The AM Forum

Back in the middle of March, both Eric/WA2CAU and I posted we thought a tremendous rally (up) in the stock market was due within a week or so.  The market at that time was around 7000 with many analysts looking for a collapse.  Today the Dow is near 8500 - a good rally.  The S&P 500 is up about 25%.   (lucky call)  ;D

I had mentioned the top of the forcasted rally would be a good time to unload the dogs that we got caught with in our portfolios.  I also mentioned that it would be a rally that would take our breath away and the talking heads on TV would be screaming we are into a new bull market.  Yesterday we even crossed above the high of the year, giving an overall gain for 2009.

Yesterday, I tuned in the business channel and heard three "anal-ysts" urging everyone to buy now - not to miss the train! 


Perhaps we are are getting near to the top of this rally - bullish sentiment alone is a great indicator. Also, if we look back to the 1929 - 1932 decline, we will see similar bear market rally patterns that lasted 4 weeks to 3 months with gains of up to 30% at times.  But every time - they failed and the market sold off to new lows until the final low of Dow 40.5  in July, 1932.

I think we are close to the top of a bear market rally now and will see the beginnings of a sharp sell off shortly - within a week or two. It could go higher, but this rally in both price and time has satisfied my expectations to history.

Look for an eventual break of Dow 800 before the bear market of 2008-2011 is over. That is a 90% total decline in the overall stock market. It has so far declined about 40%-50% or so, depending on the index you use. It will continue to have bear market rallies like we've just seen this last two months and most investers will get bullish again, only to be sorely disappointed.  I think most foreign stock markets will generally follow, but some will start to diverge and could even show strength at times, like China. Towards the end of a bear market, the strongest markets refuse to go down any farther and will be the ones to buy, but time will tell.

Anyway, this is just an opinion and many times I am wrong. Just wanted to follow up on a thread that started back in March. I couldn't remember where it was, so started a new one.  We'll have to see if this forecash works out or not.

Look for a series of news events over the next few weeks to "shock" the markets and start the ball moving down again - with the main trend, which is still down, in my opinion.

Later -

T

Then my timing is good. I'm about to convert a fairly sizable wad into cash.

We're approaching the summer doldrums, what effect do you suppose that will have? Is the lower summer volume likely have a retarding effect on declines as well as gains (trading-influenced gains/declines, that is)?

Thom,

If you look back and study the popular "Trader's Almanac"  this last two years, you will see the usual seasonal patterns got destroyed since the bear market began.  The rules have changed for now.

There have been times when the summer has been dead, but last summer, volume and volatility set new records.

Keep your eye on the dot (the market itself) and try not to get influenced by news and optimized seasonal tendencies.  There are times when the tendencies can be right 10 times in a row, but then the odds swing the other way and are wrong 10 times in a row.

When the market is ready to make a move due to accumulation or distribution, there is nothing that can stop it - even summer vacations... ;D

T

Gotcha. Fortunately, the answer wouldn't have changed my current course of action.

Some of this stuff I hate to sell, because it's been fairly stable over the last two years, but I see no hope of realistic gains in the forseeable future. I won't sell all of them, but I need liquidity more than anything right now.

Well, at least you didn't sell them into the abyss like some who panicked out at the very bottom.... ;)

I still think cash is king and the best position right now is NO position except into the US Dollar. (T-bills, and cash equivalents) The dollar has rallied tremendously relative to most all other assets and other foreign currencies whirlwide.  Amazing isn't it?  The market has little relationship to conventional logical thinking. 

There will come a time for speculation again - and the market will give us plenty of time to get aboard. Trying to pick the bottom in a bear market is the road to ruin.

Another thing:  "Corrections" against the main trend are  difficult to predict compared to "impulse waves" going with the trend.  This bear market rally is a correction. The impulse wave is down.  This correction could go higher still, but, being squirrely, it could collapse at any time too.

If this is a new bull market, then all bets are off, but I give it a low probability of being so.

T

Per Tom, K1JJ:

"Look for an eventual break of Dow 800 before the bear market of 2008-2011 is over. That is a 90% total decline in the overall stock market. It has so far declined about 40%-50% or so, depending on the index you use."

Tom, even for a contrarian such as myself, a Dow of 800 is a little tough to swallow! I thought I was bearish at a capitulation point of Dow 4500, but Dow 800..........wow.

I am preparing to go short in this market environment. As you and I had discussed at Deerfield this past weekend, I think this current bear market rally is getting a little long in the tooth, and the technical indicators are flashing red at this point.

And I wonder what kind of an impact the bank stress test results will have on the market when they are released on Thursday. Very possibly this has already been priced into the market.

Thanks for your usual objective commentary on all things market-related.

73,

Bruce

The other unknown is the inflation factor.  With the amount of funds committed by the administration and the underlying complications, the only route out of these problems is to inflate the dollar.  

This means anyone caught with cash will loose substantially over a period of time depending on the rate of inflation.  So what to do?  Some are suggesting gold or other metals, some are suggesting commodities.  Check history in the late 70s and early 80s to see what gained value and that is an indicator but may not be the solution this time.   As has been mentioned the rules don't apply any more.

I have been in cash since the S&P went below ~1200 and have remained out of the market.  It hurts to sit and watch the rally we have just witnessed but I agree that this is probably a bear rally.  There are a few strengths out there but not many, and probably not enough to support sustained recovery.  

The pessimists are saying 2011 or 12, the optimists are saying next year.  Just be careful.  I saw a CBO report the other day that forecasts the federal public debt will be 54% of GDP by 2011.  We are going to have to face the music some day soon.  I just hope rational people will get together to solve the problems.

Bruce,

Yep, it is quite a radical expectation. The markets usually go much farther than anyone expects and will surprise us most of the time.

To be more specific, I expect the LONG TERM bear market to last until about the year 2040. In between now and that far distant date, there will be many bull markets that last for a few years, but they will not exceed the highs of 2008 nor come close to the prosperity we had over the last 70 years in the USA.   I feel we have a lot of excess to work out first.   After year 2040 or thereabouts, we will begin a new era - and prosperity will return and exceed our previous highs.

