Click chart to enlargeWe're back in the black after today's gains. Our .4% gain isn't much, but we've beaten the financial bigwigs at Bear Stearns, Lehman Brothers, Merrill Lynch... the list goes on. That's gotta be worth something, no?
The above chart of DDM shows the Dow's new struggle to return to its moving average. One would think that after a 410 point rally, the day would look impressive on the chart. But given the scale of the market's recent moves, it's just a single step back to normalcy. Just as fear brought this market down, fear of missing the bottom is bringing it back up. But that fear will only last so long. We're looking not to start reversing our long posture, but to start being defensive if/when DDM reaches 40. When we set a target such as this, we do not always act at the number we have in mind. If DDM advances through 40 without hesitation, we'll make our first move at 41, maybe 42. Those are intraday decisions and cannot be written about until they happen. At any rate, we are eyeing FXP which is now back to about 90. The last time we bought FXP (last week), we paid 81.70. We'd like a price in the low 80's again. Buying FXP has different rules than the U.S. market indexes. With FXP, you sometimes look at it (particularly in the beginning of the day, end of the day, or after market) and find it at a very unexpected price. It seems an anomole, and completely out of sync with what you expected to see. This is when you buy FXP. You can get a great price on it if you keep an eye on it. We're watching it very closely now, as it is back within the range where we want to start hedging again.
We'll slowly move from a long posture to short, with the target of Dow 10,400 in mind as the top of the market's rally. We do not expect the Dow to reach 10,400 without a pullback, but we are purposely shooting high because we don't want to give up our long exposure too soon. The market remains dramatically oversold, and this rally could theoretically return the indexes back into their downtrending channels (Dow 10,200 - 11,800).
It is early to start predicting another leg down. Nevertheless, it is very important to not get too caught up in the hype (the good news, positive earnings, positive media) that will come out as the market rallies. We are still very much in a bear market, and once things feel psychologically safe (Dow 11,000 and all looks clear to move to 12,000), that's when the market is the most dangerous. It is totally possible (and actually par for the course) for the Dow to now rally to its 200dma (11,500 or so) , and then come violently crashing back down to 7,000. For the security of your portfolio, it is urgent that you play a defensive game until the new bull market begins. This will not happen until people's fears have been allayed, and a wave of new innovation sweeps in to give speculators new hope about the future. Until then, even a 3,000 point rally is just a bear market bounce.
Playing this channel is a game that requires you to not focus on intraday moves too closely. The daily charts are a better guide right now. This is because the market is climbing a wall of worry, and intraday selloffs will be the norm. The Dow could drop 400 tomorrow and then gain 20 points, closing up 10 points. This is all within the confines of the rally, and however scary, should not be viewed as a reversal of course.
44 comments:
Snot I made the mistake of buying FXI at 114, What would be my best exit stategy???
I meant FXP oops
sco3putt,
We need more info... do you have cash with which to average down? What percentage of your account is in FXP? Are you primarily long, using FXP only as a hedge, or is FXP the only thing you own?
FXP is like salt. There are healthy amounts of FXP particularly when mixed with other things, but it is deadly by itself and/or in excess.
snot,
what would you suggest to do at this time if most of my holdings are in cash? i have some CHL at a loss (avg cost is mid 60s)
thanks
Sam,
As you must already know, being in CHL is virtually the same thing as being in FXI because it's one of the big names.
So for our purpose, you're long FXI and the rest is cash.
We don't know your time frame nor tolerance for risk (although it must be high considering your diversification), so we can only say what we would do.
First, we'd sell CHL because although it is human nature to try to recoup a loss from the same name you lost the money on, it really does not matter where the reimbursement comes from. You need to detach yourself from the mentality that if you hold long enough, your stock will come back. You did make a good choice in that you bought a big name (a blue chip of sorts), but still, this is not a time to be in individual stocks. If you want to be long China, then buy FXI itself, not CHL.
