"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, January 25, 2012

Market Bottoms: Amazing Parallels

It feels like Mark Twain was wrong when saying History doesn't repeat itself, but it does rhyme when looking at last three stock market bottoms - including the recent one. Repetition of this pattern is simply amazing:

There are three characteristics which played out almost the exact same way:

1) Duration - the entire process took around six months.

2) Failed test of the initial low, which also marked the start of the rally.

3) Declining volatility during the entire process.

The chart above also shows very nicely how volatility has been clustered in recent years. Volatility clustering is a known phenomenon/market inefficiency and I'm tempted to incorporate that into my trading (shorting the VIX at cluster peek? Needs more research/work before I'll implement it)

By the way, I didn't play this structure well when it first occurred in 2009, which was the only year where the Covestor Model Portfolio underperformed the S&P 500. However, in 2010 and 2011 I got much more aggressive on the long side when this pattern showed up, which is one of the reasons why the portfolio is up over six percent in 2012 so far. 

Monday, January 23, 2012

QQQ at New Highs: Lessons from 2010

The Qs are trading at new multi-month highs, which bakes the question if one should buy at this point. The Nasdaq rallied to new similar highs three times in 2010 and each time QQQ kept rising another six percent for the next couple of weeks. So going long this overbought market for a short-term trade might make sense.

Here is how it played out in 2010:

The situation today:

Interview with new RIMM CEO: Time to Short the Stock Again

OK, he is a German dude, but after watching this interview below with the new RIMM CEO Thorsten Heins. I can hardly resist to start shorting the stock again. It seems like the company is living on an island and has completly lost sense of reality.

Some quotes and my interpretation:

"RIMM was small in the wireless arena and we have taken this to new highs."
Translation: We have done this in the past, but have no clue how to do this in the future.

"If we continue doing what we're doing, I don't see any problem us being among the top 3 going forward".
Comment: guys, you have to change something here. The German dude should be fired for this statement.

"At the very core is innovation. We always think ahead".
Comment: no, you don't. Otherwise you wouldn't have lost market share. Again: time to wake up, guys.

"Somethimes we innovate too much when building a product."
Comment: no, you don't innovate enough.

"We want to spend more time on prototyping, research and development while building the products."
Translation: our costs will go up, but you won't see new products for a long time.

"It's important that R&D is excited about our future."
Comment: well, at least you are obviously not in this video. How do you expect your people to be excited? (Excess excitement is a not key feature of Germans anyways)

"In my free time, I love to play with new technologies".
Translation: I have an iPhone myself.

What really scared the hell out of me was Heins' proclaimed future focus on the consumer market. Given the competion, I don't believe RIMM will be able to come up with a compelling consumer products. He also put a lot of emphasis on the Blackberry 10, which is supposed to be launched in September. Way too late, according to znet.com.

Here's the full video:

Bullish Put/Call Ratio Domain Change

The equity put/call ratio is one of the sentiment indicators I'm looking at. Istead of considering absolute levels, relative extremes within their local domain are more important. I introduced the p/c ratio domain concept in an earlier post last year.

It looks like the ratio is about to move to a lower general level ("bull domain") again: when the ratio of the past 10 days averaged 0.65, prices tended to reverse in the short-term during the last six months. The zone around 0.65/0.7 might now become the "too pessimistic" level: 

Thursday, January 19, 2012

ORCL: a Typical Earnings Gap Play

The "earnings gap play" is not my typical trade, but one of the setups I want trade more. The idea is to look at companies who disappointed with earnings and gapped down significantly. I buy when the stock reverses immediately after the report and tries to close the gap. I like this trade because I get the opportunity to buy the stock at a discount. Many investors got trapped on the wrong side and sold into earnings. They start to figure that they have been wrong so they start buying back the shares. Others might simply buy to do some dollar cost averaging on their long positions.

ORCL is a good recent example of this setup. I'm still long in the Covestor model portfolio, but the stock reached my target and closed the gap. I'll probably taks some (partial) profits today:

Disclosure: Covestor model is long ORCL

FCX: Tool Partial Profits

I reduced size of my FCX position yesterday and sold some into strength. The trade is developing nicely, but the company reports earnings today before the open. I usually cut size prior to these events. In addition, FCX hit the upper channel boundary, which is where I try to sell anyways:

Disclosure: Covestor model portfolio is long FCX.

Silver Opportunity

A nice technical trade is shaping up in Silver: the metal is about to break an important declining trend line and prices recently bounced from key support levels. The trade on the long side has a risk:reward ratio of 1:3 (stop @ $29, target @ $35). It's not shown on the chart, but 35 is also an important Fibbonacci level:

Disclosure: Covestor model is long SLV.

Wednesday, January 18, 2012

AAII Sentiment Survey: So What?

Market pundits have been dissecting the latest AAII reading, which has been very high for the bulls.

Tuesday, January 17, 2012

What's Wrong with This Picture?

The markets are doing funny things these days and when I get the feeling that somebody must be wrong big time when looking at key asset classes. Something is wrong with this picture:

Saturday, January 7, 2012

The Recent Decoupling of European and US Stocks

I was surprised how much US stocks recently have been able to uncouple from their European peers. 

Monday, January 2, 2012

German DAX' Today's Bullish Action

The German DAX broke out of a symmetrical triangle to the upside today, which is very bullish. 

Is it Time to Buy BAC?

BAC has been one of the worst stocks in 2011 with a decline of over 60%. Headlines are still horrible and risks from Countrywide's mortgage business continue to pressure the stock.