In the meantime, I do think we will break Dow 800 at some point to satisfy a long range market pattern, but whether that happens within the next few years or takes until 2040 to finally work out is soley dependant on the real events that occur. No one can predict the actual events or magnitude of them accurately, but the overall patterns themselves seem to work out over time.  Hopefully there will not be too much social unrest and wars during that period, cuz they can get greatly magnified during bad economic times.

The best scenario in this pattern would be a slow erosion over the next 30 years rather than chaos.  Thirty years really ain't that long when viewing the long term history of the markets going back to the 1700's.  After 70 years of prosperity, 30 years is expected for a breather. It has happened before. When we are within it, it all seems like slow motion. There will be times when the economy gets better, but it will always seem tired and lazy until it works itself out. (Debt liquidated or paid back, etc)   In contrast, when the next short "intermidiate" bull market starts (2011?) China is poised to rock and roll and become the next economic leader for the next 30 years. The USA will eventually catch up and surpass China later on.

Jim: Agreed on all.  I think this deflation bear is so powerful, inflation will not rear its head for some time now. A deflation's job is to destroy financial assets. It has done it so far in spades. I think any efforts to inflate farther will just make deflation worse. It sounds illogical, I know. But deflation is the main trend now and governments have never been able to buck and successfully turn a main trend around.... until it runs it's course.


Stock Market Strategy?  For 76 years the best strategy was generally to buy and hold. The rules have changed. The best strategy now is to trade the intermidiate swings up and down. Investors need to learn how to sell short when expecting a market decline.   The recent 25% rally is a perfect example of a trading swing. One would now be looking to take profits and find a place to sell short for a decline.


In the meantime, just live life like it's 1999.... ;D
 
T

Amen.

Tom

Remember when I said I was going to ride the market up and jump off?  Well, it didn't exactly happen like I wanted for my 401K.  I kept waiting for the big pullbacks that never came. (I don't like chasing.)  I am only in 10% (way too late) and will pull out again. (I hate that I only have bland mutual funds to choose from.) 

I did a lot better with my IRA. Using leveraged ETF's (and Apple) I made back a great portion of my losses in the last few weeks.  We are out again (except for a short REIT ETF I got killed on) and am waiting for the next ride.

Hey, that's pretty good  John - especially the IRA gains. It's not what happened yesterday, but what am I gonna do now? You took action - that's good.  Many people have given up - and now hope and hope... and are prepared to go down with the ship if it sinks.


You mentioned two problems with making profits.  First is the human factors that cause us to jump in too early or too late. (or not pull the trigger at all)  The second is picking the wrong vehicle for the move. We can have the best forecast, but make nothing if we have poor execution of the plan.

As for picking the right vehicle, I haven't bought or sold individual stocks in over 20 years. I use the S&P 500 futures index for buying and shorting. For example, the S&P 500 made a 25% move this last 2 months. Buying the mini-future would have required about $6K per contract margin. The recent move would have made about $8K per contract, or a gain of about 133%.   You always participate when you buy an index.


The other side is when a stock like Ford goes from about 1 3/4 to 5 as it did recently.  That's about a 285% gain.  Then there's stocks that actually declined during the rally or stayed the same.  All in all, I like the broad index the best. (S&P 500 future)


BTW, another sign that this rally is a bear market rally:  You mentioned that you waited for a pull-back that never came. Well, bear corrections like this usually have a steep and perfect slope. You can usually draw a nice clean trendline under them and they will hug it over and over as they advance. When they finally break the steep trendline, they generally collapse and the trend resumes down. In contrast, a real bull market rally will have many sharp corrections along the way. They try to shake people out. 

The bear market rally wants to get everyone bullish to buy and buy, afraid to miss the move.

The bull market climbs a wall of worry.... and declines on worry.   A bear market slides down a slope of hope.... and rallies on hope too.

T

...scared sh*tless that the world is going to end on Dec. 31st at midnight?  ;)

hahaha.... naw.  I've never listened to the doom and gloomers saying an asteroid, axis shift or flying saucer would take me out. It will be our own health or an accident. That's the only thing that will put us in the box... :)   

You can always tell how well off a population is by what they worry about. Some worry about which BMW to buy, some worry about asteroids - while others worry about where their next meal will come from and if the rebels will come tonight to kill them.

Right now, the USA is still in the first two groups and reasonably safe.


T

Thom

Deflation is not the thing it is cracked up to be at the moment.  Fuel and food are not part of the formula, but food is dramatically higher than even 6 months ago.  It has leveled for now but fuel has started back up.  Those two factors impact every aspect of our economy and are not counted.  We are paying about 20% more for our bi-monthly food bills now vs. 18 months ago.

Even though other prices are stable to a bit lower than 6 months ago the biggest thing is the price of housing.  In 5-6 states the price is dramatically lower while here it only plateaued and is just slow to sell.  So the overall impact is actually a low inflation for us here not the deflation some people are seeing.  In this scenario the government won't have to increase the COLA's as much.

The real movement in the market is not here yet, but you are being cautious, which is good for us who have only fixed assets and are not contributing any longer.  We only hope that the market will pay just a bit over the payouts we receive.  If I had to be in the market and I am considering them, I would strongly consider high yield corporate bonds.  They are priced low at the moment and give good yield.  But if the government keeps up the Chrysler thing, that can change.  The bonds are slow movers so one has time to dump before big losses.

Jim,

It seems end-user consumer prices have held up firmly. That is baffling to me since raw commodity prices have gone down quite a bit in the last 6 months.  It seems the govt has found a way to keep rates low (our income low - while their own debt service percentage is lower than before) At the same time our cost of living is high. Not to mention property taxes thru the roof cuz of town/city mismanagement...   We consumers are in a pickle for sure. But it's still early and I think we WILL see falling consumer prices later on as cash gets harder and harder to get and liquidity becomes poor in many markets, despite the govt's efforts to inflate. Inflation efforts will backfire and cause a more severe deflation in the end. 

