Click charts to enlarge We feel that it is too early to short the market, as it is still oversold. Nevertheless, it is a good time to start looking for opportunity on the short side, if only for a hedge. The chart at the top is FXI, China's index. It is locked in a downtrend, far below its 200 day moving average, as are the U.S. market indexes. Despite being quite oversold and deserving of further short term upside, FXI's inverse, FXP, has already fallen a disproportionate amount. We will be watching FXP closely for a good entry point. If the world markets continue to rally, FXP could offer a great risk/reward ratio for investors looking to hedge their longs, or to profit from any further market declines.
FXP could drop from its current level of 90 to about 60. On the other hand, it could rise from 90 to 200. Already, the risk/reward ratio favors FXP's longs. When a chart looks attractive, it is our inclination to put it on a watchlist and await an even more attractive entry point.
11 comments:
Snot, thanks for the chart. I sold my FXP AH with 3k loss. I was too scare to hold till tomorrow with the Asian market rallying. I need to be able to sleep.
Minnie
You have to be able to sleep. No position is worth losing sleep over. Perhaps you can get back into FXP at a lower price and look at the difference between your sale price and new buy price as a profit towards your eventual FXP windfall!
The fall in FXP is ridiculos and it seems to be it seems to be trading more on fear than an actual inverse of FXI. A better hedge would be EEV which I will be looking to buy. Probably after tomorrow's close if we get a decent rally.
Snot - A thought on your concept of the canaries analogy. Is it possible the emerging markets were the canaries and the US the leader which is going to succumb last?
GE was useless today. what is your target on GE?
You're right about the fear thing with FXP. It doesn't look like an inverse of FXI right now. There's probably room for the arbitrageurs to scoop up a few points here, so the discrepency won't last for too long. EEV is a great idea, as it allows for a lot of diversification. Not sure about the U.S. falling after the emerging markets, as we haven't been following the world markets too closely. The U.S. has been falling for a year, if you go by the Dow's highs, so our guess is that all markets have more or less been falling together. Thanks for the heads-up on EEV, we'll keep that chart on our watchlist along with FXP.
GE was useless today, but it did extremely well on Friday, so it just spent the day treading water. Every point on GE represents billions and billions of dollars of market cap, so it isn't going to move 10 points too quickly. We're not looking for fireworks from GE. We just bought it because of Buffett, the dividend, and the fact that the Dow was off 5,000 points. Otherwise, the chart is a full-fledged Stage 4 downtrend, and despite great reasons behind the purchase, we probably should know better than to buy it at all.
We'd be happy to sell it in the mid 20's. We'd be up 20% in a couple weeks, which would far outpace the dividend rate to say the least.
To show how rare last week was, this is from Bloomberg.com news:
In statistical theory, about 68 percent of events are within one standard deviation above or below the average, 95 percent are within two deviations and 99.7 percent within three. Markets are currently 9.47 so-called standard deviations from usual levels, the Bloomberg index shows.
The measures indicate conditions so unusual that they’re comparable only with winning the lottery twice in a week or the earth being destroyed by an asteroid, said David Watts, a strategist at CreditSights Inc. in London.
Snot, yesterday SSO finished up +22.4% and today there's a real possibility it could repeat that again. My instinct is telling me that if a stock goes up +45% in two trading sessions to sell it, take my profit and buy it back cheaper in the very near future.
I know you said you'd start scaling out of DDM on a strong up day once you were even, but if your position increases another +17% today, making it a two day move of +34%, what will you do?
Thanks!
Ike, if we had a repeat of yesterday's 900+ oint rally, we'd be about 80% out of DDM and about 50% in FXP.
We couldn't resist buying a starter position in FXP this morning at 81.7, and we sold 20% of our DDM at 42.
You're right that large moves are usually met with countermoves. We just scale in and out accordingly. Our initial purchase of DDM at 52 was terrible, which is why our break even on DDM is at 45. We didn't anticipate the worst week in stock market history... live and learn.
We're excited about this next FXP trade. It's a real mover.
I bought some FXP at 84.
BTW Snot, this blog has been great.
If you have time I recommend you to go thru this site. The author makes some very good points.
here is the link:
http://www.geocities.com/WallStreet/Exchange/9807/Charts/SP500/Outlook.htm
Thanks hk22,
Allow us to return the favor... if you don't already know about him, go to youtube and search for manoftruth. He's a bit extreme, but he's been dead on thus far.
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