Click charts to enlargeThe chart at the top is of the S&P index. The market has gone from one of "buy the dips" to one of "sell the rallies". If this is another healthy correction, then the S&P could retrace to approximately 1100. We believe this is just another healthy consolidation period for the market as opposed to anything more substantial. It's perfectly reasonable for the U.S. market to tread water for some time, given the uncertainty overseas. While we may see some dramatic 200 - 300 point one-day losses for the Dow, in our mind it's just treading water given the huge upside it's experienced lately. No doubt the next few weeks will offer some excellent buying opportunites. One thing we always remind ourselves during market corrections is that they are the best time to see relative strength, and that the strongest stocks will hit bottom long before the market itself. A strong stock could hit bottom next week, even though the market won't hit its lows for another month. This is often how investors miss the bottom, expecting that both the stocks on their wishlists and the market indexes will bottom out together. This isn't how it works. If you've chosen strong stocks, you should be starting to buy in very soon.
The lower chart is a chart of VECO. We're staying put with our position, although we know there may be more pain ahead. We're looking to buy more LED stocks in the days/weeks ahead. We'd like to get back into CREE, which we sold some time ago at around $76. We still feel it's overvalued, and will remain stubborn about not paying up for these shares. Stocks with low EPS's (high P/E's), such as RBCN and MRVL, are getting hit particularly hard because during corrections, stocks revert to fair valuations based not on forward earnings, but on current earnings. In this regard, we feel VECO is a bit of a safe haven, and any undue selling pressure will present a buying opportunity. We may be wrong on VECO, but we don't have enough reason to turn against it at the moment. With a P/E of 15, there's no reason for us to sell into weakness.
The only other trade we're considering is one in the Ultrashort indexes, like SDS, QID, or DXD. We are not looking to start this position at the market's current level, but if the market rallies strongly, we'll have to assume that it's a bear trap and buy into one of these. The current market downturn is not likely to end quickly, as macro-economic uncertainty such as what's happening overseas takes many quarters to work its way through. There is no reason, however, for the U.S. market to trade in sync with the overseas markets. The U.S. will likely pull out of the downturn quicker, with our strongest sectors eventually rallying so quickly that anyone not invested will have a very tough time getting in. It is our belief that the LED stocks will roughly double by year end from their Spring lows. These lows, whatever they may turn out to be, will be put in sooner than most traders expect.
The only other trade we're considering is one in the Ultrashort indexes, like SDS, QID, or DXD. We are not looking to start this position at the market's current level, but if the market rallies strongly, we'll have to assume that it's a bear trap and buy into one of these. The current market downturn is not likely to end quickly, as macro-economic uncertainty such as what's happening overseas takes many quarters to work its way through. There is no reason, however, for the U.S. market to trade in sync with the overseas markets. The U.S. will likely pull out of the downturn quicker, with our strongest sectors eventually rallying so quickly that anyone not invested will have a very tough time getting in. It is our belief that the LED stocks will roughly double by year end from their Spring lows. These lows, whatever they may turn out to be, will be put in sooner than most traders expect.
36 comments:
Our price target on CREE for this correction is $60, based on an EPS of $2 and a P/E of 30. We would start buying in the mid 60's, but would be reluctant to buy any higher than that.
Closed end funds have been steady gainers with nice dividends for a year now. They are getting thoroughly crushed in this correction, including the fixed income CEFs. Their drop is no worse than many other types of investments, but most of the time CEFs seem to be low Beta. E.g., TAI=.25; KMM=.63; EVV=.72; MSY=.69, etc. There may be some nice buys there when this is all over. I would check the portfolio on any of them in CEF connect or Morningstar, though, in order to avoid foreign debt and in order to buy one that is selling at a nice discount to NAV.
CREE looks like it has already slightly broken through the bottom of its channel. If it drops to $60, wouldn't that be well past the damage control abandon ships signal, rather than a buying point, just like you declared with POT? If one had started buying back into POT at $170 or $160, they would have been crushed in the dip to $50. Why would it be any different with CREE's chart?