Also, deflation's effects on specific assets is directly related to how sharply prices ran up during inflationary (or prosperous) times. Maybe the real estate in your area didn't have the sharp advances like Miami, Phoenix, etc, so you are in a more stable environment. As usual, there can be mini bull markets in some parts of the country while the majority is getting hammered. (and vice versa)


Anyway, in the last 6 months, deflation has done a  negative 30%-60% hit job on stocks, real estate, raw commodities (incl oil) and has bankrupted many companies through defaults related to deflation. How else can you measure deflation other than with falling asset prices and especially with debt defaults?   Those two areas are the earmarks of deflation, not inflation.

As for bonds, we ain't seen nothin' yet.  I think it was Moodys? who just downgraded EVERY government/municipal  bond agency in the country. This bear market is only 9 months old. It's still young yet and things don't happen overnight.  Muni-bonds, and especially corporate bonds are very vulnerable to future defaults.  That's why we saw US bonds more expensive to buy than tax-free Munis for the first time in history. The market is telling us something.

There will be a time to snap up cheap bonds in the future for a song once the dust settles. But for now it is pure speculation and not for "safe" money. I would sit tight and let things unfold a little longer before making big commitments in muni or corporate bonds.  Stick with US Treasury cash equivalents (T-Bills, etc)  for now and you will be safe and have dry powder later.  Cash is king and will continue to appreciate relative to other assets for some time to come.

T

Heh... my 401K was mostly high grade bonds and tanked pretty fast before I could pull out last fall.  Lesson learned.  Bond funds are not nearly as safe as cash.

Recently, I was in the HYG (junk bond fund) in my IRA.  I got in near the bottom and it was up 19% in 8 weeks - not exactly a slow mover.  The dividend was about 13% but it went down from 80 cent to 60 cents this month.  I was disappointed in the decrease.  Ford was a major part of the fund and is no longer in it.  I suspect Ford bonds had to be liquidated to reduce Ford's debt and that explains some of the decrease.  Still, even 8% at today's price not that bad.  That said, I expect the yield to go back up if stocks tank again.  I was going to hold and let the dividends accumulate, but decided instead to take 19 months worth of "dividends" up front.  I can always go back in later.

Who is going to buy real estate in a deflationary environment?

People who:
* have a (VERY) stable job
* were formerly priced out of the market
* need a place to call home for the next 10 to 30 years
* don't plan to use their home as an ATM.

Deflation is only a problem if you need to sell or your wages go down. If you wait for THE bottom, you will probably miss it anyway.  If you can get a foreclosed property at 25-50 cents on the dollar, I don't see how you can lose in the long run.

Not too many of those left.


For employment and many other reasons, no one lives in the same place for 30 years any more. I don't know a single person who has.


I'll agree that a home should be viewed as a roof over your head and not a cash cow, but the reality is that one's home is the single biggest investment most people make in their lives, including the stock market. The other reality is the tax code- Mortgage interest being tax deductible and while other debt is not deductible. Why not take money out of your home to buy a car instead of getting a non-deductible car loan? For many, that's a no-brainer.

It's all bass-ackwards now. One doesn't know how long they'll be able to stay put; it's a disaster in the making if your home goes down in value and you are upside down for 5-10-15 years. I would be very reluctant to buy a place right now, the only exception might be to purchase a rental property.

Yes, I think renting and rentals will become very popular in the future. The fundamentals appear to be in place. If it becomes hard to buy/own a house, there will be more demand for landlords to capitalize.

Yes, being in an upside-down mortgage is a heart-breaker and most people will walk after a period of time. This will have to run its course. That's what deflation was "invented" for.... to clean out the excess and set the stage for a future advance in stronger hands  :'(   

Though for others who have paid their mortgages off or have large equity in them, it becomes a relative thing and house values are just a number. ie, Everyone's house is declining in value and if one wanted to move, it would be value for value.


That's why the people who are in cash and debt free now have a great advantage. The rules have changed. For the last 70 years, they were the "fools" as inflation and fiat credit expansions inflated asset values. Now these "fools"  are right and the leveraged ones are hurting. The markets are always changing - both micro and macro views.

T

Tom,
Great question.  I've been pondering this one for the past several weeks.  Especially since we are now in
"Sell in May" time of year.  Market started to wiggle down last year around mid-May.  But these things (market)
tend to frusturate the most people all the time.   Taint' be that easy.   ???
Maybe too early, mom and pop prolly are not "all in" ....yet.

This Todd Harrison is usually a good read for these junctures....

http://www.minyanville.com/articles/dollar-Fed-dxy-economy-W-financials/index/a/22543

For employment and many other reasons, no one lives in the same place for 30 years any more. I don't know a single person who has.
[/quote]

Bill,

There may be many more of us in that boat than you realize!  Since the early 80's, many of us "more seasoned employees" have found ourselves on the wrong side of the downsizing, reorganizing, process re-engineering, etc, etc frenzy that may have prematurely ended/altered our careers and forced us to greatly reassess our plans for the future.  Sometimes those plans just had to include "staying put".  

Many, many professionals have been affected by this wave of corporate upheaval and have had to greatly modify their retirement plans and/or plans for nicer homes and other amenities.  In many cases, it has come down to making choices between staying with family or moving clear across the country, just to maintain a certain income level or career objective......only to to be faced with an ever inceasing part of your income needed just for housing and living expenses in the new location.  It seems that the areas supporting job growth and good-paying positions also have been the areas which have experienced huge increases in the cost of living and huge inflation in the housing costs.  

We have witnessed and certainly been forced to be a part of a huge transformation in our society and in our economy that has hurt a lot of people....then when the latest crunch came....it nearly destroyed those who were just trying to keep up with what they believed was the lifestyle that they had to have to be happy.

73,  Jack, W9GT

Sorry.  I forgot how abnormal I am.  I have been in this house for almost 27 years (and my wife, 10 years longer than that).  I have no plans to leave anytime soon.  My first 25 years were spent in the house my parents built when they got married.  :)

Very well said, Jack.

T

Seriously, I don't know a single person who hasn't moved within the last 15 years.
Between job changes, divorces, corporate transfers (IBM), moving closer to schools for a special needs child, or just moving to a more desirable location.

