So we had the quarter and month come to a close today. March was a record rally for stocks since the bottom of 666 on March 9th. I was in all cash until during the day yesterday I started to take some positions again. I still have my 77% gain for the year, gave back a few percent today(I had gotten to 79%). I am upset and cautious at the same time because none of my positions performed today even when the market was at it's peak up 2.5%. I suspected a sell off into the close but only took one put position to protect myself and should have gotten into another as planned as it would have limited my loss quite a bit more.
We are at an interesting point right now, we rallied to 810 but failed to hold 800 on the way back down so it appears to be a rejection of that level. I am always trying to think about what big money is going to do, was the sell off a locking in of profits that will set us up for buying tomorrow for a good first day of the month? Will they buy going into the mark to market meeting or sell and buy on the result? I have to weigh all these things.
The concern about my positions is warranted because they previously were relative strength candidates and are now weak, but how much of that was positioning for the end of the quarter? If we don't get any kind of positive results or signs of stabilization from earnings I think we will see a retracement to 750 for sure if not more. Buying the dip worked again in a few names I ended up passing on. I guess it worked out the last time I passed, and with the uncertainty it's likely better to take less risk than more to any one direction.
On a side but related note, I read the book Ugly Americans, which was very interesting about an ivy league guy who goes over to Asia to trade futures and the type of world it is. Anyways, he basically makes his entire fortune in a single trading day arbitraging stocks that are being added and removed from the Hang Seng.
This is essentially what good hedge funds do on a regular basis, buy good company stocks and short bad ones so they are always "hedged" hence the term. This is also what I generally will try to do buying relative strength and shorting relative weakness. I am trying to determine what some good pairs trades will be, one I have thought of could be long AAPL and short AMZN, the thinking being that apple will come out with a kindle competitor and steal market share and any amount built into the stock for strong kindle sales could come out while apple could go up. On the flip side though is that Amazon sells apple products so it would benefit from the revenue making it less appealing as a pairs trade, but this is just how I'm trying to think.
If natural gas can get any type of bid at all I think CHK will finally confirm a triple bottom and be a very good trade but it is still at the bottom range of its downtrend.
Overall, I am very happy although it was annoying to lose money today it is part of the process. I'm cautious going forward trying to preserve my gains but still take on new risk when it is good.
Tuesday, March 31, 2009
Friday, March 27, 2009
Seller's Remorse
I took my last position off in the XHB today and am sitting in all cash. My plan is to wait for a solid pull back in stocks as I think they are getting ahead of themselves and we are fairly overbought. Had I held onto everything through today I would have made a few more percentage points. Had I bought back after selling when I had thought about it yesterday I would have likely made at least another 10-15%. However, in trading you can't think in "could haves" otherwise you'll go crazy. My only regret is that I didn't trust my instinct and so far my timing has been very accurate.
For now though I am OK leaving a few percent on the table, given the fact that in essentially a month I have had what some people would like in a few years. On top of that I have not done it with a lot of risk(seriously it's true), I have been patient and waited for entry points and managed risk and let winners run as needed. I have used the charts as well as some logic and macroeconomic viewpoints to pick out some very good relative strength candidates.
At this point in time I think the upside is limited in the short run, likely the S&P 850 is the upside maximum unless we work off this oversold condition first before resuming. The one thing I want to be weary of and not do is become paralyzed by performance numbers. I don't want to be too scared to take on new risk in fear of losing the ability to say "I have X% return this year". I think that partially happened with my decision to not get back in after selling. The reality is I could take 5 new trades and lose on all of them and still give back only 10%, but as this example shows you need to take risk to gain reward and those positions could keep running until S&P 850 and beyond. The truth is you don't know, you just have to manage your risk properly.
Sitting on a nice percent gain is literally like sitting on a position that is already profitable. It helps emotions a great deal, at least my emotions anyways. In my mind I feel like I have the luxury to sit around and wait because this month was so good there is no reason to rush out and take on risk just for the sake of being in the market because that will likely produce bad trades. Patience has worked so far, so why change now? We are in an uptrend in the short run so as that continues I will continue to buy on pullbacks and scale out into strength until the trend changes. I have my spots chosen as to where I'd like to get into positions so I'll wait for things to come to me, and if those don't work there will be plenty of other opportunities that present themselves.