Did anybody do the CREE spread play I mentioned a few days ago? Like I said, one of em was going to $2 at least. As it turns out the $65 puts were a 10 bagger today. Ironically this trade performed better than the trade I went with (Hecla spread) but I cant complain.
That was AWESOME! I started out the day down -$15,465.00 on my massive DXD position and got out of it at break even!!!!
Thank you Greece.
Congratulations anon and Icon - I'm getting killed - I tried to buy VECO in the low $42s but it was moving too fast and my broker's server and the Internet were moving too slowly, so I didn't get a single share. When I checked SRS before the plunge, it was up 8%. It ran up to about 19% and quickly came back to 8%. Ouch! This thing could still go down again.
Was the Dow really down almost 1,000 points at around 2:45 today or are the charts just screwed up?
Snot, your charts are correct.
I feel a great movement within the force as if some awful tragedy has occurred. It feels like a cry of anguish from millions as deep, deep stop loss markers were taken out in an instant. TIPs were nice today, but they are only 10% of my portfolio.
Anon, what price did you get for your DXD? Over $29?
My DXD sold out at 29.74.
Guess that's why no one should use stop orders! Supposedly a computer glitch in Procter & Gamble (PG) added to the plunge.
If stops were triggered, there will be a lot of angry traders considering the market is supposed to stop trading before it drops by that amount. Trading wasn't halted today, so those stops shouldn't have been executed.
Suprised the media still hasn't come up with a catchy name for this new correction. The citizens of Greece are literally violently rioting in the streets of Athens, throwing molotav cocktails at the riot police. Should be an interesting correction.
Anon, you're right that if CREE breaks the trend channel and moving average, it will be a major turning point, from stage 2 to stage 3 or 4. We are betting that if it breaks down, it'll go into stage 3 and then launch a new stage 2 because LED is still in its infancy. We didn't feel this way about the fert stocks. The numbers suggest that the LED companies are not yet near the end of their growth cycles. It's a gamble, not for the feint of heart. If you want some security, avoid the high P/E issues, and only buy on severe dips (if trading is accessible to you during them).
Snot, aren't you concerned that CREE plunged 16% at the low today vs. VECO only plunging 10%? Are you still sticking with a $60 price target on CREE? Or is it now lower?
New name for the correction: My Big Fat Greek Correction.
Joe, that's perfect! Love it!
So how low do you think the market will go over the course of My Big Fat Greek Correction?
For what it's worth VECO closed above 50 EMA once again. Can someone please explain or give me a link explaining how every single stock symbol moves together synchronized. It makes no sense how millions of investors and traders can move together within seconds on every single stock symbol out there.
Thanks Snot and others for continuous input
Anon, it's all computer trading triggering orders across the board.
Please vote in our new poll on the left side of the page.
I dunno, Snot, but I'm loaded with cash after today, so another 5% would be fine. On another topic, I wonder if there is a porn movie with a similar title that rhymes with "correction"? And here is the chart of the day! Imagine! Somewhat could have made 300% on a plain trade today. How many people, other than Icon, made 300% today on options, I wonder? And how many lost 300% on them?
ACN
Yeah, ACN... crazy! Wonder if any shares actually traded down there, and if so, is there any recourse for the seller considering the market curbs didn't work the way they should have?
Imagine being that poor stock broker who has to call his client and say, "Hey, Mr. Smith, great news! Your shares of Accenture sold today!" LOL!
OK, so I voted, but I admit it was a bit like throwing darts blindfolded. The market has been in a state of Alice in Wonderland for quite some time. I think Joe may be in the best position; that of lots of cash. After all that has transpired over the last year and a half, we still get the same emotions run amuck, coupled with a severe lack of electronic trading stability. Doesn't exactly engender a sense of security.
On ACN, some asshat had a 1 cent bid that actually got filled. lol. I can see how that can happen though, since I often do 1 cent stink bids just so I have an order open and ready to execute. I just change my bid at the last second because its faster to change your bid than it is to fill out a new order ticket. At least thats how it is for those of us who cant afford to pay for a faster platform.