Maybe it's different in the West than in the east.
Maybe us older folk move less than gens X, Y and Z.

Me, I've been in my place 12 yrs and I plan to expire in my current home. No move moves.

Anecdotal evidence Bill. You work in a rather transient job/industry. Your view is skewed.

I've worked in many industries, Steve, including for several 'lifetime' sort of employers like the Denver electric company.

But in this case the nature of my employment is irrelevant in part because none of my friends and acquaintances are in the same line of work.

As I stated, I don't know a single person that's been a lifer in their current residence. Period. A simple fact. No one. Nada.

The only exceptions are my deceased mother and my mother-in-law, both of whom lived out east, Chicago and Canton, respectively.

Perhaps I'll find some statistics to back up my assertion that there are likely regional differences how frequently the average person moves, or maybe you can.

Today I see the market is hanging at the highs of the move - like it wants to have one more spike up.  This would be a good thing to grab the last hold-outs looking to buy - to call their brokers and say, "I can't take it anymore... buy me in at ANY price!"   

The talking heads would love it.

This is what I call the "stalking" part of a trade where you patiently let the trade come to you on your own terms. Sometimes averaging in over a period of days works well too, as long as we sell (or sell short) into strength. Selling/short-selling the next big spike up would be what I call a "low risk" trade.  After short-selling into extreme strength, the market will usually pull back somewhat and give us a nice buffer to work with in case we are wrong and need to bail out later if it keeps advancing strongly.

T

Now you got it. Actually stats over the entire population vice the few people you or I know.

I've been at the same location for 37 years

It's an east coast thing, Pete. We lack wanderlust.  ;D

 

    39 years here!

All you need is a Federal Government job, and those are increasing.  :D

(My dad was a Rural Letter Carrier (mailman).  I don't recall him ever worrying about being laid off.)

Even though my parent company changed names a number of times, went through two divestitures, upsizing, downsizing, several mergers, and my job and responsibilities changed course numerous times throughout my career, I never had to leave the NJ. NJ has a lot to offer. We have an ocean, swamps, high hills(our version of mountains), lots of flat land, dense woods, big cities, small cities, big rivers, small rivers, and rivers that can turn your neighborhood into a large swimming hole after a good rain. We generally don't have tornadoes running through our back yards or 3 foot high snow storms. And NYC and Philly are just down the road if one wants to really party.   ;D

Maybe that uptick rule change I hear being recommended will stop the shorters and cause the market to rise.  But I think some real answer has to be implemented for the obvious oncoming train wreck of Social Security and Medicare that are not there, not to mention the staggering national debt and its staggering debt service payments.   I read that the average interest on that - what now? - 11 or 12 trillion dollar debt is 4%... that's 400 to 500 billion a year just in interest.  How can anybody who considers themselves to be sane believe that this is workable?

We have been borrowing hand over fist for over a generation just to make ends meet, and now we are trying to borrow two or three times as fast to do the same thing.  The lenders are increasingly skittish, and the printing presses are putting out lots of new dollars to compete with the ones we earned, to buy all of the things that we need.  That will cause huge inflation, IMHO.

The Chinese see it coming... our enormous dollar debt to them, paid in dollarettes.  And they don't like it.

It will help if we can cut our losses in Iraq.  But have you seen the games they play to put a few miles of commuter rail anywhere these days?   We can not afford squat.

I watched the beginning of Cramer this evening declaring victory and lambasting the bears for not admitting that they were wrong and he was right and that this is a REAL bull market.  Either he's right, or he's setting himself up for some major egg-on-face.  IMHO, he's got himself pretty far out on a rather shaky limb.

Ironic.  IMHO, the shorts are getting squeezed right now and that's part of what's making the market go UP so consistantly.

AFAIK, the uptick rule is only going to put the brakes on a short-amplified decline (if it does anything at all).

Ah.......but just wait until this market begins it's inevitable downturn. All of the big institutional bankers (and including myself) will start shorting the market. There is absolutely nothing wrong, immoral, unethical, or illegal with doing this, and it is consistent with the philosophy that you can make money in a declining as well as a growth market.

Those big Wall Street banking firms that cried foul when the smart money was shorting them during the vicious downturn of last year, will be the first ones to begin shorting the market as soon as the tides start turning. My guess is that they already have their strategy in place. I think it was Goldman Sachs that made an absolute fortune last year shorting the banks that issued the sub-prime mortgages.

73,

Bruce

Yes Bruce.  Ironic that the banks cry foul about shorting while doing it for their own investments.

I plan to try some short ETF's.  It's been said that the uptick rule could cause problems for these ETF's.  We shall see.

Selling short is an important part of any market's structure and balance.  It's been going on continuously for 100's of years in the futures markets.

Short selling adds liquidity and is the only transaction that requires the seller to buy back his position later on, causing latent buying power that can fuel rallies and create support for the market.

When short selling isn't permitted, all you have is optimistic buy-buy-buy that can get way out of hand. Short selling puts the market back to reality.  It's funny how people think short selling is so easy and making money is a cinch when the market declines. The truth is that when short selling we must be more nimble and sharper than when buying cuz the market usually declines twice as fast as it rallies - and spends more time on the upside. ie, The sell-offs are usually faster and sharper, even when the trend is down. Trade professionals favor the short side for many reasons.  The public generally ignores short selling  and would rather look for reasons to buy buy buy everything.

As for the uptick rule... there has never been an uptick rule in the futures markets and they are some of the most liquid and fair markets in the whirl. As usual, the government overreacted after the stock market turned down and put on the uptick rule. Of course, the market just continued down to run its course.  Free markets work best when they are left alone to let the buyers and sellers do their thing. The more liquid a market is, the more efficient and fair it becomes. (Best trade executions)

Funny to hear about Cramer today, John.  He's a one-way street.... buy, buy, buy all the way down! The market breathes in and out. All he does is inhale.  He's probably led more people to financial ruin than anyone in TV history.  But as he admitted himself, his show is more for entertainment than investing.  Entertain this!

T


 

Short selling is very risky because there is no limit to the price you may have to pay to buy the stock back.

