Swensen Portfolio

Educational use only. Never intended as advice.

I'm glad that I got a reminder to update the 'Swensen portfolio' a rough approximation of the approach outlined by David Swensen in Unconventional Success. The portfolio is largely equity based, divided among US equities, foreign developed and emerging markets, real estate, and bonds.

The bond valuation component isn't exact as I don't have the latest prices on the bonds theoretically in play, but it's close.









Add in another 100 for coupon price on bonds, brings us to 104214, down from the previous @108000 in just two weeks. So it's about a 3.8% drawdown in a short-time, with the volatility enhanced by the falls in the Russell 2000 and EEM. Obviously, this is just an approximation. I haven't really 'managed' the managed portfolio, but I can continue to track the Swensen portfolio, which is up @4% in the past six months.

Good trading and great risk management.

Managing Expectations

Educational use only. Never intended as advice.

Few immutable truths exist in investing. One for me is that what I do not know about investing dwarfs that which I do know. What I do believe is that for a company's stock to succeed, the company must 'manage expectations'. Wall Street punishes missed expectations. Managers know this. Ergo, they manage expectations.

SPX daily. Coming off an oversold state, with 1245 as support, and 1285 as resistance. I've put in the 50 line on RSI, that sometimes acts as an invisible barrier.

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For newcomers, I reiterate my goals:

1) Preservation of capital

2) Risk management

3) Capital growth by buying oversold stocks in oversold markets, and selling overbought stocks in overbought markets.

4) Preparation (chart review and blogging)

5) Adherence to discipline of using proven market strategy (mean reversion)

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First, where are the markets by dynamics?

Worden T2108 - 29% of stocks above 40 day average

Stochastics oversold: 24% of SPX stocks, 35% of NDX stocks

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Mamis-Meisler breadth oscillator - close to neutral

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TRIN5 (neutral), TRIN10 (red) overbought - bullish)

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ETF analysis (assess most active by volume)

Oversold ETFs - (proprietary) TLT only

Volatility analysis (NR7s - narrowest range of 7 days)

10 ETFs show possible volatility expansion (direction not predicted)

EEM 94.60-92.45

EWY 45.36-44.55

FXI 73.50-72.60

EFA 65.55-64.97

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Proprietary overbought: NONE

Proprietary oversold:18

ADBE (daily)...this is a sample chart (without the analysis explained) of a profoundly oversold stock. Tom DeMark uses 'selling exhaustion' via a variety of his patterns that are models for my overbought and oversold idea development. Here you can see oversold stochastics (top), great disparity from key averages), beaten down MACD, and profoundly oversold Williams' %R.

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Even profoundly oversold stocks can become more oversold, and the concept works best (for me) when the market is also oversold (not surprising). As the market rallies (note how sentiment swings are occurring) toward a much more 'enthusiastic' market, then I shift my focus to looking for stocks or sectors that might be vulnerable.

Hillenbrand (HB)...below the 50 and 150 day averages, with something like a head-and-shoulders top. John Bulkowski writes about 'throwbacks to the neckline' which could be happening here. Stock closed well today, so definitely not anything I'm in a hurry to short...just watching.

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Summary: The market has been rallying (overall) off a profoundly oversold state, the most oversold in quite awhile. Bulls will try to use the Paulsen nomination to support their beliefs, and bears will try to extend May's weakness. Livermore's commentary about path of least resistance is worth remembering. I don't calculate a major advantage in either direction currently and hope to manage existing positions optimally now.

Good trading and great risk management.

Family Matters

Educational use only. Never intended as advice.

I didn't have any feel for the markets today, as I attended my maternal uncle's funeral. Bill had devastating Alzheimer's disease and had the so-called 'long good-bye', a shell of his former self.

Conor remembers Bill for his display board of 'knots' as my uncle had served in the Navy during WWII. I thought I'd share a couple of stories about Bill to humanize him after his illness dehumanized him. They aren't investment stories, or maybe they are, as no investment exceeds that in our families.

Bill had returned from some shore leave debauchery with his friend, and went to the chaplain for confession. He was in the confessional for a long time, maybe ten minutes, and got a hefty penance. Then his best friend went in, and was out in thirty seconds. Bill asked, "what gives?" His friend replied, "I told the chaplain that I was your best friend, did everything that you did, and that I was very sorry for having done it." And I'm out.

I think that is the 'economy of scale', we hear about.

About twenty years ago, my brother-in-law had just met Bill had attended the funeral of another elderly relative. Bill was talking with his brother Bo about it. "Chuck" was going to be cremated. Bo asked Bill what Chuck's wife was going to do with the ashes. Bill replied, "she's going to keep them in the trunk of her car." Bo thought that very strange. Bill noted, "yeah, so when her car gets stuck in the snow in the winter, she can throw the ashes under the tires, and know that bastard was good for something."

Everything and everyone has a purpose, I guess.

R.I.P. Bill.

Key Concept - Investing

Educational use only. Never intended as advice.

In Mauboussin's More Than You Know, he has a very key passage on page 69, that is worth printing, and substituting "decision maker" for investing and "decision" for stock. It reads:

"So an investor who has taken a position in a particular stock, recommended it publicly, or encouraged colleagues to participate, will feel the need to stick with the call. Related to this tendency is the confirmation trap: postdecision openness to confirming data coupled with disavowal or denial of disconfirming data. One useful technique to mitigate consistency is to think about the world in ranges of values with associated probabilities instead of as a series of single points. Acknowledging multiple scenarios provides psychological shelter to change views when appropriate."

A college professor of mine, William von Doehring (?) said it another way, "solving a problem isn't always difficult, but solving it correctly when you have already solved it incorrectly and believe your answer to be correct presents an extreme difficulty."

Whether in medicine, investing, mathematics, physics, economics, baseball, or politics, we will all be wrong. However, remaining wrong and holding fast to incorrect beliefs creates great opportunity for loss.

Good trading and great risk management.

Stupid Fed Tricks

Educational use only. Never intended as advice.

One of the definitions for irony is, "Incongruity between what might be expected and what actually occurs".

Almost daily we see headlines like, "Stocks fall on inflation fears". Reasonable? Let's make a couple of assumptions, including that the government doesn't want stocks to fall (benefits of the "wealth effect", problems with "revenue contraction", and the invalidation of the beloved Supply Side Concept). Second, the government, to an extent, has the ability to interrupt (not halt) the will of the market via fiscal and monetary policy.

If you were the Federal Reserve, do you fear and 'fight' inflation, raising interest rates and talking tough, or concern yourself with slowing growth and adequate capital availability? Your obvious answer is that you are concerned with both the vigor of the economy and 'price stability'. Yet, behind the scenes you maintain the option to expand the money supply via the unlimited creation of money and repurchase agreements (repos).

You understand the impact of these on the dollar as well as the principle of 'competitive devaluation'. You have not repudiated your statements concerning "the printing press" or "drop money from helicopters".

What investors want to know is where do you stand, or in fact do you stand for anything? You have no less credibility than your predecessors, but lack the miscommunication skills of obfuscation and doublespeak.

What investors everywhere wonder, in the words of Tommy Lasorda, "there are three kinds of people, those who make things happen, those who watch things happen, and those who wonder what's happening." Which are you?

Good trading and great risk management.

"Double Your Fun"

Educational use only. Never intended as advice.

Posted by Ron Sen, MD at 5:35 PM May 30, 2006
Keywords/Tags: TRIN, Oversold, Technical analysis, Stock market, Investment

The SP500 daily chart gave up much of last week's 'dead cat bounce', returning back into the 1260-1265 zone.

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Yesterday's message was 'volatility expansion' and today it came with a vengeance, on the downside. The dynamics concomitant was breadth, just terrible once again. But is all lost?

This is the sixth time in the past year that the TRIN has closed above 2. What happened in the following two days each of those times to the SP500?

May 10th May 11th +4.89 May 12th -11.75 (no sustained bounce)

August 16th Aug 17th +0.9 Aug 18th -1.22

October 5th Oct 6th -4.9 Oct 7th +4.11

January 20th Jan 21st +2.33 Jan 22nd +3.04

February 28th Mar 1st +10.58 Mar 2nd -2.1

Today

Last 5 first days after TRIN close > 2 four up, one down

Last 5 second days after TRIN close > 2 two up, three down

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SPX/VXO ratio, lowest in almost two years

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Do I want to invest at the lows or the highs? I want the lows? Looking at the 'General's' stocks, Russell 1000, SPX, NDX, Dow Industrials and Active ETFs, there are 27 stocks making 20 day highs and 123 making 20 day lows. You may not like that. I do.

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More dynamics, not as dynamic.

Stochastics oversold percentage? A little disappointing here, as 33% of NDX stocks and only 25% on SPX stocks are oversold by 14 day stochastics.

Mamis-Meisler Breadth index still oversold, but not as oversold as I'd like to get aggressive on the long side. _______________________________________________

Longer-term of Bullish Percentage NYSE stocks are nowhere close to being oversold (less than 30%) and in fact are still over 50 percent.

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First look summary. Breadth indicators oversold, both short-term (TRIN close > 2) and intermediate term (Mamis-Meisler). It would be best to have had a couple of down days into this, or traders can hope for a terrible opening to see if a reversal will step in. In favor of a reversal, the nomination of Henry Paulson for Secretary of the Treasury might lead Wall Street to believe that good things will come to them.

Worth noting? The playbook for Ben Bernanke and the Central Bank Last Supper Club has been liquidity, liquidity, liquidity (M3). The NASDAQ Composite lost 2.1% today, the SP500 1.66%, and the OEX 1.60%. The World Gold Index (long selected gold vehicles) and the World Platinum Index were flat.

Gotta run to the 'Awards Night' part of Senior Week. More later I hope.

Good trading and great risk management.

Ron

Ch-ch-changes in the value of money.

Educational use only. Never intended as advice. Not a registered investment advisor.

So you think you know the value of money. Conor says appearances can be deceiving. I guess that means a dollar may someday not be worth the paper it’s printed on.  

Good trading and great risk management to all.

Ron

Two Words

Educational use only. Never intended as advice.

Every day counts, including days like Friday, where the big players picked up their chips early, and left for the Hamptons or the shore, or wherever.

Will civil unrest in Afghanistan rattle the market? As we pause to remember service members, present and past (count me in for 10 years in Uncle Sam's Canoe Club), I suspect that many military personnel and their families seethe at the lack of proportionality between their sacrifices and that of the nation. Because the market mirrors the populace, in fact, is the populace, I don't see a signficant reaction as likely.

The 'two words' for Tuesday are 'volatility setups'. Of the 51 active ETFs (trading over 400K shares daily, 42 make narrowest range of seven days (NR7) setups. NR7s predict volatility expansion, but not direction. Throw in the end of the month markup (which usually happens the day before), and price could accelerate (in either direction). Even more so, 28 of 33 ETFs trading over 1 million shares daily are setup NR7.

The three NR7 setups most oversold are EWZ, ILF, and FXI, for whatever it's worth. Most of the biggies, excepting DIA are on deck, including MDY, SPY, Cubes, IWM, EFA, BBH, EEM, RTH, RKH, IYR, and so on. Similarly 54 of 100 OEX stocks setup as NR7s.

As for ETFs oversold by my proprietary criteria, only one, TLT.

Hypothesis: the end of the month profit pull outweighs the 'fear' engendered by a recent selloff.

As for stochastics oversold, that would be 32 of 100 NDX stocks and 24 of 100 SPX stocks, so there's nothing heavily favoring either.

As for the Barrons bounce, I guess gold could get the nod, as James Turk a gold bug of the first order talked of gold hyperinflation in terms that Richard Russell would love - distrust of the dollar, or more specifically of the monetary expansionism of the reserve currency promoted by you know whom (duh-duh-duh, duh-duh-duh, the Federal Reserve). Disclosure: net long gold.

So, it's watch and wait and hope for the best.

Good trading and great risk management to all.

Ron

Something Completely Different

Educational use only. Never intended as advice. Not a registered investment advisor.

Let’s look at the market in a very different way and see if it tells us anything. We could examine it by index, by growth versus value, by capitalization, by dividend yield, or any number of criteria. What I’ve asked the Worden TC2000 end-of-day software to do is examine by:

1. High (top quartile) or low (bottom half) capitalization


2. High (top quartile) or low (bottom quartile) beta


3. High (top quartile-2.3% or more) or no dividend

I considered stocks only trading over 20 dollars a share. Thought about including volume as well, but didn’t for this test.

That should give us eight groups of stocks to examine by price change 1 week and price change 10 days

Control group: All stocks > 20

2994 Stocks
10 days  1022 positive  536 > 2%, 1951 negative, 1348 > 2%
5 days  1816 positive, 1261 > 1%, 817 > 2%, 1145 negative, 576 > 2%

First, the Lowest capitalization (324M), Lowest beta (<.6), Lowest dividend (henceforth Low Cap, Low Beta, No dividend).

43 stocks
10 days 15 positive, 8 > 2%, 28 negative, 22 > -2%
5 days   18 positive, 7 > 2%, 24 negative, 11> 2%

Second, Low Cap, Low Beta, High Dividend

57 stocks
10 days  26 positve, 11 > 2%, 30 negative, 15 > 2%
5 days  28 positive, 13 > 2%, 27 negative, 8 > -2%

Higher percent positive and less more negative, major difference between the two groups is dividend contribution?

Third, Low Cap, High Beta, Low dividend

32 stocks  
10 days  11 positive, 8 > 2%, 20 negative 15 > 3% (higher beta, more loss)
5 days  18 positive, 13 > 2.5%, 13 negative, 8 > -2%

Wider swings as expected (beta-based)

Fourth, Low cap, high beta, high dividend

31 stocks
10 days  10 positive, 7 > 2%
5 days  15 positive, 8 > 2%, 16 negative, 11 > -2%

Higher beta, less dividend impact, not surprising in high beta group

Fifth. High cap, High beta, High dividend

12 stocks
10 days  2 positive, 2 > 2% (GM 7%), 10 negative, 8 > 5%

Dividends relative to beta didn’t offer any protection against loss in high cap space, albeit small sample size

Sixth. High cap, High beta, Low dividend

84 stocks
10 days  18 positive, 11 > 2%, 66 negative, 57 > -2%, 32 > 5%

Looking specifically at dividends, fewer stocks with highest percent losses, but overall poor performance

Seventh.  High cap, Low beta, High dividend.

90 stocks (surprising there were that many to me)
10 days  45 positive, 16 > 2%, 43 negative, 14 > 2%
5 days  71 positive, 22 > 2%, 19 negative, 4 > -2% (the worst was BNL a totally illiquid stock)

Sure looks like Low beta fared better

Eighth.  High cap, Low beta, Low dividend

61 stocks
10 days  29 positive, 18 > 2% 31 negative, 21 > -2%
5 days  24 positive, 15 > 2%, 34 negative, 13 > -2%

Dividends appeared mildly protective against bigger losses among the high cap, low beta stocks

Coming into this analysis, I noted that among the most active ETFs, only 8 ETFs were positive in the past 10 sessions, and 24 lost at least 2%, 20 lost at least 3%, and 13 lost at least 4%.

By market cap, within the top stock cap quartile, 672 of 1373 stocks lost at least 2% and 350 lost at least 5% during the past two weeks. 173 gained at least 2% and 52 gained at least 5% during the past two weeks.

In the bottom half –3376 stocks  (cap less than  324 million), 1796 lost at least 2%, 972 lost at least 5%. 651 gained at least 2% and 346 gained at least 5%.

As a group, 238 of the highest beta quartile of 383 lost at least 2%. 157 of 548 of the lowest beta quartile stocks lost at least 2%, while 131 of 548 stocks gained at least 2% during this downdraft.

Of all stocks over 20 dollars a share without a dividend, 466 of 967 lost at least 2% during the past ten sessions, and 201 gained at least 2%.

Of all stocks -759 over 20 dollars a share in the highest quartile of dividends, 245 lost at least 2%, and 149 gained at least 2% in the past two weeks.

Summary: during the recent sell off, a higher percentage of smaller cap stocks closing over 20 dollars a share lost at least 2% and a similar percentage of the largest and smallest cap stocks lost 5%.

Stocks with lower beta outperformed overall, with nearly as many winners as losers within both large and small caps.

Dividends were mildly protective, but more so in the larger capitalization stocks.

Obviously, markets evolve, and it will be fascinating to see the impact of capitalization, beta, and dividends going forward.

The SP500 is down 0.86% for two weeks, Dow Industrials is down 0.9% for ten sessions, the Russell 2000 is down 1.73%, the NDX off 1.8%, Oil Services down 4.3%, SOX down 5%, Coal down 7.1%, Gold and Silver Index down 10.55%,

How is mean reversion faring? For the past two weeks, my trading account is down about 0.8% and I will continue to pursue that strategy, realizing that with mean reversion, the gains tend to be unpredictable, but rapid (definitely not advice).

Good trading and great risk management to all.


















Good trading and great risk management to all.

Ron

Wall Street at 25,000 Feet

Educational use only. Never intended as advice. Not a registered investment advisor.

Wall Street at 25,000 feet. Actually, on the Street, they’ll stop to take your wallet.

Good trading and great risk management to all.

Ron

Worth a Look

Educational use only. Never intended as advice. Not a registered investment advisor.

THE SHARK REPORT: THE TRADER TAKE  And you thought that options expenses didn’t mean anything?


Good trading and great risk management to all.

Ron

Conor Sen's Weekly Market Roundup: Sell by June and Go Away?

Educational use only. Never intended as advice. Conor's opinions are solely his own and do not reflect those of his employers or of this website. Conor currently works as a risk analyst.

Conor developed a keen interest in markets as a teenager and worked as a quantitative research analyst for Connors Capital and coauthored the book How Markets Really Work, which has been widely discussed. A couple of Conor's favorite investment books are The Hedge Fund Edge by Mark Boucher and Reminiscences of a Stock Operator by Edwin Lefevre.

This week we finally got a short-term bottom in the global flight from risk, but first I'd like to start with a recap of the April housing numbers.

To my mild surprise, the housing market held in better than I expected. New home sales came in much higher than expected, but given how much March sales were revised down, this was a bit of a wash. Existing home sales came in right at expectations, and prices in both groups were up somewhat month over month, so if you're one of the lucky ones able to find a buyer, it looks like you'll still do okay price-wise. However, inventories are still rising steadily week after week. The stock market took every rate hike in stride until the hike to 5%. Will a similar tipping point be reached with housing inventories?

I'd also like to show some interesting stats on the seasonality of home prices. This only applies to the existing home sales data, as the new home sales prices were all over the map. Going back to 1999 (when data became available) and through June, 2005 (when I believe the market topped), we find an interesting trend. During the months of March, April, May, and June, the average total increase in median sales price is ~$16,900. The rest of the year? -$3900. And if we look at each year in this brief study, we see it holds every year:

March-June, 1999: +$11,000
July, 1999-Feb, 2000: -$5,000
March-June, 2000: +$8,000
July, 2000-Feb, 2001: -$2,000
March-June, 2001: +$14,000
July, 2001-Feb, 2002: -$2,000
March-June, 2002: +$16,000
July, 2002-Feb, 2003: -$5,000
March-June, 2003: +$18,000
July, 2003-Feb, 2004: -$3,000
March-June, 2004: +$21,000 (!)
July, 2004-Feb, 2005: -$3,000
March-June, 2005: +$30,000 (!!!)

The Fed post-dot com rate cuts began in January, 2001, and note that every year we saw the price gains during March-June accelerate. Now, let's see where we stand over the past year.
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July, 2005-Feb, 2006: -$11,000
March-April, 2006: +$5,000
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Clearly, we've got a lot of work to do if we intend to keep the March-June party going. Housing bulls will say that May and June have been the strongest two months of the year, with June averaging a monstrous +$7,700 gain over the past 7 years and a $12,000 gain last year alone. It's put up or shut up time, and with interest rates almost a full percentage point higher than they were at this point last year and inventory 26% higher, bulls have their work cut out for them.

Onto the rest of the markets. We finally got a much-anticipated bottom on Wednesday, and my guess is the bounce will last for a little while, maybe 2-3 weeks. However, I'm going to stick my neck out and say "the top is in." Of course, should the dollar head sharply lower or gold sharply higher, "new highs" in the markets are always possible in an Enron accounting sort of way. Speaking of Enron, forget about the energy market manipulation, profiteering off of California, and accounting scandals. If one is morally ambiguous enough, one can make a case for those activities. The real crimes of Lay and Skilling were closing the employee stock sale windows while they themselves sold off hundreds of millions of dollars worth of stock. Whether or not that merits a 25-year prison sentence is up for debate, but this is the issue on which I find no reasonable counter-argument.

