Thank You Sir, May I Have Another

I finally made my move on the short side this week which has left me a little poorer, a step closer to an ulcer and tired from waking up in the middle of the night to check the futures.

It is clear to me that speculators are heavily long. Whether looking at the positioning of Rydex traders, sentiment surveys or the put call ratio it is clear that investors are extremely bullish. In my experience, when the crowd is leaning so heavily long we are close to a turning point. While the first two days of the month could see fresh inflows, I believe we will see a turn by the end of next week.

The Song Remains The Same

The market is once again seeing heavy optimism in the way of call buying. All news is good news. I remain of the opinion that valuations are unattractive, the economy will sputter along at best and investors are too complacent. I continue to play the fool. Not much more to say.

Who Cares About GDP

While I am not upset to see the market dropping on the GDP numbers, I can't help but cringe when I see people trading around this number. Looking at what GDP was last quarter is like driving by looking in the rear view mirror. Everyone is well aware of the fact that the economy was weak in the second quarter regardless of what number the government sticks on it. Not to mention that the numbers are revised endlessly and are massaged to the point that its almost worthless.

CNBC and the media try to trump it up as the be all and end all because they want to generate excitement and ratings, similar to a three hour pre game show to the Super Bowl. Obviously, I am in the minority as the trading that goes on around these government releases is astounding. Without excitement the media does not generate ratings and without excitement brokerages do not generate commissions. As investors our interest are not aligned with theirs.

Oldest Trick In The Book

Good Morning. The earnings reports from last night were less than stellar but for now that does not matter. Warren Buffett says, in the short run the market is a voting machine, in the long run it is a weighing machine. Right now the market is clearly a voting machine.

Dow Chemical was up strongly after its earnings report yesterday. Revenue missed estimates by a wide margin and was down 31% year over year. However, earnings per share were better than expected after one time charges. Many of the one time charges that Dow is taking are inventory write downs. When Dow writes down its inventory their costs go down. Miraculously, earnings go higher. It is the oldest trick in the accounting book and has been around well before the days of off balance sheet transactions. Investors encourage this type of behavior by rewarding companies that engage in it. Only after losing money do investors try to figure out what went wrong.

Sign Of Weakness

The inability of the market to extend its rally late in the day is a sign of exhaustion. Were tomorrow not the last day of the month and a Summer Friday I would be adding to my short positions right here.

Then again, the media can go on glowingly about how the recession is over, house prices are going up and that the market is the best thing since sliced bread and lure in a whole new round of buyers for tomorrow. This is reminiscent of February and early March when people would turn on the nightly news and the man on TV would tell them how bad everything was and there would be new sellers every day. Listening to the man on the TV rarely pays off. Have a good night

Fundamentals Don't Matter

The weekly unemployment claims came in higher than expected. Continuing claims fell but only because people's unemployment is running out. That is certainly not good news. However, none of that matters. I am increasingly hearing from people who went to cash and want back in. Why now? Probably because the media coverage of the economy and the market have been so glowing.

Michael Steinhardt Sounds Bearish

The hedge fund manager who went out with the best record ever, Michael Steinhardt, sounds bearish on the market. He is famous for not speaking unless he feels confident about something.


  • The only vague hint of a turnaround for today is that Citigroup has reversed lower. If there is a decent supply of Citigroup to be sold, it will likely take a few days.
  • While today feels like an interrogation in a small NYPD bathroom for me, I am grinning and bearing it.
  • I knew that a rally through the beginning of the month was a risk.
  • I can't wait for the day when stocks trade at reasonable valuations and I could say goodbye to the the short side. While I have done well shorting, it is mentally draining.
  • Nothing matters, until it does.

Insiders Selling

Last night, boutique investment bank Greenhill & Co announced a secondary offering of about $250 million. The interesting part was that all the shares were being sold by insiders. This continues the recent pattern of heavy insider selling.

At the same time last week individual investors put $11 billion into mutual funds. While neither of these statistics are great short term timing tools, they are warning flags.

Bulls On Offense

Good Morning. After the show of defense the bulls put on yesterday, it was likely they would go on the offensive at some point today and they are wasting no time. In the past week the market has been acting in the same manner as it did during the June top. It has not been able to go up well or down well. Today, we will see if the bulls will be able to break that pattern.

The bulls have the turn of the month to look forward to. Generally, the market has an upward bias through the second day of the new month, which is Tuesday. The bears have extreme sentiment on their side. The American Association of Individual investors poll came out and there were the least amount of bears since May 2008 and an equal amount of bulls to the June high.

Victory for The Bulls

In light of the plunge in China and commodities, today has to be considered a victory for the bulls. A lot was thrown at them and they have been able to keep the losses to a minimum. All eyes will be on Asia overnight. Tomorrow is another day and I believe it will get interesting. Have a good night.

Citigroup Preferred Conversion Is Tomorrow

The Citigroup preferred conversion is happening tomorrow, as $16 billion in new Citigroup shares will start trading. The word around Wall Street is that this is going to have little effect because most of the shares are already accounted for. Further, it will be positive for Citigroup as this has been hanging over their head. That is also likely why there has been a large move up in bank stocks over the past few days.