Buying short ETF's is a little safer because your losses are limited to your original investment.  The downside is, it's not clear these instruments exactly replicate the function they claim, especially long term.  Even some regular ETF's (especially leveraged ones) have these issues.

There is some limit. I've never seen a stock price go to infinity. :P

I'm not sure that the market will rise happily, when the rest of the economy is in collapse due to enormous debt service costs, inflation from massive printing of bogus money, and a stunning lack of real production.   Somehow Europe and Asia seem unable to go to their own trade and economy as the USA flounders, but this will surely change.  A trillion or more dollars a year of rising debt... is simply and obviously not going to work.  The 500 or 600 billion a year of rising debt we had going for the past several years wasn't working either - we were just going down the drain a little less quickly.  But we have been going down the drain for over a generation now, and the gurgling sounds are making themselves heard.

Add to that over 100 million retirees finding no Social Security money and no Medicare money.  There are IOUs where that money is supposed to be, payable by... the US Taxpayer.  Hmm, the taxpayers who would be paying that back... are not the ones who borrowed it...  and on top of that, the money would be for the same ones who took it and spent it on other stuff!  So tomorrow's taxpayers would be expected to pay twice.

I don't think they will stand for that, especially in the dismal economy they will inherit.  I predict some very ugly times ahead.

Yes, that's correct - unlimited liability when short.  Though, a stock can drop overnight from 90 to zero too and be devastating. Some of these overnight "surprises" in the stock market create bigger opening gaps than commodity trading.  Normally, one would have stop loss orders in to limit a loss before it got out of hand on the short side, but there is NO protection for overnight gaps in stocks, bonds or futures whether long or short.

Personally, I'd much rather go short than long, simply cuz there is less public company riding along and the moves are often swifter and sharper on the downside. Fear and panic cause down-moves.... while a slow building optimism creates up-moves. (not counting short covering rallies which are panic generated) Which emotion is faster to take hold?


John, OK on  the ETF's. (Exchange Traded Funds) I'm curious - what is their DISadvantage to other vehicles like futures? Is it the lower liquidity, transaction fees, or restrictions of some kind?  There is always a downside or else everyone would be trading them...  ;)    I see the limited liability is one advantage. Options have that too, but pay a stiff price for time erosion and strike price.

T

Anyhow,

Hey Bacon, it's great to hear from you _._

Think of ETF's as mutual funds who's NAV adjusts in real time, and can be traded like a stock in real time. The main DISadvantage compared to a no load mutual fund is the you pay a fee on each trade just like a stock. You wouldn't want to buy ETF's in $100 increments if you pay $12.99/trade like I do.  Nearly all ETF's are unmanaged index funds and have very low overhead.

In general, if your a good stock picker and have the time to do the homework, you might be better off with stocks than ETF's.  If you just want a diversified basket of stocks without having to buy a whole bunch of individual stocks, but still want the liquidity of stocks,  ETF's are the way to go.

I can't comment about options and futures.  I know virtually nothing about them.  I imagine you could buy put protection (married put) on an ETF to hedge your gains just like a stock.

Everybody IS trading them...ETF's are on fire.  The GLD (Gold ETF) now has almost $32 billion under management. How big is that? This fund is now the number six holder of gold in the world.  (The Government of Italy is number 7.)

Advantages of ETF's:

http://www.investopedia.com/articles/mutualfund/05/060605.asp

OK on the ETF's.

Usually the disadvantage is the transaction fees, as you said. For day trading, it can eat us alive.  But if you do larger transactions and hold them longer term (as you do) then it may work out.

As far as volume.... you could look at the numbers, but gold futures trading each day is probably into the $billion dollar figure too, as far as total gold changing hands. Nothing is better than the futures contracts markets for raw commodities and the stock indices. (S&P 500)
But that could change, who knows?

Though I think the SPY, which just requires a stock account, not futures, is quite popular and liquid.  The problem is transaction fees still -  I once compared the SPY to the futures and found the commissions were about four times higher. This can reallly add up when day trading for 90 minute trades like I do here.

Good luck, OM.

T

Well, it's been about  6 weeks since this posting was made last May 5th. I want to continue to stick my neck out...  ;D  We were looking for the last gasp of this bear market rally.  The optimism should have peaked by now with the talking heads calling for a new bull market and recovering economy. I think we saw what we needed to see to complete the rally phase.

The Dow was at about 8500 on May 5th. Today it's at about 8295.  So, the market struggled higher to 8799 and is now heading down. It took its time to unfold, as usual.  I think we have just begun the new bear stock market swing down that will break to NEW LOWS, create lower real estate prices, more corporate defaults and cause general market psychology to get worse than it did last fall and winter. It could be a bad tumble with "surprising" news.

Time will tell, but I think we have been given the chance to dump the stock dogs we wanted to dump on this rally (some never did rally) and raise as much cash as possible.

The unemployment rate will probably be on its way to 15% as the year progresses.   The market has rallied roughly 35% since last March. This is a normal bear market rally when compared against the 1929 crash.   

It looks like the European markets have already started the decline in earnest and are ahead of the USA markets.

I'm not looking to alarm anyone - just give those interested a heads-up to be more financially conservative in case this scenario continues to unfold.  Let's hope for the best. 

BTW, I still think deflation is in its early stages and has a long way to go yet.  Inflation sounds the "logical" choice, but is dead for now.  Deflation's nasty job is to destroy assets and liquidate debt every 70 years or so. It continues to do this well. Cash and cash equivalents (like T-Bills, etc) will continue to be king for the next few years.

T

I've been tempted to bump this thread for a while.  Glad to see an update.  ;D

Tom,
We've climbed a good bit above that 'last gasp rally' in June (over a thousand points on the Dow).  I very much respect your 'sticking your neck out'.  I think that right now it's important for all of us that are in the market to keep an eye on things.  You don't want to miss the rally, but you don't want to ride the next down-turn either.  Wake up!  It's your money/retirement!  :o

73, Karl

Hi Karl,

Yep, this is sure turning into a relentless rally that is about five months old now. Generally, moves against the main trend are the hardest to forecast. This is assuming the main trend is still down. 

