Click chart to enlargeThe above chart of DDM shows our best guess as to its next move. We don't attempt to time the market based on where we think it will go next, we merely try to capitalize on what we feel are swings to the extremes that are due to return to the mean. The next most likely move is a long, drawn-out (multi-month) move to the moving average. Of course this means wild swings within the projected uptrending channel we've drawn above.
We started our FXP position today. We were eyeing it in the mid to upper 80's last night, and given the chance to buy below 82 this morning, we took the bait. This hedge allows us to hold DDM long with virtually no risk. If the Dow plummets again, FXP could nearly triple from the low 80's, whereas DDM will only lose about 1/3 of its value. In this sense, FXP makes a great hedge, particularly if your position is small enough that adding to it as it drops is well within your means. A small amount of FXP can hedge a large position in DDM the same way a small amount of SMN was a very effective hedge against the collapse of the fertilizer stocks. When holders of fertilizer stocks needed their SMN insurance the most, it provided a 200% gain.
35 comments:
Ford and GM together failed to accomplish what this do-it-yourselfer just did, and he's now enjoying paying just 21 cents per 50 miles. Maybe in 2 years or so, American car companies will start to deliver? Should we continue holding our breath or just petition this guy to make an instruction booklet?
http://www.youtube.com/watch?v=hOaoQHxByok
I'd love to see the recent lows tested over the next few days to get one last bite at the apple.
Nice fantasy move!
if only it were fantasy football.
I've traded FXP in the past and I can say that without question it is the single most frustrating thing I've ever owned. If you made a profit today dump it before the close, because if you think it should add 10 more dollars tomorrow that means it'll open 10 dollars lower.
I closed my Citi Call today after taking it out on Friday. $1.2 per call turned into $4.30 so although it was meant as a hedge for my long term put i just couldnt ignore that sort of return. Obviously my remaing 25% put position took a hit as well, but with a january expiry that has plent of time to recover. The market is riding a wave of exuberance at the moment and financials are soaring as safety looks assured however sooner of later the 20% dilution, govt interference and reduced dividend that Citi shareholders are facing will start to invade the consiousness. When that happens i believe that Citi will start back down on its path to single digits. I havent added to the put yet as i think citi could run to 20 - 22, however its impossible to tell. Tomorrow could see profit taking hence my decision today...
Nice trading, Sniper. We're in the same boat as you, just with different ticker symbols. We've been avoiding the fins because of the chance for interventions that can totally catch you off guard. Otherwise, like you, we're looking for more downside and believe that this rally is all about exhuberance (kool aid). There's just no telling how long it will last and how great its magnitude. We're scaling into FXP and will continue to do so as the market rallies, if it does in fact continue to. We're scaling out of DDM, but feel no pressure to leave the position quickly, as even the smallest FXP is a phenomenal hedge. The DDM chart shows that the Dow could return to mid 10,000's, which is still another 1,000 points higher. We don't want to get overexposed to FXP while that potential exists, but we fully expect to see FXP at 170+ at some point before the end of the year. The market remains so oversold that it is conceivable that it takes the next 2 months to slowly climb back into the channel. We're just going to approach this kool aid period with patience, and try to balance our DDM and FXP according to the daily swings of the two versus their location in the fictional channel we've drawn.
20/22 looks very possible for Citi, although maybe some backpeddling first, as it's already had a big run. The Dow could drop 700-800 points from here and still be within the hypothetical uptrending channel that could take it to 10,600 or so. At 10,600, we'd be nearly 100% short, remembering to allow for the token election relief rally. And it will be quite a relief to be able to watch TV without these goons popping up every few minutes:)
Notice how FXI bounced back down as soon as its RSI hit 50. That was my signal to buy FXP. That one single dynamic has proved extremely profitable time and time again.
