Lack of Follow Through

The market definitely erred on the side of caution yesterday. It held up above VWAP all day long which statistically points to a rally late in the day, however I held the belief that we would not rally simply due to the factors I already described which are month end and risk to the downside. The rally yesterday I feel skewed the risks even more to the downside because I feel like we will need a decent beat for GDP to have this rally continue and get over 1000.

We are again in a scenario like we were at 950 where we are overbought and close to resistance. We are admittedly a little ways away from the all important 1000 level. This is a psychological level which means it is a technical level because if it is paid attention to it becomes a self fulfilling prophecy like I have said before. If GDP comes in light or worse than expected we could see a decent reversal of this rally. Although I don't think that will happen I am decently prepared for it.

Yesterday almost at the exact high of the day on the S&P I decided to get into SDS calls as a hedge going into the GDP number. I ended up buying back my short IYR calls because it ran significantly yesterday close to my strike and was eating up a significant amount of capital in margin. This proved to be a great move as the sell off I expected into the close materialized and my SDS calls are nicely profitable.

Corn recovered and finally broke out of it's downtrend of the past 3 months. This should signal a run to 350. It should encounter resistance there but if it gets above that we could see a fast back to 400. If the S&P does happen to get above 1000, there is not much resistance until 1100 so the party may continue. However, we are currently at extreme readings in the bullish percent on the NYSE and on the nasdaq. The $BPNDX is at new extreme highs where we have historically seen a reversal and the NYSE is close to extremes as well. Interestingly the bullish percent on energy is at fairly low levels, which means they could see some significant movement if things continues to the upside. Lastly, the Baltic Dry index still couldn't get above it's 50 day MA yesterday so the flag continues.

DRYS reported earnings last night and beat estimates by a couple cents. Their outlook was actually decently positive saying they were seeing improvement and signs of a recovery. The stock was up after hours and I am hoping that will help my DSX position and the Baltic Dry to break out of it's flag. If I were extremely lucky DSX will hold up well even if GDP does not beat expectations or we have a sell off. Overall I should be decently positioned going into this number either way. I may look to change my bias depending on how things shape up.

With this sleep schedule I am on I may as well be a money manager haha.:-)

Total Return for 2009: 147%

GDP Holds the Key

I can't really tell right now if the lack of conviction selling is a positive or if this is simply just propping up the market so we can sell it off hard when GDP comes out regardless of results. I have come to realize over the years that in the absence of real news to push stocks, the illusion of performance can be predictable. This is obviously based on the psychology of traders and money managers since ultimately they move the market and the market trades on psychology. Take this week for example, going into month end the market is moved by those people getting in and out of stocks ahead of the time when their performance is measured. By deducing what we know about people, that they are greedy and fearful, we can determine probabilities for short term movement. This is by no means a hard and fast rule but so far things have acted fairly predictably up until this point.

We had a large run, those people who are somewhat reasonable will want to sell their positions and lock in their monthly gains if they just caught a 10% move in the S&P or more, they can afford to sell stocks down 2% while locking it in. After that selling pressure is relieved, the people who missed out on the rally for the most part want to jump into the stocks that went up so it looks like they were holding them the whole time. This creates a snap back or at least a temporary floor in prices. It is essentially the reverse if we have a large decline.

Keeping the typical money manager in mind and their quest for absolute return you then speculate as to what reactions may be for up coming events. This can help give you an edge(or at least a perceived edge). Overall, most people likely want stocks to go up because it is much easier when they do and everyone looks better for it and makes more money. We are somewhat in a pickle because we have run up quite a bit into this number so you wonder what is priced in for expectations. However, if we were to somehow get a positive GDP number I think we could see the rally continue because this will be a reason to buy stocks and it also coincides with the 31st of July so any added gains would be a bonus, adding pressure to the upside as shorts cover and longs pile in so they don't miss the rally.

The consensus on intrade is that we have a 75% probability of a positive GDP number. I was unaware of that statistic until today but makes me want to be long biased if people smarter than myself think there is a 75% chance of it coming in higher than estimates. Obviously I still have to manage risk properly but I am now skewed long.

Today was fairly boring, although I was fairly pissed off because my entire loss was due to my /ZC position until it reversed late in the day. Small losses, small gains and large gains are fine, it is the large losses we want to avoid which I didn't do last week so overall I consider it positive when I end up flat or higher after I get into new positions.

I am trying a long term trade on a stock and we will see how long I can be patient. I essentially took a synthetic stock position in DSX for March 2010 expiration. This is purely a play on the idea that we will have some what of a recovery going into next year and if not, as long as things essentially stay the same I will collect a nice premium in the mean time. The beauty is that even if it does nothing I will make 10%. I of course still have my exit chosen in case a recovery does not happen. I also decided to get into CHK on the pull back to near support. My concern is these stocks have all run up significantly recently but if the rally keeps going, so will they. Not to mention it held up nicely even as UNG was selling off.

