Gary's Performance

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Gary the chimp is doing a lot better than we are. He's up 5.2% as of the close today, compared with a loss of 8.0% for the S&P500 index. It's been 2 months since Gary chose his portfolio by throwing darts at 5 uptrending charts and 5 downtrending charts. Over the same time period, Buffett's Berkshire Hathaway is down 19.4%, Icahn's MOT is down 18.6%, Kerkorian's MGM is down 26.1%, and Adelson's LVS is down 63%.

Gary's performance continues to improve as time goes by because more and more of his charts are showing their true colors. The beginning was rocky for his portfolio, as many of the stocks were bought at short term inopportune times. But now with two months of momentum, Gary's underlying thesis that an object in motion remains in motion is being proven correct.

If we can prove (in real time) this simple concept on a little blog like this, then the burning question is why don't the pros know this? Buffett bought GS at 120 or so, and GE at 25. Gary would have shorted both of those charts.

Speaking of GS, it looks as if it is breaking through the top of its ascending triangle, which bodes well for the market as a whole.

We'll have to see how long Gary continues to outperform the market. His approach likely has a shelf life, as no chart goes in one direction for too long without reversing. The chart above is of EBS, one of Gary's longs. Even though his performance is impressive (leaving his more intelligent human peers in the dust), it must be understood that his performance will always be better relative to the market during bad times. In good times, Gary will still profit, but will underperform the market. He is most likely to make about 1% to 2% a month over the long run, regardless of what the indexes do. His approach is well suited for those who chose to accept a somewhat muted return during bull markets in return for far less anxious times during bear markets. We're hoping Gary can continue to maintain his current 2.5% monthly profit, which would give him a 30% yearly gain. It sounds too ambitious, considering this would mean his account would triple in value every 3 years.

Regardless of whether he makes 10% or 30% a year, your money would be far safer invested with this chimp than with Bernard Madoff. In a nutshell, this one statement sums up the reality of Wall Street, the scam that is the backbone of our financial system. Last we heard, Madoff may get the most severe punishment the SEC can give him... a very hard slap on the wrist accompanied by a $75 fine. He may also have to apologize to those he scammed. Surely this severe treatment will send a message to future scammers and make Wall Street a safer place for our grandchildren to invest their life savings.

Nasdaq

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The chart above is a chart of the Nasdaq, but it may as well be any of the indexes. Today's action was just noise. The indexes are still within their ascending triangles. Nothing has broken down yet. It is no suprise that they are struggling in here considering that traders have two reasons to sell the rallies (50dma and horizontal resistance). We always like when triangles form because they force the market to chose a direction quickly. We expect a decisive move to take place very shortly, ending the respite from volatility we've had over the past month.

We hope that move is lower, as we'd like to get rid of QID and SMN and load up on the Ultralongs now that the market is trading more rationally. Unfortunately, the next move is likely to the upside. Ascending triangles have a tendency to break to the upside, and after all, the market is still very oversold on an intermediate term basis.

Purely from a technical standpoint, we're not suprised to see oil carving out new lows every day. That's what downtrending charts do, hence our call for 14 cent oil. From every other aspect, though, we are shocked to see how weak it is. Even the recent 1,000 point rally in the Dow has not given oil a breather. Despite how much it has fallen, we continue to warn that there is absolutely nothing redeeming about its chart. It remains in freefall, much to the relief of those who cannot heat purely with wood come January and February.

As for the other commodity related stocks, despite recent strength, they all remain in downtrends. This is the strongest they've been since breaking down in July/August, but they are by no means in an uptrend. If you pull up a weekly chart of any of the fertilizer stocks and put a 100dma on it, you'll see that they are nowhere near being in an uptrend. You need to see the big picture without getting caught up in the day-to-day noise in order to appreciate how little their recent strength means in the whole scheme of things.

50 dma

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The above chart of the Dow shows that we've broken through the first milestone, the 50dma. As mentioned in the previous post, our guess is that we'll be hitting resistance at November's highs at the same time we're hitting the 100dma. This resistance level will likely give the market a very hard time. Staying within a wide trading range between 8,000 and 10,000 is our prediction for all of 2009.

S&P 500

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The chart above of SPY (S&P500) shows the 50dma (blue), 100dma (orange), and the 200dma (red). Back in the dotcom crash, every time the market returned to the averages after a significant selloff, there was widespread talk of a new bull market. People raced to buy stocks because the sentiment was that the market had sold off in error. Watching the financial news would make you want to sell your house and put everything into stocks. And each time this happened, it wasn't long before the market turned around and crashed to new lows.

It was a very frustrating time for investors. We put a rule in place at that time that we would never trust a rally below the 200dma. All action below the 200dma is typical bear market action, so there is no need to get giddy about any rallies for a very long time.

The closer we get to the averages, the more ripe the market becomes for initiating new short positions. Given the market's severly oversold condition (since its plunge in early Oct), we will keep our long bias until the market returns to at least its 100dma. At that milestone, we'll change to a net short allocation, increasing the short positions if the market continues higher towards the 200dma.

The market is currently toying with the 50dma. A significant break and close above it, if it happens, will be an important milestone for technicians everywhere. If we take out the 50dma, the next resistance is November's highs (the election rally). If the market continues to rally, there is a chance that this resistance coincides with the 100dma. In about 3 weeks, the 100dma will be roughly at November's highs of S&P 1000. If we reach it, that will be a very tough resistance to break.

Oil Prices

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Ever since they made a decisive and simultaneous break of both their trend channel and moving averages on July 17th, oil prices have been locked in a Stage 4 decline with no end in sight. Today, Merrill Lynch came out with a $25 oil prediction, an additional 40% drop from its current price of $43 per barrel.

On Oct 2, Merrill cut their oil forecast from $107 to $90

On Nov 26, Merrill cut their oil forecast from $90 to $50

So, why, then, didn't they just call for $25 oil on October 2nd? Or on July 17th for that matter?

We called for commodities to reach 14 cents, because we figured it's as good a guess as anyone else's. The CEO of Gulf oil, Joe Petrowski, says that oil could fall so low that it costs just $1 per gallon at the pumps. We're with him in that we're not willing to choose an artifical bottom on a downtrending chart. The bottom is always $0.

Merrill Lynch should have known this on July 17th, rather than change their forecast on a monthly basis based on momentum under the guise of advanced fundamental analysis.

