Today's Sell off was overdue | Some thoughts
January 07, 2009
– Comments (13) |
RELATED TICKERS: SPY
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This is what I was warning about - in 9 hours the market lost 4% - about half of the mid-December Rally (857 to 943).
Calling this top was easy - but figuring what happens next is not. I was a bit early calling it around 880 but I scaled into my shorts at 880 905 and 925 on the S&P 500... dollar cost averaging is important when you short too!
I have an equal conviction that the market can easily go to 868 or 930 from here.. if it goes to 868 I will make a lot of money - so I don't need to worry about that - what I need to do is manage my risk for 930 to 1000 on the S&P 500.
The good news for the bulls is that 900 is a major support level and so is the 885-890 area those are also fibonocci retracement numbers for this rall (Fibinocci retracements are always 38.2% , 50%, or 61.8% of a bullish rally or bearish decline... these retracements can reverse at the fibonocci number). I personally am not a big believer in fibonocci retracements because it's hard to figure out which rally is being retraced. But the bottom line is bulls have some supports around here.
The bad news for the bulls is that the market is STILL technically very overbought - more overbought than I've seen it in 1-3 years. This means that there could be a lot more selling to come to relieve the negative technical condition. Even if the bulls can reverse this sell off they'll create the most overbought market in years by doing so and upside will be very slow to come with out more selling along the way.
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MY ACTIONS TODAY:
Removing Risk Keeping a Healthy Exposure
- I did this because if we crash I make a lot of money (reward is covered)
- If we rally back my upside risk could be 975 or higher (risk needs to be covered)
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Covered - 20% of TSO (for a 6% loss)
Covered - 10% of RYL (for 6 gain)
Covered - 50% CHRW (4% gain)
Sold - 50% of SKK a 2x Ultra short (even money) biggest risk/reward... trimmed for risk.
I'll cover again if large gains present themselves
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Many of my shorts were down +7% today. I refuse to gloat however because the past week has been humbling and bragging causes trades to blow up. A wise man once told me if you find yourself bragging about an open trade - close it... because the market will keep you humble.
The reason I am writing is to update my CAPS groupies on what I am doing now that my short thesis has started to play out. Some of you may have been shorting along side me.
*** FYI I love the CAPS community so please ADD ME TO YOUR FAVORITES if you have not - I love the discussions ***
My plan is to partially cover my shorts because this rally has frightened me a bit - even though I made money I am racheting down my exposure so I have more money available in case the market goes higher (temporarily).
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What is next?
I can offer an explanation for what has been and two things I "know"
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1. The market has rallied on 6 of the last job reports... which were awful. I don't like being short past the opening of a jobs report number - the next job report is Friday.
2. We have sold off hard prior to at least 5 of the last 5 jobs reports including this Friday's
3. No sustained market rally has happened during a recession while the rate of change of unemployment (month over month) is increasing
4. THE END OF THE MONTH MARKET MARK-UP TO + 900 POINTS ON THE S&P 500 EXPLAINED:
The 401k Statement effect. In Sept, Oct, Nov, Dec Wall street managed to close every month around 900 on the S&P 500.
If the market had ended any month significantly below 900 the average retail investor would have freaked out when they read their 401k's.... and withdrawn there money or switched to new managers / funds.... Wall Street is nothing if not self-serving (I should know I work in financial services and talk to fund managers every day).
Simply put: Wall Street / Mutual Funds were able to keep the market from falling (month to month) so Wall Street could keep investors from stampeeding away creating a negative feedback loop. Who knows maybe the US government bought stocks too... they seem desparate I bet they did.d
WHAT YOU DON'T BELIEVE ME - TAKE A LOOK AT THE CHART:
THE TRADE:
Even though I am bearish I bought 2x ETFs at month end and year end. By November it became clear to me that you could always buy the market near the last week of the month ESPECIALLY ( this is important if we (a) had not rallied recently (b) we were well below 900 on the S&P 500....
5. THIS MARKET IS NOTHING BUT HOPE AND MIRRORS & TECHNICALS
This market isn't trading on news - so don't make plans to buy the Obama rally or infrastructure stocks or anything that resembles communism. This market is trading on technicals.
The market didn't bottom and rally 8% because Obama picked a Fed Chairman - it bottomed because it was extremely oversold beyond anything seen in a decade.
We didn't just fall 4% because of the ADP jobs report or Intel's earnings we fell because we were more overbought than we've been in 3 years (including the bull market)
So watch the technicals and fundamentals but don't worry about the news... the news isn't going to take the market down (although it will take down individual stocks - so I play ETFs on the long side and stocks on the short side).
6. THE MARKET IS WAY TO OPTIMISTIC
The sum of stock analysts earnings estimates is around $70 yet the sum of top down analysts and strategiests is around $56... analyst downgrades are coming! You probably just noticed analysts used the rally to downgrade a lot of stuff.
15x 2009 earnings of $56 is about 840 on the S&P and 2010 might have $65 (if we're lucky - that's the S&P trendline) 15x 65 is 975 on the S&P.
Now consider the fact that the market generally trades in a 30% range from high to low each year... that give you 714 to 967 assuming $56 earnings.... OR 828 to 1121 in 2010... ENJOY!
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