Not much on the economic calendar this week. Look for a drift upward in the markets and for the gold bulls and bears to play tug of war in the $640-650 range.

Conor

Editor's note: This week the minutes from the last Federal Reserve meeting are released. That may or may not have significance as a catalyst in either direction. Why traders rely on Central Bankers' pronouncement as though they are the Word of God I do not know.

If price stability is their mission, they have failed by Biblical proportions, as the purchasing power of a dollar has eroded by over 95% during the history of the Federal Reserve. Basically, they can shove it up their Glass-Steagall.


Central bankers destroying the value of the dollar in action.

http://www.financialsense.com/editorials/hodges/2006/0106.html

Everybody's Talking At Me

Educational use only. Never intended as advice.

Keywords: investing, technical analysis, stock market, charts, weasel words

posted by Ron Sen, MD, Saturday May 27, 2006, 11:18 AM

EVERYBODY'S TALKING AT ME

Everybody's talking at me
I don't hear a word they're saying
Only the echoes of my mind
People stopping staring
I can't see their faces
Only the shadows of their eyes

I'm going where the sun keeps shining
Thru' the pouring rain
Going where the weather suits my clothes
Backing off of the North East wind
Sailing on summer breeze
And skipping over the ocean like a stone
---Fred Neil

from http://www.sierrainvestor.com/content/stan_weinstein.html

They tell me about a fellow in my community, a little strange, always going off about his charts. I guess they called him eccentric. Maybe he was just a shaman.

Above all, Wall Street is a giant sales machine, selling deals, promoting companies, profiting from entries and exits. 'They' exist for them, not for us. I consider technical analysis a tool to help level the playing field, but they will always have more information than we will. But we can at least try to compensate, because they have one disadvantage...because they are battleships, they cannot turn on a dime.

The legitimate criticism of technical analysis is that everything is judged through the retrospectroscope. I'm no different that you, in that I have to trade from the 'hard right edge' of the chart, as Al Farley would say.

First, a reminder about drawdown. "Capital preservation comes first." If you lose 20%, you need to make 25% to get whole. You lose 10%, you only need to make 11.1% to get even. You lose 50%, you need to gain 100% to get even. That's a tall order. The moral: we must limit drawdown!

Anyone who's been here knows that this site emphasizes two core principles, MEAN REVERSION and MARKET TIMING. I use proprietary algorithms to generate ETFs, stocks, sectors, et cetera for overbought and oversold, and the sum of multiple indicators to generate probabilities for reversals by market timing. I don't care what Abby Joseph Cohen says or Joe B., or the touts on CNBC. I do listen to Jeff Saut, Jeremy Grantham, Mark Boucher, Dave Landry and others, who read the market. They're providing observations, not sales pitches.

What makes a top? Obviously, it's distribution, people getting out. The 'syndicates', the 'elephants', the 'generals' make the market, not the ants. We have to try to deal with the crumbs, and avoid getting stepped on. Above is the Stan Weinstein stage chart, which I like to combine with multiple moving averages (10 and 30 week) to TRY to make heads or tails of it all.

Let's start with the housing market. Almost everyone (except Bob Toll) agrees that it's broken). Inventory is up, prices are leveling or dropping in many bubble areas, and most serious investors know the impact of housing on the totality (consumer spending is 70% of GDP) of the economy.

Here it is, live and in color. Topped around 290, lower highs, lower lows. 10 and 30 week averages rolled over. As Ed Seykota would say in the Market Wizards series, if you can't tell what the chart's doing from across the room, why trade?

Nice reversal bar on the right, and stochastics starting to curl at the top of the chart. I almost bought some housing stocks at the close yesterday, but I decided to exert more caution ahead of the weekend. "Opportunities are easier to make up than losses." I won't kick myself if this sector rallies, because I think it has a lot more downside, maybe to 170 or 180ish (not advice)._______________________________________________

Here's Biotech (BTK), which similarly is trying to make an oversold 'stand'. The big picture is that the uptrend is broken, and that there is 'daylight' between the downsloping MAs and price. Could it rally to the 680-700 zone? Absolutely. However, it's already rallied from 613 to 655. One of Tom DeMark's many numerical observations is his use of Fibonacci, using a different approach, multiplying lows by 1.0556 and then 1.112 (I hope I'm not misquoting you, Tom). That brings us to the vicinity of 650 and then 682ish. If the former is the first stop, I'd rather wait since I missed the recent low.

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As a trader, I can't live on regret, on missed profits. I've got to look ahead.

Here's the NDX (NASDAQ100). MAs curling over, with reversal bars on the weekly. Not exactly climax volume, but I wouldn't be surprised to see an oversold rally into the end of the month. That is, after all, how the hedgies make their money.

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Ditto the SP500. Poised to rally into the end of the month.

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Notice, however, that consumer staples has a different character. MACD (bottom) may be crossing above the zero line, and the moving averages are still positive. So all these charts are not the same.

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My goal is that after reading and studying for literally years, to try to help keep us out of trouble, and maybe able to gather a few crumbs from the pirates who are trying to plunder us. That doesn't make them evil; it's just what they do, their job description.

As for the Fed, ultimately the market marginalizes them. They can print money until the cows come home, talk a good game, deny inflation, and even massage the bankers (their ultimate clients). However, the markets are much bigger than Greenspan or Bernanke, and will identify the fallacy of unlimited prosperity and bubble creation.

So the big picture isn't so sweet technically, no matter what the talking head weasels are telling you on the boob tube. But short-term, we're coming off profoundly oversold conditions and the sirens like Abby are calling you back in. I'm not saying Abby's stupid; she probably cashed in HUNDREDS of MILLIONS as a partner. So she's a genius, laughing all the way to the bank. But is she there to help us? Fuggedabout.

Make capital preservation and risk control your mantra. Find your edge and exploit it relentless.

Good trading and great risk management to all.

Ron

Good trade, Bad trade (maybe)

Educational use only. Never intended as advice.

The market has rallied off markedly oversold conditions, and the bulls have emerged from hiding. Other than part of hedging strategies, short plays just haven't been 'percentage' as part of this flurry.

Below is the daily chart of Pfizer, a Dow pharmaceutical stock which is quite oversold by my criteria.

Above is the 60 minute chart of PFE today, with stochastics below (8,3,3). PFE was making short-term higher highs and the blue (8 period EMA) moving average could function as a sign of better things to come.

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Imperial Sugar is similarly beaten down, and volume has dried up. I was looking at the inside day yesterday as a possible springboard (although not a classical 'spring').

I entered above yesterday's high, and I'm underwater. But the stock is oversold and I have a mental stop for risk control.

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Here's the SPX daily with an imaginary 'resistance zone' with the top line at the intersection of the rising "channel" that you have to visualize. Above that is the declining 50 day average as another data point.

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It's the end of the week, so let's run through ten charts to assess the market - Banks, Brokers, Consumer discretionary, Consumer staples, Cyclicals, Gold, Healthcare, Industrials, Russell 2000, Semiconductors, Utilities. Historically, defensives would include consumer staples, healthcare, and utilities.

Blogger is currently experiencing a problem, so I'll try to put them up another way.

http://stockcharts.com/candleglance/?$BKX,$XBD,XLY,XLP,$CYC,GLD,XLV,$RUT,$SOX,XLUBJ[$SPX]

What's working? Above the 20 and the 50 day averages? Consumer staples and utilities.

Below the 20 and the 50? Consumer discretionary, Russell 2000, and the Semis.

In between? Banks, cyclicals, Gold, and Healthcare.

Who are the leaders recently? We can examine the past ten days for a quick snapshot, and see that healthcare and utilities up at least a percent (not great, but outperforming).

At the bottom, precious metals and mining, coal, and Mexico, all down from 7 to 11%.

_______________________________________________

Looking forward, we have to ask ourselves where the leadership comes from, or do we have to become totally defensive?

Among asset classes, we have US equities, Foreign Equities, Real Estate, Metals and Oils (commodities), Bonds, and Cash. Regardless of what the salespeople tell us, the recent action identified meaningful risk, and even a modest correction has the pundits screaming at Bernanke, Bentsenesque, "I knew Alan Greenspan. Alan Greenspan was my friend. You're no Alan Greenspan."

Obviously, the market wants something more than 'data-dependent' from Bernanke. Jerry Maguire-like, "show me the money." They want even more liquidity, which is why I will continue to follow the energy and gold space, as the debasement of the dollar is likely to show up in dollar-denominated instruments (not advice). And cash is not trash.

Good trading and great risk management.

What's Different Got to Do with It?

Educational use only. Never intended as advice.

New Highs -18 -24 -26 -30 -17 -34
New Lows. 152 159 175 123 215 83

These sequences are concerning? Why? A healthy market can retreat with an expected contraction of new highs (top). However, one wouldn't necessarily expect to see a large number of new lows.

At the www.tradingmarkets.com pay site, they maintain lists of new highs, earnings strength and new lows, low earnings earnings strength. In contrast to the 'unenhanced' figures above, the numbers coming into today were 11 on the highs and 14 on the lows. The point? Even if you think that going short might be the way to go (during this 'corrective' phase, the data isn't strongly headed south.

Jeff Saut has excellent commentary at http://www.raymondjames.com/inv_strat.htm discussing the recent action, including an 11 plus % drop in the Russell 2000 with limited bounce coming into today. Mr. Saut (I've only met him once) describes 17-25 day cycles of advances and declines, and noted that we were at about day 10 (yesterday) by his count. He reported that 1 1/2 day countertrend rallies were common during these declines.

The Russell 2000 has gone from 673 to 726 this year (about 8%), while the SP500 has gone from 1248 to 1273 (note that it was 1268 after January 1st) for about a 2% gain.

My hedged portfolio based on mean reversion and market timing has suffered a 1.5% drawdown from high weekly closes (as of tonight) with an almost 50% cash position. Regrettably, I sold EBAY yesterday on an 'inactivity' basis. Ouch.

Good trading and great risk management.

Let It Ride?

Educational use only. Never intended as advice. All data is presented as is. You get what you pay for.

Read the whole column; it could save your life (really).

Thanks to Batman's brother for some kind words ;). Actually, there are many oddities of life that I find intriguing, for example names that are both first names, like Bruce Wayne or Frank Thomas. Frank Thomas was a great slugger, Thomas Frank wrote What's the Matter with Kansas?, an intriguing book examining the divergence between people's social conscience and economic well-being. Anyway, I digress.

Here's an 'all-in-one' chart of the SP500 (daily). From the top, oversold stochastics (buy). In the middle, candlesticks, with three thunderous tall dark candles (not good). The middle Bollinger Band would be my optimistic price target (1295) - not advice. Price (chart) resistance will probably come in around 1285. At the bottom, a 'wicked oversold' MACD pattern (hey, I'm from Boston).

People got all wound up about the 'benign' GDP and inflation numbers. The market was about as oversold as we've seen it in YEARS, and a countertrend rally was not unexpected (note the double negative). JK Galbraith wrote a book eschewing 'disagreeable English' and then wrote a sentence exceeding sixty words.

_______________________________________________

GOLD! Yesterday, gold was his-to-ry. The commodity bull market was over. As in Bernanke Kaput. I'm guessing that the Business Friendly Fed opened the spigots to juice the market. Just when it got really, really (Donkey in Shrek) oversold, and just before it touched the opposite Bollinger Band, gold reversed. I'm long some small cap miners, and some bigger dogs (risk controlled with options), like NEM and GG. I'm trying to remember the adage, "buy 'em when you can, not when you have to."

_______________________________________________

Here's a representative Oil Service stock (RIG). I'm long, but hedged here, too, via options. Note the oversold stochastics at the top and the MACD at the bottom. It's not the only way, or necessarily the best, but I can sleep nights, buying oversold opportunities with risk control.

_______________________________________________

Let's not forget the Bank Index. Now I'm not saying it's the skunk at a garden party. I am saying that it's an underperformer, now? You say, why? Banks are leveraged to the housing industry. Home inventory is going up, mortgage rates are rising, ARMs are repricing, and foreclosures have increased dramatically. John Succo of Vicis Capital pointed out today that banks are essentially individual hedge funds that operate with extremes of leverage. A lot of very smart people think 'something is rotten in Denmark', or maybe closer to home.

________________________________________________

The VIX collapsed. Ho-hum. Fear sure departs on a fast train.

________________________________________________

The Mamis-Meisler breadth oscillator is still very oversold. So I'm not expecting the mean reversion to go away quite yet, although I'm not saying that every day is going to bring a winner.

_______________________________________________

TRIN10 is still overbought at over 1.2 (1.24). This has rolled over however, also consistent with the 'tradeable rally'.

_______________________________________________

FACTOID that could save your life. From 10 PM to 1 AM, 1 in 13 drivers on the road is intoxicated. After 1 AM, 1 in 7 is drunk. Don't drink and drive, and be aware of that heightened risk when driving later at night!

_______________________________________________

Database screening:

Active ETFs oversold by proprietary criteria - NONE

ETFs with volatility expansion setups (Narrowest range of 7 days):

This was most surprising to me, turning up 30 ETFs trading at least 400K shares a day with volatility 'warning'.: I NEVER knowingly fade a breakout on these patterns (insert skull anc crossbones here)

DIA 112.09-111.29

SPY 127.73-126.43

IWM 72.28-71.04

MDY 139.29-137.66

EFA 65.42-64.71

IJR 62.72-61.86

GLD 64.76-63.76

IBB 72.65-71.54

All this means is that the potential exists (from pattern research by Crabel) for an explosive move (in either direction) out of this pattern.

Summary: Like half the known universe, the preponderance of timing indicators were setup for a tradeable rally. As mentioned within the past week, that could be 2-7 days (Jeff Saut), a move to the 20 period average, or the 10 period average (which my son used in much of his research with Larry Connors). I like to use 60 minute charts for entry points on oversold stocks, and I don't like to chase. Todd Harrison would remind me, "opportunities are easier to make up than losses."

Good trading and great risk management to all.

Ron

Major Investment Theories

Educational use only. Never intended as advice.

I got a rare treat today when extra-terrestrials arrived from the Nebulous Galaxy, to ask me how to make money in our stock market. They said that they weren't really interested in a lot of economic mumbo-jumbo, just cut to the chase. Their English was surprisingly good, and there is no fence between space and the U.S.

I replied that you can break investment behavior into three categories...

1) Momentum - if an object is in motion, it is likely to remain in motion...buy high and sell higher to somebody with less investment savvy than you.

They said they didn't understand how to control risk in that situation. I referred them to Abby Joseph Cohen, who once again said that the SP500 is going higher. I think her last prediction years ago as something like 1500 or 1600, but she's toned it down.

2) Mean reversion - 'what goes up must come down' and vice versa. They said, "if that works, how can momentum investing work?" I replied that nothing works all the time. They answered that in their civilization, the technology always works. I replied that they weren't subject to human error.

3) Leverage. No matter what you do, do it with gusto. I explained Fannie Mae, and how the executives had basically robbed the shareholders, and perhaps the entire country with their scheming to 'make the numbers.' They inquired about the punishment for such crimes. I answered that the 'evildoers' are seldom held responsible. They wondered about the disincentives not to plunder companies and the shareholders. I answered that it was on the 'honor system'. They decided to take their business elsewhere.

It's a big universe.

Good trading and great risk management.

Ron

Said Who?

Educational use only. Never advice.

Yesterday, the talking heads were on the line crucifying Bernanke, literally BEGGING for more liquidity. Today, I suspect the Fed Chairman was getting on their good side, printing greenback and reprising the Repo Man role he's been playing since his coronation.

The market, especially gold and oil, has responded in kind (net long numerous gold and oil shares via defined risk)...

Among the leaders are NEM up over 4%, EBAY on its partnership with YHOO against the new Evil Empire (GOOG), and even small cap Biotech (IBB) is up over a percent.

Last week's debacle may or may not be brushed off so easily. The SP500 is at 1268, back above the 1260-1265 fulcrum, but below the 1280-1285 range that may prove more problematic.

Will traders try to get another run at 1300 or will they do the cut and run thing in the afternoon? Follow the money - breadth (now strong), and brokers.

As for the rest of the world, India cut margin requirements, so I've dipped a toe in IFN on the mean reversion 'thingy'.

Good trading and great risk management.

Ron

Bernanke

Educational use only. Never intended as advice. No position in establishing U.S. monetary policy.

posted 7:07 AM, Thursday, May 25, 2006

(to the tune of Maria, from West Side Story)

The most pretentious word I ever heard, Bernanke, Bernanke
All the pretentious sounds of the world in a single word
Bernanke, Bernanke, Bernanke
I just met a guy named Bernanke

And suddenly M3
Will only be empty
To me

Bernanke, I just dissed a guy named Bernanke
And inflation I heard
How distressing a word
Can be, Bernanke

Say it loud and there's indignation
Say it soft and it's surely stagflation
Bernanke
I'll never stop chasing, Bernanke, Bernanke, Bernanke,...Bernanke

Say it loud and markets are running,
Say it soft and he's deferring to Jim Bunning
I'll never stop saying, Bernanke
The most pretentious sound I ever heard, Bernanke

Good trading and great risk management.

Ron

Not for the Faint of Heart

Educational use only. Never intended as advice. Not a registered investment advisor.

This column will focus on market dynamics with some other generic comments.

I watched Cramer tonight. He’s immensely entertaining, no matter what the track record on this ‘on the fly’ analysis.

Kudlow had some commentators on his program whose conclusion was (believe it or not) a global deficiency of liquidity. They literally begged Bernanke to expand the money supply. Which is why I will still hold onto my gold mining shares.

Are we in a topping process? It surely looks that way.

Are we overbought or oversold? We’ll go through some of the indicators.

Stochastics oversold: SPX  54%, NDX 57% (both pretty overdone)

Stocks > 10 day average: SPX 21%, NDX 23%

Stocks > 50 day average: SPX 25%, NDX 17%

Worden T2108: (usually oscillates 30-70%) 20%

Bullish percentage NYSE point and figure: 54%, Sector low: energy 24%, Sector high: Finance 69%

SPX/VIX ratio: Extreme relative to recent values

TRIN3, TRIN5, TRIN10: 1.27, 1.26, 1.32 (elevated- relatively more bullish)

VXO:  16.56, 10 period average 14.59 (greater than 10 period extended)

Summary: the preponderance of the evidence shows objective parameters dramatically oversold, although it is interesting that only 4 of the 52 ETFs trading over 400,000 shares a day met my proprietary buying criteria. Today’s market exemplified the marked volatility recently seen. Trading, like athletics, is about making adjustments to changing conditions.

For another opinion: Jason Goepfert's sentimenTrader

Good trading and great risk management to all.

Ron

Curiouser and Curiouser

Educational use only. Never intended as advice.

Today the market was, well, all over the place. The breadth was initially fairly neutral, then turned south to downright awful, and rebounded to negative. The market made chicken soup out of chicken feathers, but the internals were poor with down volume winning.

The SP500 closed up and just above the 200 day average, BUT did so with a lower high and lower low. I think Larry Williams calls this a 'stealth bearish' pattern. I haven't looked at the new highs versus new lows, but I'd be shocked if it were anything but negative.

_______________________________________________
I've had some vacation, so just got to hear an analyst explain why the GM (intraday above) company stock is doing better, cost cutting and barely holding its 18% market share. The conclusion was that they're not as terrible as they were. Sounds like a real story stock to me. This isn't a situation to short, at least using my criteria.

_______________________________________________

Meanwhile, gold and oil got totally crushed, and I spent the day playing damage control with my oil and gold positions. I remain with my NEM (intraday above) 47.5-55-62.5 butterflies. Everyone expected a gold correction, and it finally came. From a point and figure standpoint, it appears that NEM will make a new sell signal if it gets to 48.

_______________________________________________

Hansen Natural intraday (HANS). This stock exists solely for the purposes of a buyout. It isn't optionable, which probably explains a lot. Risk control? If they don't get bought out, then what are they worth? And if you wanted to buy out a company, do you want to pay top dollar? You wonder about an 'island' top forming (if there's a gap down). BUT shorting this is like shorting GOOG. No, thank you.

________________________________________________

Big volume on the Oil Service Stocks today (OIH) with one wondering whether the sellers capitulated (not advice).

________________________________________________

I hope to be back later with more sector and dynamics analysis after I have my end-of-day data.

The market has the 'feel' of both indecision and transition, and that doesn't necessarily mean consolidation. The housing issues are coming home to roost, and the concern investors have is palpable.

Good trading and great risk management to all.

Hope is a Four Letter Word

Educational use only. Never intended as advice.

Almost an instant replay of yesterday, but on a shorter time-frame, with early strength, and a quick fade. The early strength came off a weak durable goods print, leading traders to expect the Federal Reserve to pause. Conversely home sales continued to weaken in a relative sense.