Of course, it's a whole lot easier to sell investment advice based on sound fundamental analysis, particularly if the jargon used is not understood by the masses.

There is no fundamental analysis required to tell you that an object in motion stays in motion until bankruptcy, or an equal and opposite force (decisive and simultaneous break of downtrending channel and moving average) turns it around. We're not going to turn bullish on oil until this happens. Until then, we continue to predict that all commodities reach 14 cents per share.

Agrium (AGU)

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We're sticking with SMN given the weakness that still remains in the commodity charts. There is no bottom in sight for OIL, nor for some of the fertilizer charts like POT (at new lows today).

The descending triangle drawn on the chart of AGU above shows why we think all commodities have yet to see their lows. The odds of this chart breaking down are very high.

....

As a side note, we mentioned strength in biotech in the previous post. Perhaps we weren't clear in saying that we do not think the biotech and pharmaceutical ETF's are a buy yet. They are all stage 4 downtrending charts. We were just happy to find a small pocket of strength anywhere in this market, and felt it deserved to be recognized. The only way to play it is to buy one of those great-looking individual stocks on a pullback to the moving average or other substantial weakness. Even then, it's a risky bet, as they are small cap names with light volume. A single earnings report can cut them in half, uptrend or not. As a general rule, we never buy biotech or airlines. Both are extremely thankless businesses which spend the majority of their time on the brink of bankruptcy.

Biotech

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The chart above is the chart of Emergent Biosolutions (EBS). Normally we would think nothing of a single stock with a nice chart in this market, but this one isn't acting alone. It is among a group of smallcap biotech stocks enjoying their own little bull market. Others in the space include QCOR, CBST, and OSIR. It's exciting to find a pocket of strength like this in a market where it's difficult to find even one good chart. It shows that there is light at the end of the tunnel.

We figured that if there is strength in a sector, perhaps its ETF would also have a strong chart. Unfortunately, this wasn't the case. The biotech ETF charts (BBH,FBT,IBB,PBE,XBI) do not look bullish yet. Nor do the charts of the pharmacuetical ETF's (IHE,IXJ,PJP,PPH,XPH). Nevertheless, pockets of strength like this are the first step in turning a sector around, which of course is the first step in turning the market around.

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It is our feeling that based on the amount of time the market has been bearish without respite, we are soon due for a very formidable rally. Our time frame is longer than many on this board, as we have developed incredible patience for this game. When we say that we're due for a substantial rally, we're looking at the big picture. At some point over the next several months, we're looking for a rally that takes the market over 10,000. Anyone with a retirement account and a long time frame would likely be doing the right thing by buying into the indexes (in layers) on weakness. We just don't see the market as having much more downside below 7,500.

That's not to say there isn't money to be made on the short side. A return to 7,500 before the rally begins is entirely possible. Once we reach 10,000, we fully expect the market to lose a few thousand points again. We just aren't buying Dow 5,000 considering that all of the government's bailouts and rate cuts will start taking affect shortly. Stock prices will reflect the benefits of these actions 6 months ahead.

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A note on GS's earnings: We think the risk/reward ratio on their report is such that there is more downside than upside. They're a government-supported company with inside information that the SEC turns a blind eye to. They're playing poker with a full view of everyone's cards. So, of course, they are expected to do reasonably well. The upside is therefore minimal. If they disappoint, however, the market will be very shocked.

Fertilizers

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Of course there are many ways to play the short side of the market. Short financials may be the best bet (SKF), but not to be discounted are the recent descending triangles playing out on the charts of the fertilizer stocks. These triangles are not perfect, but the charts are bearish nevertheless. The chart of POT (top chart) looks like it's heading for a break of recent lows. The chart of MOS below it is only slightly stronger. Most of the other fertilizer stocks paint a similar picture. TNH is the least bearish of the group, but we're confident that if POT makes new lows, it will take the entire sector down with it.

Despite a rally in SMN (Ultrashort materials) today, we bought some near the close. It accounts for about 4.5% of our portfolio, but we'll add more if these stocks get to a point that they're just hovering precariously over their old lows. The chart of the sector's leader, POT, is simply too bearish for us not to act on it.

James River Coal

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Above is a chart of James River Coal (JRCC). The chart may not look familiar because it's a log chart (each vertical box is the same percentage rather than the same dollar amount). The stock just went too far too fast, and is therefore being eyed as a potential short candidate.

We don't disagree, but just to play devil's advocate, there is arguement for additional upside, if not right away, then after some consolidation or a brief pullback. The stock became way oversold recently (as did the entire market), and is now just re-entering its channel. It remains about 40% below its moving average. In this case, we used the 40dma because the stock seems to find support and resistance here.

We're not suggesting that it isn't a good short here, but are presenting an arguement for layering into the position due to the potential for the stock reaching $14.

In the interest of diversification, we looked into finding a short ETF for coal, but had no luck. If anyone knows of one, please post it. The long ETF for coal is KOL.

For the purpose of comparing their charts, other coal stocks include ACI, CNX, ICO, FCL, MEE and WLT.

Mosaic

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The chart above is a chart of Mosaic, but it may as well be any chart for the purpose of this post. You can see the clear break of the trendline and moving average that occured back in late July / early August. That was the beginning of the end, so to speak. Since then, most stocks have been going down in a channel, with the exception of early October. They got so oversold in early October, that they've spent the last two months basically going sideways (consolidating). Now stocks are just making it back into their downtrending channels. Channels are not nearly as reliable on the way down as they are on the way up, because fear can accelerate a lot faster than greed. A better measure of how oversold the market is on the way down are the moving averages. On the chart above, we drew a 100dma, because MOS responds best to it. The 200dma is actually the most common moving average used by technicians to mark major multi-year changes in market direction.

It won't be until a good number of stocks break through their 200dma's that we can even consider that the bear market may be over. This isn't likely to happen for quite a long time. We thought it would be a good idea to remind people of this, because if the current market rally continues, it is easy to get caught up in the hype of the "new bull". There is no new bull, and there won't be for a long time. No matter how bullish the news gets, and how strong the market gets, and how tempted you are to go "all in", just be cautious, because we've seen some very convincing bear market rallies suck people in and then end in complete disaster.

This post may be a bit premature, as this warning should come when the market reaches a state of euphoria, after the bear market rally has extended itself considerably further.

