"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

Saturday, May 31, 2008

I'm Gettin' Kind' a Bullish...

... for a simple reason: the bond market keeps putting upward pressure on equities. Yields are raising significantly. Check the positive correlation with the S&P: investors start seeking risk again and move money into stocks.

In addition, I put put on some nice swing trades this morning: LONG MON and JEC. Very clean charts of my favorite agriculture and infrastructure play:

Thursday, May 29, 2008

The Credit Crunch: a Good Old Buddy Returns

The title of my March 18 blog post was "The Credit Crunch is over (for now)". Two months ago, I couldn't believe that with a simple FED intervention all problems get resolved.

Right now, the price of oil seems to dominate the headlines, the credit crunch topic is slowly making a comeback, though. Brokers and financials have seriously underperformed during the last month:

A column this morning in the Wall Street Journal is titled "Buckle in for Longer Crunch Ride". Glad they finally figured that out.

Let's see if this topic will gain more traction in the public media the coming weeks. Anyways, I'm SHORT LEH and C.

BTW: the dude on the photo is of course my German fellow Dirk Nowitzki.

Wednesday, May 28, 2008

Not much going on. Really?

Looks like a quite day today. Indices pretty much unchanged. Some decent action, though when we look under the hood: Oil seems to return to its uptrend after bouncing of the resistance at 126. I went LONG USO with a target of oil at 140 and stop at 126 bucks. Let's play that momentum, baby.

Got stopped out of my MOS SHORT trade. I did a mistake here anyways (betting against the long term uptrend.)

Financials very weak today. I added to my LEH SHORT position. Target: $30.

Some nice momentum swing trades show up: opened LONG positions of MA (Target 330, Stop 270), AOB (Target 13, Stop 11) .

Sunday, May 25, 2008

Latest trades: AAPL, ENS, STP, LEH, ITB,X

I want to shift the focus of this blog a little bit and comment on my latest trades more regularly. Fewer charts, more quick rationale. So here we go:

General market comment
its time for some upside action after basically four down days. So I started to close some of my shorts and opened some long positions.

Opened LONG position on Friday. Nice bounce on positive analyst note despite falling market. Buy the rumor, sell the fact: the fact might be the 3G IPhone release in June.

Retraced 15% from peak after blowout earnings. Impressive volume after ENS reached retracement level.

Shorting this solar play! Sold off after great earnings, but unimpressive outlook. If certain solar plays can't shine with oil @ 130, when else?

Went short beginning of last week. Started to scale out and close position to lock in profits. Financials still screwed up, though.

Started to scale out of short position after a lot of negative news last week. Six down days in a row cries for technical reaction. Nevertheless, I still don't like homebuilders. On the other hand, speculation about some more government action to bail out homeowners might start soon.

Playing the bull market in steel after reaction. Down on high volume though! Be careful with this one.

Wednesday, May 21, 2008

This is how I do my Sector Analysis

An important part of my trading preparation routine is sector analysis. Since I'm a very "visual" guy, I need very intuitive charts plot what's going on in the market. Since I'm using stockcharts.com for all my charting, I can create exactly the plot I need.

Here is how it works: I'm charting a sector index in front of the S&P500 with some short term moving average. The red line is the 20 day EMA of the S&P, the blue one is the sector. Analyzing convergences/divergences of both lines gives me a good feeling, what's going on in the market.
Maybe you could design some sort of trading system based on these convergences ("buy the sector if the moving averages start to converge"). I might look into that when I have some time.

My favorite example of this approach are the homebuilders:

Look, how the home construction index started to outperform beginning of January (blue and red line moving closer together). But beginning of April, the market kept rising without the homebuilders, in fact, they stayed flat. What we saw here, was probably just a phase of short-covering. Eventually, with the beginning of May, the blue line started to going south again. If the S&P would follow, we can clearly see, what will pulls down the market.

So if the market kept rising, what pulled him up in April/May? Materials, Energy and Transportation:

Sectors, I'm currently watching:

Regional Banks
Home Construction
Basic Materials
Clean Energy (!)

Clean Energy is an interesting one: with oil rising since some quarters, you would expect the clean energy sector to rise as well. But it just recently seem to "catch fire".

Friday, May 2, 2008

Case Study: Reading Psychological Market Cycles

2008 market action so far offers an interesting lesson in mass psychology. In fact, I found a great chart, which perfectly describes the psychological market cycles. The job of the speculator is to identify these cycles and trade accordingly.

We can identify different phases on the S&P 500 chart:

July/August 2007: Anxiety (not plotted on chart)
The market starts to recognize that there might be a problem with subprime after being euphoric as a result of continued private equity buyouts in the first half of 2007.

January 2008: Panic
"We have no clue how big the problems really are". Resulting in buyout of Countrywide Financial.

March 2008: Depression (with a hint of panic)
"The world financial system will collapse. Let's just get out or stocks."

April 2008: Hope
"Maybe the credit crunch is over. The FED is bailing out the banks."

Now: Relief
"Thank goodness, we're not in a recession and the banks survive".

The relief phase is the reason why e.g. financials are so strong these days and leading the market up. Remember: bank earnings aren't terrific, fundamentals are not good. Citigroup for example keeps rising on news that they will raise more capital. The market takes this as a positive (diluting share holder value should be negative!).

So: how do you find out, in which phase of the cycle the market actually is? By analyzing, how the market reacts on news. The beauty of this approach is: you cannot predict future events, nobody can. But you can predict, how the market is likely to react on these events based on the underlying market mood.

That being said, let's stay alert if the market starts to show signs of euphoria in the future or falls back into anxiety (because for example the housing market will not recover until 2010).

Happy trading