I sold some front month puts on ACH as it pulled back to a pontential support level. I also decided to sell some front month calls on IYR as a hedge to the downside. One of the reasons I hate selling is it just uses up so much capital for margin and you have limited upside but I felt like this hedge was decent because it should be on a relative weakness candidate and even if it does go up the volatility should contract in my favor. In retrospect I could have sold less calls and bought long puts as my hedge but we'll see what happens.

Friday could very well determine the next couple months and 50 points in the S&P. Since I am net long I'd prefer a rally on better than expected numbers but I am willing to be flexible. Expectations on jobless claims seems fairly low so I doubt it is a factor tomorrow but could be a catalyst for selling if it is unexpectedly bad.

Total Return for 2009: 138%

CFA Level 1: PASS

Got my level 1 CFA results yesterday morning, I assumed the worst in that I thought I did pretty well but likely still fell just short but I passed! Probably one of the greatest feelings and best accomplishments I have had to date. It feels great to be done with that hurdle and move on to Level 2. I was actually surprised at how well I did I got above 70% on 7 out of 10 sections of the test and almost for sure got above 70% overall. I think this may be the first time that the minimum passing score was at least 70% or maybe a 69% after looking at some scores that were a band 10 fail(top 10% of failures). Even with the MPS much higher than 2008(likely closer to 65%) there was a fairly large jump in the passing rate from 35% to 46%. Either way, I passed and know that I know the material(and hopefully potential employers do too now) and get to study for level 2 now! :-)

In terms of the market I have recovered some over the past two days. Things have played out pretty much as expected so I have taken that opportunity to recoup some losses. ISRG had a pull back and I decided to cut it loose after I gained back half my loss. This was a great move at the time as it made a new high again yesterday but we will see what happens going forward. I was noticing on the monday down day that the financials were diverging and staying up when the market was down so I sold my SKF position fairly quickly thinking that if the market strengthened financials could take off. I took the opportunity to lighten my SPY puts as well. On Tuesday I closed more of my put position on the SPY and now have just a normal position size on. Each day it has still been that I have higher gains earlier in the day and the market rebounds into the close so essentially being disciplined and selling into weakness has been the difference of making back money and not.

I am now short the S&P 500 via Sept puts in case we do test 955 as we technically should before resuming the rally. To hedge this I still have my December Corn futures contract which continues to annoy me. It is sitting around this 33o level after breaking its downtrend it will likely consolidate here before moving up.

I am now just waiting and looking to get into some more positions when they are at lower risk entries. Futures are down slightly right now, Asia sold off decently with Shanghai pulling back 5%. S&P futures hit a low of 964 but have since rebounded. This could be seen as a bullish divergence however I partially feel like it is a head fake and we end up selling off. Materials will likely be under pressure all day but they have run a lot in such a short period of time it would be crazy not to expect some pullback.

I find it humorous, and it likely goes unnoticed, but since my interview where I was talking markets and I was asked what stocks I personally liked I said I liked materials and metals(for inflation and real demand eventually) and specifically FCX and ACH. Since that day which was June 13th FCX has moved 25% and ACH has moved 38%. I obviously wish I had been in on those moves, I was waiting a little too long to see if we broke down. I feel partially vindicated, even though that is short term outperformance I expect it to continue for years.

We could see a struggle today as a sell-off may be the logical choice but we have buying for month end window dressing as people get into the names they have missed so far and that helps put a floor under prices and prevents a larger decline. If materials take a hit today due to the Asian pullback it could offer some decent entry points. Oil is also pulling back which should cause natural gas to sell off as well. I am hoping CHK comes down and I can get into it close to 20. I'll be watching coal names as well, ANR at 30 is a good entry point. I will likely choose some longer dated options and possibly some synthetic stock positions. One thing is for sure though is I will definitely be hedging any longs with more S&P puts or individual weak stocks but I need to find some.

On a side note, one pairs trade that I think could work out well in the future is Long AAPL and short RIMM. Both do perform together however when Apple finally has the Iphone on multiple carriers I think RIMM will be much more hard pressed to sell Blackberries, same with PALM. The other trade could be long AAPL and short T as they will no longer get guaranteed revenues from people wanting the Iphone.

Things are looking up again, I just need to manage risk as always and trade the way I know how and I should hopefully resume my forward progress.

Total Return for 2009: 137%

Follow-Up Failure

I stand corrected; today was my worst day of the year. The past 4 days in a row it has been the same thing, either my largest gains happen early in the day or my lowest losses and then things get continually worse. I figured I had at least weathered the worst of the storm yesterday, nope. Today the market really wasn't up, but guess what was, ISRG. Corn futures essentially reversed back down to their 330 breakout level which of course added to my losses. The added problem with no movement in either direction was the drop in volatility further hurting my option positions.