I believe that Wall Street might be taking a sanguine view. First of all, only $3.2 billion in Citigroup shares are sold short, so only a small portion of the deal is being arbitraged. Even if most of the remaining preferreds were bought by people who want to own the stock, there are still a number of shares that will be sold tomorrow. It will be a negative event in that there will be supply of new stock. The only question is how negative? The fact that Wall Street thinks its a positive event is reflective of the frothy state of sentiment.

Same Script, Different Day?

Once again we are seeing a similar scenario. The early dip is bought and the call buying continues. At some point the dip buyers will have all the merchandise they could handle and at that point it will likely get ugly pretty fast. When that day finally arrives is anyone's guess.

Tops are a lot harder to call than bottoms, at least for me. However, the giddiness and complacency is reminiscent of many times where it was not a good idea to own stocks.

Chinese Indigestion

Good Morning. Yesterday, the bond and dollar rallied strongly hinting that something was amiss. Last night, the Chinese stock market fell 5% and has taken the commodities market down with it. China has been high on the Green Shooter's lists as a reason the economy will turn. Will that effect the psychology of the dip buyers today? Will investors respond to losses in Asian markets by locking in some gains at home?

At the same time we are 2 days away from month end report card time. This is the time where institutions tend to support stock prices. A lot of institutions have bought in to this market during the recent rally and don't want egg on their face so soon after.

The Strange Rally

Had someone told me two weeks ago that the market would rally close to 15%, I would have said they were nuts. While the market was set up for a rally, it just didn't seem to be setup for a rocket ship rally. The market wasn't terribly oversold and sentiment was negative but not even close to extreme. What has been even stranger is that there has not been the slightest pullback.

I am not saying that there is a conspiracy, just that the action is different than anything I have ever seen. The mystery continues another day as there is nary a pullback. However, many warning lights are starting to flash and I have responded by moving my portfolio into a decent sized short position. Have a good night.

Getting Rid Of My Long Hedge

Pfizer had a nasty reversal today on heavy volume. It has served its purpose as a long hedge but I don't want to overstay my welcome. I don't have a long hedge anymore but I am back in the PFE/WYE arbitrage trade. At the beginning of the day my portfolio was relatively neutral with a short bias and now I would describe my portfolio as having a decent size short position.

Another Late Day Rally?

Investors have been conditioned to expect late day rallies as it seems they occur every time the market is down. Will we get one today?
  • Looking at the put call ratios one would think we are up today. There is heavy call buying even though the market is down. That does not bode well.
  • After being pummeled for the past few weeks the dollar and bonds are rallying strongly. Strong days after a long downtrend often mark turning points. That is not good for the commodity and materials sector.
  • Breadth is 2 to 1 negative. Not good but not insurmountable.
  • The best thing the market has going for it is that the financial sector is strong.
All in all, I don't believe the odds favor a move up through the remainder of the day, but not by that wide a margin.

Why Turnaround Tuesday

I mentioned this morning that turnarounds have tended to happen on Tuesdays recently. I have a pet theory on why this occurs. The media is usually a trend chaser, meaning that when the market has been going up for a while they are usually bullishly biased and vice versa. On a weekend like the previous one investors are bombarded with bullish news. Many people do a lot of their financial thinking during the weekend. On Monday, these people act on those decisions made during the weekend, which extends the trend. However, on Tuesday the market is free of those forces.

Of course, a market has to be ready for a reversal for this to occur. I believe the deep overbought reading signaled that this market was in need of a rest. The weekend effect likely further extended the rally yesterday and today the market was finally able to reverse.

Added To My Short Positions

After stalking the market on the short side for the past few weeks, I finally decided to add to my short positions. Sold the August 97 SPY Calls

More On Paul Tudor Jones Documentary

One of the more interesting things that Paul Tudor Jones said in the documentary was that intellectuals and people that are too smart don't do well in the stock market. He said he wants to hire people that are in control of their emotions, don't panic and are cool under pressure.

He also says that when he does a trade he is focused on how much he could lose. When most people put on a trade they start fantasizing about how much they could make.

Paul Tudor Jones Documentary

There is an interesting PBS documentary on Paul Tudor Jones filmed in the 80's on YouTube. If you have an hour to kill, during a day of slow Summer trading it is well worth the time.

Part 2
Part 3
Part 4
Part 5
Part 6
Part 7

Turnaround Today

Good Morning. The market remains overbought. While that did not mean much yesterday, I suspect that we will see a down day today. In the past few months trends have tended to persist on Monday's, with Tuesday being the day that the market turns.

There were some signs of weakness yesterday, with the market not reacting well to the "good news" of New Home Sales. In addition, there was pretty heavy call buying and the market was only able to eke out a small gain. It seems that sentiment is in the frothy area.

A longer term positive is that we are seeing some cash takeovers. Yesterday, Agilent announced a $1.5 billion cash takeover and today IBM has announced a $1.1 billion cash takeover. In isolation these are two small deals that will have little effect on the market. However, if the trend persists it will be market positive.

Close But No Cigar

  • Strong rallies tend to end on good news. Will today's home sales report prove to be that "good news"?
  • There is heavy call buying on the ISE today, but not as much call activity on the CBOE. The put call ratios were a factor the bulls had in their favor but that maybe changing.
  • Jeremy Grantham, one of the few clear headed strategists that doesn't get bullish higher and bearish lower, is out with his Q2 letter.
  • How many people are buying this dip? Are there any bears left out there?
  • Why am I still hesitant to get short? 1. Strength in the financials 2. End of month 3. It feels like the institutions have been buying. That can take some time.

