Friday, October 31, 2008

10.31.08 - Tale of Two Markets

While the S&P 500 is down some -1% early this morning, the Russell 2000 is up well over +1%. Looking at the positive tick and advance-decline line, it's clear so far in the a.m. that money is being put into the broader market at the expense of the large caps: a stealth rally, if you will.

So the million dollar question is, have the last two days represented consolidation for another immediate leg up, or a set up for an overbought cool off (note last night's high RSI comment)? At the moment, it looks like the former; but with this being the last day of the month, the weekend upon us and national elections next week, anything goes.



9:00AM PST: I have replaced my normal SPY posting with IWM today. Note the very strong performance in-line with cumulative tick. You wouldn't know this looking at the majors. Amazing. Intramarket spread/pair trade anyone?


9:25AM PST: SPY for comparison's sake. AD Line is flattening here - careful/ watch that trend line below.


10:20AM PST: Trendline held perfectly and tick remains very, very strong. Much more of a drop and longs will get stopped.

11:00AM PST: Further up moves from here in light of resistive volume spikes will be indicative of a short covering rally that may run into the close. We'll know in the next half hour or less. Big Ben is in play also.

11:20AM PST: And... no dice, at least not while Ben is talking/on-air. Hitting strong resistance at SPY $98. Can't assume it will hold with volume, tick and AD lines remaining strong. Bullish triangle? It's an area to watch -- we'll see.

11:55AM PST: Take a look at volume, lighter than yesterday. Best week since 1974? VIX down 10% to 56.8.

12:15PM PST: Looks like a sloppier close ahead than postulated. I'll be hedging into either further strength or on a confirmed break down.

12:40PM PST: Got those on right after my last post and I'm not unhappy about it even though VWAP held and now above R1 again. Enjoy your weekend/ Trick or Treating.

Never Investment Advice

Thursday, October 30, 2008

10.30.08 - Adjusted Tick Remains Positive

Adjusted tick remains positive, albeit wending and weaving as price has trended lower. There was also a large supportive volume spike as price took its last dive to yesterday's lows. This tells me that, although we remain overbought, there may be some level of accumulation occurring "under the hood".


Never Investment Advice

10:35AM PST: Hope you are still using active money managment in this environ. It might feel whippy and you'll get nicked alot, but it will save you on the big moves. Trend still holding after/but some resistance at the VWAP... looks dicey again... not breaking down though. VWAP appears key here though tick still accumulating and volume positive. Welcome to the "hard right edge"!

11:55AM PST: Volume is very light with an hour of trading to go. Watch that up trend support line like a hawk. It has had some false breaks, but generally has been very resiliant since the mid-day.

CLOSE: Pheww. More of a "normal" looking day, but still wide ranging with many mixed signals. Tomorrow is the last day of the month and next week we can finally get elections out of the way. How about that Janet Yellin? Be advised that the afterhours RSI(2) of 96.20 out of 100... this is (possibility of a markup aside, in the event it hasn't already happened!) very high and typically not sustainable for more than a few days, if that.

Did you hear this on-air? "Burns out" is quite kind! Charlie! I hope they don't fire the poor guy; hell, I'd promote him to on-air director after that performance.

Wednesday, October 29, 2008

10.29.08 - Equities Flat on Rising Tick


So far we are fairly range bound around a flattened VWAP even as the Cumulative Tick and AD lines begin to pick up speed. Positive volume is also outpacing negative. The next few days will be interesting with the Fed announcement today, GDP and Initial Jobless Claims tomorrow, and the end of month upon us. VIX is actually higher by a hair at 68.8, but off its highs.

o Federal Reserve Site
o WSJ - Money Flows

10:10AM PST: Noise is picking up even as the day retains a bullish profile. If we close much higher today or in the days ahead, I may consider selling way out-of-the-money calls against some of my positions. Temporary resistance at the falling twenty day moving average.

11:40AM PST: Although technical support broke, be careful of directional bets short of playing the noise. Actually seeing a suportive volume spike into the weakness. Rolling again... very noisy, as expected.

12:55PM PST: Couldn't bust S1 R1 and everyone hedged, put shorts on at once. I'm shocked, shocked. ;-)

o Traderfeed - Sector Performance Reversals

Never Investment Advice

Tuesday, October 28, 2008

Cut Throat Times

Trendline Test?

Trading Tick & AD Line Convergence

Throughout today's trade (like every day), I discussed the importance of confirming price trends with the Cumulative Daily Tick (second subpane) and Advance-Decline lines (cyan line/ third subpane). These can be terrific guides, particularly in the wide-ranging directional environment we have been witnessing.

The chart below presents how the slope convergence of the two indicators may have been used today, with each vertical dotted line representing a confirmed trend change:


P.S. - Don't be fooled by the middle two trades, look closely... veritable "scratches."

10.28.08 - Gain to Pain


The large gap up to yesterday's average price couldn't hold after hitting R1, putting us back just above the pivot under a declining VWAP. I didn't "want" to believe it either, but the early turn in the cumulative tick and AD lines were early tells, forcing closure of levered longs entered last night (see prior post).

Sell the rallies is getting boring (lol), even if it remains profitable. Note the large supportive volume spike just after 8:00 AM PST, but I'd keep neutral until the aforementioned indicators turn around. That was some consumer "confidence" number... don't forget that's a coincident indicator though. Lot's of mixed messages out there on the divergences front even as we head ever lower.