I am expecting the sell off to come at some point early next week as we go into month end and companies take their profits. It is likely we only have a day pull back as we get the profit taking then people hop back into positions for window dressing. I'll look to lighten or completely exit my positions into weakness. Ultimately I think we test 950-955 again but I am not sure if I have the patience given that everytime this week I have allowed my positions to work they hurt me. Even this morning I had a nice profit and figured I would let the market work but then we rally. If we get a pullback to 960 in the short term I'll exit.

This has been an extremely demoralizing week all around. I have lost all forward progress and reverted back to my worst levels since April. Obviously my return is still good overall but this drawdown is unacceptable and to think I could have avoided it by selling out at the morning on Thursday kills me. With losses comes smaller position sizes going forward so progress will likely be slower back up unless we miraculously got a gap down on Monday of a decent size. The even better thing is of course the fact that after the close the SPY was almost another half percent higher(note sarcasm). I will HOPE that this was hedging of short positions. Rallies don't last forever but they can last longer than I can take the loss so we will see. I assume a decent amount of people are in my position making me even more concerned that it won't happen.

Just a note about the return figures, they have taken a huge hit this week. Overall return is down a lot, my account is not down nearly that much since the total return is based off my initial starting balance. If I get the pullback I want on Monday I may just sit out for a bit and wait for better entries and take a step back for a while. Obviously the important thing is living to trade another day, which I am but it is as much(if not more) a mental battle as it is a capital battle.

Total Return for 2009: 123%

The End of the Bear Market

Unfortunately I didn't post this in the morning when I emailed it out to some people otherwise I would look like a genius calling it before such a large rally(not that it helped me any, see previous post). ;-) Anyways, this is a graph of the 20 week and 40 week moving averages on the S&P 500. If you go back over the past century, when these cross it signals a change in market cycles. There have only been a few false signals but when the 20 crosses below the 40 it signals the start of a bear market, and when the 20 crosses back above the 40 it signals a new bull market cycle. As we can see we have the 20 crossing back over the 40 finally a few days ago. I assume a lot of others see this as well and is one of the reasons we have rallied so much recently.

Regardless of your own personal viewpoint this is a bullish signal and points to higher stock prices so dips should be bought from here on out. My personal viewpoint is that we are still in a very weak economy that isn't improving much however we have had better than expected earnings even if a lot of it has simply been due to cost controls. Again the market trades on psychology and looks forward so even with the current reality we may see the S&P hit 1,050 or whatever target GS has on it because people are willing to pay up for stocks until we reach that point. This means I may as well go along for the ride managing risk and buying dips as necessary until I am told otherwise by the market that sentiment has changed. I am looking to ride the market down until the re-test of 955 then will get long biased again.

Remember that regardless of what any pundit says or what I think or say the market will show the way and it is showing that it wants to go higher at the moment. I will look to get in after we work off this extreme overbought condition and likely get long mostly commodities and energy and metals.

Total Return for 2009: 145%

Terrible Day

I got hit with a double whammy today. Didn't get the job I wanted and had my worst losing day of the year all at once. Oh well, I have to keep moving forward. I am fairly frustrated because I had to get out of my short AMZN strangle because I would have received a margin call at some point. So even though I wanted to hold over earnings and thought it would reverse(my top short strike was 100) I had to exit and what happens after earnings? Stock tanks. AMZN was one of the main losses today which now cannot be made up by that drop I likely would have recouped all the previous days losses plus some more with the decrease in IV. Oh well, had to manage risk and at the time who knows it could have kept ripping higher, though likely not to 100 since that is essentially an all time high(also a reason I chose it as my short strike).

ISRG is another pain. The stock apparently had great earnings and gapped up HUGE. At around the 208 level I figured it had probably run it's course and people would start to take profits and I could ride it back down to test the gap at 200. I entered towards the end of the day and apparently people were still short and covering or just really like the stock cause it kept going up finishing at 215. My time line is to have it test it this month but i'd rather start out with a gain instead of a loss. There was another reason for my large loss today.

All my short positions got creamed today and I am sure I wasn't alone as the shorts scrambled to cover and kept the rally going, it was essentially straight up all day long. This was the rally into the extremes I originally wanted to have happen at 950 but obviously did not. I will likely get smacked for it and normally don't do this but I averaged up my SPY puts. I am holding September paper so I have some time and my target is the retest of 955. My only saving grace today was my Q calls and my corn futures position.

Going into tomorrow I am still short and will look to cut other positions into weakness as I see fit, with MSFT and AMZN disappointing and after having such a huge rally I can't imagine we don't have some profit taking into the weekend but obviously I have been wrong before. These are the draw downs I try to avoid but this was the perfect storm and I got pummeled.

