"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Wednesday, March 19, 2014

Blog Moved to a2mcapital.com

Dear Visitor,

after many years of blogging as a private investor, I'm moving posting activity to http://www.a2mcapital.com, the website of my new investment advisory firm A2M Capital, LLC. Becoming an advisor was the next step in my financial career. Unfortunately, due to regulations, I will be more limited in what I post. However, I hope that the information will be helpful to new and seasoned investors.

Thursday, February 20, 2014

The Recent Sector Rotation in US Stocks

US stocks have been trending higher, but there has been a lot going on under the hood recently: sectors, which were leading in 2013 have been lagging since the beginning of this year. The most prominent one is Consumer Discretionary because this sector had been leading the market for years. The others are Financials and Industrials. Leadership has been taken over by Technology and Basic Materials. It'll be telling to see if they can dominate in case the broader market consolidates.

Strong Basic Materials, Technology, weak Financials, Consumer Discretionary and Industrials

Friday, February 14, 2014

Sentiment: Why Prices can Move Even Higher in the Short Term

Investors are not overly bullish yet, even after the recent rally in US stocks. The equity put/call ratio is still recording at relatively high levels, which is good news for the bulls: high values represent an excess of fear in the market, which is important fuel for higher prices.

The Dip & Run Market

Mr. Market did it again: over the last year or so, indices have demonstrated a very interesting behavior, which I call "dip & run". The market sells off; actually "dips" five percent only to reverse and rally to new highs without looking back. These runs last between three and four weeks and motivated buyers can't get back in since there are no tradeable pullbacks.

Obviously, market participants have been learning: the February rally has been extremely intense, so bulls (machines?) have been buying like crazy after the reversal on Feb 5. Traditional technical analysis tells us to wait for a pullback. Maybe this pattern has become too obvious and lost its effectiveness.

The Dip&Run Market: hard to trade due to absence of pullbacks after reversal.

Thursday, January 30, 2014

MRVL: Example of a Double Dip Consolidation (CDD) Pattern

MRVL is setting up a nice Double Dip Consolidation ("CDD") pattern from my playbook: essentially the stock is trending up on good relative strength and I buy after a second leg down. This leg should be weaker than the first one and also show relative strength during the consolidation process. This pattern had a 68% win rate for me last year and is one of my favorites.

As for the actual entry trigger, I'm looking at intraday action. I will go long either on a breakout above $15 or a successful test of support around $14.60. The later one would offer a tighter stop with better risk/reward, but we'll see what we get. Feel free to piggyback. :-)

MRVL daily chart: CDD pattern setting up nicely

MRVL intraday chart: buying at support or on breakout

Tuesday, January 28, 2014

Fear Spike Suggesting Short-term Bounce

VIX spikes have had bullish implications in the last years when the S&P 500 traded above its 200 DMA. When the indicator rose by more than 20% within three days, chance of higher prices five days later was over 76% in the last five years.

If we apply even stronger conditions and ask for a 40% VIX rise within three day (similar to what we saw on Friday), there wouldn't even be a need for a 200 DMA price filter. The S&P 500 closed higher eight out of nine times after five days during the last seven years, a period which even includes the Financial Crisis.

The findings are the reason why I went long UPRO yesterday to benefit from this short-term edge.

20% VIX Rise in Three Days

40% VIX Rise in Three Days

Sunday, January 26, 2014

2% Decline in US Stocks - Now What?

Last Monday, I discussed how 1% declines have rather been a buying than a selling opportunity recently. Since the S&P 500 moved more than 2% south last Friday, should we buy this market now?

The 1% "rule" had worked fine last year, but it won't work forever. Too simple, too obvious. Frank Zorrilla highlighted that "14% corrections are part of the game", so let's say we recently got a little bit spoiled. I cannot predict if we are entering a major correction right now. It is a possibility, so I play defense. Various observations favor further declines: the Equity Put/Call ratio has been recording at relatively low levels, indicating excessive optimism. Stock participation, as measured by the number of new 52 week highs, has been declining for months. Every major market top in the last 30 years has been accompanied by a weaker stock participation rate. Sectors, which have been leading the rally, started to underperform with the beginning of 2014. Take US Retailers (ETF XRT, chart below) as an example. Key leading stocks, such as railroad company CSX, have broken their uptrends and are in massive distribution mode. Not just since Friday.
So it has been cooking "under the hood" for a while. That's the reason, why I added positions on the short side in the last weeks. Currently, I hold COST, XONE and VSI and I would love to expand this.

But coming back to the title of this post: now what? After two days of declines, the market is in the middle of nowhere and it does not make sense to start new shorts. Better wait for a (hopefully) weak rally and then sell into strength. More weakness next week could offer a compelling entry for a quick long trade to play a snapback from oversold conditions. Probability of short-term higher prices after three days of declines is higher than 50%. That's what traders do - play the percentages.

Monday, January 20, 2014

XONE - a Great Short Setup

Man, I love this chart. Upfront disclosure: I'm shorting this wannabe 3D prining company. I'm not the only one: over 40% of float is held short. Of course you can come up with a story for XONE, but I'm interested in price action. Let's discuss what happened:

XONE went public about a year ago and stock price immediately tripled. In July, the stock went parabolic, which is usually the end of a move. Since then, the $70 level attracted sellers: whenever the stock tried to move beyond that valuation, price was quickly rejected.. After an initial 50% sell-off in September, bears lost interest or simply covered their shorts. However, relative strength (lower pane) couldn't compete with the action during last summer. Last week, price tested $70 again and the level was again quickly rejected (point A on the chart below) . I went short the morning after reversal. Should this post-summer run-up fail, price could easily decline to the 30s.

Recent 1% Pullbacks - Buying Opportunities

It's not a secret that this is a strong market. Proof point: recent SPX 1% pullbacks. If one bought at the close of such a day, the position would have been in the green after three days. Obviously, every minor pullback gets bought. Monday last week triggered the last "buy signal":

Sunday, December 29, 2013

Current Covestor Portfolio Positions

I have never done this before and I'm not sure what my compliance consultant will say when I become a registered advisor in January. I might have to take these things down, so enjoy while they are here:

this is a snapshot of my current trading positions in the Covestor model portfolio with entry/partial exit points. I guess this gives you a good idea how I trade: