lot of time looking for more ideas for a couple weeks. I usually ignore most other stocks during the trading hours except for my list and my open positions. I also keep a bull list, you know, just in case ;-)

Thursday, April 14, 2005

Excerpts from a thread on the IBD forum

Since I'm keeping this blog as a trading journal for future reference, I want to post some excerpts from my side of a conversation on a thread in the IBD forum because they reflect my current thinking about the market and the way I'm trading in 2005. As a heads-up, "Klinv" is the screen name of one of the people on the forum. He was expressing his frustration with the indecision in the market lately and got me started rambling!




  • I'm up between 5 and 10% for the year. It doesn't sound fantastic, but I would be up about twice that if I hadn't gotten caught in RIMM's 20% gap up a few weeks ago. I've been doing my short sales in bursts this year, and they almost always come when both the QQQQ and my short candidates start to crest from a rally. I usually don't act on one alone, I sell them both: my candidates and the qqqq's. This has kept me out of a lot of trouble. Many times I get stopped out of a short, but I never risk more than 3-4%.

    Klinv you're reminding me of when Larry Livingston talked about how he didn't make as much as he figured he should have when he was right about the market. This is because he was swinging in and out too much. He went on to say that the big money is in the big swing and your business in a bull market is to buy stocks and hold them until the bull is on its last legs. The reverse is true for a bear. I still have my winning shorts from January and I've pyramidded into some of them. I do get nervous every now and then. It's amazing how frequently my resolve has been tested by rallies in individual stocks and rallies in the market itself.

    I'll share a few ideas that have saved my skin this year:

    * When I get nervous about a short position, if the position is too big, I'll trim it down to a comfortable size regardless of its current price.

    * If one of my positions gaps up on earnings or some other news and the chart is still bearish, I will "double down" by adding to my position at the gap-up open. If the stock closes that day in the bottom half of its intra-day range then I know I was right to stay short. A weak stock will never revisit its high price at the open that day. NOTE: you have to have a position acting in your favor well in advance of the earnings announcement, this isn't an earnings-eve play!

    * If one of my positions rallies for a few days or a week and I'm feeling squeezed, I ask myself "would I be a buyer of the stock here?" and I look at the chart. Most of the time I would never even think of buying the stock there, so why would I buy to cover? Buying and covering are basically the same thing, in both cases you are a buyer of the stock. If the stock gets close to your stop but looks weak, it could be time to "double down" (but don't move your stop). You aren't "risking" much money since its price is so close to your stop anyway.

    * If you feel like closing out a short position during the middle of the trading day because it is moving up, wait until the close. You have a better perspective at the close, and frequently in bearish times conditions will have worsened as the day carried on. You will have also given yourself more time to think over your decision. Being in a hurry is a sure way to lose money.

    * Trade the QQQQ's. When you are buying and or short-covering Q's, buy and cover stocks. When you are selling and or shorting Q's, sell and short stocks. This keeps your portfolio in tune with what the market is doing at the time, and also acts to diversify your portfolio.



  • As I understand it, the reason Greenspan has to raise the rates is the twin deficits. You probably already know this, but the government spending is devaluing our currency. This is means we can export like crazy because our stuff isn't worth as much--we spent part of what it would fetch in the market already! The problem is that foreigners who already own US debt are seeing their inheritance shrink.. the US is spending their money. So they shake up the markets every now and then to remind Greenspan of his job. He responds with jawboning about how the government spending is under control and how the end is in sight and the local yokels buy it, temporarily boueying the market. But the foreign investors see the writing on the wall and if they walk (dumping US debt - bonds, tbills, $USD, etc) you see a repeat of October, 1987. In a sense, if Greenspan doesn't raise the rates, US debt starts asymptoting towards worthless. The rates aren't really up to him even though he is pulling the strings, his hand is forced. The reason the market tanks when he raises the rates is that he's directing money from US businesses to the owners of US debt and that is bad for corporate earnings, dividends, and growth.