Second, although we do not recommend buying in the center of the range, in your case we'd add some long U.S. exposure, like DDM or SSO here. We feel that the indexes remain oversold and that they can be bought as short term or long term positions here. Short term is a little iffy, but long term it's a great entry point. You're going in with Buffett, so don't be shy.
Keep about 50% in cash. If the market rally continues, take some profits in CHL, DDM, SSO or FXI, whichever long you have. Simultaneously, add some FXP. A very small amount of FXP will hedge a lot of longs, so don't go in too heavily at first. If the market's rally starts getting overdone, despite positive media, sell more DDM, SSO, FXI or CHL and add more heavily to FXP.
In short, don't be shy about going long the indexes here if you don't already have any. Just make sure to keep enough cash. There are only two outcomes... either you make money right away, or you add to the positions as the indexes drop and you look back a year later telling people you bought the bottom. Both outcomes are positive.
Next Bull:
http://www.cnbc.com/id/27286230
Snot,
Got a question related to long term outlook instead of chart trading...
You were around during the internet boom and bust. Wouldn't you say many of those companies went bankrupt because they had negative earnings and traded extremely high PPS? The alternative energy today is not in the same boat, meaning their earnings, current PE and future growth potentials are good. If one has high risk tolerance and patients, would you say alternative energy sector will be winners in the future (1-2 yrs)? There seems to be many factors pointing to green energy; such as the election, over population, pollution, and global warming.
The main downside now is that any kind of business expansion needs bank loans and credit freeze will reduce the growth of many companies in this sector. Ones that have financial resources secured will do well. It is also encouraging to see that alternative subsidies were including in the 700b bail out, meaning people recognize that making the right choice of paying a bit more now can safe more in the future when it comes to green energy.
Thanks,
Tons
Tons,
We appreciate your enthusiasm towards finding the "next big thing". You're right that many alt energy plays are viable companies unlike some of the internet stocks. In all fairness, many of the dotcoms weren't even real companies. They were started by unethical financiers for the sole purpose of taking advantage of the dotcom's phenomenal IPO fundraising potential.
Solar stocks had their reckless heyday already, and are now back to valuations where they can be taken more seriously. If and when they perform, they may be in the spotlight again, but we think you're early.
If all goes well, and you're thesis is correct, we still think you're better off playing the space with an ETF or a basket of stocks. Or, like Kfine suggests, buy buying OIL or USO. We like the idea of buying OIL or USO now either way.
If the price of oil stays down, the pressure to switch to alternative forms of energy will subside. This happened in the 70's.
Getting back to you being early trying to figure out what will create the next bull...
You don't have to be on board early. People who knew that computer software would be the next big thing never would have guessed that MSFT would grow to dominate the space. At the time, Xerox looked like it would be the clear winner.
Rather than bet prematurely, we would rather let these stocks turn around and start trading above uptrending moving averages along with the broader market. If they can do this, meanwhile delivering the goods fundamentally, there will be more than enough time to learn the space and ride the wave.
There's nothing wrong with placing a small bet now, but we wouldn't bet the farm until the concept of the "green bull" starts to catch on. If it catches on the way you want it to, given that you follow the space, you'll still be able to get in very early, and you won't have to sell until 2 years later when you hear the guy at the corner deli talking about how he just purchased LDK.
FXP is about 40% of my portfolio.SSO UYG and FXI fill out the rest.
What about cash sco3putt?
lol but that's where I heard about LDK! From the dude at the corner deli.
I have a couple of questions maybe some of you can answer. The first is.....Regarding these ultra ETFs like SSO if you compare SSO on a long term chart to something like SPY it appears that the "ultra" part only works on the down side. The posative percentage returns seem to be the same as SPY but the losses are twice.. what is the deal with that? Is it the case of diminishing returns because of leverage? Seems like you are just getting more downside risk.
Second question....what happens if your shorting a stock and then they declare bankruptcy?