Eventually, FXI will break through 50 RSI. When that happens, it will go up to the 50dma, where it will most likely bounce off that. That is another key buy point for FXP. If FXI makes it past the 50dma, it will bounce off the 200dma. So we're looking at many potentially profitable trades before we come to the one that loses money. No way is FXI going to break all three of those resistance points in one swing.
Gotta love a good old fashioned re-test of Friday's lows. Question is, will the market re-test Friday's lows of the day? Or just Friday's closing lows? We may know by the end of day this Friday.
Either way I'm adding more SSO when it falls under 30 because it's a no brainer. Every government in the world is TELLING you they're working on getting the banking system back up and running "normally" so what else do you need as a buy signal if you have a timeframe longer than a day or two??
When the Fed says "we will not stand down until this crisis is past" I tend to believe him. He may have been a little late to the party, but he'll be the last one to leave and he'll stay behind to help clean up the mess.
The Election Rally and/or Santa Claus Rally (which will end about Thanksgiving if we get one this year) are almost given, so this selloff is one last chance to add more at levels that by next month you're going to be kicking yourself that you didn't buy more when you had the chance.
C'mon S&P...push down below 900 again!!!
Sold all my FXP shares for a 30% or more profit. Sold my SMN shares too. Too much too fast. Nothing wrong with that :-)
Meanwhile I will be stayin and watching :-)
Buyng ULTAShort ETF's too risky right now as is buying Ultra Etf's.
At this point anything can happen.
I might as well buy some gold coins.
Listening to anything the fed chairman says is a sure way to lose money. His lies are part of what has gotten us here in the first place. His policies are the rest of the reason. I would not be surprised by another 20% down week.
You see guys! every time some big heads Berna,Paulson,BUSH speak about economy, stock TANK BIG TIME. So if you want to short wait for those big guys speak then short!!!
13% of our portfolio is in FXP, and yet it was able to hedge the 40% of our portfolio that is long. Not a bad little insurance policy. We're basically break even on the day.
Now we'll revisit the lows with a little more capital this time then we had last time. We're looking to add more DDM on this selloff. We should have been more aggressive on the last drop, so here's our second chance. We may not sell off all of our FXP right away, seeing as how effective it is when you need it. But if it reaches ridiculous levels tomorrow (130+), we have to exit the position. GE is not treating us too well lately. We may exit that with a loss. We never buy downtrending individual stocks because no matter how fundamentally sound our reason for buying is, we can't seem to hold a stock for years, as we don't trust that ANY company is immune from bankruptcy. We sure hope that GE does not go under, as it is the parent company of CNBC. Employees there must be watching with bated breath to see whether or not they'll join the masses of recently high-earning New Yorkers who now find themselves on the unemployment line. Wow, what a dismal thought. Maybe we should hold onto FXP! After all, the world as we know it is ending.
Watching manoftruth videos on YouTube would have you believe that, anyway.
We'd like to take this opportunity to remind the most stubborn fundamentalists out there that despite making the best fertilizer and trimming margins to yada yada yada, MOS is headed to 14 cents.
Hi Snot,
What is your opinion on MON? Is it a buy here? $78 now from the high 150.Thanks
Why would MON down 47% be a buy while MOS down 80%, POT down 68%, CF down 69%, AGU down 70% are not?
Or are they all buys? What are you basing it on? P/E's? If so, what's your "E"? What's a fair P/E?
No one can tell you if something is a "good buy" or not without the benefit of hindsight. The best you can do is put the odds in your favor time after time, like poker. You will not profit every time, but you'll profit over time.
That said, here's our take on MON:
Like the market itself, it is trading below a downtrending moving average. It is in a downtrend. We recommend that people NEVER buy stocks that are in downtrends. There is no way of knowing where the bottom will be. It could be $70, or $10, or $0.
