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.

.....

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.

.....

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.

.....

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.

.......

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.