Thanks
sco3putt,
You need to always have some cash. UYG... yuck! Long this market is ok, but long financials is not. If there is another leg down, and financials are allowed to be shorted, they could easily get killed again. We believe that one should never go long the very sector that causes the bear, no matter how cheap they look.
You're not in as bad shape as we thought you might be though, given that you do hold SSO and FXI. They will buffer FXP, of course.
Still, 40% FXP is heavy. A little FXP goes a long way. A 40% stake in FXP is fine if you buy it after the market does something outrageous, like rally 2,000 points in 2 days. Otherwise, that's a risky bet. We're looking to get up to 40-50% FXP, but not unless the market gets way ahead of itself. With some luck you may pull it off, but the risk/reward ratio is iffy at best. At least you're hedged.
squarpeg,
There have been many articles written about the discrepency you're talking about. The Ultralong ETF's are better for short to intermediate term trades than for very long term holdings because of their depreciation. For us, a long term hold is no more than 6 months, so we disregard the issue, especially considering we're only buying these ETF's now that they've been destroyed. If you want shares you can give your grandchildren, you'll need to go with DIA, SPY or QQQQ. They mirror the indexes very closely. So close, in fact, that you can use arbitrage on their discrepencies.
Not sure what happens when a company you've shorted goes bankrupt. Has this happened to anyone here?
Bankrupt companies end up on the pink sheets trading for 2 cents a share or less. So if you're shorting something that goes bankrupt, you just cover and get all of the money you originally put up for the stock.
Regarding covering a short position when a company declares bankruptcy: In the late 90s I shorted a piece of crap cell phone provider called Metrocall (MCLL), and after they declared bankruptcy I covered at .0001 per share, or 1/10,000th of a penny!
Needless to say that was the most profitable short I've ever sold.
I believe there is a rule that a stock still has to trade for a specified period after they declare bankruptcy so people can either take their loss for tax purposes or be allowed to cover their position before the shares get cancelled.
Snot,
I have position in SSO and SMN.
Albeight buy the market and short the weakness.
What do you think this profolio, can I just let it rest there for a month and still be safe?
John
hey Snot,
I Think I am going to start a small position in TNH and let it rest for a couple of years. I might as well treat it as a saving account :-). Their current Yield is 16.9.
Also they have almost no debt.
I have done some research and found out that the farmers are starting to chose Gas and not fertilizers anymore. The fertilizers are not as needed as they were before.
I think their stock price is low enough to start a position, a very low volume stock too.
Is a very small company (Only 161 employees) so there is plenty of room to expand, if they ever chose to do so.
Your thoughts are welcome :-)
I did some more digging and found out that high yield of 2008 will be cut in half for 2009, (given a partnership agreement signed with the parent company, Terra Industries (TRA)). I suspect some investors don't know that yet and I believe on the date of the announcement they will be disappointed and sell...But than again who knows,.. I guess it is still too early to jump in or maybe it is already priced in.
Snot,
Why a short via FXP to hedge your long the indexes? Didn't you get hurt doing that earlier this year? What is the contrarian relationship between FXP and the USA indexes? Is it that their economy depends on our consumers so much?
Hi Snot,
With AAPL earning and it gives lower guidance but the stock go up any way. Is it the sign of bottom and we can go long all the way! good time to buy AAPL or SSO or DDM? Thanks
I got another good dividend player for you Snot.
Check out ERF.
Let me know what you think.
I believe the current price is a good entry to start a long term portfolio.
John, yes you'll be safe holding the paired trade SSO and SMN, but you probably won't get anywhere.
You'd be better off scaling into and out of each position after large moves in one direction or the other. Trade around the position, in other words. Market up 1,500 points... sell 1/2 SSO and add 50% more SMN. Do the opposite in reverse, rinse and repeat.
hk22,
Thanks for all of your contributions to the blog. People like yourself make it more informative for everyone. You know we think in very, very simple terms. For us, the decision whether or not to buy TNH takes only a second. It's a downtrending stock trading below a downtrending moving average in a downtrending sector trading below a downtrending moving average in a downtrending market trading below a downtrending moving average... NO!
