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RVAspeculator (28.03)

Nearing the end of the current bear market rally, BUT….

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April 12, 2009 – Comments (20) | RELATED TICKERS: SPY , QQQ , IWM

It’s been a while since I wrote a long post on my thoughts on the market out here.

---------------------------------   Background
 When this whole rally started in the 600’s I bought in with both feet.  I loaded up on Citigroup, UYG, GE, SSO, Alcoa, TAN, DXO and I sold all my gold and silver miners near the peak after the Fed announcement of Quantitative Easing at GDX = $38 a share..  I even put 100% of my 401K in the market near the lows.

Well I finally have gotten rid of all my longs except for a few I sold in the money covered calls on for April that will probably get called away from me.  I even have dipped my toe into shorting the last few days but I have kept it VERY small and actually have been stopped out for now as the “animal spirits” are really in the equity markets right now.

That being said we are nearing the end of this bear market rally.   I am not smart enough to tell you if it is today at 856 on the S&P.  I am always early on predicting market moves and luckily I have adjusted my trading to fit my “always early” timing.

For instance I was finally getting bullish on this market again when it broke 750 to the downside on February 22nd when I posted:

 “You want to see what irrational panic looks like, look no farther than today.”
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=149024&t=01001808419327792238   2/22/09

But I noted in my post that I was just STARTING to nibble on long side candidates when I said..

“I am FINALLY adding some NON-gold related longs to my real account.”

This is the number one lesson trading these markets has taught me, you are never going to catch the exact top or the exact bottom.   I started buying things at 750, bought all the way down to 666 and started selling above 830…

I have made great profits this year and am not as concerned with making all the money that will be made on the downside as shorting is stressful and dealing with Ultrashorts or put options is like juggling chainsaws….   Look the single day, 50% loss in FAZ Thursday for a good example.   I shorted Lehman Brothers the whole way down with puts in 2008 and I believe I took 3 years off my life doing so.  :)

---------------------------------  The BUT….
There is a reason I have a “but…” in the title of this post….   The reason is although this may be another bear market rally, 666 on the S&P could have been the REAL low.  But to me that does not really matter, in my opinion even if it was the REAL low we are NOT just going to go straight up off of a V bottom like what is happening right now.  We are up 28.5% from the lows in exactly 1 month’s time.  A 28.5%, 1 month rally is NOT the way a market bottoms.  So selling here makes sense if you believe 666 was the ultimate bottom OR you believe the real bottom is lower.

Arguing if that was really the low or not matters very little as it is 30% away from where we are now.   Do you want to hold even if we only retrace half of the rally?  (15% decline)  I know for sure I do not.

---------------------------------      The Reasons….
Anyway, if you want more proof that we are due for a pullback of some sort, or maybe something more sinister (like new lows) I will offer up some proof from a technical perspective and from others.  Really I probably should have just limited my post to this info.

1. The “dumb money index” at http://www.sentimentrader.com/ has swung to positive in the short run AND the long run..  First time this has happened since September 2008.

2. Corporate Bond spreads, although off the all time record levels of January 2009 have not improved substantially and are still sitting at levels that would have been unthinkable in 2008.

3. This chart, which needs no explanation. (C-RSI over the last 8 years)
http://www.stocktiming.com/Tuesday-DailyMarketUpdate.htm

4. Mutual fund inflow finally have started to surge.  Trimtabs reported 11.9 billion in Mutual fund inflows last week.   The previous week there was only 3 billion of inflows and that had been the trend through much of March.    Mutual fund money is “the dumbest of the dumb money” and you always see a surge of mutual fund money coming in when the market tops.  

5. At the same time Equity ETF’s had outflows for the second consecutive week.   So pro traders are selling to mom and pop mutual fund holder. 

6. A great deal of credit indexes are STILL HITTING NEW LOWS.  The ABX indexes all put in new lows.  What about the Public Private Purchase program? :)    The CMBX spreads are still above the levels where they BLEW OUT in November 2008.  Triple A CMBX spreads are at 600 basis points and they were at 200 during the stock market crash in October.   So right now CMBX spreads are 3 times worse than October 2008 and ABX prices are at their worst levels ever.   Yet the market continues to rally.

5.  Although unemployment is a lagging indicator it is surging at an increasing and mind-boggling rate.
http://3.bp.blogspot.com/_nSTO-vZpSgc/SdYw2CWaCbI/AAAAAAAAF0s/WVgEqu_iu7s/s1600-h/Unemployment+Rate-2009-03.png

6.  The bottom at 666 had no capitulation associated with it.

“in January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse, domestic equity mutual funds were worth about $6.5 trillion. Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion. But guess what: Over that time, net redemptions totaled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline.”   Rick Ackerman from www.rickackerman.com   One of the best investors I read.