Reading:

o Bloomberg - CDO Clearing
o AlphaTrends - New Lows Coming?
o Quant Edges - Capitulative Breadth High
o Steenbarger/Trading Coach - Ten Posts
o Shaw - Returns Since 1929

9:35AM: Narrowing range in price and vol (while VIX remains stubbornly high), be ready for breakouts.

9:50AM: Seeing that indicator turn mentioned above, now see if we can bounce up from the VWAP on the next test.

10:10AM: No test... just a pause and then break through the five-day, same effect -- though we are now about as overbought intra-day as we were oversold a few short hours ago -- meanwhile up trend continues.

10:30AM: Downtrend line from yesterday's highs to today's opening highs did indeed prove resistance.

10:40AM: Now at the intraday uptrend line. Will it hold? Overbought is burned off, but indicators are back to negative slope.

11:40AM: Indicators above still the best tells of the day -- keep watching them.

CLOSE: And back again! RSI(2) > 90 -- That doesn't have to stop a multiday advance, but recognize that it's an extreme one-day change. Fear works both ways!

Never Investment Advice

Monday, October 27, 2008

10.27.08 - Flat Lined at the Pivot


Nothing happening here. Keep your eyes open for breakouts with a prospective bias to the upside.

[Add: Bear in mind Tick & AD line remain negative, however.]

9:55AM PST: Downtrend lines broken, heading to the five-day MAs, a critical test for the day. Adjusted cumulative tick trying to go positive.

11:20AM PST: First attempt over MA(5) was met with some mild selling pressure. Positive & Negative volume are playing a bit of a dance.

11:55AM PST: Playing "connect the dots", we are at the moderately rising trendline between Friday and today's opening prints. Just under VWAP and above Pivot. Though we appear to be stabilizing and we held here earlier today, I'm wary of prints below the pivot.

CLOSE: Looks like new lows at the day's S1. Vix at a new record close, RSI(2)=3.67. Putting a little "extra" on after the close (SPX 833 or so)... we'll see. Not wanting to hold overnight vs. another one bites the dust going into today's close? Does it matter? Of course it does, but... these big moves are feeling more and more blase.

o Quant Edges - Back to Extremes
o Alpha Trends - Back to 1997?

Never Investment Advice

Sunday, October 26, 2008

Weekly Rewind - Week 43 (10/24/08)

(Click to Enlarge)

"Click, click, click" goes the stuck needle. Last week the S&P 500 (SPY) gave up its prior weekly gains and then some, finishing down -6.6%. This left the index at fresh lows: down -25% on the month, -39% on the year, and -45% from year-ago highs. Emerging Markets (EEM) were even harder hit, posting an -18.8% loss for the week!

In fact, the period's only relative bright spots were Utilities, Healthcare and the US Dollar (XLU +0.2%; XLV -1.5%; UUP +5.7%) on the global recession trade (Reuters - Dollar Races on Fears; Economist - Global Recession Looms). However, with both RSI(2) and RSI(5) exceeding 90, the Dollar proxy ETF looks exceedingly overbought in spite of being the only tracked security exhibiting any trend strength whatsoever (82). Lastly, once again the VIX options volatility index set a record close of 79 on Friday, off ten points from its morning high at the limit-down open.

Week 43 of 2008 occurs in the midst of on-going earnings and will feature a busy economic calendar, the least of which will not be the outlook text from Wednesday's FOMC Policy Statement:

Let's hope that record needle at least stays in the grooves next week.

Never Investment Advice

Friday, October 24, 2008

10.24.08 - Limit Down Open

We are sitting on "S2" (SPX 833). Play it by the book today - but with very small size. VIX 88.50?

o Global Stocks Fall
o Dow Halt Trading Rules

Here is an early chart with floor pivot indications.


Still above 10/10 lows and back to the range of yesterday's lows.

8:50AM PST: Adjusted Tick into the green. Resistive Volume spike could put a cap on it for a while.

9:55AM PST: Mid-day update. VWAP continues to hold, though most of my indicators still look glum.


10:20AM PST: Careful, range contraction.

o Rallies without Breadth

12:00PM PST: Breakout? Had to lift hedges. Crazy.

12:20PM PST: Fakeout? Couldn't bust the pivot. Very erratic trade today. Hard to imagine a breakout higher into the Friday close. [Partial] Hedges back on.

12:50PM PST: I'll go to a full dollar hedge again if we close up much higher. Fed anticipation, bargain hunting, shorts realizing they can't be too greedy... ? Probably all the above, but another crazy day for certain.

While it was positive out of the gates, many of the short time-frame moves exhibited parabolic rises and falls ("witch hats") as opposed to easier to trade "scallops" where price moves in alternating cycles of range expansion and contraction. Apologies for the toilet humor earlier today!

Close: Got those hedges back in place before the move back down on volume. Will re asses stance over the weekend. Don't forget to checkout the weekly recap.

LIMIT DOWN!


We are sitting on "S2" (SPX 833). Play it by the book today - but with very small size. VIX 88.50?

o Global Stocks Fall
o Dow Halt Trading Rules

Thursday, October 23, 2008

10.23.08 - Retest


We are close to a retest of yesterday's lows/ S1 (SPY $87.50). Pretty strong slide. VIX amazingly at +71 again.