The argument has been made of course, that a pause or even a cessation of interest rate hikes doesn't guarantee a rally.

The dollar rallied, which likely contributed to weakness in gold and commodities, although one has to wonder whether this is a durable rally.

The debt and deficits issue favors inflation (to minimize the debt impact) and Bernanke's muse is his perception that the Great Depression was caused by a failure of liquidity. So the balance comes between stimulating growth without causing hyperinflation. Mixed in with the commodity issues are the concerns about nationalization of national reserves. Yes, Matilda, globalization presents complexities heretofore not understood.

Translate, please.

Breadth weakened dramatically. The MDY and Russell 2000 both flipped the switch from significantly positive to negative, although the banks have traded relatively dry.

If we needed a tiebreaker, we'd have the action in the brokers (off 1.65%) as another indication of correction ink.

Amid the GICS space (XLB, XLE, etc), the only two marginal winners are XLK and XLP (long XLV).

Within the small cap space that I follow, a couple of diabetes-related stocks are holding up. Our lifestyle of excessive caloric intake and deficient exercise have resulted in dramatic increases in the prevalence of diabetes. Ergo, within the medical world, increased utilization of diabetic products is a certainty. Choosing the winners is less so.

Volatility continues to increase, and it looks like a traders' market.

Good trading and great risk management.

Soo-ey

Educational use only. Never intended as advice.

Posted by Ron Sen, MD 7:47 AM Wednesday May 24, 2006

Where will they go today? CNBC/Tout TV is doing their best hog-calling impersonation today, with news about a possible secondary transmission story concerning bird flu. And with the other hand, uber-investigator Herb Greenberg is going to talk about avoiding biotech.

Becky Quick (?) is going to argue that bird flu has lowered futures prices (not the dumbest thing I've ever heard, but close). Excuse me, she's the one probably pulling down 500K a year...

Here are some possible scenarios and why...

1) The market is oversold (by my proprietary criteria and dynamics) and futures are negative on the open (gap down)...the game is always to take RETAIL money and convert it into WALL STREET money. I think that readers here are the HYBRIDS, mostly retail, but not going to get fooled by these weasels. The best opportunity for a tradeable reversal comes off a down opening with reversal bars.

2) The market opens down and craters. Probably the least likely scenario. Breadth has been the best tell. Yesterday's early positive breadth faded.

3) The market opens down and aimlessly chops around. Worst scenario for traders.

4) The futures strengthen before the opening (hello Cayman Islands trade) and then anything can happen. Rumor has it that the Plunge Protection Team is headquartered in the Caymans. It could be that Bernanke needs one of those 'can you hear me now' phones, or maybe the wireless guys aren't as sharp as we think.

I'll choose option 1 as my initial trading hypothesis. Next step, let's see where the anglers fish. Some of the oversold areas I've got my eyes on are:

IBB 72.32-70.21 (biotech, excuse for a counter-trend rally?)
SMH 34.83-33.54
XLV 30.28-30.01 (Healthcare, underperforming 'defensive' sector)
IWF 50.85-49.80 (Russell 1000 Growth)

Joe Rosenberg was interviewed in Barrons last weekend and made a pitch for PPH. Let's take a technical look at PPH for fun.

Here's a weekly chart of PPH dating from January 2005. Below the 10 and 30 week moving averages. In the middle of the channel. Ho-hum. Ten of twenty PPH members are oversold by stochastics including one of the biggies (Pfizer), but ten are not, including JNJ another biggie.

.............................................................................................................

Here's a daily chart, year-to-date. There are a couple of tails down on the right, both lows at 69.08. Resistance is nearby at with the declining moving averages (let's choose 70.3 as the first resistance with the close at 69.40. So the initial 'trading' upside is about 90 cents and the downside 32 cents. One standard deviation of volatility is 51 cents (we can round off to 50 cents and double it for 2 standard deviations for a buck) which brings us to about 70.40 as 'volatility resistance'.

..............................................................................................................
But you argue, Rosenberg is talking longer term, not trading for a dollar. Here's the monthly chart going back a few years with an 8 period stochastics oscillator. I have a few other longer term patterns I look at from time to time and they're not driving me into a frenzy. From a technical standpoint, I'm not loving it here either. Of course, Rosenberg is an immensely successful and experienced guy...so we'll see how it does going forward.

As a physician, I obviously rely on the great products that these companies make. Remember how these were all supposed to be 'Bush stocks'? How's that working out for you? Seriously, the trend is less toward new blockbuster drugs, but remains toward high margin copycats of existing successful drugs. The second issue is drugs going off-patent (and as discussed in Barrons last week, biogeneric drug competition). And the third is Medicare prescription drug coverage. I don't know where these intersect, but I do remember something Cramer said years ago...buy proprietary companies at low multiples and cyclicals at high multiples. The cyclicals at high multiples idea means that earnings are at cycle lows.

Good trading and great risk management.

Jack Bauer Joins the SEC

Educational use only. Never intended as advice.

Sarbanes-Oxley has the control of "Wild Thing" Mitch Williams. Glass-Steagall authorized the Federal Reserve to manipulate the money supply. They haven't lost their touch. Every time I hear a Central Banker talk about price stability, I wanna grab my wallet.

Expecting governments to be able to regulate markets and ensure infinite prosperity and to repeal the business cycle is simply a canard. But no more than relying on most managers to outperform the indexes.

We need Jack Bauer to rein in these loose cannons. We'd ask him, "what are you going to do to get them to stop defrauding investors?" He'll shout, "whatever it takes, dammit." Forget about perp walks and depositions, these CEOs will worry about getting 'kneecapped'. Well, it's just a thought.

For me, it looked as though the 1285-1290 range would be resistance on the SP500. The market said, un-huh.The good news is that the market hasn't even come close to working off oversold conditions. Above the Mamis-Meisler breadth oscillator again found new lows (oversold).TRIN3, TRIN5, and TRIN10 are all fantastically overbought (potentially bullish).

From a 'screening' perspective, my proprietary oversold ETFs now hit 27, including the 'majors' including DIA, MDY, QQQQ, SMH, IWM, EEM, EFA, and XLV (long XLV).
My primary (short-term) 'proprietary buy and sell' criteria show 29 buys and 3 sells, and my secondary criteria show 49 buys and 0 sells.

However, my short scan criteria (longer-term) involving Russell 1000 stocks, Dow Industrials, SPX, NDX, and active ETFs and a declining 150 period average now stands at 414. I will hedge long positions (as described above) but will not take new shorts in this environment.

The VP (XLV x XLP) over KY (XLK x XLY) dichotomy between Healthcare and Staples versus Tech and Consumer Discretionary showed minus .47 and minus .04 versus minus .74 and minus .75 as the 'defensive' stocks outperform. Currently the ratio is 1.05 (defensive above 1). Michael Kahn reviewed this awhile back in Barrons Online.

The markets want to blame Ben Bernanke, Mr. Transparency. He did his mea culpa thing about 'casual stocks' with Maria Bartiromo, and now she won't get a wave. Bernanke isn't doing anything different than his predecessor, except the market chooses to react differently.

Summary: Despite dramatically oversold conditions, the market showed bear market behavior (strength in the morning and weakness into the close). Tout TV continues to parade the market analysts out to explain why the market should quickly rebound. The critical adage for speculators to remember is that it's not the news it's the reaction. The other adage goes that when they raid the whorehouse, they take everyone including the piano player. Maybe that's why the music stopped.

Good trading and great risk management to all.

Ron

Q & A

Educational use only. Never intended as advice.

"When you post those volatility numbers what standard deviation is that?"

The volatility numbers I post represent 1 (one) standard deviation, which encompasses about 67% of price movement. 2 standard deviations account for 95%, and 1.5 SD for nearly 90%. Many traders like to use these in conjunction with 'reversal signals', that could be reversal bars or narrow range bars that provide defined risk, in conjunction with market dynamics observations, like breadth, tick extremes, and so on.

I hope that helps.

Good trading and great risk management to all.

Orwell Wasn't Lying

Educational use only. Never intended as advice.

"In a time of universal deceit, telling the truth is a revolutionary act."-- George Orwell

With markets fantastically oversold, "we are not amazed" that they bounced. What is more surprising to me anyway, is that the bounce has been weaker than I expected. As of the time of this writing, the NDX is up 0.8%, the SPX 0.6%, and the Dow Industrials 0.4%.

Ben Bernanke weighed in on the markets, saying something to the effect that he doesn't control what the markets do. Appraently Senator Jim Bunning tried to come up and in on the Fed Chairman, only to realize that he had both helmet and earflap on.

For anyone who believes that they are 'entitled' to stock market profits, I've got some swampland in Florida that I'd love to sell you.

Commodities on the other hand have rallied nicely, and my directional spreads have resulted in very satisfactory trends thus far today.

Breadth: now up 2:1 after an early 4:1 spread.

Banks: up .23% i on the BKX (those philistines)

Betas: GOOG and HANS were afire, but AAPL has been more muted. I was in AAPL for a trade earlier but exited when sellers came in near 64.40.

News: Fannie Mae had accounting irregularities. Imagine that. The sky is blue and Antarctica is cold.

On the shorter-term time frame, 60 minute charts, just about everything I'm looking at is overbought, although this isn't true for XLV (no position).

A 'for what it's worth observation'. Doesn't make it right or wrong, but I had some directional (bull call) spreads on the OIH. When OIH was up over 5 points (almost 2 standard deviations), I elected to turn them into butterflies, by buying the next strike and selling the nearby strikes to turn them into butterflies.

I'm going to be out this afternoon, and frankly, I expect the market to be less interesting than watching tomatoes grow for the rest of the session. But I guess I'll find out that later.

Good trading and great risk management.

Ron

Sentiment Under Repair

Educational use only. Never intended as advice.

First, I'm net long. Longer than I've been in ages. And I'm not above talking my book. But the Tout TV Tribe is out repairing sentiment with the buzzwords:

1. "trading below value"
2. "opportunity"
3. "robust economy"
4. "overdone"

You get the picture. The sales machine is out in full force, with the 'Suits' reminding everyone of how they miss the 'biggest rallies' when they're out of the market. I never understood this, because they also missed the biggest declines.

Last night, I summed up the technical picture, with the market oversold by VIX, TRIN, Mamis-Meisler oscillator, and so on. We'll see shortly whether that translates into a 'trend day', a big range move.

Longer-term, there has been a lot of technical damage inflicted on the market, and I'm not confusing a trade with long-term investment.

The other buzzwords (or buzzards?) on Tout TV yesterday were the minimal or no risk assigned to a major meltdown on the indexes, in which permashill Larry Kudlow was the high man on probability of a major downdraft at 3%.

Avoiding 'downdraft' is key for successful investors. Currently, I'm down about 4% from my alltime highs, which I hope to close over the next few sessions.

The twenty period average of the SP500 is about 1290 and I'd view the 1285 (chart resistance) to 1290 area as the 'decision' zone for traders over the next few days. I definitely won't be trading the open, and in fact, am going out for a coffee.

The areas of great interest to watch are how oil, gold, and copper fare during this markup, whether the banking index can catch some tailwinds, and how the Russell 2000/small fry do. Just one man's perspective.

Good trading and great risk management.

Omissions

Educational use only. Never intended as advice.

I omitted some of my oversold screens, which are never advice. The information is proprietary, and of course, markets can do anything. Oversold CAN become more oversold, or bounce.

ETFs-

DIA
GLD
IYR

Miscellaneous

NAZ
CHKP
PDLI

SPX
Practically every homebuilder
AIG
LU
A lot of basic materials stocks

Volatility Bands (selected)

BBH 2.13

BKX .91

DIA .89

EFA .57

IWM .92

MDY 1.41

NEM 1.21 (net long NEM)

OIH 2.82 (net long OIH)

RKH 1.24

RTH .87

RUT 9.05

SPX 9.58

SPY 1.00

UTH 1.12

XBD 2.64

Volatility band references:
http://biz.yahoo.com/tm/060508/14279.html?.v=1
http://www.hamfon.com/daytrade/vband.htm

Good trading and great risk management to all.

Ron

Fishing the waters pretty hard

Educational use only. Never intended as advice.

Although it was a 'down' day, from my perch it felt as though the sellers were getting the fatigue, not so much that there was such great buying demand. I managed to stick to my plan, which has rewarded me more often than not.

I've been in and out of Chicago Bridge & Iron, here shown with a stochastics (8,3,3) chart. CBI broke down and has become oversold, leading me to take a small position at 23.02.

The Transports have been oversold, and Excel Maritime is one I follow. I reentered EXM today on weakness.

Energy has been ripped, too. With a couple of 'tails' down, I'm long Sunoco (SUN) with a defined risk strategy (options).

All I heard today was about how the commodity stocks had gotten so overbought, are the new bubble, blah-blah-blah. Here's NEM, the king of mining stocks, also oversold, having gotten crucified recently. I'm long, again via defined risk with options, long some Jun47.5 calls and short Jun55s. Can NEM get back to 55? Dunno.See a theme developing? Here's Transocean (RIG), similarly beaten like a rented mule. I'm long via options. Leasing contracts are high and people talking about 40 dollar oil are dreaming.

XLB, the Basic Material SPDR is oversold. No position.

I don't trade Google (GOOG), but I like the pattern (not advice).

First, I heard some ridiculous arguments today about how backdating options for management isn't stealing. Okay, it's not stealing. It's FRAUD. And it seems like a widespread way of 'rewarding' CEOs who haven't produced. I don't know about the rest of the market community, but I think this deserves some kind of special punishment, maybe a more enthusiastic version of a bris, if you catch my drift...

Second, the Tout TV cheerleading squad seemed a little subdued. I can't remember who it was, but touting the utes that were minimally up reminded me of what a mentor taught me about 'fishing the waters pretty hard', when good information was hard to find.

Do you get more bullish the more price rises and more bearish the more it falls? That's not my game. I want to own oversold stocks, especially when hope disappears. Here's the empirical evidence from the terrific CXO advisory group site. http://www.cxoadvisory.com/blog/internal/blog9-12-05/

Screens:

Proprietary oversold ETFs

Proprietary oversold miscellaneous

I'm not putting up any short ideas at this point because shorting into extremes of oversold conditions isn't my game either.

Dynamics:

Stochastics oversold: SPX 58%, NDX 60%

Stocks below 50 day MA: SPX 73%, NDX 83%

Mamis-Meisler oversold oscillator - extremely oversold

VIX extension - significantly extended, with reversal. Potentially bullish (not advice).

Summary: Oversold markets can become more oversold. Overbought markets can ramp more. However, conceptually, I believe that technical studies show that there is a greater predictability to limits to fear than limits to greed, and I am adhering to my core strategies (mean reversion and assessment of market dynamics).

Obviously, these approaches are vulnerable to external events and non-Gaussian market behavior (fat tails), which is why I insist on risk management that limits both my upside and my risk.

Good trading and great risk management to all.

First Principles

Educational use only. Never intended as advice.

Back to basics. See what you see, not what you want.

Intraday Tells.

1) Breadth. Simply abominable. Almost 4:1 negative. Can't fight city hall on this one.

2) Betas. The darling 'vision' stocks triad of AAPL, GOOG, and HANS all pounded.

3) Banks. Trade driest of all. I don't own 'em.

Sector genuflector.

Utilities, consumer staples, and financials the best. Looking at the GICS (the XLAlphabet soup) only 2 are currently positive, XLU and XLP.

Economic backdrop

Why now? Nothing is different, yet the Wall Street Journal and others note that Bernanke must balance policy between inflation containment and growth maintenance. No mention that the Federal Reserve, via their profligate money policy IS inflation.

Political backdrop.

Wall Street anticipates certain policy initiatives based upon the leadership in place. With elections less than six months away, the focus will be away from unpopular policies and toward potential vote-starters, immigration, taxes (cuts), national defense. Can we benefit from understanding this? I don't know.

Tempest?

Hurricane season is almost upon us, and what impact will this have on regional economic activity and especially energy?

Confession time. Or what I'm doing. The energy space continues to get pummeled. I washed a lot of SUVs at a car wash yesterday (basketball fund raiser) and I don't see drivers on the sidelines. I've taken some defined risk positions in energy (badly oversold), via directional butterfly options, specifically in SUN and COP. Doesn't make it right, but I'm confessing up front, so there it is.

Last week Jeff Saut opined at the Raymond James site that bounces after these major beatdowns generally last 2 to 7 days (I would have guessed 3 to 6, as shown in the weekend missives)...many of us could certainly use a respite from the selling, but the markets will do what they do.

Good trading and great risk management to all.

Questions

Educational use only. Never intended as advice.

Phil asked when commissions and slippage create unacceptable costs. As a committed amateur, I believe this has multiple parts. I hope some readers might respond as well.

1. Traders have to reduce costs as much as possible. I use Interactive Brokers because they have a low cost structure. The more trades I make, the more important this becomes. For traders who want to scale in and out of positions, there's no way to trade paying $9.99 or $12.99 for every trade (unless they're trading in much bigger size than I do).

2. Expenses (commissions/slippage) are part of the game. No way around them. For a trading platform, I use QCharts, although I'd love to hear from other traders about their opinions on platforms.

3. I don't have enough time to look at every chart individually, so I have to have a 'screening' system, which is where end-of-day software and TC2000 via Worden Brothers comes in. I focus on two groups of stocks, small cap value and large cap 'actively traded' stocks, from the DJIA, SPX, NDX, Russell 1000, and active ETFs. Another expense.

4. Why trade at all? That IS the question. If I had all the money in the world, (e.g. Bill Gates), I'd just give my money to Steve Cohen and let him make it grow. If I had tons but a lot less than Gates, I'd probably split it up among a few hedge fund stars or traders for whom I have a lot of respect (e.g. Mark Boucher and Dave Landry). But I'd still want to trade some, because that's my nature.

Good trading and great risk management.

Jones for the Market?

Educational use only. Never intended as advice. But you knew that, and you're here anyway.

Most speculators are in for the long pull, because they don't have the time, experience, or inclination to do anything else. However, most investors UNDERPERFORM the broader averages, because they're entering when general market enthusiasm is high and exiting when the pros are buying. In other words, they're buying hope and selling fear.

So how do we do something else? Aside from short-term trading (the way I play the 'Loser's Game'), people have a lot of technical options. I've decided to make that my focus today. I'm not going to examine fundamentals beyond noting that markets usually oscillate between periods of higher price ratios (e.g. high to low price-earnings ratios) and price-to-dividend ratios. Because we know that long-term growth is relatively linear, and dividends historically account for about half of return, price excesses come from inflated/expanding multiples, which have a tendency for mean reversion.

The long-term investor analyzing the best 'when' wants the period of worst growth and highest interest rates, which when mean-reverting, are likely to produce price multiple expansion. When profits and multiples are high, and 'it doesn't get any better than this', risk is higher.

Many of the commentators we watch on TV are part of the Wall Street sales machine, for whom performance is relative and 'honor' comes secondary. However, there are voices of reason (neither strident nor doomsayers) out there, such as Jeremy Grantham (www.gmo.com), Jeff Saut of Raymond James, John Hussman of www.hussmanfunds.net, Mark Boucher (at www.tradingmarkets.com), Richard Russell (www.dowtheoryletters.com), Todd Harrison and the gang at www.minyanville.com, and Bill Cara at www.billcara.com.

Long-term moving averages
"Winners live above the 200 day moving average and losers live below it."

The SP500 is testing the 200 day moving average.Conversely, the NASDAQ100 crashed through the 200. Will 1640 (previous support) become resistance?

Longer-term oscillators

Longer-term oscillators (stochastics and relative strength index) using weekly charts can be valuable when used as designed (see below).
Here's the Internet Index ETF (HHH), which has taken a beating lately with the 14 period RSI oversold (below 30). Does this represent a buying opportunity? I don't know, other than to recognize it as oversold, within the context of a NON-TRENDING market - ADX(14) weekly < style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="http://photos1.blogger.com/blogger/3127/545/400/ScreenHunter_436.1.jpg" border="0">Conversely, on weekly charts, the SPX RSI(14) has barely cracked 50 and hasn't been below 30 for years, an indicator of the strength of the market.

The yield on the Ten-Year has gotten pretty overbought and reversed. A big caveat here is that oscillators apply in NON-TRENDING markets. The ADX(14) of the SPX (weekly) is 37, consistent with a strongly trending market. In my opinion, relying on the oscillator in this setting is not as likely to be reliable (not advice).