7. The trailing P/E of the market is 100…  you won’t find that stat on CNBC.

8.  World trade has fallen off a cliff and has not recovered during this market rally.   The Drybulk index has been down 21 of the last 22 days yet the market has rallied this whole period.   Here is a graphical picture of world trade.
http://www.advisorperspectives.com/commentaries/images/jm021309image001_0F6C5DDE.gif
 

9. The big money was DUMPING hardcore into the financial run up on Thursday.
http://online.wsj.com/mdc/public/page/2_3022-mflppg-moneyflow.html?mod=mdc_leader

10. Jim Cramer called the bottom for the 10,000 time at 856 on Thursday..  (29% off the lows) Also he is still on TV and I have always said I believe the real bottom comes when his show gets pulled because no Cramericans have any money left.  

I think that is enough for now.  Something I realize is FACTS ARE NOT SHORT TERM TRADING INDICATORS but they should still be kept in mind when trying to determine the longer-term picture.   For instance some REITS are paying their dividends by issuing more stock which is the “ponziest” thing I have ever heard, but that being said SRS which shorts REITS was down 24% on Thursday.

One thing I learned from 2007 is being right on the macro level is not the same as being right trading the markets.   Still all these things are to be kept in mind as eventually FACTS MATTER.
 

Thanks for reading this extra long post.  Please rec and comment.

PS:   Quote of the day:  “Buying our own treasuries: Paying other people interest to loan ourselves money we don't have.”

20 Comments – Post Your Own

#1) On April 12, 2009 at 9:51 PM, SolarisKing (< 20) wrote:

That quote was alsty's?

1 rec

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#2) On April 12, 2009 at 10:02 PM, RVAspeculator (28.03) wrote:

I stole it from the same place he stole it...   a popular poster on TickerForum  (Karl Denninger's blog) uses that quote as their signature.  

Most of Alstry's stuff seems like it is from the MarketTicker blog, not that there is anything wrong with that.

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#3) On April 12, 2009 at 10:13 PM, russiangambit (28.88) wrote:

> Jim Cramer called the bottom for the 10,000 time at 856 on Thursday..  (29% off the lows) Also he is still on TV and I have always said I believe the real bottom comes when his show gets pulled because no Cramericans have any money left.  

----------------------------

Thanks for a good laugh. Btw, I agree with everything you said.

 

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#4) On April 12, 2009 at 10:40 PM, usmilitiadude (< 20) wrote:

Last week the S&P lowered its 2009 as reported earnings per share estimates from Q1 $8.75 Q2 $8.75 to Q1 $7.32 Q2 $6.64. Estimates went from $34.74 to $28.51 for 2009. Maybe the operating earnings per share are more important?

 

 

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#5) On April 12, 2009 at 10:51 PM, JGus (28.16) wrote:

Great post, RVA. I'm in agreement that these FACTS will matter again at some point in the very near future.

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#6) On April 12, 2009 at 10:59 PM, JGus (28.16) wrote:

I've been 'playing' with SRS the last couple weeks. I've had a couple good days and have been stopped out several times. I bought in at $32.16 on Thursday right before the close. I don't know exactly when we're headed back down, but I intend to make some money when we do.

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#7) On April 12, 2009 at 11:14 PM, RVAspeculator (28.03) wrote:

thanks russiangambit...

usmilitiadude,

Never been a big fan of EBITA earnings.  Its too 1999 for me and seems too easy to manipulate.

JGus,

Wish I could say I bought SRS at $32...   I tried it earlier on Thursday but got stopped out and was not near my computer late in the day to see how decimated it got.   I will probably take another shot at SRS next week once I am sure a bottom is in for it....  I am curious how the market reacts to Goldman/JP Morgan's "good" quarter.

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#8) On April 12, 2009 at 11:20 PM, d1david (28.59) wrote:

thanks.. you got my rec on this one.... good point... its hard to pick the bottom or top..but overall you can get a feel....

i am with you... the BIG picture is that we ARE still in a bear market... and that the run-up has been too strong and too fast...the market can be irrational longer than we think(look at the tech wreck of 2000)... but there are a lot more "itchy trigger fingers" than in 2000 and if we get a meaningful retrace, it might scare all that brand new mutual fund money away for quite a while..... 

thanks for taking the time to organize your thoughts and post... i have been to post recently

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#9) On April 12, 2009 at 11:24 PM, rogerII (< 20) wrote:

I bought TZA at 50.00 last a couple of weeks ago, betting on the fact that I thought the market would go down but it's only gone up even more. Im waiting for tza to go back up to at least 46.00 before I sell should I go ahead and sell now and take my losses or do you see the market going down this week due to the earnings coming out. 