11:10AM PST: WAMU Auction Dissappoints and we all fall down. VIX just under 78.

12:15PM PST: We took off of a higher low and are back at the VWAP (possible resistance). Risky days.

CLOSE: Craziness!

Wednesday, October 22, 2008

10.22.08 - Under Pressure


Negative Tick and Volume are far worse than we are seeing in price action. It seems the only thing propping us up from a technical perspective is trend support from the 10/10 and 10/16 lows. We are trading in a narrowing range/wedge and a breakout is possible. To the upside, look to the 5-day MAs as resistance, to the downside look to the 10/10 close as support.

9:40AM PST: Difficulty at S2 (SPY $93.10/ overhead resistance).

11:30AM PST: Trying to trade anything but the short side today has been a joke unless you trade only the shortest time frames.


12:05PM PST: The range of these moves continues to amaze me. VIX is 65 and climbing. I need to fact check this, but apparently only $5-6B changed hands yesterday on the Lehman CDS, no problems noted. WAMU prices tomorrow.

o VIX & More - Put Carpet Bomb

12:40PM PST: Downside target breached! No sign of support. Volume light, all things considered.

12:55PM PST: Caught a bid about the time I posted this, but I'm always reluctant to catch a last minute bounce. Too easy to peel back on days this weak, best to wait until the close. Ahhh... short covering. I'm not buying it.

POST CLOSE: OK, didn't peel back and put a little on in the intersession. Something about a Quant fund blowing up today... if they knew they were going to be selling, may explain the "put carpet bomb" (see above)?

Never Investment Advice

Tuesday, October 21, 2008

10.21.08 - Volume Spike into Mini-Meltdown


Stabilization was the word for the day until a mini-meltdown about 15-minutes ago. Getting a little support at S1 (SPY $95.60). The five-day would be the next level to look for a bounce, but I'd remain cautious with any counter-trend trades after several days of gains.

CNBC - 40% of Trading Volume is now ETF Based...

10:05AM PST: Hit the five-day (SPY $95.40). No reason to think it will hold as yet.

10:50AM PST: MAs held, but the VWAP proved predictable resistance. Trend is down -- but anything goes!

12:05PM PST: That was the third test of the resistance line drawn off of yesterday's aftermarket. Hmm.

12:50PM PST: That was fast. Back down to the MAs, and no sign of holding.

Monday, October 20, 2008

10.20.08 - Follow the Bouncing Ball


A bit dizzying, isn't it? However, the cumulative tick and advance decline lines continue to show strength as the VIX peels back some 11-12%. There is a clear desire to buy even as supply is released into the effort, containing gains thus far. Which will prevail?

10:35AM PST: Caught a bid after an extended retest of the VWAP. Volume is light. If we close up on the day, we may get a traditional bullish MACD cross. If we can hold within the recent (granted, very wide) range, one could begin to make an accumulation argument here even though we haven't seen a lasting bounce. I know, pretty big series of "ifs".

12:35PM PST: Break-out set up?

1:25PM PST: That was a resounding 'Yes'! Are the Lehman CDS 'winners' counting their chickens before they've hatched? We'll see tomorrow. A side note, days like this RSI(2)=91.7 80.1 set us up for the possibility of an overbought unload in what remains a bear market.

o RGE - Size of Lehman CDS Exchange?

Friday, October 17, 2008

Weekly Rewind - Week 42 (10/17/08)

(Click to Enlarge)

Did it feel like the markets' best weekly performance in over five years to you? In five days of extreme trade that saw fear play violently in both directions, the S&P 500 (SPY) ended up +5.3% as credit markets began a nascent healing process after unprecedented global stabilization efforts (AP - Markets Soar). In contrast, neither the Russell 2000 nor Emerging Market indices were able to gain any traction (IWM -0.3%; EEM -0.6%).

While there was certainly more news than I can do justice to here in this brief summary, ranging from the Morgan Stanley/ Mitsubishi deal (Marketwatch - $9B Stake), to proposed direct investments by the Treasury into our banks (Washington Post - Plan Hits Snag), it was undoubtedly a week that will be studied and written about for decades to come.

In one the week's biggest statistical stories, the VIX options volatility index set a record close of 70 on Expiration Friday, remaining some +27% above its 15-day moving average. Amazingly, this was well below its Thursday high of 81. Sectorwise, last week's best performers, Transports and Real Estate, were this period's sole losers (IYT -1.8%; IYR -9.3%). Meanwhile, Healthcare stocks (XLV) posted the strongest aggregate results of +8.1%.

Next Week's Influences

Week 42 of 2008 will feature a relatively light economic calendar, including: Leading Economic Indicators, Initial Jobless Claims, and Existing Home Sales. Market watchers will continue to closely monitor credit indicators (Calculated Risk - Credit Indicators), the Lehman Brothers CDS delivery due on the 21st, the Washington Mutual Bank CDS auction set for the 23rd (The Street - Cost Set at Auction), and the progress of the GM-Chrysler merger talks (AP - Talks Gain Momentum). Of course, earnings are also now in full swing.