Stochastic oscillators have similar applications and potential. Here's the OIH, which made a "gap and crap" pattern, gapping down and closing poorly. Again the ADX(14) is 33, with PDI (positive directional) exceeding NDI (negative directional). I wouldn't feel that excited about this 'twisty' stochastics as showing a definitive reversal.

McClellan Summation Index

http://stockcharts.com/charts/indices/McSumNYSE.html The McClellan summation index uses differences in breadth to try to identify tops and bottoms. The simple explanation is that extreme negative breadth is positive (the logic of the market) and extreme positive breadth is negative. StockCharts looks at the McClellan Oscillator here (shorter-term) http://stockcharts.com/education/IndicatorAnalysis/indic_McOscillator.htmHere's a fine summary with charts http://www.wallstreettape.com/tutorials/ta/c23.asp I haven't paid enough attention to this indicator, but will try to be more attentive going forward.

NYSE Bullish percentage Index

Point-and-figure charting examines supply-demand balance in a different way. www.stockcharts.com has an excellent Market Summary page with P&F indicators examining both market and sector action. Bullish percentage of NYSE stocks hasn't been oversold (below 30) literally for years, and continued to show high readings (over 70) until recently. P&F chartists use these charts in conjunction with the percentages of stocks above and below the 50 day average. Above you can see the 'bear confirmed' reversal from above to below 70 percent. However, at least on the SP500, only 29% of stocks are above the 50 day average. If one had wanted to go short, it would have been more favorable with a high percentage of stocks (e.g. > 70%) above the 50 day average.

Currently, the most oversold sector is:

ENERGY. This was one of the factors behind my recent positions in energy. Only 47 of 270 (about 18%) Worden TC2000 energy stocks are above their 50 day average. 99 of 270 are 'signalling' oversold by my proprietary criteria (never advice).

Buying Exhaustion

It wasn't too long ago that Tom DeMark's 'Sequential' pattern was signalling buying exhaustion, a fact that Tom was kind enough to mention to me, and that I alerted readers to.

Dynamics:

Here are the current 'dynamics' on some key indexes:

Stochastics oversold: SPX 63%, NDX 66% (both extremes)

TRIN3 and TRIN5: 1.48 and 1.35 (relatively both strongly overbought - bullish)

VIX - 17.18, with ten day average 13.98 (almost 20% extended)

Summary: what are the 'tea leaves' telling technicians? Short-term the market has gotten extremely oversold, which traders will often use to enter short-term, risk-controlled long positions. From the longer-term perspective, it makes one wonder about a Landry 'first thrust' downside signal, a warning of trend change. How traders and investors respond to market conditions depend on many factors, especially time-frame. From a short-term perspective, I'm looking at the current situation as either favorable for long positions or unfavorable for short ones. However, as I discussed yesterday, I'm looking at how the market behaves, and how much recovery happens, 2-3 days or longer, 38ths retracement or more, move to the 20 period moving average or less. Master NBA skills coach Pete Newell teaches players to 'read and react'. I'm trying.

Good trading and great risk management to all.

Ron

Conor Sen's Weekly Market Review

Educational use only. Never,ever intended as advice. Contact your investment advisor to determine the appropriateness of your investment and your time horizon.

Conor's opinions are his own and do not reflect those of his firm or this website. Conor has degrees in computer science and economics and is coauthor of How Markets Really Work.

Editor's note: charts added by the editor

That loud sucking sound you hear is liquidity and risk-seeking behavior fleeing the market.Wednesday morning the markets awaited the all-important CPI.Expectations were for a 0.5% increase MoM, 0.2% ex-food and energy.Instead, we got 0.6% and 0.3%.

Think, for a minute, about how many irregularities and estimations go into calculating something like this, and the fact that a reading of 0.24% would get rounded down and0.26% would get rounded up. The difference between 0.2% and 0.3% in agovernment statistic is well within any standard error. Nonetheless,what's important is not what a 0.3% ex-food and energy CPI increase actually means to the economy, but what it means (and the catalyst it represents) in the minds of traders and their actions in the market.

And after the prior week's market damage had left traders skittish over the prospect of yet another rate increase in June, a not-good-enough CPI reading was all the market needed to throw in the towel. The S&P got a 22 point haircut, making the market legitimately oversold for the first time since October.

Thursday Richmond Fed President Jeffrey Lacker (a voting Fed member) said that inflation has made a pause in interest-rate increases "less likely." The S&P fell another 9. Friday was options expirations, and gamma traders had a field day as the S&P went from -5 to +10 to flat to finally +5. Normally I would say that we're due for a healthy bounce, but the viciousness of the 7-day sell-off combined with normal options expiration games which sometimes need to be resolved on the following Monday makes me less confident.

What we've had is not a healthy 2-3 day pullback, but a real exit from the marketplace of risk and liquidity. From May 9-18 US large caps lost 4-6%, and small caps lost 8%+. Markets in Europe fell 7-8%.Asia lost slightly less than that.

US, Japan, and UK 10-year interest rates fell slightly, while rates in developing countries like Mexico and Brazil surged.

Commodities (XAU point-and-figure) above suffered the worst of the damage, as the XAU is now 17% lower than it was a week and a half ago,

INFLATION-ADJUSTED gold price, from www.inflationdata.com

and some of the steam has been taken out of the base metals market.Housing,as represented by an alternative index of the real home building stocks (S15HOME on your bloomie), has dropped another 9% over the same period of time.

(HOMEBUILDERS Spdr)

We're in a bad spot right now, and the markets sense it. Lagging data that the Fed is likely to use to set monetary policy should continue to show heightened inflation and strong economic output, as the litany of rate hikes and recent high commodity prices take their time working their way through the system. Housing inventory is surging as stubborn sellers think we're still in 2005, keeping asking prices high and deceptively hiding how weak the housing market really is.

Perhaps an indicator of the national housing data set to come out this week...looks like (Bay Area) sales volume is really falling off a cliff:http://www.dqnews.com/RRBay0506.shtmThe most interesting parts:A total of 8,358 new and resale houses and condos were sold in the nine-county region last month. That was down 14.2 percent from 9,745 for March, and down 25.1 percent from 11,158 for April last year, according to DataQuick Information Systems.

The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $3,048 in April. That was up from $2,958 in March, and up from $2,659 for April a year ago. Adjusted for inflation, mortgage payments are 20 percent higher than they were at the peak of the prior cycle sixteen years ago.Pretty crazy when you figure most of these mortgage payments aren't including principal.

If the Fed is really as "data-dependent" as they say, another rate hike is likely. Currently the Fed Funds market is pricing in a 62% chance ofa hike in June, and if we don't get it in June, a certainty of a hike in August. The question I have is if the Fed will break from thescript and put more weight on the housing market, which is currently in transition from a seller's market to a buyer's market and could be in a full-on rout by late summer.Conveniently for us, we get April new home sales on Wednesday andexisting home sales on Thursday. Based on the shorter-term data at:http://www.benengebreth.org/housingtracker/http://bubbletracking.blogspot.com/I expect we'll continue to see weakness here.

If you haven't sold stocks yet and are anxious to get out, I think you should wait until we get a decent one-day bounce this weak. For those with no position in gold and silver, you've got a chance to pick up a piece a lot cheaper than you could have a couple weeks ago. Otherwise, the prudent move is patience as the goods inflation/housing deflation duality resolves itself.

Conor

Countup?

Educational use only. Never intended is advice.

Friday reversed. Divine intervention? Fed manipulation from the Caymans (Plunge Protection)? Bulls and broken clocks, right twice a day, finally got it right yesterday.

How much rebound is enough? Even if you're a 'mean reversion' type like I am, how do you know where the mean is? How can you know?

Although this isn't very 'scientific', I'll propose some options. Any degree backtesting or curve-fitting has its issues, but still has merit. But I'll just muddle along.

Fibonacci
Here's the SPY...oversold by proprietary criteria (and a lot of non-proprietary ones, too)...7 point spread from 125.80 to 132.80. The most conservative (out quick) reversal trader might get out at 3/8th or .382 around 128.5, 50% reversal brings you to 129.30 and .618 to about 130.15. Preaching 'profoundly oversold' last week isn't helpful if you get in 'high'. Waiting for 'confirmation' of a reversal using 'something' like dynamics or shorter-term technicals (60 minute charts?) makes sense. I'm talking generically here as we all have to find a comfort zone or framework. I think that Kevin Haggerty likes the term 'decision zones', so that's good enough for me. Sometimes the market won't give us any comfort.

Day count
Here's the same chart, with the 3 most recent periods of oversold stochastics. The first 'reversal timeframe' is 6 days, the second 3 days, and the third is yet to be defined. One of my definite trading hazards is getting out of reversals too quickly. There seems to be something 'magical' about the numbers 3, 5, and 8 in trading (Fibs?) so I have to be more conscious of that (not advice).

Support and resistance
IBM broke south out of a symmetrical triangle (green arrow). It reversed Friday to close at 80.28. The breakdown point came at about 81.7. My view of the triangle is that it was about 6 points high, so could breakdown about 6 points. HOWEVER, we also know that IBM described a big stock buyback (that's how companies 'grow' earnings, right?). One trader I know has a huge delta neutral position with cheap IBM October calls and short IBM. I'm guessing that he's loving that one.

Bollinger Bands and Key averages Here's OIH with Bollinger Bands (20,2) and a ten period moving average (black). OIH went from 169.75 to 141.73 in 7 sessions. Holy volatility, Batman. Although some Bollinger Band conventional wisdom says that reversals go to the other end of the band, you can see how the 20 period average (red line) was support on the way up. Will it (or the ten period average) be resistance on the way down? That's still ten points to the plus if that happens (net long OIH via spreads). I don't like being short the energy complex...

Of course, I'm trading what I would call 'texturally', within the context of the overbought to oversold harmonic of the markets and sectors. Is that the best way? Probably not. It's just the only way I seem to be able to do it for now.

This recent reversal is likely to bring out the 'ads' discussing relative performance of the big mutual fund companies, and their 5, 3, and 1 year performance. As an individual investor, I have to have a sharp eye on ABSOLUTE performance, as losing less money than some index doesn't cut it.

You've got to find your muse, your edge, and stay with it. I've taken some pain recently (like everyone else). I don't like seeing a 2 1/2 % drawdown in my trading account over the past two weeks. Frankly, that stinks. But OIH is down 11.7%, EEM down over 10% in 2 weeks, SMH 7.5%, the Cubes 6.7%, SPY 4%, and DIA 3.6%.

If we're down, it's time to get back on our game. And as a mean reversion advocate, I'm usually long a predominance of seriously oversold vehicles. We'll see what that produces.

Good trading and great risk management to all.

Butterfly Season

Educational use only. Never intended as advice. Not a registered investment advisor. Not even an unregistered investment advisor.

There's two things I know for sure:
She was sent here from heaven and she's daddy's little girl.
As I drop to my knees by her bed at night
She talks to Jesus and I close my eyes and I thank god for all the joy in my life

Oh, but most of all
For butterfly kisses after bedtime prayer; sticking little white flowers all up in her hair;
"Walk beside the pony, Daddy, it's my first ride."
"I know the cake looks funny, Daddy, but I sure tried."
In all that I've done wrong I know
I must have done something right to deserve a hug every morning and butterfly kisses at night.

--Butterfly Kisses, Bob Carlisle

If you've read this column before, you know that I am fanatical about risk management, or at least I talk about it...a lot. Investments carry many different kinds of risk - from market risk (whole market tanking), to sector risk, stock risk, and opportunity cost - the cost of being in one vehicle when another is taking off.

One of the reasons I like options is the ability to define risk (if long options), albeit at a cost, the evaporating 'time premium' built in. I like butterfly options, especially directional ones, that allow participation with defined risk and defined gain potential. Sure, I'd like unlimited profit potential, but as a 'mean reversion' trader, I'm realistic that my positions aren't going to the moon.

Here’s a generic link to some Options education but I want to highlight a couple of options trades I made yesterday, not knowing how they’ll work out. Here’s a quick link to The Butterfly. Why not just buy calls outright? I want to decrease the cost of the strategy and I don’t expect unlimited gain in a limited timeframe. Why not do ratio spreads, buy some calls and sell more calls at a higher strike? Because one of the major ways companies are ‘growing’ is merger and acquisition. How can I know that company XYZ won’t get taken over? It could happen (obviously, a non-issue with index options).

Here are the CHARTS PERTAINING to the trades below.

First trade: (obviously I can’t know whether these will ultimately work)

1. Newmont Mining – NEM Newmont is the paragon of gold mining stocks, and has been savaged, losing over 15% of price in 7 days. I elected to buy NEM June 47.5 calls, sell twice as many June 55 calls, and buy NEM June 62.5 calls (admittedly an overkill on the latter) for a total cost of around $2.30 ($230 dollars per spread). If NEM closed at 45 on the third Friday of June, I’m lost. If it closes at 50, I’m up 20 cents (not so great), but if it closed at 55, my 47.5 calls are worth 7.50 and the 55s are worthless, so I’d make $5.20 over a month for a $2.30 risk. The time premium (theta) will start to evaporate rapidly soon on the 55 calls.

1. Goldcorp (GG) I made similar trades on Goldcorp, using June 30-35-40 spreads for an average of about 90 cents. If GG closes below $30.90, I’m a loser. But if it closes at 35, I make $4.10 for my 90 cent risk.

1. Transocean (RIG) – for RIG, also recently crushed and possibly ready for mean reversion, I used the 75-85-95 spreads, for about 2.90. Below 77.90 I’m in the red, but if it can rebound to 85, I’d be looking at $7.10 ($710) profit per spread, with the defined risk of $2.90 per spread.

I am the first to recognize the limitations of this approach (buying into oversold markets, oversold sectors, with oversold stocks) but the strategy recognizes an element of risk control, in conjunction with my philosophy of mean reversion.

As always I hope to be back with more ‘generic’ market observations, but I thought I’d spin this out before I read Barrons (excepting Michael Santoli’s article as Michael continues his meteoric ascent as the ‘face’ of Barrons)…


Good trading and great risk management to all.

Ron

The Story of the Tar Baby

The Story of the Tar Baby

Educational use only. Never intended as advice.

The subject of a ‘tar baby’ comes up from time to time, that I was unaware had any particular racial connotation. I’ve always heard it used in the connotation of a ‘sticky’ medical situation, one that is difficult to become unencumbered by. This usually means a dreadfully ill person, with no great resolution.

Here a reference to the Uncle Remus Tar Baby story that may prove both educational and entertaining. In that context I suspect that Boom Boom Bernanke has gotten his arms around a tar baby, the intersection of debt, deficits, and reckless monetary policy.

Good trading and great risk management to all.

Ron

Brutal

Educational use only. Never intended as advice.

Markets really do go down. Yes, Matilda, indeed they do. Anybody 'long' stocks has felt pain recently. Here are a few charts to help the visually-oriented feel it.

Here's GS, recently profiled in Barrons as a possible buy on a pullback. 166 to 146 in just 8 sessions. Admittedly, a rate-sensitive industry, having enjoyed a long run. Will it fill the gap?
Newmont, the king of miners, 59 to 51 in just 7 sessions. An inflation-sensitive stock getting taken out and hammered. Many consider Newmont's management superb, and yet NEM is within hailing distance of the 200 day average.

OIH, just crushed, and still not at RSI 30.

Clearly, the interest-rate sensitive stocks have taken on water, and commodities are taking a bath as well.

The SPX is testing the 200 day average.

What about the dynamics? More pictures to start.SPX/VIX challenging previous lows.Dog breath sweeter than NYSE breadth in the Mamis-Meisler oscillator, as the ten day average at recent record lows.TRIN3 and TRIN5 at highs for recent times.VIX vanquished? Short-term 'relative' highs, but not high.

Stochastics oversold: SPX 56%, NDX 62% (extremes)

Above 10 day average: SPX 10%, NDX 7% (extreme)

Worden T2108 (over 40 day average): 22% (extreme low)

ETFs oversold (proprietary) of 'active ETFs': 39 of 52

Active ETFs over 50 day average: 5 of 52 (NOW YOU'RE TALKING)

Summary: the market got exuberant, and now it's taking it on the chin, as well as plenty of body shots. Where's the crowded trade? The TRIN closed at 2.02 according to www.wallstreetcourier.com and CBOE put/call ratios have exceeded 1 for four consecutive days. The CHADTP is at something like -1200. Yikes!

Jason Goepfert's http://www.sentimentrader.com/ shows serious oversold conditions as well.

Finally, my bullishness-bearishness oscillator is at +15 on the -22 to +22 scale. I'd have to be puking for it to be worse.

How do you overperform? Being right, at the right time. From an overbought-oversold oscillator standpoint, everyone can see where we are, but nobody can know where we're going. All I know is that as a 'mean reversion' buy-low, sell-higher guy, I'm more bullish now than I've been in a long time. Of course, I've taken my medicine, too.

Good trading and great risk management to all.

Ron

Tout TV: "Your Nose is Growing"

Educational use only. Never intended as advice.

Everybody's talking as though they knew a correction was coming, although admittedly the cheerleaders' tone is a bit subdued this morning.

How about some facts?

1) Yes, the Nasdaq is down for the year.
2) My own unscientific research shows that the 50 day is the more important average to follow for the SPX and the 30 day for the NDX
3) OIH has fallen over 11% in 5 days (short OIH via spreads)
4) The MDY is down 6% in 5 days (long MDY calls)
5) Among the 30 of 51 active ETFs oversold by proprietary criteria, 4 have had lower highs and lower closes 5 days running, including OIH, EWY, EWT, and SMH
6) Some of the most oversold stocks by my 'stretch' criteria are EBAY, HHH (long HHH calls), TIF, AAPL, HAL, LU, LEH, and GS (not advice!)
7) The 0.888 pullback marks on a few ETFs might interest some DeMark followers:

DIA 103.72
IWM 69.28
MDY 132.84
OIH 150.74
RKH 138.26
RTH 89.33
SPY 117.83

8) Some volatility bands for today
DIA .82
MDY 1.33
OIH 2.91
RKH 1.14
RUT 8.15
SPX 9.11
XBD 2.66

As pullbacks go, this has been sharp, but only yesterday did some fear kick in. Everyone's focused on rates, and every word from the Fed, that drops as though spoken by the gods themselves. One has to wonder how long before the clarion calls of those who recognize these mere mortals don't hail from Delphi.

What do I expect? The Fed's game is tick up rates, jack up the money supply. Yes, I'm the department of redundancy department. Why? Because THEY are. The market's calling 'em on it this past week (and identified via the Connors Undeniable screen).

We have to ask where's the crowded trade, and how do we make adjustments on the fly. I've taken some defined risk (options) longs, and intend to hold my commodity plays (small cap mining). Of course, everyone needs to find their muse and stick with it. I'm long mean reversion, and a solid rally will mean reloading on the short side, via controlled risk (spreads).

Good trading and great risk management.

Nothing Matters Until It Matters

Educational use only. Never intended as advice.

Late night trying to rehab my office which was badly flooded. Got a long ways to go.

Simple and inelegant, the market delivered its message today, loud and clear: let me out. The VXO spiked, and is now almost twenty percent above its ten day average, strongly overbought. Of course, Dave Landry's caution about oversold markets becoming more oversold sticks in my craw.

The VXO overbought, and at yearly highs.

TRIN brothers MA3 and MA5 are around the highs for the year, another sign of a severely oversold market. Mamis-Meisler breadth oscillator also severely oversold.

More Dynamics:

Stochastics oversold: SPX 43%, NDX 56% (highest I've tracked)

Worden T2108: 26% (extremely oversold)

Active ETFs oversold (proprietary) 30 of 51

First proprietary criteria buy to sell ratio larger caps (13-1)

Second proprietary criteria (larger caps) (109-1)

Summary: Just as I won't chase on the upside, I won't chase on the downside. It's pretty obvious that a lot of bulls got trapped on the breakout above 1310ish.Have as many bears gotten themselves into the downside/short position? Unknowable. The SP500 closed the third of January at 1268.80, and four and a half months later stands at 1270.32. The NDX closed at 1679.93 on 3 January and today at 1598.91, down almost 5%. So for all the bluster, flat and negative is all the market can muster.

I wish I could say that I've prospered on the downside. I haven't, just lost more slowly than some with my portfolio hedged with some index and ETF shorts. I've nibbled at some DIA and MDY calls today near the close wondering whether the downside slide can snap back some. That's my story and I'm sticking to it.

Good trading and great risk management to all.

In God We Trust

Educational use only. Never intended as advice.

Partly 'up' at the temporary office. Anyway, "in God we trust, Central Bankers pay cash."

As I've written ad nauseam, the Fed is not only the policy architect of inflation, they are the instrument as well. The markets seemed to have caught on to that, with practically everything getting further downside push today.