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#10) On April 12, 2009 at 11:32 PM, arboretum (27.68) wrote:

GREAT POST! Couldn't agree more, with you all the way.

Unfortunately had to work all day Thurs and no trading time, held SRS as a hedge and got killed on it (down slightly despite huge gains in some small bank positions). Could have made a killing with all that irrational exuberance. It can't possibly last.

Having said all that and not wanting to repeat a cliche, but the market can remain irrational longer etc. etc.. Especially with the big boys at the big banks wanting to make this rally last through their earnings season. All the technical indicators have pointed to a correction for weeks, Eliot wave types are tearing their hair out, the PVO is dropping like a stone but still we keep going up. Don't want to call the top but definitely scaling into shorts at this point.

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#11) On April 12, 2009 at 11:54 PM, RVAspeculator (28.03) wrote:

David,

 

Yep, look at the weekly moving averages… still in a waterfall.

 

Roger,

 

I’m bad at the very short term…   That being said we are near some major resistance levels on the S&P and the small cap index.  Right at these levels on the S&P and up at 870 look to be strong resistance but if they break to the upside I would not be short anymore.   I am not sure how the market will react to Goldman and that is a key in my opinion.

 

As stated above I am currently NOT short this market as I want to see a break down first.  I WILL miss the first few percent of downside but that is ok with me.

 

TZA is a crazy volatile puppy and when trading those double or triple inverses I usually limit myself to a couple day holding period and put a fairly tight stop on them.   As I have ranted about in many of my blog’s in the past, they are all going to zero in the long run.  Be careful trading these guys, they are hazardous to your wealth..

 

Off to bed….

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#12) On April 13, 2009 at 7:58 AM, Londamania (44.96) wrote:

Great post - but you are misquoting Jim Cramer...his advice right now is identical to yours (at least my hearing of it)...take profits if you have them otherwise stay out and see what happens...if their is any difference in view it is that he is confident the pullback won't be back to the 666 bottom, and that a steep pullback is good in that it is a buying opportunity - which seems to be what you are saying as well.

Will be very interesting to see how we get through this big earnings week.  Anything sideways or moderate up from here would be near term bullish carrying to perhaps a May pullback?

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#13) On April 13, 2009 at 8:18 AM, Bupp (27.95) wrote:

I agree 100% I think the market is going to have some huge downside over the next two weeks.  This morning I went long 50 ultrashorts and shorted 50 ultralongs in my caps portfolio.

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#14) On April 13, 2009 at 8:24 AM, jdawg1847 (37.38) wrote:

Yes, spreads have blown out and continue to.  But I think we can attribute this to a "long-term" repricing of risk premiums.  If you're waiting for spreads to contract to 2007-early 2008 levels, you'll be waiting 30 years.

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#15) On April 13, 2009 at 10:19 AM, anchak (99.90) wrote:

Outstanding post RVA...... However I echo this big BUT..... I think this week is critical....... Lots of Financials reporting as well as GE.....

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#16) On April 13, 2009 at 11:22 AM, ClandPhoenix (76.56) wrote:

Agree with and appreciate the support for your argument. The market can be irrational up or down and despite the fact that the people rushing in tend to be "dumb money" they can in numbers shrug off the rational outcome through mob mentality. My caps portfolio will stay neutral through this earnings week and my real money was taken out last week and buried in my back yard. -rec-

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#17) On April 13, 2009 at 1:11 PM, bostoncelitcs (65.73) wrote:

Diversify your portfolio......buy US. Treasuries, buy stock in US companies!  USA!

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#18) On April 13, 2009 at 1:48 PM, usmilitiadude (< 20) wrote:

We need corrupt bankers and loan brokers in jail. There seems to be no justice. Enron seems like a game of patty-cake compared to this countries industry wide loan fraud and debt problem. The first thing we should do is tell everyone we know that fraudulent bankers need to go to jail. Maybe it will work its way to the justice department.

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#19) On April 13, 2009 at 5:09 PM, bullshiite (29.29) wrote:

I love #10:

10. Jim Cramer called the bottom for the 10,000 time at 856 on Thursday..  (29% off the lows) Also he is still on TV and I have always said I believe the real bottom comes when his show gets pulled because no Cramericans have any money left.

Great Post and Links!

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#20) On April 14, 2009 at 8:51 PM, RVAspeculator (28.03) wrote:

Thanks for all the rec's and comments guys....  

The rest of the week should be really interesting and very volatile.

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