It may interest you to know that past periods following (T +1) gains of this week's magnitude (T 0) back through 1993 (SPY inception) were characterized by more moderate performances, as follows:


However, with continued forced selling pressure likely, the possibility of defaults upon the impending swap deliveries, and potential reinvestment of all that cash post-delivery, more fireworks ahead seem inevitable. A glossary of Weekly Rewind terms and statistics has been posted here for your reference. Enjoy the weekend.

Never Investment Advice

    10.17.08 - Strong Tick & AD Lines

    Non-price indicators are showing increasing strength as price is just now beginning to pick up some steam and challenge the morning highs. The 5-day MAs are beginning to flatten and the VIX has come down some ten points. However, the Nas 100 is having a really hard time getting going given the news. Think about what this means.

    Ted Spread Plummeting

    10:50AM PST: Now that's what they call a fast-break!

    11:20AM PST: Just about back to trend line and still almost two hours to go. My goodness.

    12:55PM PST: Time to close up shop for the week. Hope you trailed stops if you ventured into the long trade. Too tempting to sell that "witch hat." Lots of earnings plus CDS delivery round-one next week... The best week for stocks in thirty years? What a joke. Take a look at the mixed board to the right.

    Thursday, October 16, 2008

    10.16.08 - VIX Tops 80


    Not pretty. Out in the a.m., will be looking for opportunities throughout the day, but no sign of a turn just now. Did get fooled by a short-lived turn in the Trin -- note to self, wait for more than a bar's worth of confirmation! There is certainly plenty of room to run in both directions.

    8:25AM PST: Downtrend line broken by a hair, VIX peeling back slightly. Also, we hit and made a slight bounce off the connected Friday low points. It's something to watch, not trade yet...

    8:40AM PST: OK, that could have been "it" -- don't forget that any longs in this market are highly risky! Unless institutions come in, the temptation for traders will be to sell it down. I'd now wait for a higher hi/low pattern to develop. Also, see how price behaves at the VWAP.

    9:25AM PST: Possible resistive volume building at the pivot. What does this mean? When normalized volume (the red/green thin dotted line on my price axis) spikes and tapers way above typical levels, it often precedes either a pause -or- reversal in price action. Also bear in mind we are at the top of the downward trend channel from the Tuesday highs. Will we break or bust?

    11:30AM PST: Last hour risk (or opportunity?). Tomorrow is options expiration. Transportation and Consumer Discretionary are the day's winners because... Oil is down over -5%. Chop Chop.

    o Quant Edges - Scary Pictures

    12:00PM PST: Fourth try to break the down channel. The more times we try, the more likely success. Still below pivot as most daily indicators have gone positive. Google coming up at the close.

    12:10PM PST: Downtrend and pivot broken by a hair... Classic 'W' bottom, or a prelude to Quant Edge's 'Scary Pictures'? No way to know for a day or two. Right now I'll assume the former, but trail stops along the way.

    12:45PM PST: The five day MAs should be viewed as possible resistance today/tomorrow (just under SPY $96). Below that is /yesterday's pre-fall peak (SPY $94.70). Also, there may be a desire to reduce risk ahead of GOOG unless it has already been leaked. Think I'm kidding? No, I haven't heard any rumors. However, the whisper number is reported at $4.75 versus the $4.08 consensus.

    CLOSE: Note that daily momentum is showing a positive divergence and that volume today was much stronger than during the last two days of losses.

    Never Investment Advice

    Wednesday, October 15, 2008

    10.15.08 - Support Holding; Internals Weak


    S1 is holding so far, but all indicators show the potential for a downside break. Honestly, could go either way so I'd manage size with stops and a preference for the short side/ hedging.



    Those interested in learning more about volatility events may consider the exceptionally well written book below, "Market Models," by Carol Alexander. Requires a willingness to work through some higher level math. Includes Excel files with helpful examples.



    9:55AM PST: Some signs of stabilization, but I'd wait for a definitive VWAP break, then set a stop just below. Right now VWAP continues to be resistance.

    10:50AM PST: Almost. Wait for it and keep it small -or- take a pass if it will keep you up at night. VIX is just under 62, a 12% stretch on the day. Bear in mind everything is still pointed down just now. S2 at SPY $92.60 puts us below the Monday open. Amazing.

    o Ted Spread

    11:25AM PST: TRIN and VIX improving somewhat. (Yes, I'm in a bit -- will manage more closely than ability to post, however!) And out a short while ago... will reassess near close. S2 was good support the first go. I'd posit buy range for a trade could be anwhere between here (low to mid SPY $93 level) and SPY $90/91 though -- and that's a pretty wide range.

    1:05PM PST: And once again in this hyper-speed market, ranges I thought would take days to hit are achieved in hours. VIX high was nearly 69.50.

    POST CLOSE: Down another couple points after the close... looks like those that "wanted" a retest will get their wish. However, I did put some back on into the close.

    Never Investment Advice

    Tuesday, October 14, 2008

    10.14.08 - Gap Filled

    A bit of profit taking in the morning caused the gap higher to be filled. However, SPY pricing was able to hold near the pivot of $99.70. Currently, there are mixed signals on the day. On one hand, adjusted tick remains strong, while on the other, the AD line has tapered off.

    I suspect traders may become distrustful of any move too near or over the daily VWAP. As mentioned in the past, there will be a good deal of inventory overhead inspite of the initial welcome reception of the added significant government interventions this week.