I'm not chasing in either direction, and in fact will take some defined risk positions as prices permit.

The only thing on my watch list that's up is FLIR, and with breadth as horrific as it is, I'm just watching. My directional butterflies and IJR shorts are keeping me in the game, and only time will tell (and breadth) when the bears have had their fill.

The moral once again for the permabulls is 'this time it's not different.'

Good trading and great risk management to all.

Objectively Speaking

Educational use only. Never intended as advice.

Is the sky falling, or something less happening?

The last time I assessed buying the SP500 with two closes above the 50 day average and selling with two closes below, that very simple strategy vastly outperformed buy-and-hold. We've had three closes below the 50 day EMA for the SPX, and the mindless dip-buying which so often worked, hasn't proven itself again. Of course, we have the lower boundary of the channel kicking in, so maybe the dip buyers will be back.

On the other hand, here's the Housing Index. HGX has driven the market via the 'wealth effect' and especially in job creation. You can argue about the head-and-shoulders top forming, or the Weinstein Stage 3 top, the 'process top', or the break of the 50 and 200 day moving average. You know it, I know it, and Bernanke knows it. Yes, he's in-between Scylla and Charybdis with a monster of his own making, hyperliquidity producing inflation and the 'denial' of the facts with hedonically-massaged 'official' statistics. Frankly, the Housing market is sucking wind, and the Federal Reserve has full ownership because it built the bubble. Of course, they're in denial,because they're never wrong. The High Priests of the Cult of the Central Banker know best, so it's OUR fault, for taking the bait.

Why not get aggressively short the package?

1) TRIN3 and TRIN5 at recent highs

2) 49% of NDX stocks and 37% of SPX stocks are oversold by 14 day stochastics

3) SPX/VIX ratio approaching the lows of the year

4) Meisler-Mamis breadth oscillator oversold

5) T2108 at 37% (Worden percent of stocks over 40 day average)

6) 41 percent of SPX stocks above the 50 day average (the more stocks below the 50 day average, the better the buying opportunity for some 'mean reversion' traders

7) 14 of 51 stocks trading over 400K shares daily oversold by proprietary criteria, including OIH, EFA, QQQQ, SMH, IBB, MDY.

8) First proprietary buy criteria to sell criteria ratio 13:1

9) Second proprietary buy criteria to sell criteria ratio: 58:3

I'm often reminded of the Linda Raschke comment about, "markets doing the most obvious thing in the least obvious way." What is the 'most obvious' path currently? I think that the most obvious pathway now is down, and the least obvious route is 'mean reversion' via a rally. Witness how sentiment is turning on a dime these days. We've gone from euphoria to pessimism on a few words from Mr. Credit Bubble Two.

With the overwhelmingly 'contrary' signals my database generates, I'll try to be patient.

The Fed is inflation. Bernanke is the architect sub rosa via monetary expansion. They don't have to deny it, they simply remove the evidence. Will it work? In the end, the market is always stronger than mere mortals, whether it's Tulipmania, South Sea Traders, the Internet Bubble, or the Great Housing Bubble described by Jeremy Grantham. But don't worry, because we can be sure that the new Fed Head will try to rehab his already tarnished image, under the 'data-dependency' flag. To paraphrase, "It's housing, stupid". So the Fed will get their playbook out, pause in rate expansion and print money like crazy. It's who they are. It's what they do.

Good trading and great risk management.

Kahn-Do attitude

Educational use only. Never intended as advice. Flood status persists here.

Well, I'm in temporary quarters with a skeleton crew and limited patient care thanks to Mother Nature, and that's good compared with the market recently.

Just a quick thought, courtesy of Barrons' technician Michael Kahn, who discussed the relative participation of conservative ETFs (XLV and XLP - healthcare and staples) to the speculative crowd XLK and XLY - tech and consumer discretionary. Now to make it simple, think Dick Cheney (VP) versus KY jelly. That's a pretty visual mnemonic, right.

So, if you want conservative, go VP. You want 'speculative' go KY.

Today the XLV and XLP are up, and the XLK and XLY are down. That's about as good as it gets for right now...

Good trading and great risk management.

Ron

Conor's Weekly Market Message

Educational use only. Never intended as advice. This site never advocates investors to buy, sell, or hold any investment vehicle.

Conor Sen is coauthor of How Markets Really Work and all opinions contained within are solely his, not reflecting those of the author of this website or his employer. Conor is a graduate of Harvey Mudd College with degrees in Computer Science and Economics.

Last Wednesday the FOMC, as expected, hiked interest rates for the 16th consecutive time. The market initially sold off, as it was apparent thet door for more hikes remained open, yet rallied to close down small.

Traders thought it over Wednesday night, and by Thursday they had their verdict: sell. What did they decide to sell? Everything. Thursday they started with stocks, taking down equities across the globe. Friday they sold stocks some more, and decided tobring base metals into the party. And today they came for preciousmetals. With the Russell 2000 down 5%, France down 4%, the UK down 4%, Germany down 4.3%, the Nikkei down 3%, Indonesia down over 7%, India down over 6%, Turkey down over 7%, Brazil down 6%, industrial and precious metals down a quick 10%, and sudden currency instability in select emerging markets, it appears that the USS Credit Bubble has sprung a leak.

It's going to take some time to assess the damage, but this feels different than prior pullbacks. Beta has been hammered,financials have been hammered, commodities have been hammered, homebuilders have been hammered, and emerging markets have been hammered. Market breadth has been horrible. Even today, when the S&P was up a nominal amount, the Russell still sold off, and breadth was negative. In the days to come, watch the above five areas for signs of a recovery.

I neglected to mention the consumer credit data which came out a weekand a half ago. Nominal consumer credit grew by a scant 2.6% in April, a multi-year low, and the seventh straight month of negativereal consumer credit growth (CPI-adjusted). Six months ago the YoY increase was 4.0%. Remember, the last three periods of CPI-adjustedconsumer credit decreases lasted at least two years in all cases, with the most recently in the early '90s lasting over three years. Today the National Association of Homebuilders Market Index came out, and printed a 45, the lowest reading since June, 1995. Anything above 50 indicates a strong (seller's) market, and anything below 50 represents a weak (buyer's) market. TOL and other homebuilding stocks are at levels not seen since 2004.

The housing tracker site I watch (http://www.benengebreth.org/housingtracker/ ) continues to show inventory growing in key areas. Check out the following 3-month growth rates in inventory (not annualized):

Boston: +40.0%
Los Angeles: +18.8%
Miami: +30.7%
Minneapolis: +35.9%
Orange, CA: +42.6%
Orlando: +26.8%
Phoenix: +30.0%
Reno: +39.5%
Riverside, CA: +30.7%
Sacramento: +27.4%
San Diego: +21.7%
San Francisco: +36.4%
San Jose, CA: +37.1%
Washington, DC: +60.0% (!)

There may be no such thing as a national housing market, but most previously heated local markets appear to be saying the same thing. With the millions of risky mortgages set to reset soon, the clock is ticking -- inventories have to fall and prices have to rise, orforeclosures will, raising the possibility for a national Walmart-like markdown in prices. My guess is we're 3-6 months away from this process accelerating, and it'll be interesting to see if buyers step up or disappear completely.

We get PPI data tomorrow and the CPI on Wednesday. The CPI release is one of the most critical pieces of data expected in years. With the market pricing in a 42% chance of a hike in June, the CPI is the government release that will swing things more than any else. A benign number could bring a powerful rally in the sectors which have just taken a beating, especially financials and homebuilders. A lofty number would likely bring new selling pressure. For now, I'd stay in cash, as uncertainty is too high and commodities could easily drop another 10-20% in the blink of an eye. And if you're staying up atnight worrying about the Fed, here's one man's take: the Fed is done.

Conor

Long Bill Meehan

Author’s note: The following has absolutely nothing in it market related, but is just a tribute of sort to my mom and her triumphs ahead of Mother’s Day.

Editor's note: Bill Meehan published this tribute at the www.minyanville.com site on Friday, and he graciously allowed me to reprint it here. I had written to Bill's dad several times when he was at Cantor-Fitzgerald, asking him a few generic market questions, and he always answered them efficiently and graciously.

As a kid growing up you get into plenty of little arguments on the playground over absolutely nothing, half the time ending in exclaiming that your opponent is not going to be invited to your birthday party that’s ten months away and will be the best thing since Hi-C came out with Ecto Cooler. Then there was always that one kid who would break out the big guns with, “well, my dad can beat up your dad.” I was always victorious in those arguments because the other six year olds didn’t know what to come back with when I responded with, “Yeah? Well my dad can drink more Budweisers than yours.” I always wondered what it would be like if little Timmy went home to his dad, who was about a six pack of Schlitz deep in his cut off flannel shirt, and told him what Johnny had to say, only to see his dad tear out of the driveway in his jacked up Bronco and head to, “that nancy boy’s” house just to prove Johnny wrong and help Timmy’s playground cred.

Sorry, got a little carried away there. Well, hopefully everyone remembers that Sunday is Mother’s Day, and my message to all on the days leading up to it is that my mom can beat up Madeleine Albright. Yup, you read that correctly. Now, don’t get me wrong, I don’t have anything against the former Secretary of State. She’s just an intimidating lady who happened to tell New York Times Magazine that she can leg-press 400 lbs at 68 years old, so she was fresh in my mind in terms of strong women whom my mom could pummel. I assure you that my mom cannot leg press anywhere near that weight, and at 5’3” and petite in stature she’s anything but physically intimidating. She is, however, stronger than any woman I’ve ever come across.

Strength has absolutely nothing to do with how much iron you can toss around in the weight room. Strength, to me, is the ability to persevere through tough times, without so much as a single complaint. That is precisely what my mom has done. Most of you know my dad’s story, which needless to say wasn’t the easiest thing to go through, but through it all my mom persevered and kept the family strong. I never doubted that would be the case for a second. I can make a long list of her accomplishments and conquests that I’m proud of that further solidify my claims, but it would make this column entirely too long so I’ll focus on the one which means the most.

I’ll never forget the look on my mom’s face on the evening of June 6, 2004 as she picked me up from LaGuardia airport after a weekend at The Memorial, Jack Nicklaus’ tournament in Dublin, OH. It was one I’d never seen before from her. It was a mixture of fear, uncertainty, anger and guilt. It was weird, but without any prior cause for suspicion, I already knew what I was about to be told. She let me know that the previous Friday, she had been diagnosed with lung cancer which had already spread to her lymph nodes. Always thinking of others first, she opted to withhold it from me all weekend so it didn’t ruin my weekend. All in one breath she told me this crushing information and continued with, “but I’m going to do everything I can and beat this sucker.”

Nearly two years have passed since then. Two years filled with chemotherapy on Fridays, a number of other drugs and not a single complaint from my mom, just pure determination and dedication. Throughout it all she’s also still had to assume her tiring role of working single mother of three, one of which being a teenager still living at home (the other two driving her nuts from afar). I would tell her to take it easy and she’d have none of it. Mowing the lawn, shoveling the snow, taking out the garbage, you name it and she still insisted on doing it herself no matter how many times I told her she could hire cheap labor for those things (neighborhood teenagers, of course). She said it from the get-go, that this was not going to kill her but she was going to kill it.

Very long story short, the good news is that she responded quite well to the various chemo treatments she’s been on over the past two years, though they wore on her physically and mentally at times and made her look like me for a period of time. I’m glad to say that Good Friday brought great news this year as her doctor told her tests revealed completely normal levels and not a trace of cancerous cells. She was told she’s in complete remission. She’s continued chemo treatment for a bit (and is in fact at chemo as I type this today) in case there’s some lingering in scar tissue, but hopefully will soon be able to fully enjoy what she’s worked so hard for the past two years. I don’t think she fully understands how proud my family is of her and how much we look to her for strength and inspiration. There simply aren’t the words to express. She is a survivor, and we all plan on her being one for a very long time.

On June 4th my mom and sister will be participating in a Walk & Run to benefit the Bennett Cancer Center in Stamford, CT. This is a phenomenal center and I credit its doctors and resources for allowing my mom to not only survive this bout, but thrive throughout it. The Bennett Center has relieved me of my biggest fear, which was having to raise a 15 year old young lady at the age of 25 when I can hardly be held responsible for myself, and for that I am forever grateful.

I humbly ask you, if you are inclined, to support my mom and sister (that’s to her personal page) with any donation you deem fit so that many other families will be able to share more success stories in the battle against this terrible disease that affects so many in the world today.

Lastly, I’d like to thank everyone who has supported me and my family over the years through our various bouts. There are simply too many to list, but I’d like to extend a special thank you to everyone here at MVHQ for being there for whatever we needed every step of the way. It was, after all, only 5 days after I began to work here at Minyanville that I received the news. I'm wishing an early Happy Mother’s Day to all moms out there! And please Mom, quit crying – all the kids are gonna make fun of me on the playground. At least I bet I can drink more Budweisers than them.

Very long Mom.

Rain Delay

Educational use only. Never intended as advice.

Not that my observations have that much value, but as they say in France, 'tant pis', so much the worse. You may have heard about the severe flooding just north of Boston, and I'm in the middle of it. It wasn't enough that my basement took on water, but my medical office building is under water, so I not only have no Internet access during the day currently, I have no office access. So my fingers are anything but on the pulse right now, and if we can get it up and going, I'm scheduled for jury duty next week.

Ergo, an even better reason to focus on the charts.

The SP500 (daily)...tails down and close near the high. A successful test of the April lows? Light volume, so I'm agnostic on the reversal.

Some say that the market's only focus is on interest rates. Interest rates are just one part of the liquidity picture. Important, but not the sole issue. My suspicion is that the market has totally caught on to the Bernanke shtick of tick up rates and fire up the printing press, and they're telling him that won't do it.

The VIX came back to within 10% of the 10 day average AND made a yearly high and came back in, a Connors CVR I signal (buy). If I did have screen time, which I probably won't, I wouldn't be looking to get short right here (not advice).

And another thing, the Mamis-Meisler breadth oscillator has worked itself into an oversold condition. So while GutenBergnanke gets a chance to rehab his image with another speech, the technicals have gotten a bit oversold.

Dynamically, 47% of SP500 stocks are above their 50 period average, 31 percent are oversold by stochastics, and only 6 percent are overbought by stochastics.

The active ETFs (52 trading over 400,000 shares a day) show 31 oversold by my proprietary criteria, AND there are 208 energy stocks showing proprietary buy criteria. The moral is pretty clear there.

The Swensen Portfolio has come back from almost 108,000 (about an 8 percent rise since December) to 106253. The value for the 2 year T-note portion of the portfolio comes from valuations of the November 2007 series.

Summary: The market has worked its way into an oversold condition rapidly, and many key reversal criteria are in place. How much of a reversal or how intense if at all? Darned if I know. All I can say is that my database would permit my mean reversionist self to fight this. Unfortunately for me, I'm a victim of a rain delay, and I don't know when I'll be back at the second job. But I'll keep trying to learn.

How Much Is Enough?

Educational use only. Never intended as advice.

Over the weekend, I briefly reviewed some asset allocation options, not recommending any specific allocation program or class, but proposing six asset classes to be considered: cash, US equities, foreign equities, bonds, gold (commodities), and real estate.

I'd guess that among my own holdings, that gold/commodities are well under 5%, which I consider too low. On the other hand, I don't believe in 'chasing'. So where can we look? Here are a couple of charts, the weekly XAU (Gold and Silver index) and GLD (gold). The strongest markets will often only pullback a third (or .382) whereas others may pullback 1/2 or .618. Fibonacci advocates use the ratios, whereas Gann believed in the concepts of eighths (3/8ths, 1/2, 5/8ths).

For simplicity, on the XAU the levels to watch at 153 and 147

On Gold the 'zones' to watch for .382 and .5 are 650 and 630 (never advice). If Gold can hold 650, that would constitute remarkable ongoing strength, although obviously the 'Johnny-Come-Latelies' get a ten percent haircut to get there.

I'll be watching the volatility bands today if I get time. Rumor has it that my office is underwater...not good... A few (one standard deviation:)

DIA .71

IWM .78

MDY 1.22

NEM 1.15

OIH 2.90

RUT 7.49

SPY .84

Good trading and great risk management.

Ron

Where There's a Will, There's a Way

Where There’s a Will, There’s a Way

Educational use only. Never intended as advice.

George Will writes an intriguing and ‘authentic’ argument today concerning contemporary politics. It’s worth your time.

Authenticity and sincerity don’t suffice in most work because one could be as genuine and ‘real’ as could be, and yet ineffective or worse. Warren Buffett makes the point about the necessity for intelligence, energy, and integrity in business. The first two, without the latter, make you dangerous.

What I try to do at ‘Technically Speaking’ is to give you my interpretation of the market’s message, one which is colored through the prism of 1) mean reversion and 2) my distrust of the government, borne of having worked for ten years as part of it on the outskirts of Washington, D.C., while serving in the military.

If you make widgets, your goal should be to make efficiently the best possible widgets at the best possible price, and to develop a market for widgets, ideally one that can grow and prosper. You should report your sales, costs, and discussion and analysis in both a timely and clear fashion, so that your investors can determine whether to support your operation or your competitors.

It seems that despite the excesses of the past decade, and despite the Sarbox legislation, we accept market information that is confusing, inaccurate, or deceptive. Fannie Mae, a government sponsored entity, hasn’t filed financial reports for quarters, yet trades as though clarity existed. United Health has been savaged concerning executive compensation and options irregularities. Numerous CEOs lament the expensing of options, and the effort required to meet reporting requirements and compliance with Sarbox.

As investors, we shouldn’t accept anything less than a full accounting of what businesses do. We’re paying their salaries, whether we realize it or not. It’s not a ‘dumbing down’ of the industry, it’s manipulation by ‘the smartest guys in the room,’ in concert with an industry centered around commissions and fees, rather than customer service. Making matters worse, much of the financial reporting industry serves as cheerleaders, providing neither commentary nor perspective. Caveat emptor.


Good trading and great risk management to all.

Ron

Good Stuff "Uncle Jack's"

Educational use only. Never intended as advice. I don't own a yacht...

The water keeps piling up, but the good news is that pretty soon I'll be able to fish without leaving the house, and have an aquarium without buying a tank.

Good stuff from Uncle Jack at http://www.myunclejack.com/index.php/category/market-update/

Do you believe that an academic can solve your financial problems? Be fanatical about risk. Bernanke probably understands risk, but he's on the government payroll, so he's not taking any. AND remember, he's the one who talked about dropping money from helicopters if necessary. There's a word for that in economics, Professor, "hyperinflation".

Good trading and great risk management.

Woody Hayes Offense

Educational use only. Never intended as advice.

Keywords, tags: stock market, market timing, technical analysis

With over 3 inches of rain on the ground and several in my basement (and rising), I'm reminded of the old Bill Cosby routine, "Noah, how long can you tread water?" The market certainly hasn't reached that stage, but after well over a thousand days without a five percent correction, it 'feels' a little different.

What the Federal Reserve and the Federal government have tried to do is to repeal the business cycle, and plow money into the system via low interest rate policy, record monetary expansion, exploding government spending, and tax cuts. Keynes would be proud, or dismayed. When will it catch up with us? Obviously, nobody knows. But the surge in commodity prices reflects not only demand (after all gold has circumscribed industrial uses), but a weak dollar (consequent to monetary expansion), and a shift toward a desire for 'tangible' money and concerns over fiat currency.

The massive liquidity in the system encourages stock buybacks and M&A activity, with resultant earnings growth occurring at far slower rates than reported because of the financial machinations. Real 'organic' profit growth is far less than financially engineered growth. All of which doesn't say that it can't continue with the ongoing fiscal and monetary policies in place.

How many ETFs made 6 week lows and closed above their open (Connors undeniables 'long')? NONE. How many made six week highs and closed below their open? 132 of 248. RED ALERT. DANGER WILL ROBINSON. 68 of 132 did so on increased volume. Of the 52 ETFs trading over 400K shares daily, 29 showed the Connors Undeniable Short pattern. 19 of these 29 'Big Boys' showed increased volume.

Here's the mighty Dow Industrials. New highs, downclose, increased volume. The Livermore 'warning pattern'.Ditto for IYT (the DJ transport Ishares).

And the MDY.

Of course, it's never that simple. "Volume makes moves and volume ends moves." I don't think that the volume (so far) suggests the end of anything. AND tops tend to be processes, not events. Which is why I like to call them 'process tops'.

For shorter-term traders, the ultrashort term appearance is one of an oversold market. Traders have to ask themselves, if the market opens down, do I want to fade it and if it bounces, do I want to sell it, and how much of a retracement (3/8ths, 1/2, 5/8ths) has to occur for me to do that.