The entire market is extremely oversold and overdue for a sustained rally. MON will participate, as most stocks will, if and when that rally happens. If we don't break the lows, that rally may have already begun. You'll tell us we were wrong to tell you not to buy MON in a week or two if it is trading higher, but our advice is sound regardless of where the market goes. If you feel the urge to buy "low", then why not buy an index instead? Unlike individual companies, the indexes will most likely return. If we have a 1987 type crash, MON may never return to the $70's. We cannot endorse buying an individual stock in this market, no matter how oversold it appears.
Thanks Snot!
You guys watching Googles earnings tomorrow? I bought some November puts today at $270 for $10 each. I'll either lose the lot tomorrow or else make a fortune but i'm thinking that it will be a winner for a couple of reasons.
1) The bounce didnt last long and i think that overall we are heading back down. This wasnt a pullback on profit taking today and now they govt is well and truly out of ammo. They have thrown everything in and short of actually telling everyone that they now only owe what thier house is worth i cant imagine hat they can do next to arrest the side.
2) 6 months ago goog suprised on thier earnings and soared 25% as a result. Some people made so much cash on the back of that that i reckon tens of thousands of people are going to be hoping for the same again and setting expectations very high as a result.
3) Ask any business owner what expense goes first when times are tight and they will either say IT or advertising. The man on the street cuts discresionary spending and buying stuff in response to an ad on the web is about as discretionary as it can get.
4) If goog does fall 10% it will set a new low and break its trend line with no sign of support below. That could panic any number of people out of the stock and add to the chaos.
Marry low results with high expectations and you have a recipe for disaster so i'll be watching with baited breath tomorrow...
Short every consumer related stocks
6 months ago GOOG suprised on their earnings and soared 25% as a result. Yes that is true, but 6 months ago their chart looked a lot better. You could tell that people with inside knowledge were buying, as the stock price had been rising in the weeks before they released earnings. In fact it had gained more, in terms of percentage, before earnings (compared with their march lows) than it did on the day it had that big rally! Do you see anything like that happening now? No, now GOOG looks like WM or LEH...
GOOG's chart is like a carbon copy of AAPL's and many others. They gained 30% in the last sucker's rally, then lost more than half of those gains. Because so many charts look like those failed bank stocks, I would be surprised if the DOW did not fall to 7000 before the end of this month.
Solar sector is on the verge of breaking out. FSLR, ENER, STP, SPWRA, LDK, TSL, SOL, ESLR, YGE, JASO... their charts are all telling me the same thing. Breakout is imminent in the next 10 days. Because I think the DOW might be headed to 7000 for an intraday low, it makes it difficult to calculate an entry point. But LDK under $20 is a good place to start. I'm thinking LDK might fall to $16 then bounce back. I loaded up at $19.50 and am preparing to buy more at $19, $18, $17, 16.50, 16.00, 15.50, 15.00, and 14.50. If it does fall all the way to 15, then I think a 80-100% gain would not be out of the question.
LDK is rubbish, just go on Yahoo! message board to confirm. You'll be glad you did.
Besides, if you think you want to invest in China buy a China ETF.
Wish we had an idea where GOOG would go next, but we have no opinion either way except that it has more to do with how the report is received than what it contains.
It seems as if the Fed is pulling out a hidden weapon, which is to brief the media on how they report financial news. Their tone has changed too quickly, and we are very suspect that the Fed is involved. After all, they control market and economic sentiment to a large degree. Why didn't the Fed just start there? It would have saved us a few tril.
We're looking to sell FXP this morning. We think that our projected channel on the DDM chart may just pan out. If the powers-that-be want the market to go up from here, everything will be viewed in a positive light, including goog's earnings, almost regardless of what they are.
Hi Snot,
What make you so bullish?
Sold FXP at 109.
We're not so bullish, we just see that the tone of the media has changed too quickly to be natural.
FXP was a nice call. Those bite-sized trades that pan out so quickly like that sure are a lot of fun!