    10:25AM PST: We are consolidating within a ten point SPX range. A bit maddening because directional indicators are parting ways and oscillators can't seem to lock onto a cycle. Tried to get short (again) and got shook out too soon. I'll stay out for now.

    11:05AM PST: Should have held that short! Slope of Tick, AD and Trin are now all aligned to the downside (as of about ten minutes ago). I did keep my hedges. Then again too, the only thing worse than second guessing yourself... is getting run over in this fast moving and wide ranging market!

    If you haven't been over to TraderFeed lately, there are a couple recent articles that are especially good.

    11:55AM PST: There is no 'predicting' support these days for bet the farm positions, but traders will no doubt be looking to S1 and the 5-Day Mas for strong support below (SPY $96.00/ $94.50).

    Reading:

    o CXO Advisory - Advisor Excuses
    o Yahoo! - Intel Beats
    o Quant. Edges - Volume Clues Point Down

    I'd say odds are for more negativity tomorrow. Then more positive again in the short-intermediate term. Will reassess at the open though -- I did think it was fairly impressive that INTC was able to increase sales/ EPS to record levels in spite of their "cloudy forecast." To 'Mac's' point (see comments), it's one day at a time every day here.

    Wed. Open: I'll be looking for potential buy opportunities near Monday's lows.

    Never Investment Advice

    Monday, October 13, 2008

    10.13.08 - No Sign of Letting Up

    Tick is exploding higher. The AD line only seems flat because it's pegged at highs. Institutions need to participate in moves like this or risk getting left behind. Volume looks very low. VIX down about 15 points to 60.

    12:05PM PST: Talk about a melt-up!

    CLOSE: I would have guessed it would have taken a few days to get here. Unreal. Selling risks remain. A measured move up would be incredibly nice, but it's still not a normal market so I can't predict that. In fact, I did some serious trimming and partial hedging at the close, but would be more willing to re-in on pullbacks here. Wouldn't be surprised to see a morning move up a touch, then a mid-sized pullback.

    Overnight Gap

    Markets are trading up strongly higher across the globe this Sunday evening (+6 to 10%). One one hand, gaps like these have tended not to hold. On the other, it's incredible how unimpressive the move looks on a chart when viewed against how far down we came last week.

    PREOPEN: We are actually down a buck or so from the overnight highs... still room to move higher. As CNBC pointed out, with the bond market closed, there is less opportunity for rotation back into equities [add: or the other direction for that matter!]. That may not be such a bad thing. By the same token, I still wonder how much Lehman CDS selling is ahead, not to mention WAMU next month. A strong move higher like this may relieve the pressure to raise cash all at once -- but it's really hard to get a handle on that. Morgan Stanley up 60%? Watch that first hour. Crawling around the 5-day about 40-minutes in.

    Sunday, October 12, 2008

    "Make an Impact, Engage Your Passion"

    Needless to say, I was pretty amazed to find this link over the weekend. Incredible to me that it's still posted. Read the copy closely, hilarious in a very sad way. LEH, I think we've all experienced you first hand for ourselves last week, and are quite ready to move along. We can only hope "the journey" is near its end... (NYT - Insurance Next Big Test)

    As a postscript, LEH default swap delivery, while priced last Friday, is actually due October 21st. If anyone is aware of any back-of-the-napkin calculations of how the poorer than expected auction results translate to additional fundraising needs, I'd be happy to post it.


    Note: I highly recommend reading the comments to the post below entitled "Into the Rabbit Hole." The topic is what may constitute a relatively safe portfolio in times like these. Just thoughts, not individual recommendations.

    Saturday, October 11, 2008

    Into the Rabbit Hole?

    You may have read about the latest federal actions targeted at making direct capital investments into our nation's banks (Bloomberg - Paulson May Invest). While the focus just one month ago was on getting liquidity back into the system so that we could all continue to go about our business, the delays in doing so and related lack of confidence have led to forced equity selling to raise cash (most notoriously last week in response to Lehman Brothers Credit-Default Swap auction) and shore up the capital base.

    A bank's leverage ratio is naturally defined by "Debt/ Equity," and the value of that equation's denominator has taken a plunge. It is easy to see that the most recent bout of selling has caused a vicious cycle whereby stock price devaluation means that our financial institutions could be as levered as ever. In spite of all the talk about "deleveraging," we may well effectively be back where we started or worse, and banks are only permitted to become so levered. This means continued lending restrictions at best, and further contagion on an increasingly massive scale at worst. In this regard, it's no wonder the Treasury decided to lend to companies directly last week.

    I almost hate to raise the point, but the same is true for individual brokerage accounts. Regulation-T permits 1:1 leverage to be held overnight, and many brokers are even tightening this due to the recent volatility. Imagine the unintended leverage that some buy-and-hold investors starting out a year ago may be holding had they started borrowing against their accounts without off-setting sales. With the markets down nearly -40% from their highs, it's easy math to imagine.

    I have recently written about economic multiplier effects and tipping points (see Why 'We've Got to Stick Together'). We are now somewhere between very near and well into the mouth of that rabbit hole. This market has got to firm up. Sour socialist implications of banking nationalization aside, a capital call or two at the individual level, and that hole becomes mighty hard to crawl out of.