I am curious to see how the month end plays out. Futures are down about .5% right now, will profits be taken at some point or will we see window dressing all the way into next week that may in fact coincide with us getting to the 850 level? Our subsequent rallies have gotten smaller and smaller lately, we had a hard time getting above 820, and only got to 832. This could be a sign of a good bull trend starting as moves get smaller and more predictable but the VIX has yet to break below 40 meaning there is still expectation of volatility ahead. We shall see, if I take on any more risk I think it will be minimal and more delta neutral. Earnings season will likely be when we find out if this is a short term top or if it has fundamental legs...
For now though I am OK leaving a few percent on the table, given the fact that in essentially a month I have had what some people would like in a few years. On top of that I have not done it with a lot of risk(seriously it's true), I have been patient and waited for entry points and managed risk and let winners run as needed. I have used the charts as well as some logic and macroeconomic viewpoints to pick out some very good relative strength candidates.
At this point in time I think the upside is limited in the short run, likely the S&P 850 is the upside maximum unless we work off this oversold condition first before resuming. The one thing I want to be weary of and not do is become paralyzed by performance numbers. I don't want to be too scared to take on new risk in fear of losing the ability to say "I have X% return this year". I think that partially happened with my decision to not get back in after selling. The reality is I could take 5 new trades and lose on all of them and still give back only 10%, but as this example shows you need to take risk to gain reward and those positions could keep running until S&P 850 and beyond. The truth is you don't know, you just have to manage your risk properly.
Sitting on a nice percent gain is literally like sitting on a position that is already profitable. It helps emotions a great deal, at least my emotions anyways. In my mind I feel like I have the luxury to sit around and wait because this month was so good there is no reason to rush out and take on risk just for the sake of being in the market because that will likely produce bad trades. Patience has worked so far, so why change now? We are in an uptrend in the short run so as that continues I will continue to buy on pullbacks and scale out into strength until the trend changes. I have my spots chosen as to where I'd like to get into positions so I'll wait for things to come to me, and if those don't work there will be plenty of other opportunities that present themselves.
I am curious to see how the month end plays out. Futures are down about .5% right now, will profits be taken at some point or will we see window dressing all the way into next week that may in fact coincide with us getting to the 850 level? Our subsequent rallies have gotten smaller and smaller lately, we had a hard time getting above 820, and only got to 832. This could be a sign of a good bull trend starting as moves get smaller and more predictable but the VIX has yet to break below 40 meaning there is still expectation of volatility ahead. We shall see, if I take on any more risk I think it will be minimal and more delta neutral. Earnings season will likely be when we find out if this is a short term top or if it has fundamental legs...
Wednesday, March 25, 2009
Two-A-Days
Two posts in a single day? Probably a first ever. I just felt compelled to weigh in on the trading day. I took nearly all profits today close to the high of the day because many of the stocks seemed to be behaving toppy and having a hard time exceeding previous highs. My plan was to buy again on a pull back to 790, which ended up happening today but I was gun shy in pulling the trigger thinking "will buying the dip work again?" It did work and now I am kicking myself. In reality, I could have approached my profit taking a little differently and scaled out as usual to still remain somewhat long but I thought it would be irresponsible to not take some profits. I have one position open and am standing on a 77% profit for 2009.
I think the entire action today was simply positioning ahead of the GDP and jobless numbers tomorrow. My expectation is that the numbers are better than expected, I am taking the patient approach now and will wait for the market to confirm the continuation of the trend, if we break above 825 we will go to 850 in short order. Had we broken above it today I feel that the better GDP numbers would have been built in and it would be a sell the news, with the pull back mid day today I feel like there is still upside and the market will want to get to 850. I am aware of the developing oversold condition so if the above happens I will likely shift to a more short bias.
If the other side happens and things are worse than I think or it still is a sell the news scenario I obviously feel good about being patient and taking some profits. Overall, taking profits still netted me money except on one position. If things want to continue higher it's likely I'll roll into different options to help lock in profits and look for good setups.