The Citigroup Preferred Conversion

Citigroup is swapping its preferred shares for common stock. My understanding of the Citigroup preferred conversion is as follows. $15 billion in new Citigroup shares will start trading this week, which doubles the float of Citigroup. I believe the shares start trading on Thursday.

Another $15 billion will start trading in approximately a month. Those are the shares that were issued to the sovereign wealth funds. I believe they are likely to sell out of at least part of the shares, especially if the stock manages to rise. They were very quick to trade out of their Barclays shares a month back in a very similar situation.

The government will also receive $25 billion in new shares but they are unlikely to trade the shares any time soon, so there will be no net effect on the stock or market.

The Bull And Bear Case

Good Morning. It felt like investors finally embraced the rally on Thursday and Friday. In my experience that usually means we are late in the game. However, I wanted to take a look at both the near term bull and bear case.

The Bear Case
  • In the short term the market is deeply overbought. In March, when the market reached similar levels of overbought we were 4% lower 5 days later.
  • Some sentiment surveys are showing extreme optimism. Anecdotally, I have begun to see the same.
  • The Citigroup preferred exchange is occurring this week. I believe the new shares will begin trading Thursday. A large new supply of stock is bearish in the short run.
  • The better run companies have already reported earnings and the bar has been set pretty high for the remainder of earnings season.
The Bull Case
  • We are approaching the end of the month and those that bid up stocks likely don't want to see stocks sharply lower for their end of month report cards.
  • The market is only overbought on a short term basis.
  • Put call ratios have not been showing optimism. While investors might be turning more bullish, they might not have acted on that bullishness yet.

Market Finally Overbought

The chart below of the 10 Day moving average of the NYSE Advace-Decline Line depicts a market that is now maximum overbought in the short term. This will act as a headwind for the market in the near term.

One of the reasons I have shied away from getting aggressively bearish was that until Friday this chart had the potential to go higher. However, going forward climbing higher will be increasingly difficult. The reason being that the strong rally started ten trading days ago. This being a 10 day moving average, it will start to drop readings from the beginning of the rally.

Although the market climbed higher on Friday there were some divergences. On the NYSE there were 63 new highs on Friday. The prior day there were 108 new highs. That means the rally is getting narrower. In isolation this chart does not bode well for the market.

Healthcare Bull

The following video sums up nicely why I believe healthcare is the best sector to be in. There is no need to look over the valley for the stocks to be cheap. They are cheap now.

Market Sucking Money In

Many knew that technology was a bubble in the 90's and that the housing bubble was going to burst the following decade. However, making money off that view was a lot tougher than just knowing. Many people who were smart enough to realize these were bubbles blew themselves up by betting on their demise too early.

While the current market is certainly not a bubble, I believe the current juncture holds some resemblance to those prior periods. Many people recognize that we are currently in a bear market rally and that the economy and markets are likely to suffer a double dip at some point. However, making money on that view will be tougher than just knowing it. Some will even be seduced to the green shoots camp.

I have traded through both bubble periods and have the war wounds to prove it. That is the reason I am being very careful before getting aggressive on the short side. Have a great weekend.

The Long Awaited Correction

It appears that the long awaited correction is finally upon us. The ironic part of it is that yesterday probably blew a lot of bears out of the water that were looking for this correction. I believe the correction will last a few days and could take the S&P 500 as low as 940.

I believe we are in the process of putting in an intermediate term high after which we will head lower into the Fall. However, putting in a top is a process and we could still make a marginal new high after the current correction is over. The reason being that markets rarely just roll over after a strong overbought reading. Usually there is another rally with internal divergences.

Tactically, I remain short SPY calls and am long Wyeth stock as a long hedge. Wyeth is really just a proxy for Pfizer, who is buying them out. To this point my gain on Wyeth has actually neutralized my loss on the SPY Calls. At some point I plan on shorting Pfizer, which would get rid of my long hedge and shorting or buying Puts on SPY. My goal is not to be too early.

Microsoft Mystery

Good Morning. A few months back I was surprised to see Microsoft come to the debt market with a $3.75 billion bond offering. The company was sitting on a lot of cash and according to Steve Ballmer on the Q1 conference call they were not looking to buy back shares. I assumed that meant they were close to a search deal on Yahoo.

After no deal was announced, I assumed that they decided to buy back shares. However, in the second quarter Microsoft hardly bought back any shares and its cash pile is now over $30 billion. They were cryptic when asked what they are planning to do with that money on last night's conference call. I would not be surprised if they ended up buying back shares 50% higher than where they could have last quarter.

Healthcare Will Lead

One last thing. I was a little surprised healthcare did not perform better today given that the Senate has delayed voting on healthcare reform until the Fall. That is excellent news for the healthcare sector as healthcare reform might never happen or will be greatly watered down. Obama is slowly losing popularity as voters realize that "Change" was just a catchy slogan they got sold.

I believe the main reason healthcare didn't outperform today was because there was a beta chase going on. The earnings disappointments in technology tonight might send some of the hot money to healthcare. In addittion, the lack of a healthcare reform bill should lead to some analyst upgrades in the morning.