You may have all of the reasoning correct regarding fertilizers and earnings and dividends, but you can't fight the tape. Don't let us talk you out of what may be a sound investment, but from our simplistic mindset, the chart of TNH looks like a typical Stage 4 (downtrending) stock currently returning to its moving average from which it will crash. The whole market looks like that, actually. Wouldn't be at all suprised to see Terra Nitrogen in the 50's.
Anon,
Earlier this year, we were forced into damage control mode on a trade with FXP. At the time, the bear market had begun although it wasn't considered a bear yet. As the U.S. indexes rallied back to their 200dma's, we expected them to drop hard, so we loaded the boat on FXP. When the averages overshot their mark, we traded in and out in an attempt to break even on the trade. We got out with a small loss. Don't remember the exact percentage, but it wasn't one of our watershed moments because it was hedged. As fate would have it, the market did plunge soon afterwards, sending FXP up almost 100%. Funny how we always preach patience when you have conviction on a trade, and yet we cannot always do it ourselves.
As for the relation between DDM or SSO and FXP, there is none. We are not fundamental traders, so the consumer never enters the equation. The thinking is this... When the U.S. market drops, Asia drops harder. Therefore, a small amount of FXP can hedge a lot of long positions. If you were to put 80% of your portfolio in DDM and 20% of it in FXP, and the market were to drop 2,000 points in a day, you would come out of it alive. FXP is an extremely potent vehicle, especially if you can take advantage of its radically irrational swings to buy it cheaply.
Anon(ymous),
AAPL's earnings were irrelevant. The market was going to go up regardless of their report. Unless, of course, it missed even the lowest expectation by a large margin. Until further notice, the market is working on a "buy the dips" mentality rather than a "sell the rallies" mentality.
No doubt this will change, but until then, all reports are good regardless of what they contain. Financial "news" is the biggest hoax going. It's only because "news" is reported as having an effect on stocks that people believe that's how it works. But the truth is, stocks are trending in one direction or the other, and are only momentarily affected by "news". This explains why so often they react in ways that are not commensurate with the "news" itself. This is why we so often say that it isn't what's contained in the report that matters, it's where a stock is trading ahead of it that determines its reaction more often than not.
hk22,
ERF is also in Stage 4, so we say no buy. If you want a dividend play, check out MSB at 32.90%.
It, too, is a Stage 4 stock, and we would avoid it like the plague. There is also a strong possibility that the div is being misrepresented, so if you're interested in the stock, check it out a little. We heard that the div is one quarter of that. Not sure who to believe.
Hi Snot,
Recently you made a positive comment about USO & OIL. What do you think about DXO?
I realize it has limited history, but isn't it more or less the equivalent of a 2x USO and just as "safe"? And does the fact that DXO is an ETN rather than an ETF make any difference to you?
As always, thanks for your responses.
If you believe oil is oversold or reversing its downward trend, then DXO would be a great choice. Just like if you believe gold is heading downwards, then DZZ is a great choice. I think DTO has been the obvious best choice for the past few weeks, with gains outstripping even DZZ.
With OPEC holding an emergency meeting in two days isn't a production cut a given? And wouldn't that at the very least stabilize, if not reverse oil's current downtrend? I mean isn't that the point of this emergency meeting?
We don't typically trade oil. It's still in a downtrend, so until things improve, you probably shouldn't pull the trigger. As a long term hold, we think oil mostly just goes higher, but we like to see a turnaround before buying anything.
How many think we're in for another leg down starting from here? We never got high enough for us to sell any DDM or SSO. In other words, below DDM 40, our only interest is accumulating long positions in the indexes. If we do crash again, we'll be looking to buy below DDM 30. Our last buy was at 31+.
Our guess is that we rally today, but who knows. It's amazing to think that people could possibly be suprised that earnings are suffering. We lost 7,000 points over the past year in anticipation of poor earnings. Now that they're here, people are suprised by them? We aren't buying that. We're still looking for more upside. Should be fun to watch.