I think the entire action today was simply positioning ahead of the GDP and jobless numbers tomorrow. My expectation is that the numbers are better than expected, I am taking the patient approach now and will wait for the market to confirm the continuation of the trend, if we break above 825 we will go to 850 in short order. Had we broken above it today I feel that the better GDP numbers would have been built in and it would be a sell the news, with the pull back mid day today I feel like there is still upside and the market will want to get to 850. I am aware of the developing oversold condition so if the above happens I will likely shift to a more short bias.
If the other side happens and things are worse than I think or it still is a sell the news scenario I obviously feel good about being patient and taking some profits. Overall, taking profits still netted me money except on one position. If things want to continue higher it's likely I'll roll into different options to help lock in profits and look for good setups.
March Madness
While people are experiencing March Madness for the NCAA, the market has also been going crazy. We have finally started to see some consistent movement to the upside and some of it has come in very large movements. Nearly a 7% move on monday as the treasury announced it would purchase bad assets from banks.
My risk management and long bias has served well in this environment and the market is acting like it wants to move higher as well, if it holds the 800 level I think we will reach 850 in a short time. I currently have a 67% gain on the year, which monetarily isn't huge since my account got fairly depleted last year but my trading and discipline has done very well this year, letting winners run and taking profits at targets and cutting losses. The key now is to again maintain and try and keep producing positive returns consistently, this type of performance is likely not very sustainable but even if I can do 5% gains a month for the rest of the year I'll double my account.
I would like to see a solid test and hold of 800 then a resumption of the trend upward and I will look to take more risk to the long side. If we start to see improving economic conditions not to mention better than expected earnings we could see this rally continue for a while. Is it a bear rally? Technically yes until it exceeds the previous relative highs of 1650, it doesn't matter to me, you have to ride them while you can. Increased patience is probably one of the other big factors to the recent success, waiting for the good entry points. We'll see what happens going forward but if I remain smart and disciplined and patient I should actually have to owe money to the government at the end of the year, who would have thought that was good? ;-)
My risk management and long bias has served well in this environment and the market is acting like it wants to move higher as well, if it holds the 800 level I think we will reach 850 in a short time. I currently have a 67% gain on the year, which monetarily isn't huge since my account got fairly depleted last year but my trading and discipline has done very well this year, letting winners run and taking profits at targets and cutting losses. The key now is to again maintain and try and keep producing positive returns consistently, this type of performance is likely not very sustainable but even if I can do 5% gains a month for the rest of the year I'll double my account.
I would like to see a solid test and hold of 800 then a resumption of the trend upward and I will look to take more risk to the long side. If we start to see improving economic conditions not to mention better than expected earnings we could see this rally continue for a while. Is it a bear rally? Technically yes until it exceeds the previous relative highs of 1650, it doesn't matter to me, you have to ride them while you can. Increased patience is probably one of the other big factors to the recent success, waiting for the good entry points. We'll see what happens going forward but if I remain smart and disciplined and patient I should actually have to owe money to the government at the end of the year, who would have thought that was good? ;-)
Wednesday, March 11, 2009
March Maintenance
My bullish bias has played out well this week so far. I have had some positions in relative outperformers such as FCX and AMZN. On monday at almost the exact low I sold puts against the FAS( 3x bull financial etf), this was simply good timing but also a good trade from a logic standpoint. Financials were severly oversold, the FAS was trading at $2.50, and I was able to get .60 a contract for a march 2.50 put that is right at the money. Volatility was insane at 340%(not too insane since it is 3x) so I have the likely hood of volatility decay on my side as well as time decay AND the fact that I literally have limited downside at this point. I sold 20 contracts so my risk to reward 3:1, generally the opposite of what you want but in a naked selling scenario you generally have much larger risk. The other appealing thing, and the only real time you should sell naked puts is when you are comfortable owning the stock and having it put to you. I would have been fine having the stock put to me, I would have a cost basis of $1.90 at a likely low and significantly oversold market level. All of these things put the probability of immediate or future success in my favor.
I have tried to lighten my bullish positions and have scaled out of FCX with a target price of $37 in the short term to unload my remaining 2 contracts. I have found that scaling out is a very helpful method to control emotions and let winners run. It allows me to lock in profit and not have as large of account swings to the downside when stocks pull back. Depending on the price action I will wait for a pullback and look to get back in to FCX as I think it's longer term target is likely $45 in the next few months. My target on AMZN in 75 now that it has finally broken out of its 60-65 range, however I am holding shorter dated options so if it has much trouble getting above 70 I may get out and roll into a longer dated option on a pullback.