We have a lot of 'breakout' traders in this market? Is a breakout on the Volatility Index (VIX) the same as a breakout on a cyclical stock? Or is it just a 'blip in the massive bull market?' Another question without an answer. The VIX closed at 14.19, with the ten day average at 12.24, over 15% extended, so a bounce (rally) wouldn't surprise.

Something is different on the OEX/VIX ratio.The TRIN3 (3 day average) is at its highest level since February, another 'bullish' sign. It would be more bullish if it closed at an extreme (>2).

Stochastics oversold: NDX 36%, SPX 22%

Stocks over 10 day average: NDX 14%, SPX 19%

Worden T2108: 40%

Stocks above 50 day moving average: NDX 40%, SPX 46%

Active ETFs above 200 day average: 38 of 52

What's different in the 'this time it's different overview?'

Fridays new lows (199) dramatically eclipsed new highs (35). The VIX spiked above the recent range. 47 of 52 active ETFs are oversold by proprietary criteria.

Summary: There's talk (limited) of a Black Monday. I don't see it. The market is remarkably oversold short-term, and I wonder about four possible scenarios.

1) Minor weakness on the open (buying opportunity)

2) Minor strength on the open (probably a non-event)

3) Gap up over 0.5% on the open (likely would get sold)

4) Gap down over 0.5% on the open (likely would get bought, and then sold later in the day on the retest of Friday's action).

Overall, as a mean reversionist, what I expect is the proverbial 'dead cat' bounce, based on the dramatically oversold proprietary criteria, the high TRIN3, the VIX extension, and 'hope' ahead of a major Bernanke address on Tuesday.

As I wrote last week, Bernanke, a Princeton professor, surely thinks that he is smarter than everyone else, and that he can engineer his way out of this with liquidity. My understanding of his expertise is that he feels that the Great Depression occurred because of a lack of liquidity. Although I've never even taken an economics course, I'd at least venture the thought that the situation is quite different now (globalization), massive deficits, commodity supply-demand imbalances, housing weakness, and war. If you run the Woody Hayes offense (three yards and a cloud of dust) forever, eventually it catches up with you.

The caution flag is out, big time.

Good trading and great risk management.

Ron

Express Yourself

Educational use only. Never intended as advice.

Express yourself. Richard Lee has a worthwhile site aptly entitled Trading Quotes at www.tradingquotes.blogspot.com

Great traders give us wisdom about what works. Above all, we need to have an edge (not THE edge), discipline, and yet be prepared to adapt to changing market conditions.

Good trading and great risk management.

Kevlar

Educational use only. Never intended as advice.

Russell 2000 monthly.Even a .382 retrace goes all the back to 683 (not advice) Russell 2000 point-and-figure. Recent sell signal at arrow, but support not far away from previous breakout. (Resistance becomes support?)Here's the Russell 2000 weekly. Easier to 'read'.

SP500 monthly. A .382 retrace takes the index back to 1225. SP500 point-and-figure.

SP500 Weekly. Best case scenario. Back to the bottom of the channel. 30 week moving average still rising. At least volume wasn't rising.

Dow Industrials (weekly). Light volume pullback. Dow point-and-figure shows support at 11300.

Bullish percentage NYSE stocks by point-and-figure. Hasn't been oversold (below 2002).

Yield on the Ten-year note (breakout at 5%).

Gold, continuous contract. Ultrapowerful rally by point and figure. Gold is the enemy of central bankers, 'real' money, the antithesis of the 'money out of thin air' that allows currency debasement and manipulation.

IYR (Real estate shares) Housing index. Broken. EAFA Index, a blend of developed (mostly European) countries and Japan

Britain's FTSE. Somehow I've heard it called the 'canary in the coal mine'. So I like to keep an eye on it.

Let's try to be logical, not emotional in reviewing the current 'state of the market'. We're not talking religion or politics, no something much dearer to our readers, money. Let's also try to choose facts, neither the 'sky is falling' mantra or the Kudlowian alternative.

The name of the game, 1) capital preservation, 2) income generation, 3) expansion of capital.

The choices (first obviously is time frame) begin with asset allocation, and for simplicity, let's assume only six choices.

1. Cash

2. Bonds

3. US equities

4. Foreign equities

5. Commodities (I'll choose gold for simplicity only)

6. Real estate

CASH: 6 month yield 5%, USAA Money market pays 4.45%

BONDS: if you choose to believe the P&F chart of the Ten-year yield above (breakout above 5%), bonds are anything but a safe (obviously depends on your intention to hold to maturity)

US Equities: the SP500 was off 2.6% for the week, the Dow Industrials -1.7%, and the Russell 2000 took a 5% haircut. With my hedged portfolio, I ended up flat, but it sure felt a lot worse than that. The "Big Picture" recently showed DeMark 'sell' signals on monthly charts (discussed in previous charts), and there has been much debate about the preference for big cap over small cap stocks 'ready to change'. I don't think most investors view 'losing less' as desirable.

Momentum investors say that the wind is still at the back of both the economy and the market, and that there is no reason to panic. Long-time market watchers like Richard Russell and Jeff Saut say that this market is expensive by low dividend yields and high mean and median P/E ratios. Jeremy Grantham argues that 'mean reversion' of profit margins tends to compress valuation. As an example, the high valuations of 'search' gave GOOG meteoric price rise. Microsoft, Yahoo, and surely others intend to compete intensely with GOOG for this dollar, and competition generally produces better results for consumers, and lower profits for competitors (see The Winners' Curse).

Foreign Equities: As discussed last week, foreign equities have shown significantly better relative strength than US markets, and only time will tell whether they continue to do so. EFA lost 2.1% and EEM lost 5.35% on the week, and I might argue that the fate of the global economy (or maybe global stock prices) are much more closely linked than some would like to believe.

Commodities. http://en.wikipedia.org/wiki/Reserve_currency The dollar has been the world's 'reserve currency' and as such, assets priced in dollars tend to expand with dollar weakness. Despite the 'easy lending' policy of gold from gold banks that tends to suppress gold prices, global monetary expansion/currency 'competitive devaluation' has, along with increased investor attraction and the development of ETFs, produced dramatic increases in gold prices. Technically, gold is long overdue for a correction. Of course, all here know that markets can remain irrational for far longer than most investor can remain patient. Streettracks Gold (GLD) rose 4.6% for the week (long selected small cap mining stocks).

Real Estate. The housing indexes and homebuilders are chafing under decreased demand and oversupply.

"Active housing listings" are up, both new home and resales are down, and considering that a major portion of job creation in the US has been in the housing industry, this portends 1) falling home prices and 2) potential for layoffs in the totality of the housing industry, leading to 3) impact on consumer spending. Perhaps this has created the slowing of consumer credit. Of course as Bones McCoy of Star Trek might say, "Fow gawd's sake Jim, I'm a doctor, not an economist."

In summary, using a 'data-dependent' approach, it appears that growth is likely to slow, and it's less certain what interest rates will do. As long as the politicians continue to increase spending (it's an election year), and the Federal Reserve continues monetary hyperexpansion (it's what they do), investors better be prepared to get the helmets on. "He who panics first, panics best."

Our mantra remains "capital preservation through risk management."

Please remember your mothers and loved ones, this week and every week.

Good trading and great risk management to all.

Ron

Good trade

Educational use only. Never intended as advice.

Maybe we need a little levity. Ben Bernanke was coming out of his office, carrying two giant hogs. His chauffeur snapped to attention and said, "mighty fine pigs, Sir." Bernanke didn't hesitate but said, "those aren't pigs, sir, those are prime razorback hogs. I got one for Treasury Secretary Snow and one for former Secretary O'Neill."

Without hesitation, his chauffeur replied, "good trade, Sir."

Anyway, it's just ugly with bad breadth and very little sign of snapback here. The VXO has moved all the way up to (drumroll) 13.24, and the baddest dogs on the porch, like GOOG and HANS are getting spanked.

Gold and Silver are getting hammered (long selected small cap mining stocks) and the only GICS winner is XLV (HealthCare) and minimally so.

Is this a tectonic shift or just a sentiment shift? Don't know, just trying to stay alive.

Conor simply calls these 'deflation days' where all assets get deflated. When we talk about the seduction of risk taking, this is what those who get in at the top get.

Good trading and great risk management to all.

Market Movers?

Educational use only. Never intended as advice.

It's always about 'them'; it's never about us. I don't expect the bulls to give up without a fight, and expect commentary or speeches about:

1) overall economic strength
2) relatively low interest rates
3) low unemployment
4) improvement in energy picture
5) overreaction of commodities
6) ongoing merger and acquisition activity

In other words, the investment community will do everything imaginable to poke the bears in the eye. That's just the way they do it...

Four areas to watch (all oversold ETFs)

EEM 110.20-107.07 vol band 1.42
MDY 149.00-146.72 vol band 1.13
SMH 36.98-36.02 vol band 0.45
IWM 77.16-75.23 vol band .72

I'm building a 'short watch', but today probably won't be an ideal takeoff point after a selloff (Never advice)

AAP
CENT
DVA
FFIV
IVGN
LOW
RE
UNFI

Gaps down often create excellent short term reversal opportunities, with the caveat that the markets often again reverse in the direction of the initial gap. Obviously, not information for the casual investor.

Good trading and great risk management.

The Good News and the Bad News

Educational use only. Never intended as advice.

Charts courtesy of www.stockcharts.com

Yesterday, I think I reminded people that chasing could be bad for your health, or at least your equity curve. When we get selloffs like today, I'm always wondering whether there is a trend change, or 'just a down day'. Jesse Livermore wrote about new highs with down closes and high volume as being warning signs. How many of these were there today?

Among the 52 'Active' ETFs, there were 3 (XLE, XLB, EWM), among the NDX (2) NIHD and GRMN, and among the SPX (22) including NEM, PD, and SLB. All in all, I'd call this a very orderly selloff and wouldn't be at all surprised by a reversal tomorrow. Maybe we'll go into 'updown' mode, with a few alternating days of action.

Here's the Bank Index. Recent action took it from 106 to 113 1/2, a 7 1/2 point move. It has pulled back about a third, not far from the second tall white candle. It's been pretty apparent that the liquidity-driven crowd hasn't been restrained by reality. I'd say that it's as likely to reverse as it is to pullback to 109. ADX(14) not shown is 27 (trending), so relying on the oscillators isn't kosher. I wouldn't take a position in this sector ahead of tomorrow because I don't feel any 'edge' here.SPX got smacked for almost 17 points (about 2.5 standard deviations of price by volatility bands) today. In response to an excellent comment regarding wide-range days, I quote from Larry Connors "Advanced Trading Strategies", "When markets move two standard deviations from their normal volatility, the reversion to the mean principle will kick in and more than likely, the market will take a few days to rest...a word of warning-in strongly trending markets (ADX greater than 25), this principle does not hold true. Our research shows that it works best in non-trending markets." Larry was referring to selling options in high volatility situations, which certainly doesn't describe today's markets.

The SPX obviously pulled back into the range, which might qualify as a failed breakout. I'm not excited about it in EITHER direction.

Mining the data. 29 of 52 actively traded ETFs are now oversold by my proprietary criteria. Right or wrong, I took this opportunity to close out short positions (options) on the DIA and the IWM. I also bought some extraordinarily inexpensive SPX calls. Virtually every major ETF that I follow is now oversold, and "mean reversion" is my game. That's my story and I'm sticking to it.

As for the NR7 (volatility narrowing space), it dried up to nothing today, so gotta move on.

Proprietary oversold setups: There are only a few and I'm NOT buying homebuilding stocks.

One of Tom DeMark's principles is the retracement from absolute highs. On the Housing Index (HGX) let's say that 290 is the absolute high. A retrace to the .618 mark gives us something like 180. Will that happen or when? Who knows? It's just that I don't want to fight it, Bob Toll or not.

Dynamics:

Mamis-Meisler breadth oscillator: turning over?

Stochastics oversold: SPX 16%, NDX 30%...maybe this gives the NDX an 'advantage' over the SPX tomorrow. That's what's so great about the game, you review what's going on, form a hypothesis, and see what happens.

Gold Bonds pow-wow.

Standard & Poors had a Gold price target of 710 BY THE END OF THE YEAR. Gold got to 715 before Barry Bonds, although maybe both have been on performance-enhancing substances. Richard Russell calls it global competitive devaluation. Cheapen your currency and make your goods more competitive. Of course, if everyone does it, you get the price action in gold and silver.Here's the SPX/VXO ratio, headed toward the lower end. Another reason why I made a calculated speculation on SPX calls. The downside? Pretty obvious the short time to expiration and the potential for volatility contraction.

Miscellaneous:

SMH very oversold, broke down below the 200 day average. The best case scenario would be a gap down and reverse opening. It seems as though you never get the best case...

Finally, I like to look at how many of my 'Haggerty Stocks' are below the 150 period average, which must also be below the 150 day average of 10 periods earlier. That's 301 of 1040 stocks.

Autozone is one (AZO)...to decrease risk (everything has a cost), I am involved in some AZO butterfly options (75-85-95 calls), with my goal of having AZO 'find' 85.

Summary: I try to be fanatical about managing risk. Today was a good day at accomplishing what I wanted to do. My trading hypothesis is a short-term reversal, with a choppy environment. In my opinion, the Federal Reserve will continue the liquidity spigot, because that's pretty much the only play in their playbook right now. Tweak up rates, to 'fight' inflation, expand the invisible M3 to try to 'monetize' the debt and prevent the housing market from collapsing. It's a loser's game, and I'd bet these bureaucrats would say so over a couple of brandies, as long as you're buying. Of course, they can't say that, because it would expose them as the manipulators many believe them to be.

Good trading and great risk management.

Ron

Market Diagnosis: Looking for a Cure

Educational use only. Never intended as advice.

In Jack Black's School of Rock, they had 'stickittodamanitis'. The market's versions have been 'stickittodashortsitis' and 'buythedipitis', as every pullback is met with buying.

Yesterday's Federal Reserve action must have at least innoculated some of the crew, as the roaring dip-buying hasn't come out (yet). Of course, we know that Gentle Ben has the printing presses revved up, and the helicopters fully fueled, preparing to drop cash wherever it's needed.

Congress is a little distracted by the revelations of NSA collecting data on EVERY phone call made in the US. Does that mean we'll really find out where the pols are when they say they're working late?

Breadth - negative almost 3 to 1
Betamasters - whacked, as more discussion about Click Fraud affecting you know who
Banks and brokers - in the red, as thoughts of Evil Fed Rate Hikes danced in their head

Winners: volatility, Gold (thank you, Mr. Bernanke - long GSS, long DROOY)

Losers: TRIN, Airlines, Tech, Latin America (ILF)

Merck, JNJ, HD, and Alcoa the only Dow stocks in the green as of now. And the beaten down Healthcare space is losing less than everyone else (0.2%) among the GICS brethren (XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY).

So when this space talks about 'mean reversion', "That's what I'm talking about." On the other hand, with TICKs dramatically oversold, and the 20 period MA as the backstop, I'm expecting some bull snorting soon (not advice).

Good trading and great risk management.

Ron

Remember Mom

(originally published at www.uwritesports.com) by Ron Sen, May 2003 (author's note, Mom passed on in January 2004)

May brings us Mother’s Day, which means thinking about Mom. Moms are special, as the sideline reporters catch the ‘Hi, Mom’ and nouveau riche athletes buy mom the dream house she never had. Even if Dad were teaching the fundamentals, everybody knows Mom was the law.

From the time a boy or girl is old enough to crawl, Mom is usually the one who rolls them the first ball. With time and practice, the little one starts to enjoy their first game with the rolling ball, the precursor to chasing some other ball on the diamond, the court, or the field. Mom probably signs them up for T-Ball and Little League, and does more than her share of driving to and from practice. Moms even earn the special moniker of ‘Soccer Moms’, a ‘focus group’ for political parties, a constituency of van-driving, referee-baiting power.

Mom always tried to make a game of everything, Spelling Bee or Math Rounds during washing the dishes before there were dishwashers, and Scrabble or cribbage to sharpen a young mind. She introduced me to medicine, too, with a book called ‘The Great Physicians’ at age 12, where I learned of Galen, and Vesalius, whose grave-robbing exploits revealed the circulatory system, and the wonders of Morton and Pasteur.

Sometimes mothers become the catcher, or the goalie, or the batting practice pitcher. I remember how Mom’s sister was the athlete, who could play ‘catch’ with ambidextrous ease. Still Mom was the one who got dinner out early, and never complained as we wolfed it down to get to practice or games on time. Mom was always my biggest fan. Mom would make sure the uniforms were clean, and that we had spikes, or cleats, or sneakers, even when money was tight, which it always seemed to be.

There was never any question about hustling on the field or on the court; it was very obvious that Mom and Dad hustled to make ends meet. When progress merited it, there were a couple of years where the ‘rents’ scraped up the dough for me to go to Sam Jones’ basketball camp. I still can’t understand how Sam could put four quarters on the back of his hand, turn it over, and catch them individually, as though he were a machine.

Mom and Dad would make the traveling appearances to watch a game when they could, ‘night games’ mostly, because they worked, and there was only one car anyway. They’d sit on hard bleachers in cold weather to watch their son pitch or hit, or try to field. They never could make it to any soccer games, but tried to go to every basketball game, even when I didn’t really want them there. They came to the “Tech Tourney” games in the Garden, and were rewarded with a photo of their son kissing the Division I North trophy along with his smiling teammates.

They came to Wakefield, Winchester, and Waltham in sweltering heat to watch the Inter-City League games, and even after Dad had passed, Mom still came to watch her ‘little boy’ try not to embarrass himself as a forty-year old in the Wakefield Twi-League of twenty-somethings.

She smiled a lot, even though she started to feel the pain of advancing age, just like her son the pitcher.Mom wasn’t perfect. A meticulous housekeeper, she was a neat-freak nightmare beyond any teenager’s belief. She was a domestic tyrant. If displeased, she unleashed a stream of undeleted expletives which let you know where she stood.

Those times made it easy for a son to find comfort at the ballpark, the gym, or the library, safe with teammates and books. She never had a lot of friends, and her outbursts kept those at a distance. Her Irish temper had a volatile and short fuse, and too often she sought refuge at the end of a bottle.

But through it all there was a constant, a devotion to her children and their success in making it in a hostile world.Mom no longer has the inquisitive and sometimes scolding eyes; she sees her world with an indescribable emptiness and often vacant expression. Her face is kinder now, exposed to a brave new world. Her mind and body dwindle, ravaged by Alzheimer’s Disease and cancer. Her biggest comfort comes from the further mind-numbing effects of pain medication in the nursing home, not from the visits of caring friends and family.

Nobody should have to live as she does, and she deserves five words which she hears but cannot remember. So, if you can, tell your Mom “I love you” and “thank you”, while she still knows you care and she knows your name.

Cry

Educational use only. Never intended as advice.

Could you cry a little
Lie just a little
Pretend that your feeling a little more pain
I gave now I'm wanting
Something in return
So cry just a little for me
---Cry, Faith Hill

Just another teardrop in an ocean of liquidity. Tax cuts, Japanese monetary expansion, massive domestic monetary expansion...and the market cries foul because the Federal Reserve reiterates its data dependency of economic policy. Only the hedonics of the BLS statistics can coverup the rampant inflation consumers notice, at the grocery (hamburger 3.99), the gas pump (my son's local San Francisco station at 3.46), college tuition, insurance, health care costs. Oh, but big screen televisions are less expensive.


Here's the daily SP500 chart. Light volume, lower low, lower high. 1315 sets up as first support (not advice).

The Bank Index. Overbought and possibly setting up for a divergence with RSI.

The Broker-Dealers are still holding at the 20 day moving average, but the air seems to be coming out of the balloon somewhat here. Are the powers that be rotating away?

If they rotate out of one group, where might they show up? Healthcare has been savaged, and here's Healthcare Ishares looking miserable and forlorn.

The Russell 2000 Ishares looking a little tired, with a gap up 3 bars ago, followed by two inside days and a pullback (net short IWM via options - defined risk).

What about DYNAMICS?

Here's the Mamis-Meisler breadth oscillator. It's not the be all end all (what is?), but I'd rather sell when it's high and buy when it's low.

Stochastics oversold:

SPX 11%, Russell 2000 14%

Worden T2108:

61%, turned below 5 day average

Database basics:

I like to screen for a number of different patterns, not necessarily always for trading ideas as much as to get an idea of where the 'excesses' of optimism or pessimism might be.

1) Only 1 ETF is oversold by my proprietary criterion (SMH). The whole concept of company-specific weakness has been showing some holes recently.