    Friday, October 10, 2008

    Weekly Rewind - Week 41 (10/10/08)

    (Click to Enlarge)

    Goodness Gracious Late Cretaceous -- Equity markets were pummeled back to the stone age this week. (Alright...) Well, I am glad that I caveated my positive outlook for these last five days with a Black Swan comment, because that is exactly what we got. In one of the worst weeks in market history, equity commentators could only draw analogies to 1929. Once again, save some surprising US Dollar strength (UUP +0.3%), the S&P 500 (SPY) recorded a truly staggering -19.8% decline over a period of record ranges and little respite as credit markets refused to thaw on a global basis and the Lehman CDS auction took place. (FT - Icelandic Banks; BW - Global Cuts; NYT - Insurance Next Big Test)

    In fact, the VIX options volatility index nearly reached 77 on Friday, now some +53% above its 15-day moving average. That is a whopping stretch, my friends (please be careful with recently owned options). However, for the first time in a while, the NASDAQ 100 showed relative strength, down a mere -13.4% on positive IBM earnings. Sectorwise, Transports and Real Estate also managed to show relative outperformance (IYT -9.0%; IYR -11.4%), while the Energy group (XLE) dropped an incredible -25.2% on the slowdown trade.

    Trading in Week 42 of 2008 will be influenced by Inflation, Retail Sales, Beige Book and Jobs readings on Wednesday and Thursday, and Housing data on Friday, not to mention Options Expiration that same day. Market watchers will also closely monitor developing rumors of the demise of Goldman Sachs and/or Morgan Stanley, progress in the credit arena, estimates of residual Lehman/Washington Mutual CDS counter-party fundraising needs, and any related global coordination efforts announced at this weekend's G7 meetings. These last two weeks have represented new statistical territory in many respects (take a gander at those RSI's below), and while it maybe asking alot, be prepared for anything.

    A glossary of Weekly Rewind terms and statistics has been posted here for your reference. Enjoy the weekend.

    Never Investment Advice

    10.10.08 - Red Sky at Dawn


    I want to believe in a potential bounce as much as anyone, but right now the adjusted tick and advance-decline lines remain negatively sloped and price is below the declining daily VWAP just above S1 (SPY $87.20). These have been terrific predictors throughout this period, though it is still early in the day. VIX broke 70 and remains high.

    On the other hand, volume at the open was huge, commercial paper markets are supposedly improving, and now we have some CDS pricing (albeit awful). I can't emphasize enough how important these elements are.

    9:00AM PST: VIX 73+ and climbing -- but oil and gold are both down -5.9% and -2.2% respectively. Here is an interesting article from Macroblog. Restesting opening lows.

    How Low Can We Go?

    This is for my father in-law, who emailed me this photo with the suggested caption "How Low Can We Go?" Maybe it should rather be captioned "Institutions Afraid to Get Burned on a Bounce?" VIX ticking down a tad after exceeding 74+. Quantifiable Edges looks at past intraday plunge reversals here: Two Outcomes...


    Seven Sources of Selling

    It's incredibly unusual to see selling due to all seven of these self-reinforcing causes at once. This is what has made this "event" different, prolonged and cascading in nature.

    1. Global Deleveraging
    2. Mutual & Hedge Fund Redemptions
    3. Margin Call Cash Raises
    4. Operating Liquidity/[Add: CDS Counterparty] Cash Raises
    5. Valuation Reset on Earnings Reductions
    6. Valuation Rest on Higher Risk Hurdles
    7. Individual Fears

    10:10AM PST: Again, I want to be proven wrong, but this isn't holding and momentum remains downward. We really will need a massive buying effort to overwhelm the supply we will see on any drive higher. Plus, there is a "you first" phenom. Looking at tick, it is once again hugely negative, even more than price belies.

    Note that next week is holiday shortened on top of the G7 meeting outcome and options expiration.

    10:45AM PST: Third go at the lows after multiple attempts to bust the VWAP. One of them will break before the day is over. Oil and Gold are now both down nearly -8%. Demand destruction for Oil plus rotation/ cash raising for Gold, which you'd otherwise expect to have gone up. SPY re-approaching S2 ($83.50) and VIX is back on the rise at 75+.

    11:30AM PST: SPY volume is on pace to exceed records set on September 18th when we saw the TARP reversal (that lasted a day). Volume has certainly been a missing component of the recent pull-back. The temptation has been to view that as a cumulative exhaustion proxy for the desired "capitulation" event. VIX is on the rise again. Quite a battle playing out -- Art Cashion has been asked to predict the close. I won't do it!

    12:40PM PST: Technicians will like this on so many levels. Still, there will be a lot of supply above. Thousand point range and we end down, what 110 Dow points? Enjoy your long weekend [my mistake, banking holiday only]. ["Cramer" says Dow 6,000 on Monday. Brilliant... Well, he's probably right minimally in the sense that we need a news flow turn anyhow.]

    Thursday, October 9, 2008

    Market Crash Update

    The table above should give you a pretty good picture above of where we are at. How many more days of this? One, two... Do we get to SPX 800? I don't know; no one does. We could just as easily be up 20% in a week or less, though there is certainly no sign of that possibility whatsoever just now.