The market remains oversold enough that a Dow rally of an additional 2,000 points is conceivable. Even with a run like this, we would still be in a bear market territory. We will continue to post updated charts such as the one above if the market continues to rally in order to keep the bigger picture in perspective.

Snot Field

Dear Vikram Pandit,

It has come to our attention that your company, Citigroup, required a government bailout because your predecessor, Chuck Prince, was focusing on everything but banking during his tenure. Your company created $20 billion worth of Citi stock (out of mid air) to sell to the taxpayers of the United States. Considering there are 140,000,000 taxpayers in the U.S., we will each be paying $143 to help save your ass. Unfortunately, we had previously set aside this money for a present for our child to assure him a happy holiday season. Now that he will not be receiving a present, could you please rename Citi Field after our family? He would greatly appreciate the gesture in lieu of a gift.

By the way, what were you doing building a stadium again? Oh, nevermind, just please name it after us. Thanks, Snotwheel

Our Performance

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The bar graph above shows our performance each month. Assuming it acts like an oscillator (which it may not), we're at an extreme right now. However weak an indicator this may be, it suggests that the market is not likely to extend its losses for the rest of November. It also suggests that December is likely to be a neutral or positive month, as we have not changed our net long bias for some time. The elusive return to the averages that has been a prevalent pattern in all bear markets to date seems to elude us this time around. As much as we expect the rules to be constantly changing, the market simply cannot go straight down for several quarters on end without the country slipping into a depression, and we don't think it will get that bad. A prolonged recession, a restructuring of Wall Street, yes, but depression no.

The wealth in the U.S. built over the past 10 years (computer and internet productivity, widespread real estate development, etc), still exists. It is tangible wealth. Market sentiment (fear) brought the indexes down to 10 year lows, but there's no way all of the past 10 years of the world's progress meant nothing.

Much of the market's plunge is, in our opinion, people voicing their disgust for Wall Street rather than a real feeling that we deserve to be back to 1998 levels.

SPY

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The above chart of SPY shows the breakdown from the descending triangle. We bought some SSO today figuring that once they took out the stops, the market might reverse. But considering the close we got, there's little question that a new leg down has begun. It's anyone's guess as to where this one stops. The horizontal line on the chart above is now resistance, and we'll be trading in a new, lower "box".

A few days ago, we posted a chart of SKF (inverse financials). We mentioned that the charts of the individual financial stocks looked like they had further to fall, but we couldn't imagine anyone buying SKF at 175. Today, it hit 275. Simply an amazing market we're in.

GE down to below $13 not much more than a month after Buffett invests $3 billion into it at $25... more historic action.

And Citigroup (C), need we say more? Despite Prince Alaweed's vote of confidence today, our guess is that Citi goes bankrupt. When a stock trades below $5, the odds of it returning to glory are very slim.

This is reminiscent of the dotcom bust when not only the obvious bankruptcies happened, but many companies "too large to fail" were also pulled down with the ship. At the time, we never thought that Tyco, Worldcom, or Aol would fail. This time around, we just expect the unexpected.

Berkshire

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The chart above is BRK.A, Warren Buffet's Berkshire Hathaway A. While the market itself is only just breaking its October lows now, Buffet's funds are now doing far worse. Yesterday, Berkshire Hathaway fell 12.5% compared to the market's 4.8%.

Both Berk A and Berk B are down 45% over the past 12 months. We're not picking on Buffett, just trying to put things in perspective. Actually, Buffett is outperforming most of his peers.

Long Term Dow

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The chart above is a chart of the Dow going back to 1900. Because it's a log chart, it's possible to draw a trend channel on it. The slope of this line represents the the rate of growth of America's economy. It only deviated from the channel twice. Once was during the Great Depression, when the market overshot on the downside. But it eventually returned to its natural slope. The second deviation began in the mid 80's, and has continued ever since. Computers and the internet revolution added significantly to progress and efficiency, so much of this recent higher slope is deserved. Still, it is an interesting study to see where the market would be if it never got ahead of itself in the first place. The bottom of the channel is now at approx 2,300 and the top of the channel is at 5,000.

The scary thing is that if companies such as GM, C, and GE were to fail, we could potentially see Dow 5,000 again, putting us back into the market's long term channel. So much for accelerated progress. Perhaps it isn't possible to grow faster than this predetermined rate. Could economics have natural and immutable laws much like physics?

S&P Support

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Just a reminder that even if we do break down, the S&P has support from its 2002 lows, as shown on the monthly chart of SPY above. Those lows are at 771, which isn't all that much lower than we are now.

General Motors

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Something doesn't add up here. A year ago, GM was trading at just over $42 per share. Considering the market cap was $25B at the time, it makes sense that no one stepped in to buy the company. But given the chance to buy the company for $20B, there may have been some interest. If not, then maybe at $15B. Ok, $10B. Let's make a deal... $5B. Still no takers.

And there were no bidders at $4B, $3B, $2B, and still none now that it can be had for $1.6B

If a stock's price is supposedly representative of a company's value, then how can they lose 94% of their value and not attract buyers? Somewhere in the calculation of value, there must be some real estate, factories, intellectual property, etc. If all of that only accounts for the remaining 6% of the stock's price, then what was the other 94%? Was that earnings for the next 400 years? 2,000 years?

Even if we can accept that Honda, Toyota, and Nissan have no interest in buying GM even if the price were $100M, then it still doesn't answer the next question...

How does a company with a market cap of only $1.6B need $7B of taxpayer money to survive? If the company is only worth $1.6B, then with $7B they could recreate the company, all their real estate, etc, more than 4 times. If not, then GM stock is a great value, in which case Toyota (or Buffet) would buy them. And around and around it goes.

You can't have it both ways.

....

Either it's a great value, in which case where are the buyers?

.....

Or, it's not a great value, and really only worth $1.6B, in which case why don't taxpayers build a better company from the ground up with $2B instead of putting $7B into a company that's not even worth $2B in the first place?

Descending Triangle

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The chart above is a chart of DDM extended out to year's end. After the big drop in early October, the market was extremely oversold. In its attempt to catch up with the moving average, it could have done one of three things, ranging from most bullish to least bullish...

1.) Uptrending channel - We had originally hoped for this after selloffs in mid October put in successively higher lows. But all bets were off by the third week of October when the market broke those higher lows.