Personally, I haven't owned a stock or mutual fund since 1987 and have done no long term trades since then. All of my trading is short term S&P 500 futures that last about 90 minutes on average.   So, I live through mini bull and mini bear markets each day.... ;D  This five month rally is a good example of why I stay away from longer term trading.  ( I would have been longer term short in late June and lost money on the overall index as of today)

I'd agree with you that there is more risk on the upside right now than the downside.  August has been a month of important tops with Sept/Oct being good for sharp declines. Maybe we will see it again this year.  After it finally tops, I think the next decline will be truly devastating - watch out below.

Other than that, I still think simply holding cash and cash equivalents is the most prudent thing to do with our "important" money right now. Nothing wrong with speculating with 5-10% of it, however.   Probability dictates that occasionally the speculation money will make more than the safe money - but usually not.

BTW, those cash for clunker videos broke my heart. What a waste of good machines -  what a crazy way to stimulate the economy...sigh.

T

I'm with Tom on this one.  I am a very short term trader (sometimes my trades will last 3 hours), but  *NEVER* overnight.

All it takes is some news, good or bad to completely reverse a trend, or to have a big overnight gap up or down.  Depending on which side of the position you're on (long or short), it could be good - but it could just as easily spell disaster.

Regards,

Steve

I am also with T on this.
We are still in a bear market rally. I believe a the US is headed for a double dip recession. The fed has lowered the the prime and fed funds rates to near or ZERO%. Inflation will hit hard and curb spending. 70% of the US GDP is based on consumer spending.
2 coditions have to be met:
stabilization in the housing market
stabilization in employment
Untill then, money market acoounts, and commodities are still the stable place to put money.
The market reacts first to any economic conditions, employment lags.
until employment is lowered to normal levels ( 5% or lower), and foreclosures lower, things are still pretty shakey, invest with caution!

I get nervous when we all agree..... ;D   Turning points are usually formed when the majority are one-way and wrong. Or maybe Steve, Mike and Karl are part of the smart minority.... 8)


Back in May at Hosstraders I remember someone axed me about the mkt. I said I was still bearish after this rally. I noticed several people I didn't know nodding in agreement. I was surprised so many people thought that way too and thought that maybe that was a sign the rally wud be bigger and surprise the majority - as usual.  And we were all wrong for a few more months.  Contrary opinion is a powerful indicator, but we need to be mavericks to make it work at the turning points. They say a true bull market climbs a wall of worry and a bear mkt slides down a slope of hope. I've been hearing more hope in the news and from people more than anything else, so maybe she's still a major bear.


I also hear many people say they are in it for the full ride - good or bad. Some losses are so big they have given up and are just hoping for a bailout. That's a bearish sign for lower prices later on.

Anyway, Steve - how is the short term option writing going? In hindsight, writing those fat put premiums since March would have been a gravy train, but took some very big BA's...  :-)    (as usual)

T

not being a high roller I must notice the market goes up every time you post gloom and doom.
 

Good! We have at least one bull that disagrees.  Then it must be time to buy tomorrow, Frank... :-)

Doom and gloom was very popular in March near the lows, whereas right now people want to hear more rosy stuff for a change. It swings back and forth with the market. 

BTW, look back at the older posts and you'll see Eric and I called the bottom a week before the final low in March. It was so lopsided bearish. Though, calling the top of this rally is fooling many.

Hi Tom,

I've been trading ETFs (SPY, in fact) exclusively for quite a while using some unusual indicators.  Always in and out in the same day, and never overnight.

Previously, I was doing a "double option" strategy, with a put and a call spread - in the market at the same time (a short put with a long put at a lower strike price for cover, and a short call with a long call at a higher strike price for cover).

This is a very reasonable strategy if there are not any large movements, which in this market has been just about all the time (placid). 

---

I know you know about this Tom, but for anyone not familiar with how this works - writing a short call or a short put (selling calls and puts) allows you (the writer/seller of the option) to keep the cost of the option as profit, as long as the option stays "out of the money" (does not reach the strike price of the option).  However, if you don't "cover" the options you sell, you are selling naked options - and everyone knows that is risky.

So, to avoid selling naked options, you also buy "covering" options (at a MUCH lower price than the options you sold), which limits your maximum exposure.

My particular implementation of this strategy is to DAY TRADE (or over a couple of days) the options, and capture the depreciation (options depreciate as their expiration date approaches) of both options.  Furthermore, since you have both a short put and a short call out there, as one goes up in value, the other goes down in value - and in a reasonably stable market, these just about wash.... so you are still getting the depreciation when you buy back both options (at a lower price than that which you sold them). 

Every morning, I would "buy back" my options, with the combined prices of the put and the call being lower than what I sold them for the day before.  The greatest depreciation takes place between the late afternoon and about mid to late morning the next day.   So, late in the afternoon, I would then sell options (usually at modified strike prices, since the market would have been likely to move), and buy them back the next morning, etc. etc. etc.

A twist on the strategy is to use market direction to further improve profitability.  Example: If the market is moving up, buy back the calls (which become more valuable as the underlying goes up - costing you more money as the market goes up), and leave the puts in the market (these decline in value as the underlying moves up), and then buy them back later in the day as they further declined in value.  If things are really moving up - leave the puts out there until the next day... and just sell some new calls.  What you do would depend on the particular conditions at the time, and it not an exact science.  You would do the opposite if the market is moving lower - buy back the puts, and leave the calls out there for a while longer.

The risk in this strategy is large market movement (particularly overnight movement).  If the market moves several precent overnight, the changes in the option values do not track (and therefore do not cancel each other out) - the option which is getting closer to being "in the money" (strike price), will move up in value faster than the option which is getting further from being in the money.  There is a rather complicated mathematical model for calculating option values, and the "Delta" (how much an option moves when the underlying security moves in price) changes as the options get closer to, or further from, being in the money.

---

Anyway, this was a profitable strategy for me, however it requires a lot of position monitoring, technical, and fundamental analysis to keep from stepping on any land mines.  I was also not able to successfully automate the strategy in any meaningful way, so it was a completely manual trading process.

