"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

Friday, October 31, 2008

Some intersting Swing Trades on the SHORT Side

Some interesting SHORT candidates. Didn't manage to reverse downtrend in recent rally:

LTM:

GT:
DRYS:
LVS (huge short covering, be careful with this one):


Thursday, October 30, 2008

Looking for Possible Shorts

Futures up this morning, market still pretty unstable (check the last minute selloff yesterday), though. I plan to move into some short positions. I'm currently unhedged, which doesn't feel good in this choppy environment. I'm looking to short the following sectors/ETFs:

Consumer Discretionary (XLF)
Semiconductor (IGW)
Homebuilders (ITB)
Agribusiness (MOO)

Stay tuned

Wednesday, October 29, 2008

Two types of charts

When looking at the charts after Tuesdays 800 points run, we can detect two basic types:

1) stock/sector took out the lows of October 10.
In this case, the recent rally indicates a rebound in the currcent downtrend.
Example: the consumer discretionary sector.


2) the Oct 10 lows were not taken out. Example: regional banks.

Since I believe that this is just a short term bear market rally, a possible trade is to go long on these sectors and start shorting the sectors of group one once momentum start to fade again.

Some of the group 2 members (I like especially the ones displayed in bold letters):

Biotech IBB
Pharmaceuticals IHE
Aerospace ITA
Energy IYE
Healthcare IYH
Regional banks IAT
Utilities IDU
FInanicals IYF

It remains to be seen if these sectors can keep their leadership. In any case, I'm looking for declining volatility,
indicated by the average true range (ATR). Insofar, the 800 point move in the DOW has more bearish implications.

Saturday, October 25, 2008

Next week: Keep Listening to the Markets

Last week caught me (and probably everyone) by surprise: huge swings to the upside during the last minutes on Thursday, a quiteresilient market on Friday. But what do I write? Calling a 300 point drop "resilient"? It's all a question of perspective.

I was totally bearish on Thursday, 100% SHORT. When I checked the markets on Friday morning, I thought I'll win the Jackpot. And in fact, my account was up 15% intraday. BUT: the big crash didn't come. Are we in for a bear market rally, are hedge funds just doubling down or was this a "pre-rate cut-move". It's quite difficult to read the markets these days.

Anyways: everbody is waiting for the big crash, but there was a nice piece in the Journal today about a "mudslide scenario" as an alternative to the big bang. I don't like that, but as traders, we have to be flexible. We have to follow the markets, the markets don't follow us.

So what does all that mean for next week and how do we play it?
I covered most of my shorts last Friday and went into short term treasuries (SHY) to reduce portfolio volatility. For next week I will keep listening to the markets to figure out the next major move. Until then, I'll keep my powder dry. It's ok if you sometimes don't understand the markets. Let the markets come to you!

Happy trading

Thursday, October 23, 2008

Get Out...

...while you can.

Pulte (PHM) said in the conference call today that "the bottom is nowhere near". If that is true, we definetly haven't seen the bottom in stock prices either.

Waiting for a panic to cover my shorts.... (or a massive government intervention)

Wednesday, October 22, 2008

Trading Themes

A couple of current trading themes and how I play them:
  • Weakening international markets
    SHORT Emerging Markets (EEV), CAT, MTW (also a play for the weakening Dollar theme, JEC
  • Stronger Dollar, weakening commodities
    SHORT DRYS, waiting for a pullback in the Dollar to pull the trigger.
  • Weaker Oil prices
    SHORT SU: should Oil go below $50, oil sands exploration doesn't make financially sense anymore
  • Collapse of the American consumer
    SHORT names like M, MA, SBUX or ETF XLY, LONG WMT (nice relative strength vs S&P)
  • Improving credit conditions
    LONG GS (also nice relative strength)
  • Falling short term interest rates
    LONG ETF SHY
So overall a mix of LONG and SHORTS.


Tuesday, October 21, 2008

Nice rally: but how far can we go?

Nice (oversold) rally yesterday created a short term bullish S&P chart. Volume was weak, though, so potential looks limited. I'm currently long, but will probably switch to SHORT around DOW 9600 (if we get that far).

Monday, October 20, 2008

Short Term Market Direction: Conflicting Signs

There are strong conflicting themes out there which can significantly determine short term market direction. I'm trying to figure out the ones that will dominate this week to see if I increase LONG or SHORT positions.

On the BULLISH side:
  • Market extremly oversold, ready for a rebound
  • Market participants very bearish, VIX > 70 (contrarian argument)
  • TED spread declining
  • Rumors for more government interaction might come up (to jump start the housing market)
  • Speculation of more interest rate cuts (declining inflationary pressure)
On the BEARISH side:
  • Hedge funds keep selling into rallies to meet redemption requests
  • Earnings season: estimates still too high, market is setup for disapointement
  • Economic indicators keep deteriorating faster than expected
The conflicting themes are probably reason for the last days volatile sideways action. Let's see which forces become dominant.

Happy trading!

Sunday, October 19, 2008

Remember July?

...when so many "analysts" predicted a stock market bottom? Especially the guys on CNBC were pretty convinced the lows would hold. Obviously, the contrary happened...

When I browse the financial media now, I detect much more pessimism ("Is this really the bottom?"). Using the same logic as in July, the contrarian in me is motivated to take a bullish stance.
(It's just an (unscientific) observation market conditions are much more complex of course.)

Wednesday, October 15, 2008

How to Trade the Latest Market Action

I stopped focusing on individual stocks since the market overwrites everything these days. So we keep trading indexes such as the S&P and Emerging Markets, since I believe they will be effected most by the current deteriorating economic conditions.

It is impressive how fast market themes change: days ago, traders were focusing on the US government bailout, today everybody is supprised that US consumers stop spending, which was in fact predictable.

I was surprised how fast market momentum faded on Tuesday, so I switched from LONG to SHORT. These days, you have to move fast...

I see two scenarios after todays horrible economic numbers:
1) The market will crash the next days
2) The FED will jump in with a significant emergency rate cut. In that case, Bernanke would have played out all his cards. Don't know if this is so possitive....

In any case, two extreme scenarios, so it's not getting boring. Playing the market from the SHORT side with rigorous stops and reverse in case of major events. BTW: I'm 80% cash. (with my risk management, my cash position is direct proportional to market volatility, shouldn't surprise anyone)

My gut feeling, though, is scenario 1. Reason: the market is in a 'possitive feedback loop', meaning: the bear market feeds itself. (market declines, investors get scarred, pull out money, market declines even more,...)