2.) Sideways channel - Once all bets were off for an uptrending channel, we hoped for a sideways channel instead. This is not out of the cards yet. A rally to DDM 40 puts this back in play. Unfortunately, recent market weakness points to a strong possibility that we're in the least desirable pattern, the descending triangle.

3.) Descending triangle - Particularly brutal to longs, as each rally is weaker than the last. Descending triangles almost never end well. A break of support is more likely than a break of resistance.

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Of course there is no way of knowing how many more iterations within the triangle there will be, if any. If there is another rally before support is broken, will we reach DDM 40, keeping the sideways channel in play, or will we put in another lower high, perhaps DDM 36?

We don't have these answers, but as time goes by, the pattern will become more obvious. The value in keeping track of such patterns is that if they play out the way you expect, then the next move is that much more predictable. If we do rally to DDM 36 and then come back to support, we will have a very clear triangle which will be obvious to all technical traders, if it isn't already. In that case, a break of support or resistance will be a major event. Arguably a break of support would already be a significant event, as no pattern recognition is required to know that the market has been flirting with a support level for almost 2 months.

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One thing to be careful of, which can occur at any time, is an intraday break of support. Hedge funds like to take the market below support to to take out the stops. Then they'll bid it back up later in the day. As long as the market doesn't close below support, they've met their objective and the pattern is still intact. This can be tricky because as it's happening, it seems that support has been broken and there is no bottom in sight. This is why we don't consider support to be broken unless we close decisively below it. At that point, the market is free to spiral out of control the following day.

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The way to play it: Buy at DDM 28 with the intention of selling at DDM 35. Set a mental stop loss at DDM 26. This results in 2 points of downside and 7 points of upside. Rinse and repeat. A lot easier said than done.

TSL breakdown

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It put up more of a fight than we thought it would, but TSL finally broke down today. It will most likely establish itself in a new box (a new range), with old support as its new resistance. Perhaps it will trade between $6 and $10 now.

But there is bigger issue than TSL, and that's that the entire market is trading within a downtrending triangle.

SKF

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The chart above of SKF (inverse financials) is nearing the top of its range. One would not normally buy this chart "up here", but the individual charts of the financial stocks are not improving. Their decline has no velocity, which means that fear never spikes, fireworks don't go off, and we never hit a bottom. Charts of Citi (C) and Goldman Sachs (GS) just carve out new lows on a daily basis, with no end in sight. GS deserves its fate, as does Citi. But thousands of other well run companies are being pulled down with the ship. Not fair.

Our guess, from a look at thousands of charts, is that the market will break its lows and head dramatically lower. The descending triangle on the indexes puts the odds in favor of further decline. Whether it's on this iteration, or after another rally or two, no one knows. One thing is for certain, people are giving up (or have already given up) on the scam that is Wall Street.

The cat is out of the bag... stocks are worth 14 cents per share, give or take.

It makes sense if you do the math. If a growth rate of 10% yields a p/e of 10 for a company earning $5 per share, then the stock is "worth" $50. But when growth slows to 0%, or turns negative, the stock has no value at all (other than the company's tangible assets divided by umpteen trillion outstanding shares). Either way, 14 cents is roughly the value of a single share of any publicly traded company.

So now that the public has accepted this previously guarded Wall Street secret, where will the market bottom? From the people we've spoken to, the answer is "who cares". Wall Street has dug their own grave, and there is little or no sympathy on Main Street. Furthermore, most people realize that the housing market in the U.S. dwarfs Wall Street. The housing market must be stabilized, as it accounts for 33% of our economy. Wall Street is only 5% of our economy. The more people we ask, the more we're finding that other than insofar as it affects their 401k's, people would rather see Wall Street crumble than survive.

From our own experience, in a recent land sale of $16 million, the buyer drove up in a Prius. Certainly someone with $16 million to spend on land does not have to worry about gas prices. So, of course, we had to ask about his choice of wheels. "Screw them", was his reply. A simple reply, but boy did he say a mouthful.

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Please participate in our new poll about the market's bottom.

Hedge Fund Deadline

The deadline for investors to request to get their money back from some hedge funds is today, Nov 15th, 2008. Some theorize that this could send the market reeling on Monday, as hedge funds scramble to sell stock in order to fill their client's request for cash.
According to the following article, however,
http://www.mmexecutive.com/news/187418-1.html
some hedge funds have already sold off a lot of their stocks, moving to 50% cash in anticipation of the redemptions. One must wonder, then, if the request for cash is not as large as anticipated, wouldn't that leave hundreds of millions, perhaps billions, of dollars waiting to get back into the market at advantageous prices on Monday?

Citigroup

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While the charts of the indexes look absolutely horrific (Nasdaq and S&P breaking down to new lows today), we find many charts that are as oversold as they typically get.

Of course this does not signal a bottom for the market, but look at the chart of Citigroup (C) above. The fact that the moving average more or less parallels the top of the trend channel gives validity to the slope of the channel, so it isn't drawn incorrectly. Citigroup is as oversold as it typically gets. Can it really plunge from here? If so, is Citigroup going bankrupt? Can that happen? What about GE? Look at its chart... down to $15 from $20 a week ago.

We are taking that stance that any selling from here will be met with a formidable rally such that buying here represents little risk. That is to say that indexes (not necessarily individual stocks) purchased now will either rally from the current level, or return to the current level quickly after dropping. So you either profit or break even.

We're not buying unless the market drops significantly because we already have enough of a long position, but our feeling is that we may look back at this level in a few weeks and wonder why we didn't add more aggressively here.

Trina Solar

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Apologies to all the tree huggers out there, but this chart is screaming "short me!". It's a chart of TSL (Trina Solar). It's formed a descending triangle with its support at all time lows. Several other solars have already broken down, such as STP, SPWRA and JASO.

Some solars have not broken support yet, such as FSLR, LDK and YGE, so it is not a foregone conclusion that TSL will join that half of the pack that has already taken the dive.

Of course the broader market will decide its fate more than anything else short term, but this chart is a great short candidate. Just bringing it to your attention, but as always, do your own DD.

For the record...