One more thing:  I only traded options on SPY (spider trust ETF for the S & P 500).  These options have high liquidity (generally), and the spread between the bid and ask prices is often .01 (one cent), which is very good for options.  Other options have a .05 or GREATER spread, and you lose the spread, lowering your profits.

Yikes, what an old buzzard post  ;)  Hopefully, someone will find it interesting. 

Don't overlook options - they are excellent trading vehicles if handled properly.  For example, a synthetic long stock (a short put married to a long call) will cost you less than owning the actual underlying stock, but will give you the same dollar movement - so your return is higher per dollar invested - all assuming the stock moves up, which why you invested in the first place.  The risk is the same as owning the stock, but you've tied up less money (you may need to maintain margin to cover the risk in the event of the stock going to 0).  This strategy is often done with LEAPS (Long Term Equity Appreciation Securities), which depreciate very little over several months due to the fact that the expiration date is (often years) away.  Synthetics have their complexities, but I have used them for medium-term investing.

Nice post Steve!
It gave me a lot to think about, esp given the current market conditions.
Always enjoy reading Tom's wisdom.

As for me, I'm out of the market entirely, sold all my Ford stock yesterday, it was a fun ride up, but I agree that things have peaked, and this health care debate, more taxes, etc. is only going to drive the national mood lower. Folks are angry, you see it town meetings, on TV, in the blogosphere.

May be time to "Go John Galt." Frankly, at age 45, if I could cash out of my biz and other non-liquid assets, I would do so in a heartbeat, and go kick back on an island. I just don't see much of an upside in the next 10 years, maybe much longer. My state and the feds are broke, and they are soon going to coming looking for someone to pay the bills. Guess who they have in mind...

Time to sit back, squirrel your nuts, may take a closer look at Steve's strategy.

Good time to review the lessons in Atlas Shrugged.

Sold a lot of treasuries during the last low point.    Bought a bunch of stable defensive dividend paying stocks.   So far I am $$ ahead along with a great yield based on the stock prices when I got them.    Will try to hold them for a year at least to get low capital gains rate.     Then going to buy more TIPS to cover for the coming inflation.

Oh, another good options strategy is to buy deep in the money options (a $60 call option on a $100 security is deep in the money, and should cost you a little over $40).  These options have a delta of 1 (or very close to 1), meaning for every dollar the stock moves, the option moves a dollar (it is a multiplier).

The nice thing with this is - you are paying some fraction of the stock price.  So, for the same dollar movement, your option costs you considerably less than the underlying stock - and you get a much higher ROI.  Since you are long, there are no margin requirements or unusual risk.  The time value of deep in the money options is often a small (or even negligible) part of the option price - particularly in the near months.

Example:  The December 30th 2009 $70 CALL option for SPY ($101.20) costs $31.44.  The option gives you the right (but not the obligation) to buy SPY for $70.00 a share anytime you like, up to the expiration date.  So, you are paying the difference between the option strike price ($70), and the underlying stock price ($101.20), plus a few cents for "time value".  This option has a delta of .932 (the delta is how much the option changes in value when the underlying stock changes in value).

Let's say you buy 1 option contract (a contract is for 100 shares).  That will cost you $3144.  If you bought 100 shares of SPY, it would cost you $10,120.  Over the next few weeks, let's say SPY moves from 101.20 to 103.20 -  a movement of $2.00.

Our options will move  $1.864 per share ($2.00 X the delta of .932) - so for our contract for 100 shares, it moves $186.40.  Assuming we sell our options, we make $186.40 (minus commissions, etc.) or an approximate 6% return on our money.

If we had bought the actual stock, the return over the same period of time would have only been around 2% !!

Anyway, another strategy  8)

Well Bruce now that all the middle class factory jobs pay taxes in china and india guess who is next.

"  Well Bruce now that all the middle class factory jobs pay taxes in china and india guess who is next. "

 " Free-floating apex??"                 Dr. L Peter


de klc

Two data points:

The Treasury Secretary has asked for the debt ceiling to be raised.

The Fed is monetizing the debt.

You've got me there Frank, but I think you're going to suggest that the white collar positions are next in line?

Don't misunderstand, those "middle class factory jobs" are critical to the survival of our nation, both from a cultural and strategic standpoint. First, wealth is not created by consumption, or spending, but rather by making things. Problem is, the powers that be have allowed aforementioned jobs to migrate overseas or south of the border, to the great determent of the heartland of this nation. We need "middle class factory jobs" every bit as much as we need high tech positions. By allowing manufacturing to go overseas, or south of the border, has simply served to weaken our nation. Treasonous behavior for certain, but all too often celebrated in the name of efficiency.

<begin>

move piece parts manufacturing overseas

move assembly overseas

move engineering overseas

move middle management overseas

move corporate HQ to a tax friendly nation overseas

<done>

This is called freedom. To use the power of the government to prevent it would be treasonous.

<begin>

(due to entitlement and tax structure (eg. providing services and redistribution of wealth to those who haven't earned them))

create bloated governmental structure and tax to support same in addition to previous line

give the appearance of generosity, caring, and public service to justify previous line

achieve subject (er. citizen) dependency

move piece parts manufacturing out of California

move assembly out of California

move engineering out of California

move middle management out of California

move corporate HQ to a tax friendly state

<90% complete>

<loop - replace California - many states>

<60% (est) complete>

<loop - replace many states - USA : state - country>

<inproc>

disestablish manufacturing as a major portion of the economic base in USA

<inproc>

<branch depending on leadership, vision, and common sense>

destroy USA way of life and perhaps establish relatively weak agrarian society, possibly centralized in northern California, Oregon, and Hawaii

learn Chinese

apply Chavez/Ortega 2016 "Change We Will Let You Live With" presidential sticker on your market cart (were they actually born in the US?. . . .{future update} supreme court strikes down challenge 6:3 citing previous administration.)

provide the opportunity to agree with ruling administration as the example of bipartisan cooperation and democratic process in action

