"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, October 27, 2012

A New Long Swing Trade: PIR

The market is a mess, but some sectors are holding up well. One of them is Homebuilders and related companies. Pier 1 Imports is a stock I went long last Friday. The setup is a simple pullback after a strong move. Relative strength suggests that investors are buying despite market weakness and the stock pulled back after a strong move to new highs. 
Note that I'm using a pretty lose mental stop in case algos try to run the obvious $20 level.
A wider stop also means smaller position size, but that's how HFTs have changed the world.

Tuesday, October 23, 2012

Market & Portfolio Commentary

Doesn't look good for US stocks this morning. I'm mostly in cash and own just a residual of QID. I would like to be more aggressive on the short side, but it won't be a good trade to enter positions here.  

Sentiment is not in panic territory so far: my favorite indicators in this arena are not recording at extreme levels, but they are moving fast. For example, the McClellan Oscillator closed at negative 20 on Monday, but could approach extreme readings if stocks sell off hard today. A close below -80 would make me look for swing trades on the long side to benefit from a potential oversold bounce.

The high probability short trade will be if that bounce should run out of steam. Until then, I'm trying to keep e powder as dry as possible.

Friday, October 19, 2012

Jim Cramer's Performance

Regular followers of this blog know that nothing annoys me more than TV figure heads and financial advisors who do not publish their track records. CNBC Entertainer Jim Cramer is one of the few who is relatively open with his performance, believe it or not. One just needs to subscribe to his Action Alerts PLUS service (which is what I did for the trial period) to get an idea of his track record:

I took these numbers and compared portfolio growth to the Covestor TechnicalSwing Portfolio. If someone wound have invested with Cramer in 2008, he would still be sitting on losses in June 2012. It is beyond my comprehension that thousands of Americans keep watching Mad Money each night in the light of these results:

Sunday, October 14, 2012

Market Commentary: Why Doing Nothing is OK

After declining for another week, US stocks are now close to oversold territory. Market character has changed and even stocks, which held up pretty well such as KEY began to roll over after no news.

Good news are sold. Example: WY, which I had in the Covestor Model Portfolio since September 21. The company increased its dividend last Friday, usually a bullish event. However, the stock closed lower.

To support the bearish thesis, I would like to see more volatility. It has been a orderly pullback so far. There is either still to much complacency in the market or the decline is just a normal consolidation in an uptrend. Based on the weakness of bellwethers such as AAPL, I would be skeptical, though. The sentiment indicators I'm tracking are not at extreme levels, suggesting further downside potential.

Trading-wise, we are in nowhere land: you can't go short due to oversold conditions, you can't go long because of a possible trend change on the intermediate time frame. Trading often means waiting and that's what makes most sense right now. One of the advantage individual investors have over institutions is that they do not have to be 100% invested. Cash is also a position.

Friday, October 12, 2012

Why Does Swing Trading Work?

Every investor or trader needs to understand why his methodology has a chance to work in the market. Let's say one is watching Mad Money each night and makes investment decisions based on Jim Cramer's recommendations. There might be nothing wrong with the approach as long as underlying mechanics are understood and somebody has shown that Cramer's picks outperform after being recommended on the show. I haven't come across such a statistics, but hundreds of thousands of TV watchers obviously have.

So why do I believe that swing trading actually works? Because the strategy ultimately exploits a market anomaly that academics call the "overreaction hypothesis". Antweiler and Frank (2006) investigated stock price behavior after major corporate news. They summarized that "overreaction to news is actually the typical pattern on the main American stock markets between 1973 and 2001" and that "return momentum is observed for many days after the [news] event". Their investigated time frames match average holding periods of swing traders.

If the crowd's psychological overreaction is responsible for abnormal returns of successful swing traders, it seems plausible that the anomaly can persist over time: the crowd would need to stop being emotional for overreaction to disappear. Maybe one day we will live in a world, where 100% of investment decisions are made by computers. Until then, I will be a swing trader.


Thursday, October 11, 2012

Market Thoughts: Crash Ahead?

So the Dow is down three days in a row after approaching multi-year highs. Volatility has been muted so far, so the recent decline should look like a normal correction in an uptrend and bulls should step up soon to "buy the dip". Not so fast!

There has been significant weakness behind the scenes and major indices are at critical levels from a technical stand point. They would not only break important moving averages, charts would also signal potential top formations. On the other side, one should have expected some bumpiness when stocks try to break through multi-year resistance levels.