________-77.6%__-26.3%___-54.6%__-94.8%___+2.4%_______

This year has been very difficult for investors, so if your portfolio is hurting, you may seek solace in knowing that even the most elite investors have been struggling as well. Above we've posted photos of five such elite investors (from left to right) Kirk Kerkorian, Warren Buffett, Carl Icahn, Sheldon Adelson and Gary the Chimp. We are not going to compare the investing acumen of these highly skilled individuals, but rather provide a brief update on their 2008 performance, just for the record...

Kirk Kerkorian:
Bought $1B of Ford (F) shares in April at $7. He has a 74.3% LOSS
Bought $700M of DPTR shares in Feb at $19. He has a 71.9% LOSS
Owns a large stake in MGM Grand (MGM). In '08, an 86.6% LOSS

Warren Buffett:
Bought $5B of GS shares in Sept at $125. He has a 40.3% LOSS
Bought $3B of GE shares in Oct at $22.25. He has a 20.0% LOSS
Runs Berkshire Hathaway BRK.A shares in '08 have a 21.2% LOSS
Runs Berkshire Hathaway BRK.B shares in '08 have a 23.6% LOSS

Carl Icahn:
Bought $1.4B of YHOO shares in April at $26.3. He has a 56.8% LOSS
Bought $1.3B of MOT shares in Feb at $9.1. He has a 52.3% LOSS

Sheldon Adelson:
Owns a 65% stake in Las Vegas Sands (LVS). In '08, a 94.8% LOSS

Gary the Chimp:
Gary invested in 10 stocks in '08 and has a 2.4% GAIN

...

U.S. Automakers

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One of the largest uncertainties hanging over the market is the future of the U.S. automakers.

We believe that the market will not rally substantially until this is resolved. Above is a chart of General Motors (GM). It can be had for approx $3 per share, down from over $40 per share a year ago. Even just a quick glance at this chart shows a company heading for bankruptcy. No fundamentals required to make that call. The chart of Ford (F) is no better. A share of Ford can be had for below $2 per share, and its descending triangle with support at new lows shows further bearishness.

The government may bail these companies out in some form or another. But they won't do it until it becomes an emergency. The time frame for this bailout will not be driven by GM or F's needs. Rather, it will come from Wall Street's action. Only after a sharp drop in the Dow, and perhaps when it is in position to threaten breaking its lows, the government will consider this an emergency. If these companies are allowed to fail, it will be a severe blow to the U.S. economy, one which we clearly cannot afford.

We're looking for an opportunity to shift our portfolio to either an all-long or all-short bias to get out of this sideways rut we've been in for some time. If we have a decent selloff, we'll sell FXP and EEV and start adding DDM and SSO. Overall, we still see the market moving closer to the averages rather than breaking the lows and moving further away from them. Much of this depends on how the scenario with the automakers plays out.

The other catalyst this week is Walmart's earnings due out Thursday. Rumor has it that people cannot afford to shop anywhere but McDonald's, Walmart and DollarTree. But are they even shopping at all? Walmart will answer that question for us this Thursday.

DDM's channel

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At least for the short term, DDM's channel is perfectly horizontal. These linear regression channels are computer generated using the opening price of each session. Until DDM 40 or 28 is broken, trading will be simple... buy at 30, sell at 40. We're going to do this more aggressively (with less hedging) than we've done in the past. We cannot continue to have our account go sideways along with the market. It is getting very frustrating to see so much volatility and not profit from it. If the market keeps dropping, we're going to unload almost all of our FXP and EEV and start moving back into DDM as it nears its lows. We'll keep a sliver (3% FXP) just in case the market drops 1,000 points one of these days. Other than that ugly scenario, FXP's effect on our portfolio will be dwarfed by the size of our DDM position if we can get it at 30 again.

Other than FXP, dry powder is our only weapon against a drop below recent lows. Anywhere below DDM 28 is longer term buy-and-hold territory as far as we're concerned.

Goldman Sachs

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The intraday chart of GS above is how a chart looks right before it breaks down. The odds of GS decisively breaking $70 today are very high.

FXI

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The 30 day moving average shown on the above chart of FXI indicates that at today's open (27.3 or so), FXI will hit resistance. Moving averages aren't quite as accurate on the way down as they are on the way up, except for the 200 day moving average which is widely used to mark the start and end of major market cycles.

Nevertheless, FXI will either get rejected at the 30dma (as it has the last 4 times it rallied to it), or it will break through it. Of course there is downside risk, but one may consider buying FXP and watching FXI for clues as to its next major move. FXP is double short FXI.

As always, only a decisive close above the moving average counts as a break of it. This would signal a significant change to the rate of the collapse of the index, but not necessarily signal that a bottom has been reached. Only a break of the 200 day moving average is considered to end a bear market.

DDM

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The chart above shows a potential new uptrending channel for the market. It's too early to call it a channel yet, and the last time we started a channel like this, it failed to hold. If we can put in a higher low and a higher high, it is possible for us to remain in this uptrending channel until we get close to the 200dma. On the chart above, the 100dma is shown. This is a lofty enough goal for the time being. If we can put in another higher low so that we get 3 points to connect, we'll be able to do some more aggressive buying on the next drop because we'll have a clear buy and sell signal, the break of the channel being the sell signal. We're going to add some more DDM and SSO tomorrow. We should be able to buy it back cheaper than our most recent selling price for DDM which was 38. EEV is going to damage us now, no doubt. We bought it at 92 and sold half of it at 102, making 10 points. It looks like we'll be down 20 points or so on the other half thanks to China's bailout announcement. This reminds us of the days where shorts got burned each time the Fed suprised the markets with a rate cut or bailout announcement. Now China's doing it. Great, huh? Is no hedge safe anymore?

Gary's Week

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Gary's portfolio has been running for one week, and as of 2:00pm today, all 5 of his shorts were profitable. Only one of his longs was profitable (AFAM). Overall, he is down 5.5% on the week, a little better than the S&P500 index's loss of 5.9%.

What hurt Gary this week was that all of his long positions were entered after huge run-ups. We personally would have waited for a pullback on all of them before buying, but for this first experiment, we're not intervening with stock timing, layering into and out of positions or distinguishing between small and large caps. We're starting this experiment with Gary being as simple-minded as possible to see if the system itself has merit despite gross error. Over time, Gary's short term timing should not matter nearly as much as it did the first week.