Total Return 2009: 145%

Can't Nobody Hold Me Down

Once again the market gapped down in my favor and then rallied back up to my chagrin and loss of paper profits. I am trying to be patient and let my positions work but this has happened two days in a row. The market is acting bullish and normally I would welcome it but I guess I find it annoying due to my net short position. I also find it annoying because we got some less than good news from some of the major financials today. WFC had great results on the surface however their write downs were fairly large and they predicted hard times in the next couple quarters. MS had nearly triple the loss expected and the stock gapped down but finished even on the day. This happened essentially across the board. There were some positives with US Bank beating estimates and fairly limited write downs which helped the stock rally. This is a time that is separating good banks from bad and it definitely still appears like US Bank is one to have in the portfolio long term.

I was looking like a genius at the open, SKF was up, SPY was down and the Q's were flat to up, everything in my favor. Financials reversed as did the S&P, the Q's continued up so the hedge was fairly useful but didn't make up for the overall change. It was very odd, at the end of the day the SKF finished flat yet my options lost .20, as did the SPY but the options gained .20.

The quiet rockstars were actually my short strangle positions in AAPL and AMZN. Despite gapping up $5 my AAPL position made money from the volatility contraction just as I predicted. Same with AMZN, they don't report until tomorrow after the close but volatility already started to contract putting more money in my pocket. I do have to say that one could likely make a decent monthly income with option selling strategies, but it will never match the risk reward potential of a long option. I will defintely use selling strategies to enhance my gains when appropriate in times like this.

The complete surprise today was my corn futures position. At the end of regular trading I had a loss, then I saw someone tweet about corn and took a look and I suddenly had a nice gain as something caused it to shoot up 3%. I obviously hope this continues and will be curious to see why it moved like that. I was obviously looking for movement to the upside but that was a swift move. Since I am holding a December contract I am debating if I should take a time trade and just hold it until December and see what happens. I could actively trade it and commissions are not too bad but I am curious what my profit will be come December if any.

ADM confirmed it's inverse head and shoulders pattern today so I may look to get long on a re-test of 29 just to make sure it isn't a fake out but the pattern looks very nice. Overall, with the broad market I can't argue that things are acting bullish and the more we test the 955 level it will eventually break so I will be quick to cut my short positions if that happens. We have another slew of earnings on deck for tomorrow so we'll see what happens futures are up decently at the moment. I feel ok about my overall positions but am feeling a bit more exposed since I highly doubt my strangles will help me out as much in the future as they did today. I may need to add a select long position. Overall I just want a pull back to 930 to exit and get long biased again but as I have been taught many times in this game it has nothing to do with what I want.

Total Return for 2009: 163%

Late Day Giveaway

Yesterday was playing out extremely well for a majority of the day which of course meant it would not continue. I had tweeted that I was wary of a reversal in the afternoon, treasuries were looking fairly toppy and starting to reverse. Generally as bond prices come back down it will confirm a rally in equities. In this case it wasn't much of a help in that regard but we rallied anyways. I still had a decent day gaining back a few percent but I was up much more earlier. I had made a few moves before the rally in anticipation of something and to better balance myself since I was fairly short.

I exited my IYR position because I was already short biased and that position was pushing my limits. My thoughts were that if we got some bad bank news about commercial real estate it would collapse back down but I was holding too much that way and it would hurt worse if it went against me. I also sold my MFE position yesterday to give myself a little more cushion for my other positions.

AAPL reported huged earnings, again. Very nice results and a trend that is likely to continue for quite a while, I would be buying pullbacks for the long term for sure. I sold a strangle into earnings and the day of the release it was up a decent amount but we'll see how it is with the gap higher. I basically gave it a range from 130-175 to finish between, that would have both strikes expire worthless. I sold a strangle on AMZN again giving myself a wide range from 100-70, which is also profitable.

To balance my shorts I went long QQQQ calls as tech has been relative strength and continues to impress. I also went long some December corn futures as another long exposure play. With corn trading near 320 which is basically right at a 5 year support level I figured risk was easy to manage and we could see a move off this level. I would hope a lot of people are hedging their businesses if they have it as an input because to have this be back at a 5 year low when we have 5 more years of population growth and will have inflation at some point seems like a bargain, but time will tell.

Financials reported today with somewhat mixed results. US Bank beat expectations and had fairly limited write downs which is great news for them. :-) Wellsfargo beat expectations but had quite a bit of write downs and said they expected them to increase which I think is finally showing some of the reality that is out there and one of the additional reasons I was net short. MS reported a much greater loss than expected. I guess it is hard when you don't have the inside info like GS does to trade on. In all seriousness though I think the MS results have to be somewhat of a surprise and the financial results in general have to take some of the rosy view off the rally and make you wonder how much of the previous good results were due to the government assistance.

So as of now I am essentially short the SPY and long the Q's as my hedge and so far it appears to be shaping up decently before the open. This could be the roll over from 950 I was looking for but I definitely don't want to keep giving back gains on rallies so I'll watch things closely.

Total Return for 2009: 155%

Net Short

With nearly an 8% run over the past week and most indicators pointing to overbought conditions I feel that there is more risk to the downside than the upside at this point. The McClellan Oscillator is near extreme overbought levels and fairly far away from it's mean.