Hi Snot,
Any idea on UYG ? Any chance of this moving up ?
Thanks.
I am sorry.. I wanted to know about UYM.
Thanks.
UYM is very dangerous. None of the stocks in the materials sector (including fertilizers) have shown any sign of a turnaround. We are still predicting that stocks like MOS head much lower. We wouldn't be suprised to see MOS trading in the 20's not before long.
UYM is in a downtrend, trading below a downtrending moving average. You may get lucky, but the odds strongly favor further decline. Be careful.
Just sold FXP at 120.4
What a great hedge that makes. We actually had that by mistake, but good thing. We're now going to focus on accumulating more SSO if/when DDM goes below 30. Otherwise, just sitting tight.
Hi Snot,
I thought the market is BULL now after AAPL earning with lower guidance and still going up. What up with this sicko market... When is good time to get some SSO and DDM. DOW 7000 maybe?
I think the DOW will tap below 8,000 one more time and the S&P will tap below 850 one more time and then the cash sitting on the sidelines will come into play. With recent memories of the new lows and then the ensuing rally that followed people won't want to miss that a second time. Plus people like myself will consider it a gift because I'm looking to add to my SSO just as you're looking to add to your DDM. I have confidence in continuing to add to my position because with everything in the pipeline and the way governments around the world are trying to stave off a repeat of 1929 do you really want to bet against that over the long run?
Like you've said before these ultra-compressed timeframes are something that many people have become used to, and now that we knowingly may have to wait months for the TARP to really take effect many can't see the light at the end of the tunnel. Then we see people like that IDIOT on CNBC this morning who said that the DOW could crash to 3,500!! And while there's always a chance of that happening, GIVE ME A BREAK! They hadn't had that dude on since 1982 and I doubt they'll have him on again for another 26 years after that way-too-over-the-top "prediction".
I seriously doubt that the guy even believes that number himself, but he got himself on TV!
Anon, you should start your position now, then add if it drops further. We're far enough off the top (down 40%+), that buying here for the long term is fine. Buy a 30% stake, and add as it drops.
Pullo, we agree, if the Dow goes to 3500, the market will be the least of your problems. You'll be too busy fighting off thieves trying to break into your house to steal your canned foods and bottled water, assuming you have any.
If market go 3500, we all share the problem...
Hi snot!
I have read the Bernstein and the Darvas books (excellent reads), what is you next recommendation? :)
Fundamentally, there is nothing holding the market up. Very few companies are going to experience any growth over the next year, so there is little reason to own stocks. They arent printing nearly enough money to hold up the deflating bubble. They need to create about 5 trillion out of thin air, just to keep this ponzi scheme going. DOW 3500 could be an optimistic number. My own target is about 1600-1800 on the DOW. But that should take 3 years to reach.
The next recommendation is to read them again. There are other decent books, but those are light years ahead of the others for their simplicity. Most other books we've read just confuse the issues. We're going to read them again ourselves. Our fundamental research doesn't go any deeper than Darvas's because it doesn't pay. Technofundamentalism, with an emphasis on the "techno" is our approach. Different strokes for different folks, as they say.
Anon, we think you're underestimating the ingenuity and resourcefulness of Americans. Granted, we've lived on too much credit for too long, but for most people the adjustment is not nearly as severe as the market would indicate.
Interest rates have plummeted, oil is not the economy-killer it was over the summer, and we've had massive bailouts, all of which will kick in over the next 6-12 months.
We're not betting against America. It's a losing bet. We're taking the stance that accumulating the indexes will pay off, particularly if you trade around your position and hedge it to minimize risk and lower your break even price as much as possible.
But thanks for the counter-view. It helps make this blog (and the market) interesting. You should watch the manoftruth videos on YouTube. He is predicting the end of America. Needless to say, the videos are interesting whether you believe his message or not.
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