This crash was surely caused by someone hitting the panic sell button as they were watching events unfold in Greece. For a while there it looked as if they were going to break the police lines. Whoever this seller was, they made the mistake of thinking that there was enough liquidity in the market to execute a market sell order without losing too much from bad fills. What must have happened was the HFT computers front-ran his trade. Remember, these machines intercept all order traffic, and then execute trades ahead of big orders, in the hopes of scalping a few pennies. Since it was a large sell order, they tried to scalp one too many pennies, and in the process used up all the liquidity the market had to offer. Once you do that, all the bids near the current price get filled then there's nothing left. Once all the bids near the current market price are taken out, any further market orders will result in huge moves. Because then the only bids that are left are GTC orders like that 1 cent order for ACN that the buyer surely never intended to get filled. It is seriously bad that it did fill. How the market can have any confidence when that happens is beyond me. I'm glad I'm not long anything.
On Proctor & Gamble, there seems to be a problem with liquidity once you go beyond the normal trading range. (There is a lack of stink bids.) For a DOW component, it is rather striking. Notice on the 1 year chart, there are many days where PG spiked downwards much further than it should have. That can only be explained by a lack of bids relative to other DOW components. This is really important because it is hard to see exactly how much "real liquidity" there is on a stock that trades 10 million shares a day. I think that is the only reason PG went down so far compared to other DOW components. As I take note of this, I am placing some stink bids on PG calls in the hopes that they will fill if this happens again. There are other stocks that are like this. As long as you got money on the sidelines, it cant hurt to put it to use in the form of lowball bids.
The reason "every single stock symbol moves together synchronized" is because most of the market is controlled by big players like mutual funds, pension funds, etc who hold a little bit of everything. (Or a whole lot of everything actually.) When a fund manager panic-sells, he sells everything at market. How far each stock drops depends on how many bids are outstanding. For PG, there must not have been very many, especially once the HFT machines front ran this panic-seller and ate up most of the bids. This is why many people have been screaming from the rafters that HFT is nothing less than criminal. But that still doesnt change the fact that fund managers are generally too stupid to know how much of each stock they can sell at market. Looking at PG's chart, any fund manager with a brain would have known that there is not much liquidity there compared to other DOW components, so he would have reduced his exposure to compensate. Blue chip or not, it's no good if you can't sell it. Especially when you might be forced to sell if your client is the one who panics.
One more thing to note: whoever it was that hit the panic sell button, they did not own any GLD or gold miner stocks. Those simply did not go down today. And they would have if they were part of his portfolio. That is further proof that this was just a low grade moron at play. A rich moron obviously, but a moron nonetheless. Otherwise he'd have been holding at least 10% gold and metals miners and they would have tanked too.
I used to trade LTL heavily. It is a low volume 2x telecomm ETF. I would put in silly bids and silly asks and would sometimes get 100 shares for an extra 2% discount or sell 100 for 2% extra. One time when I had over 1,000 shares of LTL, sold dolt put in a market order at the open. At that time they had a computer generated bid and ask which were about 30% or 40% out there. That market order ripped out shares all the way up to the MM's maximum and for about 10 minutes, the price stayed there with no one trading. My account showed a profit of $50,000 or so. I showed it to my wife. She was impressed until I told her it would disappear in a few moments, which it did. I had a silly ask at the max and I think I sold 4 shares or 6 shares. The MM got most of them. Every since then, the automatically generated bid and ask of LTL, and some other low volume ETFs I used to trade, are in a much narrower range. I bought a bunch of HYT in that plunge -- corporate USA bonds CEF. I think I'll go put in a silly ask on them in case some dolt puts in a market order for them tomorrow. If you want to visit the zoo, go to the ACN message board. All kinds of crazy claims and rumors. It is as much fun as the LDK board used to be.
DOW JONES NEWSWIRE 5/6/2010 5:11:20PM "Initial plans called for exchanges to void trades taking place in that period of time at prices more than 30% below or above the pre-2:40 p.m. time period, according to a person briefed on the discussions. The move would let traders break up trades in stocks whose prices plunged to pennies at the height of Thursday's market chaos, when the Dow Jones Industrial Average at one point was down by nearly 1,000 points. NYSE Euronext (NYX), Nasdaq OMX, BATS Exchange and Direct Edge were said to be involved in the discussions."