Will Panic Buying Lead To Panic Selling

Some heavy hitters in the technology sector have disappointed after the bell. Amazon, Microsoft and Juniper are all trading sharply lower. There was a lot of panic buying today. The bulls will be tested tomorrow. Have a good night.

You Can Cut The Tension With A Knife

Nerves are clearly frayed today as the anxiety could be cut with a knife. Money managers who have thus far stayed underweight are feeling the pressure and piling in. In general, I like to fade panic and go the other way. However, I have held back on doing anything for the time being.

There are a few issues that are keeping me sitting on my hands today.
  • Strong markets don't usually reverse late in the day. This has become especially true since the advent of the leveraged ETFs.
  • While this clearly feels very emotional and climactic, climaxes can be the most vicious part of the move.
  • My next step is to get rid of my long hedge (PFE via WYE) but I kind of like my long position and am hesitant to get rid of it.
  • There is no need to be a hero. I would rather wait a little longer and be sure the bulls have tired themselves out. The key is to survive and be around for the easy trades.

Where I Went Wrong

I fell into a trap last week, even though I should have known better. Late Wednesday with the S&P 500 approaching 935 I decided to sell the August 94 SPY Calls. I received approximately $2.55 for those calls. It seemed that it was not that bad of a trade as the S&p 500 was already up close to 70 points from its lows a week back, and by selling calls the S&P 500 could climb another 30 points and I still would break even.

I learned long ago that in a rally one should focus on the time and not the price. At the time we were only 3 days into the rally. Strong rallies, which it clearly was, rarely last for only 3 days. My general rule is to wait about ten days before starting to go short. Duration of rallies are a lot easier to predict than the point gain.

Luckily, I quickly realized my error and covered my Pfizer short which gave me some upside exposure via my Wyeth long. Pfizer has rallied close to 9%, which has covered the vast majority of my loss on the SPY call short.

While the end result was not that bad for my portfolio I believe that it is more important to focus on the process than the outcome. I was impatient but got bailed out by the fact that Pfizer rallied 9%. Eventually, trading with impatience will lead to large losses.

At this point we are nine days into the rally and I will let things play out. This was likely the time I should have waited for to "start" building short positions.


The market has now convincingly broken out above its high from a month back. That might be what is necessary in order to get sentiment where it needs to be.

The Missing Ingredient

Despite the fact that a lot of the indicators I look at are starting to line up for a move lower, I am still hesitant to get aggressive on the short side. There still doesn't seem to be that sense euphoria that is typically seen at tops. The sentiment surveys support my claim. Bullishness is nowhere near where it was a few weeks ago, when we were at similar levels. I still believe we are setting up for a move lower, but it might need some more time.

No Improvement To Date

UPS said that trends in July are showing no improvements to date. UPS is one of the best judges of what is going on in the economy as they ship goods for thousands of companies. Many companies are "beating the number", either because of low balling estimates or cost cutting. However, eventually the economy will need to recover for corporate profits to rebound.

I posted a chart earlier in the week that showed valuations were not particularly attractive at the current market levels, using normalized earnings. Those normalized earnings are actually higher than the "better than expected" numbers being reported.

Is Healthcare The New Tech

Good Morning. The healthcare sector looks a lot like the technology sector did a few months back. They have easily understood balance sheets, low debt, strong free cash flow and very reasonable valuations. We are continuing to see cash buyout activity in the sector as Bristol Meyers announced the cash takeover of a smaller rival last night. While the theme in the market has been to issue stock, healthcare companies are using cash to buy each other. I believe the sector is under owned as investors are positioned for a recovery.

The Double Dipper

The stars are beginning to come into alignment for a move lower in the markets. The market is now overbought, which will make the upside harder. Additionally, sentiment is no longer supportive of the market. I will be looking to build up my short positions in the days and weeks ahead. Have a good night.

Name That Tune

  • Everyone knows the name of the game is buy the dip. That is generally something that occurs a lot closer to a top than a bottom.
  • I can't recall a top when it didn't seem like the market couldn't go down.
  • That said, I am allowing for the market to rally into the end of the week before getting aggressive on the short side. I outlined my reason yesterday.
  • The financials have put on an impressive turnaround with the regionals, yesterday's goats, leading the way.
  • While everyone is focused on tech and financials, pharmaceuticals have broken out. I believe they could run far as the stocks have large bases and are under owned. I remain long Wyeth.

Confidence Doesn't Pay The Bills

Confidence has done a lot to aid the stock market in recent months as investors moved from cash into riskier assets. Confidence has propelled demand as many delayed purchases during the period of uncertainty. Confidence has also allowed companies to restock inventories and slow down the pace of firings.

Confidence is a trait that the CEO of Wells Fargo possesses. Even though Wells Fargo had just over 3% tangible common equity compared to assets (nearly 30:1 leverage), the CEO proclaimed the stress tests "asinine" and didn't think he should have been forced to raise common equity and dilute shareholders. As a matter of fact he raised the smallest amount possible and plans to earn his way out of his leverage. Today, he showed he is hell bent on continuing on that path by employing the most aggressive of accounting tactics. If the stress tests turn out not to be as "asinine" as first thought the cost of raising equity will be much dearer.