I am fairly short, possibly too short but I feel like there are very few times you have the market up against technical resistance at 950 along with an overbought condition. This should further reduce the upside risk potential however I do fear that we may get one last hoorah move that could shake the weak shorts and send them scrambling for cover. I am not necessarily bearish on the market, it just is the lower risk play and that is the smart trade to take.

IYR is a big annoyance as it continues to move up for no apparent reason. I do have more time on those options but it is pushing my patience and loss limit to the max. I noticed that IBM is very far away from any averages or reference point and thought it could be a good mean reversion play in the short term. Long term I like the stock but the point is to trade isn't it? ;-) Could be a good trade down to at least 110. I would have taken it but I was already into my other short positions and didn't want to take more risk on to the bearish side. I of course got short right into the face of a GS upgrade of the S&P index. They raised their outlook to 1,060, which is definitely possible if we break out but hopefully it is a contrarian indicator for the time being. Just like oil if we have a break out it could be a self fulfilling prophecy to 1,060.

I took my profits on USO today as it was close to my target of 35.00. Of course as I expected it traded up to 35 premarket when I can do nothing and then sold back down to 34.60 at the open. Overall, it seems to have been a decent move because oil is currently trading down but we wll see what happens over the next couple days. The dollar was fairly weak today as the Euro broke out of its recent range. Interesting to note was the divergence in the treasury market. 10-year treasury prices moved up with equities which is the opposite of what you would expect. This could be a possible bearish divergence for stocks as people are anticipating a pullback and get into safer assets.

I bought puts on the SPY looking for at least a 2% correction to the 930 level, ideally the 915 level. Financials have run pretty far fairly fast as well so you could see some profit taking over the next couple days weighing down the market. USB reports before the open Wednesday and I am rooting for them for personal reasons. :-)

We'll see how tomorrow shapes up, we could have a run at new highs as shorts get squeezed. AAPL reports after the bell, I actual sold a strangle into earnings, however in hindsight it may have been an essentially worthless move because implied volatility is the lowest I have seen in a while. However on the bright side I chose a fairly broad range so if it finishes within that range I collect the premium on both sides which has about an 80% chance of happening. It may have been smarter to sell a strangle on AMZN since it is cheaper and IV is higher, I still may do it.

IYR was the main reason for the losses today, I get annoyed that the SPY options trade for 15 mins after the close because it can amplify your gains or losses prematurely. In this case it added an additional percent to the losses.

I will also be releasing my latest article tomorrow for The Davian Letter at www.davianletter.com about option selection.

Total Return for 2009: 152%

Good Friday

The week left off on a very good note both financially and personally. Financially I recouped yesterday's losses plus some more.

Trading wise it was fairly boring as expiration went out pretty quietly with stocks getting pinned and held early to their appropriate strikes that will make the market makers the most money. I followed my plan to buy back my short AA options into weakness which worked out very well. I actually ended up with a small profit and was able to buy them back near the lows of the day. After I closed that position I was pretty much content to just sit and watch things unfold. USO moved up, the IYR moved down, MFE was flat. My PALM and POT positions were far enough away from their strikes that my short options did not move in value. In the end, all of my remaining short options expired worthless which has a double benefit because I will get to collect the remaining premium and don't have to pay commissions to buy them back. By tomorrow the rest of the profit should be reflected in my account so I just added it onto todays gains for my return calculation.

Going into next week I'll be curious to see how the market acts. Both Bank of America and Citigroup reported better than expected results. Citigroup came in with a large profit when a large loss was expected so I wondered what kind of accounting standards they were using...turns out all their gains came from their sale of Smith Barney, not actual business activities. CIT is apparently in talks for financing from GS and JPM, oddly coming the day after the government said they would not help and the bond prices collapsed further. I understand it is a business but it seems kind of shady depending on how things happen. It would have been extremely easy(and highly illegal) for GS and JPM to buy bonds and sell CDS's or just gone long equity knowing full well they were going to help. Theoretically there should be a firewall in place to prevent this type of thing and maybe they just waited so they would be able to get higher rates of return on their financing but it makes you wonder about some of those business practices, no wonder their profits are so large! One of my friends said "you knew you should have gone long CIT!" I had that inkling too, however I said I'd rather deal with companies that don't have the possibility of going bankrupt because there is no reason to take on that excessive risk.

All conspiracy theory and unethical behavior aside we are at a precarious point in the market I feel like. This MAY be the point where the market is starting to look towards a recovery by the end of the year or early next year and so far the cost controls and expense cutting of companies definitely improved profitability and outlooks. As we know upside earnings surprises are the main driver of stock price appreciation as analysts re-value their models and people are willing to pay higher multiples during times of expansion. I read a research report from Goldman on commodities that essentially reflected my own sentiments. They actually had specific trades using futures that they recommended putting on which got me wondering how I would perform if I decided to put them on myself. I will use equities and options to carry out my own view. One stock of note I just looked at yesterday is ADM which has a massive inverse head and shoulders pattern. If I see it then so does everyone else making the self fulfilling prophecy possibly more profitable once it confirms. I would actually like to see some pull back and I will look to get into it.