We made 33% on the FXP trade. Our projected trendline for the Dow was broken (at least intraday), so we bought half the FXP back at 114.5 just to insure against complete disaster. It's hard to imagine the Dow will drop 1,500 points from here, but anything could happen. Even this very small dose of FXP (now 6% of portfolio) goes a long way in helping us have the courage to keep adding to DDM. We added more today in fact, at 32.5
We're now 33% in DDM, but our ultimate target is 67%, so we've gotten half of our position at an average price of $45. $31 if you count the profits from the FXP trade towards this attempt to buy DDM at the bottom.
We're out of GE at a loss at 18.8. Every time we break our basic rules (NEVER buy an individual stock trading below a downtrending moving average), we lose money. And yet we still do it from time to time. Perhaps the idea of a 6 to 7% dividend and Warren's blessing was too good to pass on, but the trend is down, so a lower price and a higher dividend yield are a good possibility.
We were hoping the Dow would stay in an uptrending channel for a while, to get out of its oversold condition. It may still happen, as intraday movements do not void a channel, but today looks more like a retest of the lows is on the schedule first.
Vix is at new high 80+ , what is your take Snot! Get some LONG here?
Depends on your time frame. We've been trying to get primarily long for a while without losing capital. It's a tough gig. If you are trying to make money by tomorrow, we can't offer any advice. If it's long term you're looking at, you'd be crazy to not be building your desired position now.
Hi Snot,
I like your opinion about staying with index rather than individual stock. Given the beaten up price of the financial sector and all the governments around the world have gotten together trying to save this sector from furthur melt down, would you consider long in UYG or KBE for now?
Thanks,
Edward
If the financial sector does well short term, it will only be because the broader market is doing well. It's too risky to buy UYG or KBE when you can get the same results buying the indexes. If this market rally from the lows today holds, our projected uptrending channel for DDM may still be in the cards. This channel represents the "normal" action going forward, but this market isn't playing by any of the rules. Be careful with the financial sector, as there may be more failures to come.
Given this bounce off the lows today (for no particular reason), we're sticking with our uptrending projected trend channel thinking. We've moved to a completely long portfolio of nothing but index. We're buying SSO now instead of DDM. DDM is ok for short/intermediate term trading, but we're looking for a longer term position in which SSO provides far better diversification. If SSO outperforms DDM, it will only be evident after many months.
If the market continues higher (as the trend channel suggests), we'll layer out of the longs and back into FXP. If instead it (unexpectedly for us), drops, we'll continue adding SSO and will be underwater for a while.
great blog, have been here for months. keep it up snot, i just may get my retirement back.
Snot, after today's (re-test?) action do you think that 7882/839 are going to be THE lows? Today's action would seem to increase that possibility, but as everyone knows the "rules" don't apply to what's been going on lately. And I keep hearing about titanic positions that hedge funds still have to unwind due to massive redemptions...what's your take on that?
Thanks!
Well, On such a positive and happy day like this I bought some FXP shares.
If they get cheaper I fill buy more tomorrow.
We won't have any uptrend until we know for sure who is going to be our president.
Lets see If investors are willing to hold their shares over the weekend.
Good luck to all
Heavenhelpme, you're welcome and thanks for reading!
Ike, we don't know if 7882/839 will be THE lows, but you don't need to know that yet. For now, let's assume the projected trend channel we have on the chart of DDM is going to hold. We'll lighten up longs near its top, and add shorts. We'll lighten up the shorts near its bottom and add longs (as we did today). If the channel gets broken to the downside, then new lows are certainly a possibility. There is no need to worry about that until the channel is broken. It is in its infancy, but it is the most likely next path for this market.
As for the hedge funds, at this point there is more money waiting on the sidelines than there is looking for the exits. You will hear the absolute worst "news" near the very bottom. It is entirely possible that we've already seen the bottom, but the bad "news" will continue to trickle out for weeks or even months. It is Wall Street's job to release bad "news" and downgrades when prices are good, and good "news" and upgrades when prices are overinflated.
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