While confidence can make people do many things it does not make people able to pay the bills as Wells Fargo learned first hand. Their more confident borrowers were unable to come up with the mortgage and credit card payments. Americans have taken on more debt than their incomes could support. Until balance sheets are repaired there will be rallies and blips in the economy based on confidence but there will not be a sustainable recovery.

Not So Wells

Good Morning. The financials are once again selling off today on the deteriorating credit quality at Wells Fargo. Since this bear market began two years ago there has been a very familiar pattern. Financial stocks begin to underperform but the market manages to hold up and even rally in some cases. The action in the banks is shrugged off as investors focus on the hot sector of the day. Then suddenly a few days or weeks later the bottom falls out.

It appears as if we are setting up for the same script. Any further rallies from here where financial stocks continue to underperform should be sold into.

How Did We Get Here

  • A statistic that stood out in this weekend's Wall Street Journal: "In 2007, the latest year for which final numbers are available, Americans spent $92.3 billion on legalized gambling, according to Christiansen Capital Advisors; that same year, says the U.S. Bureau of Economic Analysis, Americans saved only $57.4 billion.". Need I say more?
  • When will I get more aggressive on the short side? Likely at the end of the week, unless we fall apart by then. I outlined the reason in my opener.
  • The new Citigroup shares will start trading a week from Thursday. I view that as a market negative event.
  • There are rumors that Wells Fargo will announce another capital raise with its earnings announcement this Wednesday. If that occurs I might move up my timetable for getting shorter.


  • The move in Regions Financial (-12.5%) is giving the bulls flashbacks to a period they would rather forget. When's the last time we saw a bank stock move like that?
  • It is a long term positive that California has cut its budget and it is a necessary step to a lasting recovery. However, in the short term it is the opposite of stimulus.
  • What happens if the widely publicized breakout was a fakeout? What happens to the Wall Street analysts who are handing out upgrades like they are going out of style?
  • The Wall Street strategists will likely keep their jobs and reap hefty bonuses, regardless of the timeliness of their recent calls. Where do I sign up?

Alert, Alert

The banks are broadly lower today. Canary in the coalmine?

When The Music Stops

Last week I tried to debunk the myth that earnings were great by pointing out the flaws in Bank of America's and Citigroup's earnings. I don't contend that money shuffling and holding toxic assets were a great business to be in last quarter (ala GS and JPM), but I don't believe that is representative of what is going on in the real economy. In the short run perception is reality and what I am saying will not matter until it does. But here are some examples of what is going on in the real economy:
  • CSX was highly touted as being better than expected but revenue was down 25% year over year. The best they could say was that some markets may be bottoming. That they guided low enough so they could "beat the number" says little about the overall economy.
  • Fedex, another company that ships goods, said they were not seeing an improvement in the US economy.
  • UTX is reporting lower orders. That coincides with the industrial side of the GE business, which was worse than expected and orders were worse. The GE Capital side of the business made up for the shortfall. There is very little credibility to GE Capital's numbers as any longtime GE shareholder can attest to.
  • Pure banks that don't have the benefit of a capital markets business have been falling short on earnings as delinquencies are running higher than expected. BB&T and Regions Financial are some examples.
  • IBM, RIMM, NOK, XLNX and GOOG were all weak on the top line, even though some managed to "beat the number" on cost cutting.
This bear market rally is doing what bear market rallies do. It is sucking the money in off the sidelines. This can continue for a while as these rallies generally last longer than anyone thinks possible. However, it is always the case that the majority believes they will be able to get out before the music stops. That is rarely the case.

Wall Street Research

All the research coming out of Wall Street this week has been unanimously positive on the market and on an individual company basis. Today, Credit Suisse is following Goldman's lead and raising the price target of the S&P 500. This is the mirror image of what was occurring when the S&P 500 was approaching its low in February and March.

Are We There Yet

Good Morning. The chart below is the 10 day moving average of the NYSE Advance/Decline line. The chart is finally reaching overbought territory.

However, the chart is not yet maximum overbought. The table below shows the 10 readings that make up the 10 day moving average. I highlighted in red the readings we will be dropping over the next 2 days. They are negative so it is still possible for the market to get more overbought. That is the reason I have been citing Wednesday as the day the market will be overbought. By early next week we will be dropping very high numbers, which I highlighted in green. At that point the market will have a very tough time going up.

While the table above does not support a down day today, I believe we might be setting up for one.

Do You Feel Lucky

  • On Friday, I pointed out that there was less than meets the eye to Bank of America's and Citigroup's earnings. It looks like investors took a harder look at the results over the weekend.
  • The good news for the banks is that the rest of the group is shaking it off.
  • Would a breakout after an 8% straight up run be exhaustive or the beginning of a new leg up?
  • I am less bearish and therefore less short than the last time we were at these levels.
  • There is simply not as much exuberance as the last time we were here. However, the fact that we saw mass upgrades this morning likely means we are late in the game.
  • Today makes 9 straight up days for the Nasdaq. Do you feel lucky?