2) ETFs with narrowest range of 7 days (volatility expansion setups) show only 2 among 52 ETFs trading > 400K shares daily. XLP and XLY

3) "Reversal" patterns, long or short. I use some modifications of Jeff Cooper's 'lizard' patterns. Only one long and three short (not much to get excited about here).

4) Extension patterns, also long or short. 25 extended long and 4 extended short.

Here's OfficeMax (OMX). Now clearly this has shown remarkable strength after a gap up. Where's your risk control if you buy OMX at the close today?

5) "Haggerty DeMark Sen buy or sell patterns" Haggerty stocks are among the Russell 1000, active ETFs, Dow Industrials, NDX, and SPX. DeMark is the inspiration (buy or sell exhaustion) and I add my name on comparing lions and tigers to squirrels. Anyway, with my proprietary criteria, there are 21 sells and 1 buy. The buy was Cigna (CI) today and among the sells are WFT and MAN (definitely not advice).

Summary: Markets advance and pull back, with the old 'no tree grows to the sky' adage in force. Even the power of the Federal Reserve ultimately frays under progressive imbalances. One of the lead articles in the Boston Globe today was about a thirty percent increase in mortgage foreclosures this year. Can the Federal Reserve prevent spillage into consumer discretionary spending by creating an infinite amount of liquidity? Maybe, but that creates INFLATION (monetary supply-dependent), DOLLAR WEAKNESS, and FLIGHT TO GOLD. Ben Bernanke may be the Princeton professor, but it appears that the market is delivering the lesson right now. Will Bernanke listen? I doubt it, because most Ivy Leaguers BELIEVE they're smarter than everybody else. Trust me, we're not.

Good trading and great risk management.

Ron (Harvard '77)

It's Only the Reaction That Counts

Educational use only. Never intended as advice.

Typical pre-Fed market quiet action, feigning fear of the almighty Fed. NO MATTER WHAT THEY SAY, they will continue to print money and do repos at an alarming rate until something bad happens (I guess that would be foreigners refuse to keep buying our debt).

Richard Russell has had it right. With a massive debt to finance, the Fed fears not inflation but deflation. So they pay lip service to 'fighting inflation', of which gold and commodities are the proxy, and reflate like crazy against the diminished willingness of consumers to take on more credit.

Companies do stock buybacks and M&A, inflating earnings through nonorganic growth and as long as the market buys it, everyone is happy. It's a lot like eating doughnuts and ice cream because they make you happy, while you get diabetes and artery-clogging cholesterol problems. Only eventually you pay the piper.

So we have a society that doesn't save, borrows from other producer-saver economies, and we take the money and buy stocks, making the prices rise, but the overall underpinnings of our economic engine worse. And then to make it even more interesting, 'we' (as in We The People) spend like crazy and cut taxes at the same time.

And then we congratulate ourselves.

Meanwhile, in a society demanding outperformance, we take on more risk, to try to get incremental marginal gains. Why? Because THIS TIME IT'S DIFFERENT! Haven't we heard that sometime before.

Beware the initial market move, as it can be a false one (never trading or investing advice).

Good trading and great risk management.

Match Game

Match Game

Educational use only. Never intended as advice.

It’s only human nature to be thankful for a kind word. What I especially value is honesty and integrity. Here’s a comment and question I got today, “I find your posts not only educational but honest as well (a rarity). I have a question regarding a previous post that referred to volatility bands.  Do you calculate these manually or do you have a program that does it?  Are you using the average of the ATM implied or a moving average? 

I used to calculate the bands by hand because I was stubborn (stupid?) but now I go to HamFon Day Trading and click on the Volatility bands button, quick, easy, and very helpful to estimate ‘how much is too much’.

For example, let’s say that I’m interested in a volatility breakout setup with the stock trading yesterday from 50.20 to 49.80, closing near 50. If one volatility band of price is 50 cents (and my stop at the other end of the range), then my margin for error isn’t really that favorable.

Here’s an article that I think is important, but will go unnoticed. Thomson Financial is a big supporter of the www.minyanville.com site that I value and has good products, but they belong to the permabull camp. NEVER is heard a discouraging word. Excluding options expense is nonsense.

Here's a panorama of index and commodity charts from Stockcharts. You can see the strength of the Commodity arena and the Dow Industrials and the weakness of the dollar (imagine that).

Using my proprietary criteria, I find NO oversold ETFs among the 52 ETFs averaging over 400,000 shares a day. 39 of 52 of these trade with stochastics values over 80 and 27 trade with stochastics over 90. If you want to chase momentum, here it is.

Here are the ten most overbought ACTIVE ETFs by stochastics. If you feel compelled to push the envelope, start licking (not advice).

VOLATILITY EXPANSION WARNING. 17 ETFs have the NR7 (narrowest range of 7 days pattern) and 16 of 17 have stochastics at least 80. So a melt up is a definite possibility (? Blowoff top). Just some biggies, like EEM, SPY, MDY, QQQQ, IWM, and IJR. A number are repeat entrants in the volatility space, so if you want action, it’s likely to be coming. The NR7 setup does not predict direction.

YOU WANT CRUSHED? Here’s crushed. Cigna.

YOU WANT OVERBOUGHT? Eastman Chemical.

Dynamics:  

Stochastics oversold: NDX 16%, SPX 9%

Close > 10 day average: SPX 70%, NDX 65%

Worden T2108:  62%

Close > 50 period moving average: SPX 66%, NDX 64%

VXO: 11.33 (10 day average 11.09) – no signal

SPX/VXO:  117

Mamis-Meisler breadth oscillator: 357 (10 day average) this TENDS to oscillate between about –250 on the downside and +500 on the upside


Summary: My son Conor summed it up in his weekend missive. This market is constructed to encourage investors to take more risk. John Succo echoed that message today in a commentary at the www.minyanville.com site, with the compression of volatility to the Greenspan encouragement of homebuyers to take on adjustable rate mortgages, to the dramatic monetary expansion exploding under Chairman Bernanke’s watch.

Mother’s Day is coming up this weekend. All of which reminds me of something my mother used to tell me as a child, “if you want to play with matches, you better be ready to get burned.”


Good trading and great risk management to all.

Ron

It's Never 'Easy'

Educational use only. Never intended as advice.

In one of his books, Bill Eng wrote that the first ten years are spent learning the game, the next ten profiting from it, and the third ten mastering it (or something like that). I've also read that really good trading is 'effortless'.

I'm not sure about the effortless part. The struggle isn't to identify your setups, but the integration of preparation, execution, and monitoring. You can't wait for 'perfect' opportunities, because the game evolves, as the sentiment of the organism (the market) evolves.

I do try to pay attention to a lot of things, just like in medicine. Many possibilities exist, many outcomes are possible. Far more uncertainty reigns than we (doctors and patients) want to believe.

In the market, there's the market action, sectors, stocks and their 'sister stocks', dynamics of buying and selling pressure, both short and long term. But most of all, we battle the inner 'demons' that want us to turn trades (losers) into investments, and winners into profits - instead of big winners.

All the while, we must keep our ego focused on trying to build our equity, which is the amoral target.

By the way, I'd put up an ORANGE ALERT, as in the market's ready for a RICHARD PRYOR move, BUSTIN' LOOSE. Which way? I don't know. But the SPY has a 46 cent range today, 41 yesterday and the IWM 48 cents yesterday and 41 today. The cannon is loaded. Are we firing or being fired upon?

No Snow in May?

Educational use only. Never intended as advice.

Is Snow out at Treasury? Like that has some impact on markets...

Fascinating day, with many 'NR7' breakout setups on indexes, with the DIA triggering above 116...as it tests the all-time high.

So far IWM, MDY, SPY have NOT triggered, although FDX did (below 118.7

I can't see taking new short positions here, with the manipulation (that's right, call it what it is) going on. John Mauldin had a fascinating piece yesterday implicating Japanese liquidity in the international carry trade, along with currency protection (Japanese). His point was that the international yield curve (US 10 year less Japan 2 month) remained steep, and traders (the rich elite) continued to borrow short and invest long.

HANS (the new GOOG) blasted off today. It's still water.

Breadth is positive 16:15, TICKs are a little overbought (not advice), and the bank index is marginally positive.

Gold, VXO, and South Africa are all up over a percent, and generally equities are still getting some love.

I sold off the calls I bought on EBAY yesterday, and continue to watch MCO and UNH (net long via options) get crushed.

I bought some DELL on the smackdown, and sold covered options (calls and puts against it as a value play).

Although OIH is up, it appears 'they' are selling into the rally as it has steadily drifted down after the potent opening (net short via directional spreads).

Overall, I've battled back after last week's 'trading infection'.

Does anybody have a wider variety of facial expressions than Chloe on 24?

Good trading and great risk management to all.

Ron

No Thrill in the Chase

Educational use only. Never intended as advice.

Back to basics today. Buy oversold stocks, preferably undervalued. Don't chase. At least by executing the playbook, you get satisfaction in adhering to one's sphere of competence. Such as it is.

SPX (daily) According to Connors on Advanced Trading Strategies (as I recall) a large range day is often followed by price contraction.

NDX daily. Net negative since early January. Facts.

Mamis-Meisler breadth oscillator. Overbought, but not extreme (not advice).

SPX:VXO ratio. Static today.

VXO 11.02, 10 day average 11.01 (neutral)

Worden T2108 (stocks over 40 day average) 64% (rising) - extremes of about 30% on the downside and 80% on the upside, although stochastics peaking on the graph itself

ETFs trading > 400,000K shares/day: 52

ETFs above oversold by proprietary criteria: NONE

Stochastics oversold: SPX 10%, NDX 17%

Active ETFs trading in the narrowest range of 7 days (volatility expansion?): 22 of 52

The biggies: DIA, SPY, MDY, QQQQ, IYR, IWM, EEM, and more. Here's the moral - volatility has compressed tremendously on MANY major index proxies. This OFTEN leads to volatility expansion, and I am exceedingly wary of fading these breakouts.

Good trading and great risk management.

Ron

Bonus for Readers - Enjoy!

Educational use only. Never intended as advice.

Keywords: free software, investment websites, sports websites

You’re a casual visitor here. Here’s a little bonus information for readers. I’ll reward you by giving you a list of some websites worth visiting, financial and otherwise.

Financial:
www.billcara.com (wealth of information, crisply presented)
www.minyanville.com (subscription, soup to nuts education and commentary)
www.tradermike.net (high quality investment blog)
www.thekirkreport.com (another ‘must see’ investment blog)
www.tradingmarkets.com (subscription)
www.hussmanfunds.com (Hussman’s weekly commentary a must)
www.raymondjames.com/inv_strat.htm (Jeff Saut’s weekly missive)
www.schaeffersresearch.com (options and more)
www.tfccharts.com (commodity charts)
www.stockcharts.com (excellent charting site)
www.softwarenorth.com/trading/commitmentscurrent/
www.wallstreetcourier.com (market data overview)
www.brettsteenbarger.com (Psychology of Trading)
www.morganstanley.com (Steve Roach commentary very worthwhile)
http://moneycentral.msn.com/investor/finder/customstocks.asp (stock screening)
www.hardrightedge.com  (Al Farley’s trading site)

Sports:
www.espn.go.com
www.minorleaguebaseball.com (everything site for minor league baseball)
www.bostondirtdogs.com (Red Sox dirt and news)
www.thehardballtimes.com (love baseball?)
www.baseball-reference.com (information site for everything baseball)

Newspapers:
www.nytimes.com
www.washingtonpost.com
www.thesun.co.uk/

Miscellaneous:
www.techsupportalert.com/best_46_free_utilities.htm (best free utilities)
www.craigslist.com (job listings and more)
www.majorgeeks.com (software)
www.wonkette.com (irreverent commentary)
www.nonags.com (freeware and shareware)
www.merckmedicus.com (information for health professionals)

Crow is Never on the Menu

Crow is Never on the Menu

Educational use only. Never intended as advice.

For something different, I’ll examine first the ‘Macro’ events that might serve to shape our investment choices going forward.  

Tom DeMark’s point about not allowing politics interfere with your business decisions comes first. Having spent ten years at Bethesda Naval Hospital, in part caring for politicians, let’s say I have a healthy distrust of what they say versus what they do. Washington’s prime directive is twofold: 1) get re-elected, 2) expand your power base. How does that relate to government ‘of the people, by the people and for the people?’

Everything that Washington pols say or do occurs in the framework of how it affects their chances for reelection or running for higher office in the future. The two most important words in Washington have been and will be ‘plausible deniability’. The market has its own perceptions about how power swings impact various sectors and industries. It pays to acknowledge this.

Major political events of 2006:

Mid-term elections
Impact of Iran on U.S. elections
Global war on terrorism

Major economic issues for 2006 and beyond:
Budget reconciliation
New Orleans reconstruction
Ongoing demand for US debt by foreign creditors
Supply/demand balance for global energy
Inflation, as measured by monetary expansion and commodity crunch
Relative value of US dollar and other currencies

Major peripheral social unknowns for 2006:
Bird flu
Hurricane season

Miscellaneous long-horizon concerns:
Water
Aging populations in US and Europe with social needs versus growth populations of developing world

So how can we make some money by examining the four pillars of price – sentiment, fundamentals, technicals, and allocation?

Investor’s Intelligence: 44% bullish, 29% bearish (relatively neutral)

Weekly stochastics/RSI review:
SPX    66   92
NDX   58   63
INDU  69   95
BKX   69   96
SOX   58   46
XAU   74   93
XBD   68   82
CYC   74   94
CMR   62   59
XOI    62   82

Close > 10 day MA by selected ETF
BBH   9 of 18
EFA   129 of 189
EEM   64 of 79
ICF    11 of 30
IWM  1259 of 1987
IYH    67 of 163
OIH    18 of 18
RKH   18 of 19

Stochastics oversold:

TRIN5  0.95 (neutral)

Worden T2108: 63% (mildly overbought)

SPX/VXO ratio: 120 (recent range mostly 130 – overbought, 100 oversold)

NDX/VXN ratio: 119 (recent range mostly 125 – overbought, 95 oversold)

VXO extension from 10 day average: less than 5 percent (neutral)

Active ETFs over 50 day average: 45 of 52

NYSE Bullish percentage by point and figure: 70% (recent reversal, negative) – sector high Energy = 80%, sector low Healthcare = 50%

Close > 50 day average: NDX 63%, SPX 66%

CHADTP: neutral (slightly overbought)

Multifactorial indicator: (proprietary)  -7 (ranges from overbought –22 to oversold maximally at +22)

Sentiment: is not as enthusiastic as one might think. Technicals: overall show no weakness. Dynamics: mildly overbought, but NOT extended.
Fundamentals: we know that price-to-earnings ratios are extended by historical standards, profit margins (mean reverting) are at historical highs, and that dividends as a percentage of the Dow Industrials and SP500 are very low
Allocation: by inference, commitments to energy, commodities, financials.

Simply stated, it’s been nearly impossible to do anything on the short side. The systemic imbalances continue to rise, posing increased risk, which as my son points out in his message, has been accepted as an alternative to “risk-free return”. The mo-mo crowd has the rights to crow, the memories of 2000-2002 expunged by a torrent of liquidity.  The great but troubled Jesse Livermore would contest Graham’s ‘margin of safety’ arguing for the ‘path of least resistance,’ which is up. The market screams: “we don’t care about risk,” and the ‘Bubble’ over the cartoon characters says, “Uncle Ben will protect us.” Can he?

Here’s a link to another site, with their proprietary view:

Sentiment Trader by Jason Goepfert.


Good trading and great risk management to all.

Ron

Conor's Corner - Weekly Market Commentary and Observations

Educational use only. Never intended as advice. Never a recommendation to buy, hold, or sell any investment vehicle.

Conor Sen works as a risk analyst in the investment industry and any opinions contained within are solely his own and not the official opinion of his firm or this website. Conor has degrees in Economics and Computer Science and has worked as a market researcher of quantitative short-term trading techniques and is coauthor of How Markets Really Work with Larry Connors.

While thinking of a way to start this piece, I was stumped. Seeking inspiration, I turned to the front page of the business section in today's San Francisco Chronicle (Alexis subscribes; I probably never will -- sorry, NYT/GCI/WPO). And what do I see, but "Rally Sends Dow to 6-Year Highs" shouting from the top of the page. Let's do a little comparison of different assets classes since the beginning of May, 2000: (3-month, 1-year, and 6-year returns sorted by 6-year returns):

Copper: 51.2%, 135.0%, 335.0%
Silver: 44.1%, 98.7%, 180.3%
Crude Oil: 7.8%, 38.1%, 157.2%
Gold: 20.0%, 58.9%, 145.1%
Median Sales Price of an Existing Home through March, 2006: - 1.8%, 7.4%, 56.8%
Cost of a year at Harvey Mudd College (from 1999-2000 to 2005-2006): 40.0%
Cost of a year at Harvard (from 1999-2000 to 2005-2006): 29.6%
Dow (with dividends): 7.9%, 14.6%, 23.9%
CPI through March, 2006: 1.5%, 3.4%, 16.7%
S&P 500 (with dividends): 5.4%, 15.2%, 2.0%
Dollar Index: -5.3%, 1.4%, -23.5%

What is this telling us? US investors have it tough these days. Over the past 6 years our currency has lost a quarter of its value relative to other nations. By being in long-term treasuries we would have outpaced our stock market, but struggled to keep pace with the cost of high-quality education. With savings accounts we would have done far worse. And of course, we'd be getting lapped by housing, industrial commodities (oil, copper, and others), and "real money" (gold and silver). Americans aren't stupid. They see that simply keeping money in the bank is now a losing proposition. So what's the only alternative? TAKE MORE RISK.

A three-year bear market soured investors on stocks, and the combination of tantalizingly low interest rates and loose lending standards induced Americans to place their bets on housing. Intoxicating gains by some led others to follow, reaching critical mass as a majority of new California mortgages in 2005 were of the interest-only variety to take "ownership" of a house that would be far cheaper to rent on a monthly basis. These monstrous gains in housing kept the economy afloat and still growing, and it is estimated that 40% of new jobs over the past 5 years are real estate related. However, with housing inventory surging, buyers exiting the marketplace, and prices now down over the past several months, we are at a new crossroads.

For a combination of reasons, oil has reached politically uncomfortable levels, with fingers pointed in multiple directions. With copper up 50% in the past two months, and gold and silver not too far behind, ashtrays are outperforming 401ks, with nickels and old pennies worth more than their face value. Stocks continue to creep upwards, but which ones? Geezers like IBM, GE, GM and GM have, at best, remained flat over the last several years. Their more recent brethren like MSFT, DELL, INTC, CSCO, EBAY, and YHOO aren't faring any better. Last year's darlings, GOOG and AAPL, are flat year to date.

So other than throwing spaghetti at the wall in the way of ETFs and seeing what sticks, where are investors going to turn? So far, it seems, they've been rushing into oil and metals. But this is dangerous. Inflate the price of a San Jose house or a tech stock and you might confine the inflation to just those asset markets. Inflate the price of a barrel of oil or a ton of copper and you're inflating something that goes into manufactured products.

This leads to two possibilities. One, corporations eat the costs, and their margins and profits sink, eventually impacting the stock market (hello, Eastman Kodak). Two, those costs get passed on to consumers and we get inflation in the price of goods. So far, with gold/silver, bond yields and stocks continuing to rise, the markets are placing their bets on the latter case.

Ben Bernanke has said more or less that the price of gold isn't important to him. And the markets believe him, with gold rising another $30 this week to yet another 25-year high. But should Bernanke change his mind, he's not going to like his options. His predecessor, Paul Volcker, saw gold rise to $850 in 1980 dollars and needed to take interest rates up to 20% to crush inflation and finally quell the gold rush. Gold is a tricky beast. Unlike rises in housing and stocks, which become manias due to greed, gold becomes a mania out of fear, fear of holding onto pieces of paper becoming worthless before a citizen's eyes. There have been four billion ounces of gold ever taken out of this earth. At $683 an ounce, that's approaching $3 trillion worth of gold, and good luck finding it all. Estimates for the total value of all assets in developed countries (stocks, bonds, and real estate) top $100 trillion. If we get a new wave of gold fever in the 2000s, what will stop it this time? How close to par could the ratio of gold to developed country assets eventually go? How will the dollar fare? These are the things one should consider as they read about "new highs" in the Dow.

Conor

Sector Checker - Rotation, Rotation, Rotation

Educational use only. Never intended as advice. Not a registered investment advisor. Successful investing means controlling risk.

Earlier today, I reviewed graphically some charts. Tonight, I'd like to focus on some sector analysis using sector SPDRs.

XLB:SPY...double top weekly?...................................................................

XLE:SPY will the ratio be limiting or further extend the oil patch's power? ..........................................................................................................