Tuesday, April 12, 2005

Gah! I hate days like today

Unless you are trading intraday movements, you don't really benefit much from these reversal days. I was long a couple lots of euros this morning and got knocked back to the flat position at 8:30 AM when we found out the deficit worsened, and the euro is now back on its way up! Same thing with stocks. I had a nice overall gain in my portfolio this morning, all my shorts were off a good bit and my single long position, NSI, had rebounded after coming within $0.01 of my stop. But as the day wore on I could tell something was fishy by the way stocks and the indices were acting. I was glad to already be in position because it felt like a big move coming, although I did not know in which direction it would be so making any new moves with my time horizon was too risky. Then BAM, most of my gains from the morning and yesterday retraced =/

Today's action was strong enough that I'll count it as day 1 of a rally attempt. As O'Neil teaches in his book "How to Make Money In Stocks", a strong bull run will be started when the market has a gain of at least 1.7% on above average volume on the 4'th to 7'th day of an attempted rally. This is when I'll take in my shorts and open longs.

Another reason I'm not covering shorts yet is that today had the same feel as that day at the end of June 2004 had, you know, when the fed raised interest rates for the first time that year and the market rallied!! Those who were around back then know what happened for the next month and a half, and for those who weren't I'll tell you. We had the nastiest sell-off of the year - it was brutal because it never even gave a relief rally to sell into. I remember so much talk about "oversold" back then, and well, eventually they got it right.. in late August.

Thursday, April 07, 2005

First buy since January

I haven't been long any stocks since January, but I'm willing to entertain the idea that the market may have some upside potential in the next couple of weeks. I have been browsing the "Bear trap" Point and Figure stock scans over at stockcharts.com because every now and then it comes up with a chart sporting a nice cup and handle. A couple that I had been watching for a week or so are BNN and NSI. Well NSI broke out this morning on high volume so I picked up a small position with a tight stop. If the breakout is legitimate, then I won't be stopped out and I'll be in a nice position for a market rally follow through (I cover my shorts when everybody else does).

A quick note about the charts of BNN and NSI:

BNN looks like a sweet cup and handle on a small weekly chart, but if you view a longer timeframe of data, you will see that it has run up quite a bit and is making a late stage base (although it is well-formed). The handle on BNN is getting a little long...

NSI looks HOT. On the dialy chart you can see where it broke through resistance today as accumulation buyers got into a panic. I would call NSI as a first stage base because it just broke out from the first base where the price was over $5.

I never ended up taking a position long in GRU. I figure it will make a higher low yet again before breaking out into new high ground. If it happens like this, then it will be a lower risk place to buy then when I was contemplating buying at $16.10 about a week ago. If it just keeps going into new high ground without basing first, then I'll miss the action, but thats ok. Speculating is all about when not to pull the trigger. I try my damndest to only take the layups.

Friday, April 01, 2005

Everybody kept telling me it would happen

I was going to make a killing today. Trades all set, I was going to make more money than I have ever made before. But it wasn't destined to happen, not to me. I finally busted. Blew out and lost my roll. Too much leverage and couldn't meet the margin calls. How could AIG go any lower when it already fell too far too fast? How in the FREAKING WORLD could the euro reverse its breakout this morning from 1.3050 all the way down to 1.2890 IN THE SPAN OF A COUPLE HOURS???? WHY THE CRAP DID I DECIDE TO USE MOST OF THAT 200 - 1 LEVERAGE THAT THEY THINK ITS SAFE TO GIVE PEOPLE... LONG THE EURO TODAAAAYYYYYY. WHY H.E. DOUBBLE HOCKEY STIKC DID IPUT MY WHOL F'IN MARGIN LONNG FREAKINNNGNG AAAAAAAAAAAIIIIIIIIIIGGGGGGGGG!!@#$!@#$




















April Fool's =)