The chart above is the chart of Gary's worst performing long, LPHI. We posted it because it may be of interest to traders who are willing to take larger risks than we are. It has fallen over 16% since Gary's purchase on Monday, yet still remains in an uptrend. In a bull market, the charts we buy look something like this. We do not buy individual stocks in a bear market.

Because Gary's long picks are smaller companies than his shorts, his portfolio is better suited for a bull market, as some readers have pointed out. Small caps tend to be more volatile, often amplifying the broader trend of the averages. This would mean that Gary's longs will drop a larger percentage than his shorts during a bear, and would rally a larger percentage than his shorts during a bull. His portfolio has a long bias in this sense. If Gary's portfolio, with all of its inherent flaws, does work out to give him an edge over the indexes over time, we'll genetically mutate Gary to fix his flaws and will eventually start taking his investment advice.

After all, for all of his mistakes, he did manage to beat the S&P this week, with a fully invested portfolio, which was not such an easy task.

This week

Unemployment statistics are due out this Friday. If this rally continues strongly this week, we expect that traders will need an excuse to take profits ahead of the weekend. The unemployment report is perfect for this.
We do not attempt to time the market, but we will react to it if this week plays out the way we think it might. If there is a rally election day and/or Wednesday, and it is formidable, we'll be selling our longs and adding FXP or EEV into it in anticipation of a selloff ahead of the weekend.
If it plays out this way, odds are the resulting pullback will be a buying opportunity rather than the next leg down. If the market rallies sufficiently this week, on top of the 1500 points it already has, it will be ready for a healthy pullback. It isn't until this rally persists for several weeks and gets closer to its 100 and 200 day moving averages that we'll be looking for a substantial drop that should not be bought heavily until fear spikes again.
We would not be starting any large new positions here, as we feel that overall the market is in neutral territory (mid range). A portfolio that is heavily biased to the long or short side here represents an excessive amount of risk. All positions should be partial positions, or hedged positions, until the market moves another 1000 points one way or the other.
You may have noticed lately that people are becoming more complacent about the market, as if the worst is behind us. The more this mindset sinks in, the more dangerous the market becomes. It's a good sign for prospective shorts to see that people are growing more confident that the bottom is in and it's all uphill from here. Given more time to saturate investor psychology, this perception will ultimately lead to a condition where we can begin a new leg down, or at least a very rapid return to the recent lows. We don't expect this to happen until complacency has really set in, which may not be for a few weeks, or even months.

Gary the Chimp

Meet our newest fund manager, Gary. We thought it would be a fun experiment to see if Gary the chimp could beat the averages, thereby outperforming the majority of Wall Street fund managers.

One of our most fundamental and important beliefs in "investing" (if you can call it that today), is that an object in motion stays in motion. You know the sayings, "The trend is your friend","Don't fight the tape", etc. In the spirit of these words, we trained Gary to distinguish between uptrending and downtrending charts. Believe us when we say that Gary knows nothing about fundamentals. We had him chose 5 uptrending charts and 5 downtrending charts.

For the uptrending stocks, he chose AFAM,ALGT,EBS,LPHI,THS

For the downtrending stocks, he chose BCSI,MMM,XOM,GOOG,ANW

The opening price of Monday, Nov. 3rd will be our starting price for each stock.

On the left side of our blog, we are going to track the performance of a fictional portfolio that goes long these 5 uptrending charts and simultaneously short the 5 downtrending charts. This fictional portfolio is being run by a chimp, remember, so it will not benefit from layering into and out of positions, nor from taking profits on any chart that makes an enormous move.

We will post the performance of each stock and the performance of the portfolio vs the market averages at the end of each week for several months.

It should be a very interesting experiment. Because we're not betting on overall market direction, this approach would work in any market environment. And the portfolio could easily be created in minutes by anyone with access to a garden variety chimp and a few bananas... quite a few bananas, actually.

Disclaimer: No animals were harmed during this experiment.

This rally has legs?

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TGIN... Thank God it's November! We've gotten out of the descending triangle and now face a series of important resistance lines. We're at the first one right now. It's the highs of Oct 20/21. the next would be the high of Oct 14 at 9800, and then the lows of September from which we broke down at 10370. We look for decisive breaks of support or resistance, using the market's closing price only. Intraday breaks are usually meaningless. It's important to be aware of these breaks of resistance levels as the market climbs because once broken, they become support.

This is exactly what Nick Darvas referred to with his "box theory" in his book, "How I Made $2 Million in the Stock Market". It's an old book, but the market still trades in ranges, making his theories applicable today. In the spirit of Darvas's teaching, the Dow is now in the 8200/9400 box. The huge range is a sign of the times. A decisive break and close above 9400 would place us in the 9400/9800 box, where 9400 would be support.

We sold off another 1/7th of our longs today, with a sale of DDM at 38. We held off on adding to FXP just yet, as we need a low price to offset the first layer bought at 114.6.

We suspect the market's rally to continue, although that's just a pure guess based on the fact that the market's uncertainty about the elections will disappear next week. If the market does rally, we profit from our net long position. If instead it heads lower, we revisit the bottom of the box with more capital than last time because we've lightened up on DDM twice now, and we've added some FXP.

We put a 200 day moving average on the chart above to show how oversold the market still is. Our thinking is that the bottom is roughly 8000 and the "top" is roughly 11400. The 11400 number comes from the top of the downtrending channel the Dow is trading in... ahem. So that makes the center of its overall range somewhere around 9700. This means we're just below the center now, which means if the rally continues, we'll soon have to start flipping our position to be net short. It's too early, though, to talk about a net short position just yet. We're personally still at a point where we'd be perfectly content remaining net long if the market fell from here. We would in that case start rebuilding our long position on the way down.

We are only up .2% since June 1st, which is by no means an impressive gain. However, we've managed to remain in the game without getting slaughtered through one of the most unforgiving months we've ever witnessed.

Maintaining Sanity

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The above intraday chart of the Dow itself shows its nearly 500 point drop in the last 15 minutes of trading. This chart underscores what a casino Wall Street has become lately. There is no sense in trying to predict the market's next move, because odds are when it comes, it will not even have a catalyst.

We titled this post "maintaining sanity", because we feel that in times like this it is important to not let the market get the better of you. You should embrace the volatility and use it as a training tool to improve your trading. If you can navigate this market while remaining invested, the skills you learn will help you through any market conditions you may face in the future.

Learn this dance, and in time you'll be handsomely rewarded.