XLF:SPY shows another MACD cross above the zero line. Is the market focused only on interest rates? If so, are they ignoring the 'data-dependent' malarky the Fed spins?...................................................................

XLI:SPY industrial component. XLI as in 'it's all good'...............................

XLK:SPY can it be that tech has underperformed? Think DELL, ERTS, MSFT, INTC, ADBE, LU lately......................................................................

XLP:SPY a defensive sector...ready to move?............................................................XLU:SPY: another underperformer showing signs of life. Dividends count?........................................................................................................................XLV:SPY...ouch. UNH has killed a lot of portfolios (long UNH)...........................................................XLY:SPY Consumer discretionary. Paycheck to paycheck. Here's where it can show up.....................................................................................................

Price-to-earnings ratios are just one way to look at valuation. Above is data from www.standardandpoors.com Jim O'Shaughnessy argues that price-to-sales are a better way to assess value, because sales are harder to manipulate than earnings. Extensive stock buybacks have accounted for a sizable proportion of earnings gains. These do not reflect organic growth, and time will tell concerning the appropriateness of this use of capital.

As speculators, it is our job not to pick the 'most beautiful', but to identify whom others believe is.

Good trading and great risk management.

CPI, no lying.

Educational use only. Never intended as advice. Often in doubt and too often wrong. Past performance does not guarantee future results.

Here are statistics worth perusing about the Consumer Price Index. They don’t call the Bureau of Labor Statistics the ‘Bureau of Lies’ for nothing.

CPI versus 'real' data.  A hedge fund manager with whom I correspond says the CPI is really about 8% according to their calculations, less hedonics. This site would agree.

Good trading and great risk management to all.

Ron

Thoughts on Allocation

Educational use only. Never intended as advice.

Ultimately we know (both intrinsically and empirically) that asset class distribution allows similar returns with diminished risk. Of course, maximal returns involve overconcentrated portfolios, and with less diversification comes more risk. What we are seeing is investors taking on more risk as the bull market proceeds.

The first issue becomes what markets in which you intend to invest, then determining allocation to them. I don't know that we can agree on 'investible' categories, but I do believe David Swensen's argument compelling in Unconventional Success. Let's look at relative strength charts (weekly) on some major asset classes, using indexes or ETFs. Later, I think we can do the same with the GICS groups versus the SPX. I'm going to choose the SPX as the 'gold standard', although maybe gold itself should be the gold standard.

An article in Barrons today points out that price ultimately results from the intersection of growth and interest rates (competing for allocation), and that growth is likely to slow while interest rates have increased and may continue to do so (a debatable point).

I choose to look as gold as the 'anti-dollar'. The Federal Reserve, via its relentless monetary expansion continues to squeeze the life out of the dollar. The casino will have another option soon, a mining ETF.

Here's the 'size matters' chart, comparing the Russell 2000 ETF (IWM) versus SPY. The hedge funds must watch this action like a hawk, because they can turn it around. Developed foreign markets (including Japan), versus the SPY.

Emerging markets (EEM) versus the SPY. Real Estate (IYR) versus the SPY. Interest rates must bother somebody.The SPY hasn't kept up with the rise in interest rates.

Gold actually has kept up with interest rates, and then some. Central bankers hate gold, which competes with paper as 'money'.

Let's see. I'm a central banker in a savings rich, producer nation, buying US long bonds, so they'll buy my country's stuff. I own a lot of US paper, that keeps getting weaker. As Piglet might say, "I don't think that's good, Pooh."

Now I'm an emerging markets finance guy. My people's standard of living is getting better, a burgeoning consumer economy. Maybe I want to take more money from the US market and invest it 'domestically' instead of intermediate bonds (EEM:IEF)

There's one argument that I have problems with, probably because I'm just dumb. "They" say that as long as the dollar goes down slowly, it's no big deal. So, if the Central Banker 'steals' your buying power, it only matters how rapidly 'he' steals it. And there's the argument that if Stock XYZ is worth Y, and the dollar falls by 50 percent, then XYZ should now be worth 2Y. Grantham might argue that relative to another stable currency, the 'replacement value' does not change. Help me finance people, I'm stupid on this. Maybe there's some middle ground.

I put in the squash, snap peas, and onions today (Boston weather isn't that good) so I'm tired from digging in the dirt. But I hope to be back trying to dig up some more info later this weekend.

Good trading and great risk management.

Immunity Idle

Educational use only. Never intended as advice. Unless it's good advice.

Trading has a million 'sayings', including 'good traders are not immune from bad trading.' This week was a downer for me, and I'll examine why. That isn't to say doing the right thing can't go wrong, but most often, doing the wrong things create wrong. Public confession for bad technique does deserve note.

1) Poor preparation. That would be Friday (today). Didn't come in with the fully prepared trading sheet that I normally do. As John Wooden would say, "failing to prepare is preparing to fail."

2) Anticipation. Traders have to be prepared for what the market does. "It's not the news, it's the reaction." Today's weaker job reports acted like Pavlov's bell for traders, who ignored the inflation part of the equation and decided to take it up. The only thing that counts is the what, not the why. Light volume doesn't matter. Reading the market properly matters. I anticipated a 'reversal', and failed to respond optimally to the obviously positive breadth and financial action. The market pays you to react, not act.

3) Sticking to your guns. Hard to stick to 'em when you haven't brought 'em, preparation wise. I have RKH calls and MER calls and sold a little stock against the rise, but even then am not delta neutral. I didn't try to force shorts against the tide, but that's hardly genius.

4) Dynamics: attention. I just felt distracted today. Wasn't really paying enough attention to the winners or losers, breadth, and so on. The medical job wasn't that busy either, so that's no excuse. I haven't had a day off for a few weeks and I'm not at the top of my game...should've recognized that.

Tonight I went to a retirement dinner for a surgeon with whom I've worked for fifteen years, and who has been a surgeon for forty years. The evening captured him perfectly, a terrific surgeon who is a cantankerous curmudgeon, with a heart of gold. Best wishes in retirement Henry Haynes. Bravo zulu.

Good trading and great risk management.

Ron

Fun Comes First

Educational use only. Never intended as advice.

Short note as I just returned from the "Mr. Melrose" contest, where eight high school juniors and seniors competed for the prestigious title of Mr. Melrose. In addition to the inevitable 'question and answer' segment, there were formal wear, beach wear, casual wear, and a talent contest.

Phil Meador (escorted by my lovely daughters) captured second place, despite a hyperactive performance including a Chippendales knock-off and a front somersault.

John Needham, a 6'7", 280 pound junior offensive tackle captured the title. Undoubtedly, his 'pink ribbon dance', performed wearing a pink tutu garnered a lot of support from the judges.

The market has unlikely winners sometimes, too, but not too often.

Today's 'Letterman-Style highlights'

10. It was N's over S's as the oversold dominance of the NDX led to some mean reversion action.

9. Eastman Kodak took their usual quarterly loss. Just my opinion, but this is a very sorry company (no position).

8. Among the 50 'active' ETFs, only one (TLT) is oversold by my proprietary criteria.

7. 16 active ETFs show 'volatility expansion' patterns, including DIA, IWM, RKH, BBH, and IBB.

6. Despite all the hoopla about the 'fantastic' retail sales, the RTH was up all of less than half a percent.

5. How many ETFs made six week lows and have closed above the open for the week (Connors undeniable)? None.

4. 24 percent of NDX stocks and 14 percent of SPX stocks are oversold by stochastics, which may portend better for the NDX than the SPX tomorrow (not advice).

3. There's a lot of scuttlebutt about a 'forced liquidation' of a health care hedge fund, which is creaming the health care sector. Is that the truth? Who can know?

2. Gold marches on. Unseen by the masses and unloved by central bankers.

1. The battle du jour comes from the SP500 and 1315. Surely, there will be beaucoup buy stops that can get run, and a 'melt up' can happen as easily as a bounce off resistance.

The government acts like money grows on trees, with another spending appropriation and talks about permanent extension of tax cuts. Wait it's not that the money grows on trees, it's that they cut down the trees to print more. Maybe that's why lumber futures turned up recently. http://www.tfccharts.com/chart/LU/W

As trading psychologist Mark Douglas reminds us, "the market can do anything."

Good trading and great risk management.

Why Pigs Get What They Deserve

Educational use only. Never intended as advice.

So Piglet asked Pooh "what makes stocks go up?"

Pooh, as always, had an answer ready. "Stocks go up because people who buy them expect that they will become richer, because if the price goes up they are richer, and some companies also pay the owners money, something called dividends."

Piglet said, "ooh, that's nice. But he asked, why do a lot of the stocks that go up the most not pay their owners this money?"

Pooh said, "because the people want the stock more than they want the dividends."

Piglet replied, "I don't understand that Pooh. What if the stocks were to go down? The new owners would get nothing for their money."

Pooh said, "that's what a man called the Federal Reserve Chairman is supposed to do, keep them from going down."

Piglet wondered, "how can he do that?"

Pooh said, "he prints a lot of money and gives some to the banks to give to people to invest more and more."

Piglet answered, "but with all that money around, isn't the money worth less?"

Pooh replied harshly, "Piglet, you ask too many questions."

Piglet sighed, "but if I don't ask the questions who will?"


Ron (I'll try to keep asking the questions)

Charts and More Charts

Educational use only. Never intended as advice. You own your trades.

It's hard to muster a volatility expansion argument here.

MDY - clues? Triangle forming, AND an NR7 (narrowest range of 7 days). I can't see an explosive downmove (it could easily happen, but 'they' don't seem to let it happen) but volatility could accelerate out of this pattern.

The NDX has pulled back. 28 percent of NDX stocks are oversold by stochastics and 39 percent are over their ten day average (not excessive).

Every chart isn't going to tell a story. Here's the XLY (Consumer discretionary), which isn't speaking to me. Dollar squalor. Here's a weekly chart of the dollar. You print enough of 'em, they start being worth less, or worthless.

Here's GOLD weekly. The dollar is fine. Deficits aren't a big deal. There is no inflation. I think my wife got me a camera phone in case I can catch Ben Bernanke whistling past a graveyard.

EZA, Ishares South Africa. Almost 25% above its 200 day average. "Do you feel lucky, punk?"

DNB. Is this a chart of "Done and Bradstreet?" Very oversold short-term however. I don't like to chase either up or down.

The Mamis-Meisler breadth oscillator has rolled over. End of the rally or just a fake out?

In a bad mood. Could be worse. You could have bought Moody's at 73.

So, let's review.

1) System imbalances persist (fundamentals)

2) Nobody cares (technicals) based on VXO

3) 28 percent of NDX stocks and 16 percent of SPX stocks are oversold. That makes me feel 'better' about the NDX.

4) Your 2001 dollar now buys around 60 cents of 'stuff', but not so much gold. Isn't that special?

The problem for my approach is that not a lot is standing out in either direction, so it's probably best to stand aside and manage existing positions.

Good trading and great risk management.

Prevaricators and Prognosticators

Edcuational use only. Never intended as advice.

Rarely do we encounter two groups of people who see precisely the same thing from such a different viewpoint.

We have the bulls, who say that stocks are cheap on lookahead earnings, low inflation, and technicals. A weaker dollar is good, promoting our exports.

Meanwhile, the bearish camp says that the bull market is extended by duration, by buying exhaustion signals (DeMark), that debt and deficits matter, and that a fragile housing market can overturn the entire apple cart. Richard Russell correctly points out that dividends, those compounding and confounding assets that produce about half of return, are anemic. Grantham reminds us that high profit margins are mean reverting. A weaker dollar makes it more difficult (theoretically) to convince our creditors to take more US debt.

From a sentiment standpoint, bullishness has waned. From a seasonal standpoint, we have increased risk.

Inflation is 'low', unless you pay for healthcare, food, energy, tuition, or insurance. The Federal Reserve 'fights' inflation with one hand, ratcheting up interest rates, while promoting inflation to manage US debt by printing money and doing repos (repurchase agreements) until the cows come home.

The small fry (the Russell 2000) have outpaced the Big Boys (SP500), until they don't. The banks and brokers seem to push relentlessly up, until they won't.

Banks: negative
Breadth: negative 3:2
Betas are fairly neutral.
TICK - overbought

My son told me that his proprietary market risk alert is flashing red (overbought - NEVER ADVICE).

Who are the prognosticators and who are the prevaricators?

Do you measure the strength of an argument based upon who has the loudest voice?

Wait for your pitch, whatever your strategy.

Good trading and great risk management.

The Defense Never Rests

Educational use only. Never intended as advice.

Keywords: investing, stock market, mean reversion, trading techniques, volatility

I don't get a lot of feedback here, which is fine. I write to try to present other opinions, some market data, and fully acknowledge many successful (and unsuccessful) styles of investing.

A terrific comment came in today. "However, I cannot subscribe to your basic philosophy of "mean reversion" and "overbought"/"oversold" methodology and philosophy. Notwithstanding the fact that theoretically 95% of all occurrances take place within 2 Std. Dev., stocks seem to go much higher and lower than this methodology and these indicators would predict."

I can name many successful investors who would never contemplate 'mean reversion' and note their styles.

William O'Neil, with CANSLIM, has modified some of Jesse Livermore's thoughts about 'pivotal points' and clearly is a breakout trader.

Dave Landry identifies trends, and believes in 'trend resumption' certainly an approach that has worked for him, with outstanding results. (I sometimes use Landry's screens to look for mean reversion candidates).

Warren Buffett, the disciple of Benjamin Graham uses discounted cash flow predictions, incorporating the 'margin of safety' into buying 'wonderful businesses' and holding them forever.

Kevin Haggerty on the other hand, is a remarkable trader who believes in short-term trading and focuses on decision zones (Fibonacci, key moving averages) in conjunction with volatility bands (mean reversion) AND market dynamics. When asked about not knowing any rich technicians, Larry Connors replied, "I'd ask Kevin Haggerty about that one, but he's off shark fishing."

Jack Schwager describes many types of traders and their styles in his 'Market Wizards' series, with the common thread being risk management.

Tom DeMark, one of the most respected market observers of the past quarter century, has shown buying and selling 'exhaustion' as viable and profitable strategies. DeMark works with one of the best traders in history, whom most of you know, who happens to be among the 400 richest people on the planet.

My son, Conor Sen, studied and developed many 'mean reversion' approaches while working with Larry Connors. Some are available via the book, 'How Markets Really Work', that examined short-term price behavior of several major indexes, establishing mean reversion as a validated statistical concept. Is it THE WAY to trade?

There are many ways to win and to lose in trading. Among the most famous are unwillingness to take a loss, and over willingness to take a gain. Risk management obviously applies on both the upside and the downside.

We can name 'strategies' ad infinitum (just a few)

Breakout:
Volatility breakout from narrow range 7 days (NR7)
Inside day, NR4 with historical volatility <>Trend resumption:
Cooper 1-2-3-4
"Windows"
Pullbacks after moving average crossovers (Landry Bowties)
Pullbacks to key moving averages

Reversal:
Cooper lizards
Volatility bands
DeMark Sequential and Combination

The problems for the trader are 1) can you master your approach, edge, entry, management, and exit and 2) does it make a difference 'when' you trade?

Also, my son notes that some 'mean reversion' groups are less reliable than others. He notes that the pharma stocks don't work as well as other sectors. Conor also notes far better reliability of mean reversion from oversold than overbought. In other words, limits to fear and less limits to greed. I'm working to develop methodologies to define extension on both sides, but in a cyclical bull market, that is, of course, problematic.

What we all recognize ("this time it's different") is that markets go up and down. Some of the people I enjoy reading the most, including Jeremy Grantham, Jeff Saut, and John Hussman all recognize mean reversion as a fact but aren't dogmatic about it being the only fact in investing.

My proprietary system finds the four most oversold stocks on the DJIA to be MSFT, INTC, HD, and VZ (net long VZ).

On the NDX, it's XMSR, SEPR, DELL (net long DELL), and MSFT

On the OEX, it's DELL, CI, F, and MSFT.

I adhere to my beliefs and today took positions in EXM, ENG, and PDCO.

PDCO, totally fallen out of bed.

EXM...I want to buy despair and sell hope.

Dynamics:

TRIN3 - pretty neutral

Mamis-Meisler breadth oscillator

Stochastics oversold: SPX 15 NDX 24

> Lowry's 10 day average: SPX 55 NDX 39

Summary: Success in the markets is almost literally, 'no accident'. Whatever one's methodology, risk management is essential. I believe that the best time to buy is obviously in a upward trending market when the vehicle is oversold, and prefer to sell overbought stocks in oversold markets. Lacking that, I still favor buying low and selling higher, versus the popular 'greater fool' theory which has worked wonders for so many but proved catastrophic during the great bear market that produced a 75% NASDAQ haircut.

By the way, using my proprietary methods, there are no oversold 'active' ETFs.

Good trading and great risk management.

Ron

Bentsen and Hedges?

Educational use only. Never intended as advice.

Ho-hum, nothing much happening until the CMO (Chief Monetary Obfuscator) Ben Bernanke emphasized 'data-dependent' instead of 'pause'. I guess it was a Lloyd Bentsen paraphrasing moment for the market, as in "I knew Alan Greenspan, and you're no Alan Greenspan."

With the market faced with uncertainty, it elected to selloff, led by the bankers and brokers.

Here's the Dow Industrials. Three 'tails' up as 'they' sold this rally. Overall rising price and possibly lower MACD peak (not advice).

Yield on the Ten-year. Oops. Not so clearly the pause that refreshes.

Following suit, the RKH 'chilled' a little. (Long RKH calls, short RKH).

Last week it was Goldman-locks and the Dead Bears, with GS headed straight to 200, without a pause. Barrons had commented (last week) that GS might be a great buy on a pullback to 140. Bulls plowed ahead. Bears answer: the Paws that refresh.

ETFs oversold (proprietary) ONE, as in TLT. Not confidence inspiring here.

ETFs volatility setups (NR7)

Only two worth noting (never advice)

IYT 84.36-83.63

EEM 106.62-105.40

Dynamics:

The Mamis-Meiser breadth oscillator has gotten overbought, but not 'maximally'.

The SPX 'volatility deflator' (just made that one up) shows trending back toward the bottom of the range (100-130).

Summary: Sometimes I wonder whether it's worth studying anything except psychology of the markets. Last week, it was hunky-dory, don't fight the fed (pausing), and this week I'm sure it's "that rat-buzzard Bernanke just stabbed us in the back." That's what makes the game so hard.

Do yourself a favor and check out Jeff Saut at http://www.raymondjames.com/inv_strat.htm.

Imagine the carnival game where you drop a ball down amidst a series of pegs, trying to land the ball in a given 'slot' at the bottom. The pegs might be considered 'random' variables, or obstacles to market prosperity. How confident would you be amidst uncertainty in the housing market, monetary policy, currency risk, commodity price change, labor market issues, geopolitical risk, and so on, that your future would land in the slot you want? Probably not very. But commentators come on Tout TV every day, ringing the bell, getting you revved up to get in the game. The casino is open Monday through Friday, (9:30 to 4:00) with the bells and whistles, bright lights, laughter and heartbreak.

I'd think about remembering 1) Lloyd Bentsen and 2) the hedges.

Good trading and great risk management to all.

Ron

Good trader, Bad trader

Educational use only. Never intended as advice.

The toughest battle a trader faces is always the battle within. On days like today, sometimes it is tempting to 'do something' even if it's not there.

You can make your own list, but here's some of my 'good trader' goals

• Control risk
• Control risk
• Control risk
• Have a quantitatively 'proven' edge
• Maintain the 'edge'
• Don't sell a winner just 'because'
• Don't fear selling losers
• Do your homework
• "Read" the market
• "React", but don't anticipate
• Discipline myself to follow my edge
• Don't take tips (a doctor literally walked out exasperated today because I wouldn't listen to his stock tips)

In sports, they call it 'staying within yourself'. Maybe we should call it 'trading within ourselves'. It's a lot harder than it looks.

Good trading and great risk management.

Wild Blue Yawn-der

Educational use only. Never intended as advice.

For a first day of the month and in the wake of the Barrons 'Dow 12,000' cover, today has been a disappointment. If anything, they're 'selling' the rally, with the VXO up, banks and brokers down.

Energies and Walmart are winning as the indefatiguable consumer hasn't yielded to inflation or gasoline.

However, only the brokers are down over a percent (actually a deuce)...I've got a 'Volatility' position on, long MER calls and short MER.

Banks - negative
Breadth - 8:7 positive, but weakening
Betas - mixed

It would be hard to call the 'action' so far anything but mediocre. As for Chairman Bernanke's contentions concerning inflation and gold, it appears that gold and silver choose to laugh in his face.

Good trading and great risk management.

Ron