Option Exuberance

  • CIT's debt is being rolled at a higher interest rate by bondholder's who don't want to take a loss. How does higher debt service make an over leveraged company more viable? Good money after bad?
  • If the loan they are making is good, then why wont banks who don't hold CIT debt make the loan?
  • CIT's best customers are likely out looking for other lenders, while their worst customers will have no other choice but to stick around.
  • A Wall Street Journal article mentioned that many banks are allowing commercial loans to be rolled that would not qualify for a new mortgage. Is this becoming a trend?
  • The Goldman strategist that raised his S&P 500 price target, said on February 26 that the S&P 500 could reach 650. That was not the low, but it was pretty close.
  • There is once again extreme call buying. I am adding to my short position for a trade.

Is The Market Cheap

The chart below is from Sprott Asset Management's July Letter (please note: I added the circles). The chart show's the price to earnings of the S&P 500 from the year 1900 until June 2009, using the Robert Schiller method of normalizing earnings. A chart using normalized profit margins in order to normalize earnings would look similar.

I circled the valuation troughs of previous bear markets in red. The one uniting aspect of all secular bear markets was that valuations bottomed at the very low end of the valuation range.

As it stands today, valuations are roughly at the mean of where they have been throughout history. Many argue that the market is cheap, but that is only when compared to the bubble period of the past 15 years. If history is a guide the market has yet to see the bottom in terms of valuation.

The chart above spans close to 110 years, so by definition it has little bearing on what will happen in the next few days, weeks or months. There could be a cyclical bull move and we might hit the valuation trough during the next cyclical bear. Or there could be hyper-inflation and while the real price of the market would be lower, the nominal price level could be higher. However, those who are making a case based on valuation do not have a leg to stand on.

In previous secular bear markets valuations were low and stayed low for a while. That never occurred in this market. I suspect that when that time comes people will say this time is different and have millions of reasons why the market will never come back. I highly doubt the word "green shoots" will be in their vocabulary.

Weekly Strategy - Will We Break Out

Two weeks ago, after the market already declined 8%, there was heavy put buying as the head and shoulders pattern was the focus of market participants. The combination of a large short base, option expiration and some headlines (earnings, Whitman, Roubini) led to a 7% rally that has quickly brought us back to the top of the range the market has been in for the past 11 weeks.

The strongest argument the bulls have is that they have been able to move the market to the top of the range without generating too much excitement. The last time the market was here the vast majority of people believed the market was going to break out and the S&P 500 was headed over 1000. That is what ultimately doomed the move. However, now participants seem more skeptical and fewer are calling for the same feat. That actually increases the likelihood that the bulls will be able to break out of the range this time.

The bears will argue that option expiration might have unduly influenced the market in the past week and that the days after option expiration have not been kind to the market in the past year. In addition, the market will be maximum overbought sometime in the middle of the week. While the Dow 10,000 party hats might not be out this time, sentiment did get pretty frothy at the end of the week.

My positioning is that I am short the SPY August 94 Calls. While I am more concerned than the last time I was short at these levels, I am going to give this position some more time. I want to see how the market acts after expiration. The market has already run 7% and we are headed towards being maximum overbought. Even if the market runs a little further, there should be a pullback shortly thereafter. I will reassess my position on the next pullback

Next Week

While I believe there was less beneath the surface of the earnings "beats" than meets the eye, I am in the minority. As a result the bar has been set pretty high for companies reporting next week.
Additionally, there will likely be a resolution to the CIT matter next week which can work either way. Have a great weekend.

Money Shuffling

  • Is it a healthy economy when the only people who make money are the money shufflers, while those who produce anything report double digit declines?
  • Without a one time $5 billion gain from selling China Construction Bank, Bank of America actually lost money. But they beat the number.
  • The same applies to Citigroup with their sale of Smith Barney.
  • During times like this, when it seems everyone has bull market fever, do the facts even matter anymore?
  • What would Lenny Dykstra do? BUY, BUY, BUY. BOOYAH!

Late In The Game

We are seeing extreme call buying this morning as after an 8% run investors are well trained to buy any dip. Generally, this means that we are late in the game. This is something that is seen a lot closer to the end of a move than at the beginning. The upside from here should be limited.

Jon Stewart Takes Some More Pot Shots At Cramer

Jon Stewart takes some more pot shots at Jim Cramer via Lenny Dykstra. Its almost too easy.

The Daily Show With Jon StewartMon - Thurs 11p / 10c
Lenny Dykstra's Financial Career
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Political HumorJoke of the Day

Earnings Observations

  • All the upside in bank earnings were the result of higher markets, while the recurring revenue streams were tepid at best.
  • 60% of companies have missed revenue estimates, but most are beating the top line. Cost cutting is something that could be done once but eventually revenue will need to grow.
  • GE's black box, better known as GE Capital, has been allowing GE to beat analyst estimates by one cent for as long as I could remember, before malfunctioning a year ago. Its nice to see they got that thing fixed.
  • On the JPMorgan earnings conference call CEO Jamie Dimon said he believes the regional banks will be in trouble because of their Commercial Real Estate exposure.
  • Companies have rigged the game of beat the number by setting the bar low. That investor's get excited by it reminds me of an infant that gets excited about "peekaboo".

Taking A Rest

Good Morning. The market is set to open lower this morning. It would be very surprising for the market not to take a break after the 8% run that it had in the past week. We finally got hints that investors were starting to get over exuberant late yesterday, as we saw heavy call buying and there was a sense of euphoria.