    These are very volatile times of unprecedented proportion and the root causes are daunting to consider relative to prior, more "contained" events in recent memory. Some have called it correctly. Some too early to be credible, others more recently; but I doubt many expected it to occur this rapidly and relentlessly. Hang tight, choose your spots wisely. Whatever you have done this past week, it's the past -- profit or loss. Get rested. Best, Jeff



    Overnight:

    11:50PM PST: US Futures down - 3-4% overnight. Nikkei down -9.6%; Hang Seng & Straits Times about - 8-10%. Rumored fears over in Europe of Goldman/Morgan failures pending.

    12:10AM PST: London Stock Exchange -18% at the open. FTSE/ DAX -10%. Bodva (sp?) - "No Floor..."

    12:20AM PST: Why the selling? Deleveraging, yes. Forced selling, yes. Think about all the institutions that need cash but can't get it. Where can they go to to get liquidity/cash if not a bank? The stock market -- hence the across the board fire sale in an environment where valuation means little. (Abstract CNBC - EUROPE)

    Here is a summary of market-watcher and politico thoughts on "what we need now":

    o Direct Bank Capital Infusions
    o Further Rate Reductions
    o Market Clearing Mechanisms/Pricing
    o Mark-to-Market Suspension
    o Uptick Rule Reestablishment
    o Defaulted Mortgage Purchase, Reinsurance &/or Refinance Program
    o Additional Stimulus Package
    o Full Money Market Gaurantees

    It never seems to end, does it? I have mixed thoughts on several of these, some of which are timing issues based on efforts already underway (clearing mechanisms). Clearly, however, actions in progress can't happen fast enough, and any further efforts need to be more coordinated, better-paced and multi-faceted to have impact.

    The focus has to be on getting the system working again, and soon. Meanwhile, equity prices will continue to take a hit as this systemic problem goes far beyond the typical "contained event" capable of reversal on a capitulative/fear-based washout, and is likely not addressable in the short-term by government actions alone.

    12:50AM PST: Minor recovery ahead of "bed" - hopefully more than just a reactionary bounce. Perhaps the overseas markets will find a "floor" for the US before we open. Thanks guys! Now, what will GE say tomorrow (expecting $0.45 EPS)? Also Lehman protection...

    Reading:

    o VOX Compilation - What the G7/8 Leaders Can Do
    o One Perspective - The Downside Reality

    10.09.08 - Price Holds In Spite of...

    ...strong negative tick and AD line slopes. It's funny, as this market has gotten crazier, I have reverted more to of a day-trading mode, while consummate day-trader Brian Shannon from AlphaTrends is at least considering longer-term historical stats for a swing.

    My observation is that it may be more difficult to bounce when everyone is expecting one, particularly in light of the continued forced institutional + emerging retail selling -- again, keep managing size. In any event, it's undoubtedly helpful to gather multiple perspectives in this environment. In that regard, don't miss Dr. Steenbarger's article on trading one's ego instead the market. Meanwhile, GM's market cap at 1929 levels, my goodness.


    P.S. -- Dear Shorts: Welcome back, we've missed you! Of course you've been doing it synthetically all along, but now perhaps you can cover without getting busted? The VIX is signalling a potential move of 15-20% in either direction ahead; which do you think it will be? We are down nearly -38% off our highs from almost exactly a year ago (and my goodness how much in just the last month?), which side are you willing to bet on/risk? Sure, we could and likely will go lower before this is all over. But governments around the world are pumping unprecedented levels of liquidity into the system. Are you feeling even the slightest bit nervous? We've been wondering why the market hasn't been behaving normally in your absence...

    Yield Curve


    o Ted Spread at New Highs?

    11:35AM PST: Breaking down, in case you hadn't noticed. Still above the (new) lows for the moment. If we could hold around here, it would then appear that the new lows are losing momentum. Six successive days lower for the SPY? Over an hour to go.

    11:40AM PST: TNX Rising quickly... rotation? More steepening? Just higher return requirement.

    12:15PM PST: SPY $93 represents the 1998 LTCM crisis lows and the trough highs from 2002/2003. SPY $80 represents the reversal lows of the post-Internet bubble during that same period. We are nearing a full retracement of the last five-year rally. RSI(2) = 0.57; VIX will likely exceed 60 before this day is over.

    Keep trading "what you see", but ask yourself, do you think earnings will be revised down (yes), and then, how much worse can this news cycle get? Amazing.

    12:45PM PST: Just broke S2 at $92. I believe it's an overshoot, but a scary one at that [and maybe we'll see more for a day or two, then again, we could easily be up 20% in a week or less!] I'll knock it off with the levels and support talk, obviously they mean nothing on a day/times like this (unless it's resistance). VIX is nearly 64.

    Close: Capitulation, Crash? Call it what you will. Believe it or not, SPY volume was lower than yesterday. No sign of this being over, hang tight. RSI(2) = 0.17.

    Reading:

    o How Shall We Bounce? (Yikes!)

    Wednesday, October 8, 2008

    10.08.08 - S1 Holding/ VIX 58+

    This spring is now highly sprung (let's hope it doesn't break!). You don't need me to tell you that neither statistics, technicals [Add: OK, save straight-up momentum] nor fundamentals have provided much of an edge in this market, but if you step back and consider the nature of the forced selling we've been seeing, the added uncertainty of elections ahead, the absolute panic sell overseas last night, and the significant and meaningful intervention afoot, this increasingly looks like the spot to make a play.