I still struggle with the divergence of my opinion of the economic fundamentals and what is happening in stocks. The economy may be getting less bad but isn't really improving much, unemployment is still getting worse, financial companies are setting aside more loan loss provisions and if people have no jobs how will they consume and if GDP is 70% consumption...I could go on for a while. This is countered with recent price action and the apparent known "fact" that stocks bottom and head higher much before unemployment rates improve. The S&P 500 also gets cheaper on a valuation basis as earnings outlooks get revised upwards.

I have to assume we pull back at some point here soon because we have moved 7% in a week essentially and the McClellan Oscillator is nearing overbought territory. If we happened to have a gap higher on monday I feel like it would be a good opportunity to short into. If we work off this overbought condition and get above 950 on the S&P it points to more upside. Going off of technicals theoretically a test of around 910 should now be bought so that could help put a floor under stock prices. If FCX pulls back to the 50 level I will be a buyer and I am contemplating a longer term strategy with a synthetic stock position going long a call and short a put because ultimately I feel the direction is up.

Total Return for 2009: 156%

BMC vs. S&P 500: Update

I decided I would update my graph of my total return vs. the S&P 500 today, so here it is. Since I last posted it I am up an additional 25%, however I am now 20% off my highs for the year. We can see it is also no longer a steady uptrend and there have been a couple sharp pull backs, however some of that is a function of not having all the data to smooth it out. Overall I am glad I am higher but I am frustrated that I seem to be stalled from making significant advancement so I'll need to determine why that is. My time in market has not been nearly as good because I essentially made my big move during the rally from March to May and have now been churning around only making another 20%. Obviously keeping things in perspective 20% is a great return for a year by pretty much all standards so to do it in two more months is fine but makes me long for a more consistent trend.

I do have to say that we tried to pull back a little but couldn't do it today and ultimately headed higher and ended near the highs again. The usual things happened again, none of my positions worked. This seems to be a more common occurrence the week of expiration. MFE acted like it had a 1.00 delta with the amount of volatility it lost in addition to the stock being down. AA continued higher again. I sit now with a small loss which is of course irritating because I had a very nice profit three days ago. I'll look to close it out into some weakness tomorrow. My three other short positions however will expire worthless so I guess that is technically a 75% success rate and the profits will easily make up for the loss on Alcoa.

GOOG and IBM reported after the bell, both beating expectations. IBM killed expectations and raised guidance again supporting the idea that this rally could possibly be warranted. IBM could be a good stock to get into on a pull back. The financials struggled today even after JPM beat expectations as well so that was an interesting divergence, but possibly expected after things have run up over 10% in the past week. I am actually surprised GOOG did not do a bit better because of the fact that I would assume more people are staying at home and increasing computer time, not to mention the higher adoption rate of smart phones which all should add to their revenues.

Materials continued their move up and I continue to flagellate myself for exiting my UYM. Interesting was seeing the movement in UNG. Oil was mediocre but UNG moved up 7% after forming a decent bottom over the past week. This could signal the time to buy natural gas equities and get back into CHK and similar companies. The idea behind this is the fact that if these stocks can move up while UNG is hitting new lows then if UNG actually starts to get a bid they should outperform.

Overall it was a disappointing day today as we were flat I was holding up decently but things fell apart as we trended higher and things were disconnected in my account. I look forward to next week when I will have nearly all my capital freed up after expiration and I can look to get into new positions.

Total Return for 2009: 149%

Can We Continue?

After a huge 3% rally across the board today we find ourselves finishing right at resistance near the 930 level. The question becomes is this as far as we go or will we keep going? As usual the market will show us what it wants to do and it may show us by the end of the week with JPM results coming as well as GOOG. In addition to these earnings we have an added uncertainty of option expiration on friday. With options expiration it is not unusual to get some decent volatility as the market makers attempt to milk as much as possible out of their positions. One of the interesting things to note today is that with a 3% move the $VIX should have collapsed, however it was actually UP on the day. This is a peculiar divergence and could point to some pull back or could indicate some hedging of new long positions.

Apparently it was pretty foolish to get out of my UYM positions. Obviously at the time it didn't seem foolish but it has since ripped higher without me. I am long term bullish on metals and commodities but it seemed like we were going to face short term head winds(and still might). China GDP tomorrow could also lend a bid to these stocks tomorrow if it comes in better than expected. AA ripped higher to my dismay today finishing above 10 dollars and making my short calls ITM. I still have a profit but it was significantly reduced today as it shot up 6%. I think there is a fair amount of open interest at the 10 strike so hopefully that will help the stock gravitate to that level for expiration and assist my position. If it moves up much more I will have to exit the position.