The day after option expiration has tended to be negative so a correction could last through Monday. However, I would expect the first dip lower to be bought. Often when the market has a straight up run there are investors who don't want to chase it, so they buy the first dip. If the first dip is bought and the market rallies into the middle of next week we will be maximum overbought right around the time everyone will be gaga over the market. That should set the market up for a move toward the lower end of the range.

Funny How That Works

PIMCO, the largest CIT bondholder, is proposing a debt for equity exchange with CIT. I find it interesting that they did not propose this sooner. It seems the plan was to allow CIT to fall flat on its face so that the government would bail them out of their bad investment. Now that they see they aren't getting bailed out, they are putting up capital. This should serve as a lesson to the government that they are being played.

The strength in the equity market is one of the most amazing things I have seen. Have a good night.

Bought Back Pfizer

I have been in the Wyeth/Pfizer arbitrage trade for the past few months. That means being long Wyeth and short Pfizer. I decided to take off the the short Pfizer leg of the trade and leave the long Wyeth position. Pfizer was one of the companies on the list of reasonably priced stocks I published on Monday. It seems to be trying to break out from a multi month base but is being magnetized to the 15 strike.

Truth be told, my position of being short the SPY August 94 Calls is starting to get me nervous. It doesn't seem like the market is ready to roll over. I want to be long something as a hedge.

Wheres The Excitement

  • I would say that we have learned little from earnings so far. Goldman Sachs and JPMorgan made their money due to the strong rebound in the capital markets and the rebound in asset prices. One would have to have been in choma not to realize this. The positive aspect is that financial stocks are not being sold on the news.
  • In technology Intel was positive, while Nokia, Dell, Xilinx and a host of other companies were not. At best we can say results have been mixed. While its hard to conclude that the economy is better the positive aspect once again is that stocks are reacting positively.
  • Shorting this rally is making me more nervous than the previous rallies. Why? The ease of which we rallied 7% and the fact that there seems to be much less excitement. What happens if we generate excitement again?
  • Nouriel Roubin has thrown in the towel. Will that be looked back on in a few months as the sign of a top?

Free Gloom

Marc Faber is shaping up to be one of the better investors of our time. He has a subscription service called The Gloom, Boom and Doom Report that is quite expensive. There is a copy of the July issue posted online. Hat tip Market Folly.

Not So Fast

  • Some markets are showing signs of risk aversion while others are not. Treasuries and the yen are higher , but risk assets are largely not effected.
  • It will likely take some time to see what the effects of CIT will be. Todd Harrison of Minyanville reminds us of the case of American Home Mortgage. When they had trouble nobody even blinked, even though in hindsight it was an obvious clue to the upcoming subprime crisis.
  • I am not saying that anyone should hit the panic button. Just reminding readers that when markets are up people tend to ignore warning signs.
  • We are finally starting to see some call buying today. This lends credence to the idea that investors are finally embracing this rally, which is a necessary precursor to the rally ending but not a guarantor.
  • If we get a decent move down today, I might cover up my shorts from late yesterday. Overnight earnings are a huge wildcard and I might get a chance to put them out higher.
  • I am listening to the Paulson testimony in the background. He sounds like a man that simply does not give a damn anymore and is happy to be out of political office.

Fertilizer Rumors

There are rumors about a $25 billion all cash offer for Mosaic, from the Brazilian company VALE. If true, this would be an equity positive. I have harped on the fact that if the market is to climb higher we will need to see another source of demand for stocks.

What Does CIT Mean For The Markets

Good Morning. Most equity market participants have a very basic understanding of the debt markets, myself included. Many will be quick to declare that the CIT bankruptcy does not matter but few really know what effect the CIT bankruptcy will have. CIT will carry 60 billion dollars of debt into bankruptcy.

While I can't offer much on CIT, being a novice myself, there are two observations I could make. The first is that the announcement last night was a surprise to the bond market. CIT's bonds dominated the list of most actively traded junk bonds almost every day this week and they traded up strongly. The junk bond market was preparing for a bailout, not a bankruptcy. The second observation I could make is that allowing CIT to fail is deflationary at the margin. I don't know how much of a deflationary effect it will have and the effect might be negligible or it might not.

CIT Gonzo

CIT announced that its talks with the government have stopped. CIT is gonzo. Looks like my late day sales were timely. Ill take lucky over smart every day of the week.

CIT Is In Trouble

Rumors are circulating that CIT is in trouble. Maybe that is the reason the VIX was up today while the market was 3% higher.

Back In On The Short Side

I sold the August 94 SPY Calls at the close.

All Lathered Up

While it seems that many pooh poohed the Intel news, I am hearing that people are getting all lathered up about the Capital One and Discover news of lower delinquencies. Rallies don't end until they are embraced and I believe we are finally in the process of that occurring. At the end of the day today the market will be overbought on the 10 Day moving average that I posted earlier, with room for it to get more overbought into the middle of next week.

I might sell some naked August SPY calls at the close. That would give me some breathing room to be wrong. If we reach maximum overbought next week, I would likely add to my position with straight up shorts.

Isn't It Ironic

Two weeks ago when the market was at these levels we saw heavy call buying. After the employment report, with the market at lower levels we saw heavy put buying. The ironic thing is that if the market ends the week at these levels, both the put and call buyer's will lose their money while the house wins. With the low volume, expiration will likely have an outsized influence.