    Of course, it's hard and would be foolish at this time to ignore what happened in 1987, but even if you do consider it and unless you are a complete doomsday adherent this go, look where that market was a year later.

    o Quantifiable Edges - CBI Spike
    o E-mini Addict - SPX 800 Here We Come
    o Traderfeed - A Look at the Volatility

    So What Did 1987 Look Like?

    Big picture, something like this. Note that sell off came on the heels of a strong bull, rather than the extended decline we have already seen. Naturally -- the root cause, trading nature, and recovery of every market shock is different.


    Why is this not getting any mention! -- Alright, CNBC just did a focus on it... Anyway, one hopeful sign. Lord knows where people are getting their financing!

    11:30AM PST: Price is pausing at the Pivot (SPY) and 5-Day (QQQQ). An obvious measure of the potential of this move will be whether we can bust through these levels today as day-traders and mechanical trading programs will be 'asking' themselves whether they are in for the swing or the scalp here. It's going to take people/ investors to tell the machines/ algorythms where to go -- if that can happen, the program traders will re-establish long positions and maybe we'll get parabolic on the last third of the day.

    12:00PM PST: Doesn't feel like it will go. Sure hate to see another try at a sell. Even a hold would be positive. We'll see, and manage your size as we get through this.

    1:00PM PST: Wow! Someone put it more eloquently on-air than I did above -- "the marginal buyer/seller remains the day trader." See you tomorrow. RSI(2) = 1.27; SPY -38% off of nearly exact year-ago highs.


    o Traderfeed - Historic Market Weakness

    Never Investment Advice

    Broker Short Sale Letter

    "October 8, 2008

    Dear XXXXXXXXXXX clients,

    IMPORTANT MESSAGE:

    The SEC has modified and/or extended its emergency orders regarding short sales as follows:

    Financial Companies

    Now that the President has signed the Emergency Economic Stabilization Act
    of 2008, the SEC order prohibiting the short selling of securities of financial institutions will expire at 11:59 PM Eastern Time tonight, Wednesday, October 8, 2008. This does not mean, however, that all of the financial-related stocks that were on the SEC and exchange lists will be available to sell short. After the expiration date noted above, normal "locate" procedures shall resume for these securities. All short sales will continue to be subject to the enhanced delivery requirements described below.

    Hard T+3 Close-Out Requirement

    The SEC has extended its "enhanced delivery requirements" emergency order until 11:59 PM Eastern Time on October 17, 2008, although the Commission intends that the order will remain in effect beyond that date without interruption in the form of an interim final rule. Consequently, the procedures outlined in our message to you dated September 19, 2008 are still in force. This means that if you sell an equity security short, and there is a failure-to-deliver on the securities you shorted by settlement date (T+3), we will close out your short position no later than T+4.

    You are reminded that you will receive NO FURTHER NOTICE prior to our closing out of any positions in compliance with the SEC Order.

    Also, any losses suffered or lost opportunities realized as a result of any such buy-ins to comply with the SEC orders will be solely your financial responsibility.

    For additional information, please visit the SEC website at www.sec.gov or contact the Trade Desk at (XXX) XXX-XXXX."

    Tuesday, October 7, 2008

    10.07.08 - Pivot/ VWAP Sandwich


    Adjusted Tick is mildly positive as we roll along here. Even though the VIX has come down ten points, I'd like to see the AD line stronger. So far so (sp.) quiet ahead of earnings kick-off tonight, and the FOMC minutes later today...

    9:25AM PST: Note the declining wedge formation. Looks to me more like lower-lows though. Daily Tick is headed south.

    o Standard & Poors Earnings Estimate Report (MS Excel)

    Note that we are currently trading at a trailing 12-month PE ratio in the mid-teens/ roughly the same on a forward basis. Forward earnings forecasts look to be about $68 per share. Let's bracket that:


    PEs have typically ranged between 10 and 30, though they have certainly been both higher and lower. Note how the outlook has drifted downward significantly from only several months ago. I suspect that $68/70 may still be high. That said, as these forecasts continue to come in they will provide a progressively easier bar to surpass in the quarters ahead. [Add: I should have added this is for the more pessimistic top-down forecasts. The bottom's up forward forecasts exceed $95 per share!]

    10:00AM PST: Who ate our sandwich? Price keeps drifting lower though the VIX has remained stable and it looks like we are getting some support now (level consistent with yesterday's before the final plunge). We'll see.

    10:25AM PST: The Ted Spread has come down. Mr. B isn't painting a very pretty picture, though, and we're breaking down again towards a retest [of yesterday's low]. Did you hear his hint, however -- "[need to reassess policy appropriateness...]"?

    o FOMC Minutes

    11:10AM PST: So now we find out just how important yesterday's lows were.

    12:35PM PST: A near exact hit, but still about half an hour to go...

    12:50PM PST: New Lows to S1 (SPY $100.33).

    1:05PM PST: SPY Breaks $100 ($99.65); RSI(2)=0.91. With all the usual caveats (quite seriously on those -- these are fat tail, risky times), for those with cash to put to work, this will probably look like a good spot down the road [for a trade in the short-term, then as an investment over an extended horizon (Add: and I do mean long, meaning only consider legging in if that's your horizon).]

    o Intrade Presidential Prediction Market

    Never Investment Advice