I took a new position in CHK today, as I think natural gas should be close to a short term bottom and if we start to see an uptick in prices I think CHK could see a significant move upwards. It broke above resistance at 15 so hopefully that will continue. Oil got creamed today after a bearish inventory report but if it can stabilize and start to move up again that should help the energy sector and my position.
Tomorrow is the hearing about mark to market accounting. My guess is that nothing actually happens, or if something does happen the reaction is muted given we have had such a run up into it. Most financials are still in longer term downtrends at resistance after these large moves up. Either way I am not very concerned with my FAS position, it is highly unlikely the stocks re-trace their entire amount in 7 trading days but it is of course possible since they moved up this much in only 3. Like I said I am fine taking delivery if it comes to that. I would almost prefer a pull back so I can get into some of the stronger names, I will likely look at MS if it pulls back.
Even though everytime I say this I immediately get smacked by the market gods but I currently now have a nice positive return for the year after the most recent move, now it is a matter of maintaining it with risk management and patience to wait for the good entry points.
I have tried to lighten my bullish positions and have scaled out of FCX with a target price of $37 in the short term to unload my remaining 2 contracts. I have found that scaling out is a very helpful method to control emotions and let winners run. It allows me to lock in profit and not have as large of account swings to the downside when stocks pull back. Depending on the price action I will wait for a pullback and look to get back in to FCX as I think it's longer term target is likely $45 in the next few months. My target on AMZN in 75 now that it has finally broken out of its 60-65 range, however I am holding shorter dated options so if it has much trouble getting above 70 I may get out and roll into a longer dated option on a pullback.
I took a new position in CHK today, as I think natural gas should be close to a short term bottom and if we start to see an uptick in prices I think CHK could see a significant move upwards. It broke above resistance at 15 so hopefully that will continue. Oil got creamed today after a bearish inventory report but if it can stabilize and start to move up again that should help the energy sector and my position.
Tomorrow is the hearing about mark to market accounting. My guess is that nothing actually happens, or if something does happen the reaction is muted given we have had such a run up into it. Most financials are still in longer term downtrends at resistance after these large moves up. Either way I am not very concerned with my FAS position, it is highly unlikely the stocks re-trace their entire amount in 7 trading days but it is of course possible since they moved up this much in only 3. Like I said I am fine taking delivery if it comes to that. I would almost prefer a pull back so I can get into some of the stronger names, I will likely look at MS if it pulls back.
Even though everytime I say this I immediately get smacked by the market gods but I currently now have a nice positive return for the year after the most recent move, now it is a matter of maintaining it with risk management and patience to wait for the good entry points.
Sunday, March 8, 2009
Will It Ever Stop Going Down?
I was asked in an interview whether I was bullish or bearish on the market(best question ever in an interview). I generally like to just say ( or think) I am risk managed. I had made the statement that I don't necessarily think that the S&P was going to go to 600 or lower, however I don't believe anything is out of the question so you must continue to manage risk appropriately. I said people think that this time will be different than before and I said that seemed to be a stupid assumption, this time could actually be worse given all that is happening so if X happened because of Y before, why would you assume Z would happen( if Z is better than X) given the same input.
Do I think the bottom is in? We won't know that til it happens but I think it is much closer. There doesn't seem to be the same panic there was back in october and november which is good but still hasn't stopped the grind lower. We are about 55% off the highs, if we see another 10% downside I would be very comfortable committing long term capital to the market. The reason being that the average bear market has gone down about 50%, I would say this scenario is worse so a 65% decline would not be out of the question. Do I still think there is less downside risk than upside potential? Of course, but the thing that must be considered is time. There is unlimited upside (theoretically) and in my opinion probably a maximum of 20% more downside. We have to determine whether this is acceptable risk for our required return. If our time horizon is one year and we think MAYBE there is 20% upside over the next year is it a good trade if the risk to reward is 1:1? No. If you assume in 10 years we'll be back at the highs, is a 55% return good for 20% downside? maybe. Being young I have the advantage of time, I like to focus on more shorter term trading but for longer term investments in other portfolios I think it would be smart to put a portion to work. Generally I disagree with averaging in but there are some potentially "attractive" buying opportunities people are simply too scared to jump in, if you retire in a few years that is good to be scared but if you retire in 20 you are an idiot.