We can offer you 5 tips to help you maintain your sanity in this market:

1.) Avoid individual stocks. The main reason to do this is because it is psychologically easier to convince yourself to hold (and buy more of) an index during the really bad days than it is to convince yourself to hold(or buy more of) an individual stock. The index offers enough diversification that you don't have to doubt the future of the company you're invested in. With the stress this market brings to traders, one does not need the added stress of worrying about earnings reports, margins, etc.

2.) Don't buy your entire position at once. If you buy your entire position and the index goes against you, you are playing with scared money. Just at the time you should be adding to your position, instead you'll be frozen by fear because it has already moved so far against you. You always want to be in a position to add more if it goes against you, because if you do this repeatedly, you'll be able to break even or profit when the index eventually swings the other way.

3.) Always keep dry powder. The notion of getting all of your money in at the bottom is a fantasy. We would consider ourselves to be very successful if we were to get 70% of our money in near the bottom. The other 30% is an extremely valuable little insurance policy which makes it possible to cut your break even price in half if need be.

4.) Trade around your position. Scale in and out of your core position when the opportunity presents itself. Take small gains here and there as they present themselves. When you sell something, consider shorting it if it continues going higher. After all, you sold it because it just ran up. A further run is likely to fizzle out soon enough.

5.) Never lose sleep. If you're losing sleep over a trade, then you are trading outside your own comfort level. Everyone has a different tolerance for risk, and different investment goals. It is a very personal thing, and therefore all stock market advice should be taken with a grain of salt.

Don't listen to people like us. Make your own decisions and use CNBC, blogs, gurus as a way of gaining a net feel for the market rather than an "all or nothing" decisionmaker.

...

Right now, we remain focused on trying to get as much of our capital invested in the indexes at the bottom. While your basic premise may be different than ours, you may still benefit from our method of achieving this, because the same approach applies to scaling in and out of positions during a bull market. The skills this current market can teach you will stay with you for life.

To meet our aggressive goal, we sold 1/7th of our longs today, which was a sale of DDM at 35.5.

We put 3% of our account in FXP yesterday at 114.6. Neither price was particularly great, but the net effect gets us one step closer to our goal of remaining invested by trading around a core long position in a severly oversold market in order to benefit from the eventual and unpredictable rapid snap back.

We are now in a position where if the market goes up, we profit because we remain net long. We have 10 times the capital in long positions as we do shorts. If instead the market drops, we revisit the lows in much better shape than last time. By shedding 1/7th of our longs, we'll lose less on this ride down than last time. The FXP will also help our bottom line if we return to the lows. Both of these savings will mean more capital to invest at the bottom. Rinse and repeat.

You will not make major headway doing this. In fact, we have been on either side of 0% for quite some time. But on each return to the lows, we wind up there with more shares than last time. At some point, trading around our core position in such a way as to maximize the number of shares we hold, and to constantly be working to lower our net buy-in price will result in a formidable gain. The market's recent volatility is a welcome event if you can remain positive about what it can do for you, and take advantage of it rather than fight it.

We remain focused on selling DDM and SSO while adding FXP if the market rallies, and adding DDM and SSO while selling FXP only on a return to the lows. If the market breaks its recent lows, then the dry powder, the other 65% of our account, will come into play.

Let's hope tomorrow is just like today!

SPY

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The chart above is a daily chart of SPY, the S&P500 index. Despite yesterday's nearly 900 point Dow rally, this chart suggests that the descending triangle hasn't been broken yet. We'd hate to think that we'll be back near recent lows sometime in November, as we were hoping at some point in October we'd launch a rally back to the moving averages to relieve the market of its oversold condition. Of course today is all about the Fed, but as far as the bigger picture is concerned, we're watching to see if we can break this triangle. Either way, the market is moving sideways overall, and if it countinues to move sideways instead of lower, it will eventually meet up with its moving averages. At that point, the oversold condition would no longer exist, and our inclination would be to go short. It's the same as buying near the averages on a dip in a bull market, just in reverse. If the market does go sideways instead of rallying back to the average, it certainly gave the bulls little chance of profiting from its oversold condition, as no sustainable rally has been launched since SPY's fall to 835/836.

EEV and FXP

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You may feel giddy watching the market jump nearly 900 points, but it would be crazy not to use this opportunity to hedge your longs once again. That is, assuming you're long this market at all. The above charts are our favorite ways to hedge against market downside. The chart at the top is an Ultrashort ETF of the emerging markets (EEV) and the chart below it is Ultrashort China (FXP). If you're not already familiar with them, be careful. They make the Dow's recent volatility look like a walk in the park. EEV may be the better of the two, as it moves in a slightly wider range, and is more diversified. A very small amount of either of these can effectively hedge a lot of long capital because of the percentages involved.

We added some FXP today at 114.6, and will continue to add slowly until it reaches the 80's, at which point we would start to buy it more aggressively. If we get a decent rally tomorrow and can get FXP below 100, we would add another layer there.

DDM's triangle

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The market's descending triangle is harder to see on a daily chart, so we're posting the above hourly chart of DDM which shows the descending triangle which began forming a few weeks ago.

For all of the naysayers of technical analysis, there is a reason these patterns repeat themselves so many times. They are a map of the psychology of investors... a graphic representation of collective fear and greed playing out in real time. We suggest you do your own DD because this market is unpredictable, but the above pattern usually leads to a breakdown rather than a breakout. With the Fed expected to cut rates tomorrow, the election only a week away, and the Plunge Protection Team (PPT) aggressively guarding the market's support, this pattern could be hijacked before it gets to take its natural course.

The only certainty with triangles is that because their lines converge, you know when they are reaching a boiling point. This triangle has very little time left before it breaks resistance or support.

Next Week

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Here is a chart of how the Dow may look after next week. Of course nobody knows what next week will bring, except for extreme volatility one way or the other. The way we see it, if the market is going to crash, it will most likely happen next week. This is because it takes time for fear to build to a crescendo, and that is certainly happening right now. Second, October is the month that crashes take place, and bottoms are put in. There's only one week left, so it's show time. Third, the market will likely stabilize after election day (Nov 4), so the window for a crash is closing. Fourth, October 28th and 29th, Black Monday and Black Tuesday mark the anniversary of the stock market crash of 1929. This year, the 28th and the 29th are this coming Tuesday and Wednesday.