Overall luckily my longs outpaced my shorts and I had a gain although it was less than the index which is always annoying. AA is the main reason I didn't have a better day and my UYM hedge is no longer on. USO had a great move as the buying in equities cause some short covering and possibly new long positions in oil. This is exactly the move I was looking for, I will look to take profits near the 35 level. MFE broke out today above the 42.50 level I had previously talked about on good volume. Hopefully this move can continue as the strength in tech continues. My concern is that tech is becoming increasingly overbought so it may be hard to sustain the rally. I think the logical and reasonable short term target on MFE is now 45.00. It is entirely possible it will eventually make it to $50 however I'll look to get back in on a pullback.

We may face some resistanace at the 930 level but if the earnings and guidance keep coming in better than expected the party will continue. IYR has finished right at 32.50 which is my line in the sand. If it continues to strengthen I will have to cut that position and look to re-enter at a later time. For now I am sitting on my hands and waiting to see how the week finishes out. Once we get into next week after expiration I will see how things are looking.

Total Return for 2009: 153%

Things Are Looking Up

We seem to be two for two on significant companies beating earnings by a wide margin as the main part of earnings season kicks off. With GS posting 4.93 and record revenue, and INTC posting .17 cents and raising Q3 guidance, that is the type of thing that will send this market higher. The question now becomes is this the exception or the norm?

We finished right at the 905 level which in my opinion is still a possible head fake, however after Intel's results we saw S&P futures jump 10 points to 911 which should translate to a 915 cash market open if we hold overnight. That type of action definitely points to higher prices in the short term. If the financials can keep surprising to the upside this could very well take us back to 950 and beyond.

The more traditional bank results will likely hold the key. When I say more traditional I mean companies that are true bank holding companies like US Bank, Wellsfargo, not hedge funds in disguise like Goldman and Morgan. If the other major financial players can earn money without the help of proprietary algorithm program trading that essentially guarantees money to companies like GS, then I think this rally could continue.

My view on the fundamentals will not change, I still think unemployment will go higher and likely top out close to the 11% level (at least the way they measure it). This will definitely weigh on consumer spending and further depress housing prices. Once we get into a less favorable housing season I think it could get decently worse and commercial real estate may start to deteriorate further. The funny thing is that GS reported a fairly high write down related to commercial real estate yet the IYR was up today.

So if I am still not that optimistic on the economy how can I think we go up from here? Well for one the technicals are in favor of a move higher. The break back above 900 will be seen as bullish by traders and we get that self fulfilling prophecy. The other thing is that if companies report better than expected earnings, even if those expectations are low, the market psychology will likely once again want to buy stocks. There is somewhat a disconnect between some businesses and the actual real economy. The job losses we are seeing are coming from the very companies who are reporting. While it is definitely unfortunate for the workers who are laid off, this does reduce expenses making the companies operate in a more efficient(aka less expensive) manner.

So in the short term the pain in the real economy could help support corporate earnings surprises which are statistically responsible for a majority of stock price appreciation. Even though I do think poor economic fundamentals will eventually catch up to most companies, I am not opposed to the possibility of a near term rally. Sadly, only profits seem to matter and if that is what the market is looking for then we could be setting up for a decent move higher. I am not willing to take too many positions just yet though. I will likely do nothing for the rest of this week unless I need to cut losses, and then if things still seem good going into next week I may take on some new risk in good looking stocks.

Oil continues to frustrate but it looks like the make or break point could come with tomorrow inventories. In the recent past, it seems to be that if we sell off ahead of inventories we get a rally on their release and vice versa. So the recent price action could be setting up for a rally especially on bullish numbers but of course you never know. USO is obviously a fairly inferior trading vehicle as it hasn't even properly tracked oil this year which is why I do not plan to hold it for very long.

One of the definite lessons from this market is that you don't necessarily have to agree with what is happening but as long as you manage risk properly you may as well go along for the ride. Market psychology is emotion based which allows for the exploitation of inefficiencies for possibly better than average risk adjusted returns.

We'll see what unfolds in the days to come. I would actually be curious to go back and see if the majority of first week of earnings releases beat expectations, then do we generally rally regardless of the remaining releases?

Total Return for 2009: 151%

Placing Bets Ahead of GS

So apparently, after I had posted my entry this morning, I found out that Meredith Whitney had made call to buy Goldman Sachs ahead of earnings and put a fairly lofty price target on the stock. This is likely partially to blame for the move in futures pre-market as she made the call on CNBC's "squawk box". I obviously missed this as I generally try to avoid watching CNBC anymore unless it is on mute. ;-)

We have now re-tested the 900 level on the S&P a little quicker than I had previously thought. I thought we could have some run up today then a test tomorrow if GS had a good report. Now we seemed to be poised to break back to the upside if things seem positive. I assume the market is smart enough to realize this but GS and the rest of the financial landscape are not the same. Hence my call of possibly choosing relative strength and weakness candidates in the financial sector for a pairs trade.