I myself am still beating the market but am down 4% to the markets 24% YTD, obviously I'd prefer a positive return. Right now there looks to be some positive things happening in the market. Commodities and commodity stocks seem to have bottomed, they are higher than the panic lows of october and november. Gold is not above 1000, and we are much lower than in october and november. Copper is moving higher which is a great global economic demand indicator. It could reverse but so far it has bottomed and I think a break about 1.71 would signal further upside in materials, crude oil is holding up as well.
As crude holds up, the energy sector is severly oversold which generally points to a short term and potentially long term recovery. Bullish percent figures are in the single digits. Same goes for financials. There is the hearing about changing mark to market accounting, if that happens and they pass a measure to alter it this could spark a rally that signals the bottom in the market. The idea is balance sheets would virtually improve overnight. I think the upside potential warrants taking some risk and I will be doing so on monday. That obviously doesn't solve all the economic problems it merely masks them to an extent however I think the ensuing rally would be hard to re-trace again without a lot more negative news. Plus there is so much bad news already built in to these stocks the downside is limited if it doesn't pass.
Another place I am looking is China, it seems to be holding up much better than the US, as evidenced by the FXI, we are at new lows and the FXI is significantly off of its lows and this relative strength could continue.
In the short term I am bullish given the significant oversold level of the market shown by the McClellan Oscillator and the bottoming formations in some leading indicators like commodities and long term treasuries. We'll see what happens, either way have to manage risk and diversify.
Do I think the bottom is in? We won't know that til it happens but I think it is much closer. There doesn't seem to be the same panic there was back in october and november which is good but still hasn't stopped the grind lower. We are about 55% off the highs, if we see another 10% downside I would be very comfortable committing long term capital to the market. The reason being that the average bear market has gone down about 50%, I would say this scenario is worse so a 65% decline would not be out of the question. Do I still think there is less downside risk than upside potential? Of course, but the thing that must be considered is time. There is unlimited upside (theoretically) and in my opinion probably a maximum of 20% more downside. We have to determine whether this is acceptable risk for our required return. If our time horizon is one year and we think MAYBE there is 20% upside over the next year is it a good trade if the risk to reward is 1:1? No. If you assume in 10 years we'll be back at the highs, is a 55% return good for 20% downside? maybe. Being young I have the advantage of time, I like to focus on more shorter term trading but for longer term investments in other portfolios I think it would be smart to put a portion to work. Generally I disagree with averaging in but there are some potentially "attractive" buying opportunities people are simply too scared to jump in, if you retire in a few years that is good to be scared but if you retire in 20 you are an idiot.
I myself am still beating the market but am down 4% to the markets 24% YTD, obviously I'd prefer a positive return. Right now there looks to be some positive things happening in the market. Commodities and commodity stocks seem to have bottomed, they are higher than the panic lows of october and november. Gold is not above 1000, and we are much lower than in october and november. Copper is moving higher which is a great global economic demand indicator. It could reverse but so far it has bottomed and I think a break about 1.71 would signal further upside in materials, crude oil is holding up as well.
As crude holds up, the energy sector is severly oversold which generally points to a short term and potentially long term recovery. Bullish percent figures are in the single digits. Same goes for financials. There is the hearing about changing mark to market accounting, if that happens and they pass a measure to alter it this could spark a rally that signals the bottom in the market. The idea is balance sheets would virtually improve overnight. I think the upside potential warrants taking some risk and I will be doing so on monday. That obviously doesn't solve all the economic problems it merely masks them to an extent however I think the ensuing rally would be hard to re-trace again without a lot more negative news. Plus there is so much bad news already built in to these stocks the downside is limited if it doesn't pass.
Another place I am looking is China, it seems to be holding up much better than the US, as evidenced by the FXI, we are at new lows and the FXI is significantly off of its lows and this relative strength could continue.
In the short term I am bullish given the significant oversold level of the market shown by the McClellan Oscillator and the bottoming formations in some leading indicators like commodities and long term treasuries. We'll see what happens, either way have to manage risk and diversify.
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