So no one got anything at .01 cents. What a surprise, you're wrong again.
Anon
If Icon bothers you so much, may I suggest a) that you go somewhere else, and/or b) while you're it, contribute something to the blog. Your continuous ranting is bothersome, irritating, unproductive, insipid and incredibly stale. Another suggestion: Icon has his own blog, may I suggest you duke it out there?
The reason gold and gold miners didn't drop was that people were running to a safe haven in gold. SPY had 647 million traded today compared to an average of 199 million. That 3 to 1 ratio is not much different from GLD which traded 50.5 million today compared to 15.5 million average. GDX traded 24 million today compared to an average of 13 million. The chart of GDX reveals that the "panic button" did affect it quite noticeably at 2:45 PM.
http://finance.yahoo.com/q/ta?s=GDX&t=1d&l=on&z=m&q=l&p=&a=&c=gld
While not as pronounced as some other equities due to the gold rush, a similar 2:45 dip can be seen in the daily charts of AEM, ABX, GOLD, GG, NEM, AU, KGC, GFI, and HL.
Will margin calls further feed the correction?
Yeah GDX did take a small hit but notice in this google finance chart of GDX, there was an even sharper selloff on more volume, 2 days earlier. It doesnt take much to move the miners.
To the butthurt anon: it doesnt matter if the exchanges attempt to undo those trades. Those trades were real. The damage to CONfidence is done. They were exactly what you would expect to happen when people are panic selling into a no-bid environment. Everything worked as it should, there just was no liquidity. That's how all crashes occur. The games they are playing and the excuses they are making are just attempts to preserve CONfidence. You can tell it was real because the currency markets went crazy as much as 20 minutes before the equities went down. Look at the yen chart. And look at the VIX. The VIX went parabolic well before 2:30. It was a steady exponential buildup. Quite beautiful actually. It wasnt the result of any type of glitch. It was a slow and steady selloff that grew exponentially until the market ran out of bids. Of course the media is going to parrot bs excuses, and of course the suckers are going to buy it. But anyone with money they want to keep is going to take note: the veneer of liquidity is remarkably thin. This will force money onto the sidelines if for no other reason than to capitalize on these situations.
Those who can't do, teach.
U.S. unemployment went up to 9.9% so wheeeeeee let's rally!! What a joke. Does anyone really trust the constant revisions?
To Anon who constantly says, "Those who can't do, teach," you need to go back to school, buddy, and get some more education or else change your attitude and be thankful for what your teachers taught you. Otherwise, you would not be able to read, write, type, add, subtract, or engage in logical thinking. In regard to the latter, though, you need to go back to school. Or see a counselor to figure out why you have such a low self esteem. I can help you with either. :)
Sounds like someone struck a nerve. :)
Yep. I'm a professor and my two children are also. It is a noble profession and someone needs to cork it.
Snot or others,
Looking at a 5 day view, VECO has held up significantly better than GOOG or AAPL or a lot of NASDAQ symbols. Is this an example of what you were saying a strong stock will do during a correction? Or is this way too short of a time frame? What time frame is good to study? I know it's different for everyone, but I'm curious what people's opinions are.
I joined you today, Snot. I bought VECO for the first time, after having owned AIXG and CREE in the past. HANS was a nice day trade today. Icon, how much could a person have made, by percentage, if one had guessed that HANS would take only a 10% plunge and had bought/sold options? And what would your choice have been to limit loss in case HANS didn't plummet? It dropped much more than that today.
After watching Fast Money where the CEO of Locatestock said hedge funds are doubling down on their shorts and planning to short more it sure seems like a risky time to be long. This guy thinks there's another 1500 points on the downside to go.
Couple that with Cramer saying the DOW could easily drop to 9,000 or even 8,500 and I'm patiently waiting to buy my first layer of both VECO and CREE.
People may not care for Cramer but 99% of the time he's a pumper so when he changes tune like this it's probably time to listen.
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