As we've said before, there is a regularly scheduled Fed meeting next week, ironically taking place on the 28th and the 29th. Many are predicting a 50 basis point cut, and some are even looking for 75.

A very wise man told us today to stick our head in the sand and re-emerge after the election. It's good advice, but we plan to peek out of our hole every so often to place some very low bid buy orders on SSO. Should be an interesting week whichever way it plays out.

DDM descending triangle?

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The chart at the top shows 10 years of SPY, the S&P500 average. In the dotcom bear market, the market went down in steps. After each large drop, it reverted to its 200dma, forming an uptrending channel in the process. Those channels are very much compressed on this chart, but each took several weeks, or even months to play out. The bear we're currently in started in a similar way, with a return to the moving average in March/April/May, and another in July/August. We figured on that scenario playing out again considering how severely oversold the market has gotten on a technical standpoint. That concept is not off the table, but the "typical" trend channel that would form after a large drop has been destroyed by today's action.

There is a new pattern forming, which is far more ominous, shown on the chart of DDM above. It is another descending triangle, much like the ones we saw in the charts of MOS, LDK, GE and SID yesterday. These descending triangles, especially when coincident with new lows, almost always break down. The pattern is, of course, at this point just a theory. We don't usually point out a triangle until it is very near to its breaking point (after it has wedged itself in so deep that it has to break out within a day or two).

We honestly don't know if the index will react to the pattern the way an individual stock would. Nevertheless, it is a pattern formed by psychology, which generally plays out the same way each time. We only say that the index may be different because the Plunge Protection Team is defending 7,882 with all they have. This is not conspiracy theory. It is well documented that the government does buy stock to keep the market above key levels to prevent another crash like we had in 1987. They've been buying at the support levels trying to prop the market up for the past year. While they do succeed on a short term basis, ultimately the market is too powerful for them to stop.

In a "normal" sidestepping bear market, we could easily make the buy or sell calls, using the 200dma as a guide. There is nothing "normal" about this market, and we therefore do not know what the right call is. We often will make a correct call, but fail to act on it. It is very tempting to go short the market, even at this "late" stage, given the overall lack of buying evidenced by the lower highs of the descending triangle. On the other hand, the "typical" crash days, Monday and Tuesday, overlap an anticipated Fed rate cut at their regularly scheduled meeting next week. How will that affect the market?

DDM - Channel intact?

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Here's a chart of DDM at the close of the day. The projected channel is intact but slightly damaged. Ideally, today's low would have been higher than yesterday's to keep the uptrend since bouncing off of 7882 alive. You can't be all long here without nerves of steel. We're still holding all of our DDM and SSO, and have been in and out of FXP (currently out) each time the market crosses its intraday moving average. We just aren't willing to go without that insurance when the market is trending lower intraday. Needless to say, if we ever did close below 7,882, all of the stars would be aligned for a global crash that would be historic to say the least. With that threat looming, it is very hard for us to up our 40% long exposure. We would only add to our current positions if the market takes out its lows. We're still hopeful that this oversold market has tested the area of the lows for the last time and is ready to launch a sustainable rally. We feel more and more alone in that thinking, as the market does not seem to be able to hold a rally for more than an hour or two.

You may look back at a chart of the market someday and wonder why you didn't just put everything in right here. After all, you knew the market was low, and Buffett just bought stocks in his own account. But here you are, worried about a global market crash, nervous to even be 20% long, wondering if being all short wouldn't be better. So it's never easy.

The market will rid itself of one of its uncertainties on November 4th when Obama wins by a landslide. We still don't see how the election is an uncertainty at this point, but such is the market. We'll just be happy when October is over, because the greatest crashes in history (1929 and 1987) both occured during this month.

Descending Triangles

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Here's a graphic to go with our last post's sentiment about descending triangles. Since we made these images, MOS has broken down and LDK is very close to following it. Unfortunately, because these extremely bearish descending triangles exist in several sectors, it does not bode well for the overall near term health of the market.

The top chart is MOS, then GE, then LDK, then SID.

DDM Breakout

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The market broke above its moving average on the 2 minute chart, so hopefully we've shifted back to "buy the dips" at the line rather than "sell the rallies" at the line. We used the breakout as a chance to dump the FXP we bought this morning, losing 5 points. It's just too hard to go without that insurance when the market is trading below its downtrending moving average.

If it reverses again, we'll have to add it back. So now we're 40% long, 60% cash once again.

Of course the hope is that this rally is strong enough to bring us back to the center of the projected trend channel so that the next drop is a test of the channel (higher low again), rather than a break of it which we were facing last night and this morning.

We're keeping a close eye on 4 charts that have descending triangles, MOS, GE, SID and LDK. Descending triangles coincident with new recent lows almost always break down. If these charts break down, it could drag others below recent support and take the market with it.

DDM 2 minute chart

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The above chart is DDM on a 2 minute chart with a 100dma. For those of you able to watch the market as you work, we've found that when this moving average is decisively broken, the market turns. We don't want to focus too much on intraday charts, because we don't want to become intraday traders, but it is nevertheless valuable information in a market like this. With such wild swings, a week's worth of normal trading now takes place in a day. If you look at this chart and pretend it's a daily chart, you'd probably do pretty well trading it. Buying when it begins trading above its uptrending moving average would treat you a lot better than buying the dips.

MOS - Headed Lower?

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Congratulations to the Snot Wheel Group on their 100th post!

Despite their recent fall, we think the fertilizer names (MOS, POT, CF, AGU) are headed lower.

The chart above is a chart of MOS, one of our top holdings until late July when the whole sector broke down. For anyone that has read Nick Darvas's "How I Made $2 Million in the Stock Market", you'll easily be able to apply his "box theory" to this chart. MOS trades in a range and then breaks out of it. Darvas used this theory on the upside, but it works both ways. Whether or not MOS has another rally or two first, we don't know. But we feel that it will break down at some point and find itself trading in the 20's. Fundamentalists will tell you that it's impossible because the p/e is low or something like that. But that's just not realistic. These same people said that at 100, and 80, and 60, and 40 and so on. Bottom line: it's a downtrending stock trading below its downtrending moving average in a sector and a market doing the very same thing. This has "danger" written all over it, and despite its technically oversold condition and presumably solid fundamentals, we'd avoid this chart like the plague.