Sector divergences are concerning: small caps, basic materials and energy stocks have been acting weak since September. The last leg of the rally has been supported by a decreasing number of stocks.

What worries me most is the underlying theme: QE 3 has been sold aggressively by institutional players and even though an old Wall Street lesson says "never fight the Fed", I wouldn't bet the bank on it. What if the driving theme becomes the thought that more QE doesn't help? The Economist summarizes in its latest issue: "Central bankers alone cannot save the economy. It is time for politicians to pitch in."

If the current US earnings season would fail to supply a positive catalyst because earnings collapse and companies present negative outlooks, if economic numbers do not pick up in the next weeks, I would even argue that the market could crash before Santa comes. The combination of technical and fundamental factors can create an explosive mix when all algorithms want to sell all at once. Remember that we still don't know why the Flash Crash really happened. That's spooky. Forget circuit breakers, they just delay the process. If everybody wants to get out, demand goes to zero. Pretty simple.

Based on my comments above, you would think I'm at least 100% short. Well, I'm not. I still maintain a balanced portfolio with longs (AAPL, AIG, AVP, GPS, KSU, RGLD and WY) and shorts (DELL, HAR, MCHP, ORCL, TZA) . Nothing goes down in a straight line and I have actually been taking profits on the short side this week. What is relatively likely, though, is that rallies will be sold by the big guys. As usual, I will be happy to join them and reduce long exposure.



Tuesday, October 9, 2012

Insider Sales at HAR: These Guys are Really Good!

Here is a fun exercise: go to finvis.com, punch in HAR and scroll down to insider transactions and then scroll up and look at the chart and check where they sold.
Usually I don't care when insiders are selling since buying is more important, but these guys are really good traders. Look how they sold stock in a concentrated effort in October 2011, this year February and (drumroll) last month. At least they sold right after earnings. HAR headed significantly lower after the sales. I guess Harman directors and executives are pretty good traders.

Seriously: I'm considering shorting HAR here since the chart offers a promising setup.

Monday, October 8, 2012

5 Reasons Why I Shorted Small Caps

I added TZA, the inverse leveraged ETF, to the Covestor Model Portfolio last Friday for a swing trade to benefit from current weakness in small cap stocks.

1) Underperformance vs. S&P 500: small caps are not confirming the latest rally
2) Intraday chart setting up a failed breakout trade from 835 - 845 range. 
3) Daily chart setting up an "anti" trade (check out Adams Grimes or Linda Raschke for reference)
4) Potential rejection of long-term high at 860 could setup major top and lead to large downside move due to trapped investors. 
5) Russell 2000 a good proxy for risk-on/risk-off sentiment, expecting larger moves when overall market turns south. 

Here is design of the trade with entry and exit points. Note that (as usual) there is no guarantee that this trade will work out. There might be a 51-60% chance that the position will be profitable:


Thursday, October 4, 2012

5 Reasons why Silver Prices Could Explode from Here

Silver is right now trading around $35, a key technical level. Recent price action suggests that the metal could breakout to the upside very soon. Should this happen, we could see Silver prices at $40 or higher by the end of the year. Here's a summary of bullish arguments:

1) Silver relatively stronger than Gold: recently, the cheap metal has been outperforming its bigger brother.
2) Technical setup: a breakout from the intermediate-term $26-$35 trading range would force the shorts to cover and therefore supply fuel for higher prices.
3) Bullish bets not at extreme: COT data suggest that large traders are currently long around net 30k contracts. Silver has historically often turned south when over 50k contracts were held net long.
4) Positive seasonality: Silver tends to rise from October - December.
5) Dollar intermediate-term negative: technically, the Greenback is in a downtrend since July and has created a "bear flag" in recent weeks. Expecting continued weakness.

I currently own SLV in the Covestor Model Portfolio and plan to increase the position on a breakout. However, all bets are off if Silver would close below $33.5 and fall back into the trading range. 

Monday, October 1, 2012

A Difference Between the QE2 and QE3 Rally

I'm really not a Dow Theory guy, but things become interesting when patterns differ despite similar news. Case in point: as you can see from the chart below, Transports and the Semiconductors rallied with the broad market in anticipation of QE2, which was announced in December 2010. However, they failed to participate this summer, when markets started to price in QE3:

Such a significant divergence does not contribute well for overall market health. Caution is warranted as long as these sectors don't start to play catch up.