I am definitely not a conspiracy theorist, however both times I have exited my short option positions that were ITM, they have reversed and subsequently would have become OTM and likely will finish worthless. This is fine with me as I have to properly manage risk and cutting the loss was the right thing to do but either way it is curious and frustrating.

I made a couple moves today, however it may have been a little premature. I exited my calls on UYM because they had a decent move and I did not want to be overly long over the remainder of the week through earnings season so I took my small profit. Also I am already long USO calls which should have at least some positive correlation to materials, although oddly did not today. Oil has held up twice now at the $60 dollar level which was my original reason for going long to try and capture a move back to $65. Ideally we will get some bullish inventory numbers this week as gas prices came back down and created a draw. My remaining calls are on MFE which has recently hit a new all-time high. If it can get above 42.50 it should run for a bit. Hitting an all-time high in this market is the perfect example of a relative strength candidate.

To offset my call positions I got into some IYR puts as I had been waiting on a rally to get a better entry point. My entry was likely still a bit premature, I would have preferred 32.50 but did not want to be completely exposed to the downside and I still feel like it could see some decent movement down.

It will be very interesting to see how the market acts tomorrow after Goldman's earnings. It has yet to be seen if GS is simply the exception to the rule or a precursor to the next move up that is assisted by the financials. I am contemplating getting into some more defensive positions for the short term such as WMT or a health care play to see how earnings play out. From a technical standpoint if we have a decent close above 900 we are headed higher. However I really don't see how the fundamentals support that. I guess the point is not necessarily to agree with what is happening but just to accept what the market psychology is at the moment, no matter how irrational it is, it can still be profitable as long as risk is managed.

Total Return for 2009: 150%

Moment of Truth

This week we see a kick off of earnings season in a more significant way. Larger financial firms will be reporting such as Goldman Sachs which will most likely beat estimates as they always do with their unmatched ability to dominate trading activity. Financials will likely set the tone for the remainder of the summer in my opinion. If outlooks remain bleak and there is talk of a lot more write downs as has been speculated, then we could be headed back towards the 800 level in short order and possibly lower.

It will be interesting to see how realistic they are on their future projections since back in 2008 even the companies themselves didn't see it coming so it is humorous to think they will do any better this time. For better or worse we have a tendency to be optimistic so that is likely what we will hear. It could be a good time to start pairs trades on financials, possibly going long those who raise guidance(if they will) and short those that don't. The usual players seem to be considered "safe" GS, MS, JPM on top of their trading revenues they seemed to participate in the largest amount of underwriting and normal M&A activity(the small amount that occurred).

These fundamentals will likely determine the technicals because we have so far held the neckline of the head and shoulders pattern on the S&P but it has so far tested it a couple times. The more the line is the tested the more buying gets exhausted and we likely breakdown(which likely coincides with poor earnings releases).

Last week finished up decently for me. This week will be significant as my short options will expire this week. This month has definitely been one where I have been short options more than I have been long(or been both at the same time). I have cut positions that were questionable or ITM going into this week so I should have limited exposure there, it will just depend on how volatile the market wants to be this week. All of my short strikes are decently far away and would require some significant short term moves to become ITM but you never know what will happen, especially with earnings. The downside of having the short positions is that it requires a lot more capital to be held in reserve so that is an opportunity cost taking away other long positions. I am trying to make that steady grind back to my old high returns as the market figures out it's direction. If things go extremely well all my short positions will expire worthless and hopefully longs gain some ground as well or at least stay flat.

Futures just recently took off so we'll see what happens today. Hopefully good things, especially with my interview :-)

Total Return for 2009: 147%

Attempting To Recover

My lack of posting recently has been due to a lack of decent internet access and action until today. I had bought some MSFT puts last week and closed them before the weekend and took my 50% profit in case we had a bounce and to avoid time decay. The odd thing that happened was that I literally did not get filled until the closing bell which made me say "well I bet we go down on monday because they wanted them back." So far monday and tuesday we have continued to break down.

Many stocks are confirming Head and Shoulder or Double Top patterns. Materials are definitely struggling and facing some headwinds however many of their individual stocks are right at their neckline support and have yet to break. Until they break down obviously the long attempt is the way to go if you want to take the risk. I am taking the risk thinking we could get a little bounce before we really break down. Because a majority of the material sector has not broken yet, I decided to get some exposure via the UYM. This position will likely be made or broken by the results Alcoa reports and the reaction the stock has. I have hedged the UYM position with a short OTM call position on AA. Since AA is a significant portion of the UYM if we get positive news out of AA I should see a decent pop in the etf and benefit from the volatility decay because right now IV is 109% and the next month is 75%. If we assume a collapse down to at least 75% that is nearly a .35 cushion against an unexpected upside surprise.

We shall see what happens, if we break down I should benefit from my short option positions. If we have a bounce back rally I should benefit from my long option positions so I would consider myself decently hedged.

Total Return for 2009: 140%