<else>

remove and replace all (yes even the idiots who claim to have not read laws that they voted for) sitting members of US government. (note this is not party specific) (I'm thinking this is 80% deserved and 20% collateral damage)

utilize locally occurring energy source (ref natural gas) for motor vehicles and electricity generation (ref "My CNG Expedition is cleaner and greener than your Prius" bumper sticker)

develop and utilize locally manufactured alternative sources of energy (wind, geothermal) made by US manufacturers (eg GE, Raser Technologies)

Achieve 25% of non vehicle electricity supply from wind (eg Denmark) and geothermal (eg Norway) in five years. (at 5% per year, not end loaded)

employ in decentralized grid development and construction

{Congressional response expected before R&R complete, Huh??? Can we tax it? How can we control it?}

employ in CNG acquisition and distribution

employ in energy R&D in oil, uranium, natural gas, coal (steel production)

employ in additional mining

employ in manufacture of CNG vehicles and retrofits (eg. Utah)

employ in building of CNG fueling facilities

employ in additional drilling for oil

employ in additional refining

employ in nuclear (or nuculer if you prefer) electricity production

export 90% oil (eg. Europe)

export 90% gas (eg. Iran)

replicate Canadian Amateur Radio power limit process and legislation

enjoy the prosperity and benefits of using what you have and having what others need

<begin again>

Somewhere along the way between else and begin again the stock market hit S&P 2000

I would think the role of government to protect the us which includes our way of life. Traitors in control .
Bruce i agree with you.

I wonder if this is OK to Say ??   ...

Seems to me that the largest interests get the laws written in their favor,  with little or NO consideration of the effects on the people.  It makes no difference what political party the legislator belongs to.  The corporate interests contribute most of the money for the campaigns,  and this provides special access.

I had thought that it might be possible for the populace to buy back our lawmakers by a concerted national campaign of $$ raising,  but someone pointed out to me,  that the large interests also provide employment opportunities for the retired lawmakers and their retired staff members,  and this is something that the citizens could not directly provide,  and after all,  the laws are written by those elected,  not the citizens.

This might seem political,  but,  I am not saying that either major party is better or worse,  both are the same.   The Supreme court has said that corporate contributions are free speech.

Personally,  I llike one person,  one vote.  Each lobbiest counting for ONE vote -- just a person llike all of the rest of us.  JMHO.   It is little wonder that the middle class has seem incomes stagnate.   Our manufacturing base has been mostly exported.   ... and so on ..
   Vic   K6IC   monitoring ...

The role of the government is to follow the Constitution. That's it and no more. Protect our way of life (whatever that might be) is not found in the Constitution.

Ah, no one wanted the jobs we exported overseas, anyway.
Except for those who weren't educated, bright or motivated enough to do anything else.

http://www.theonion.com/content/video/obama_promises_to_stop_americas (http://www.theonion.com/content/video/obama_promises_to_stop_americas)

I personally don't think Vics opinion is a problem, although a little off topic But a Good Opinion none the less. I always felt everyone's opinion laid out in good format is worthy of thought. I Like Steve an others do feel the same about the Gov, an I've always held the opinion that if your Business is Failing due to your own mismanagement OR very careful Heisting of the mechanism of your business which in turn causes collapse it should not be the responsibility of the citizens of this great country to bail you out I'm sorry what can and will happen is your business once again Nobody Ran To Pittsburgh When the Steel Mills Fell and the Union Pensions Collapsed here.....an that's my opinion...

I Like Steve's and JJ"s Analogies alot. :)

73
Jack.

I guess I mean this, on a purely philosophical level...NOT a  D or R political level.

In general, should American government support and even pay for the only sh!tty jobs that the dumb, uneducated or unmotivated can do? What is the alternative? There were alternatives for those folks in the past, not likely in the future. Would failure to do so de-stabilize society?

Granted, there is a difference...We export decent jobs like computer programming, but also jobs like assembling Vego-Matics or Bic lighters on an assembly line. Or dealing with credit card customers at a large bank.

This question has been bugging me for some time.

We should have exported these people. Problem solved.   :D

Back on topic.

The thing is Bill is Confidence...there's been alot of big moves made in this global market, it is global now and moving into those terms is hard an I'm not just talking about the markets, All the big three are doing Very well in their overseas investments, BUT in America we have a Problem...Imagine that...

It's going to take Pure Entrepreneurship build better confidence in our markets by continuing the things that Steve an JJ an few others myself too at one time till my little interruption in life here that invest try to build our portfolio's up to sum usefulness for our latter years...

An it's going to be a rough road to hoe because now it's in our hands to do...no more somebody thinking for you even though in some areas it looks like Socialism is creeping it's crummy face in the mix...Please keep it out of the markets....I feel Now that the Representatives that speak for us has taken on the Business Mix they have no choice BUT to see it through and my feelings are through the Fall is going to be a good period.  :)

73
Jack.

OK Steve how about this.
You would think the blood sucking  beltway morons would be interested in maintaining their tax revenue by making sure the tax payers had an income to tax.
closed loop system is more stable
 

I wouldn't think that at all. Most aren't that smart. Most never ran a business. Most are far too short sighted to see any long term consequences.

Not that smart. HMMM let's see. The best health care our money can buy for life. Best retire early plan. Best free travel plan.

Yea, you're right, smart in a criminal way, not smart in a business way.

I just read an interesting article on how to eliminate the debate over health care reform. Just have all members of the government welfare system take part in the new deal.

Ya, Frank. That has been floated by several of our representatives and only Obama has stated he would do so. The question is, do you believe it? I find our representatives have developed the attitude that they rule us rather than represent us and act accordingly. There are a number of mechanisms that would curtail this tendency but all would have to be approved by those who would be affected so that isn't going to happen. This is an area where I think we strongly agree. . . .

However, considering that the reality of job loss and consumer spending is being revealed it makes sense that this is a bear market rally and not a new bull. Yes, bulls climb a wall of worry but bears slip down a slope of hope and optimism.. .usually unfounded. I see no fundamental change that should power our economy to a new high. We need conceptual change and innovation for that and that means risk must be rewarded not taxed into oblivion. Take advantage while you can but cover your assets. . .

-ap

Yup Art, our two fine examples in the Senate from Ct. Sr. Useless and Jr. more useless. I really thought the people of this state would have booted more useless the last election.