Bull Headed

The bears are getting loud about Intel's quarter saying that it is nothing more than an inventory rebuilding. Seller's to the end user are not seeing any pick up in demand. Dell, HPQ and the electronic retailers are all saying the same thing, that demand has not picked up. Intel is at the tail end of the supply chain and is a lagging indicator. In the past few quarter's Intel was seeing a larger drop than the end market as people were cutting back on inventory. It seems that inventory adjustment is over.

I agree with the bears in the longer term about this issue, but in the short term it does not matter. When the market is rallying, people look for any excuse to join the herd. This is just the excuse.

Neutral Territory

Below is a chart of the 10 day moving average of the NYSE Advance Decline line. As you can see the market is not yet overbought. That is the reason I decided to give up on my short side try on the SPY. Shorter term overbought indicators are very overbought. However, I rarely trade on shorter term indicators. I strayed from my discipline by putting on the short SPY trade. Little damage was done so hopefully it was a cheap lesson.

I put an X below last week's oversold reading. As you can see the market never got very oversold last week. I wanted to get long as I saw heavy put buying and it seemed that sentiment shifted towards excess bearishness. However, there was still room for the market to get more oversold so I held off on getting long.

Covered SPY Short

I covered my small SPY short for a small loss. I don't usually trade on such a short term time frame. I guess I let boredom get the best of me.

From The Horse's Mouth

"But as I just said there are a lot of companies around the world that still need to fix balance sheets. And I think that if the markets stay receptive, that there will be a lot of equity issuance going on over the rest of the year."
-David Viniar, CEO of Goldman Sachs, on yesterday's earnings conference call
Good Morning. The CEO of Goldman Sachs laid out the reason that the market will have a hard time sustaining a rally. If the market rises, companies will start issuing equity again. In the 2003 bull market, companies were buying back stock and LBOs were flourishing. Now companies are selling stock and LBOs are non existent.

The only source of demand for stock is investors. In the first leg of the rally that was enough as investors were short and in record cash. However, that is no longer the case. If this rally continues, I believe we will see a pick up in equity issuance quite soon.

I took a small SPY short last night. This is more of a scalp, as a gap up after 2 up days is usually hard to sustain. I will be looking to cover this short pretty quickly. If the rally lasts into next week I will likely build longer term short positions.

Initiating A Small Short Position

I am taking a short position in the SPY. The S&P futures are up 10 points on the Intel news. I believe it is overdone.

Why I Like Healthcare

Historically, healthcare has traded at a premium to the S&P 500 especially during times of recession. At the current juncture healthcare is the cheapest sector in the S&P 500 trading at 11 times earnings. The ratio of free cash flow to earnings in the healthcare sector is higher than in the vast majority of sectors, making the quality of those earnings higher as well.

Many healthcare stocks, like pharmaceutical companies have been value traps for years and its hard to imagine what could turn them around. However, I believe that the sector has some strong catalysts in the near future.
  • The PFE/WYE and MRK/SGP deals have a combined cash component of $50 billion dollars. That means that $50 billion of stock in this sector will disappear once these deals close, forcing those who want exposure to the sector into other stocks. Much of that buying will happen automatically as a result of indexing.
  • The large buyouts in the sector are in stark comparison to other sectors where companies are issuing stock. That companies are willing to lay out cash to buy eachother is significant.
  • This recovery will not be like other recoveries. It will be a jobless recovery and the old playbook may not work in this new world. Owning the most cyclical sectors is not a no brainer.
  • I believe any resolution on healthcare will send these stocks flying. There is a huge overhang from the uncertainty of the Obama healthcare plan. A lot of bad news is already priced in and the effect Obama's plan may have might be overstated. "Change" was a nice campaign slogan but everything Obama has done to date has been more of the same.
  • Baby boomers are aging and entering the part of their lives where they need addittional medical care. That might help to offset the drag from any government pressures.

No Worries, We're Hedged

  • A quick move up on the S&P 500 this morning would have made for a decent short side entry point. The market would have been extremely overbought an a short term basis.. However, this market is not making anything easy.
  • My biggest fear is that I take on a position out of boredom.
  • If we do get a retest of the lows in coming months my purchases will likely be centered in the healthcare sector. I will write a lengthier piece on why I like the sector later in the week.
  • Will we see a slew of new equity offerings once companies report earnings? Large equity offerings would be the stake in this rally's heart.
  • I could see why the US wants to save CIT, but why make bondholders whole while the US taxpayer foots the bill? Bondholders and bank lenders should be forced to convert debt to equity.
  • Goldman has $3 billion of loans out to CIT but they say they are hedged. Who is their counter party? AIG?

Great Quarter Guys

Good Morning. Goldman Sachs delivered the well telegraphed good news that everyone was waiting for. The reaction to this news will be very telling as Goldman is an excellent proxy for the financial sector and the financial sector tends to lead the market. Everyone is expecting good news from financial companies and they are likely to deliver. The question is, will that be enough to push these stocks higher or will investors focus on the uncertainties that lie ahead?

For my part, I am waiting for the bulls or bears to push things too far in either direction. I remain largely in cash watching the show from the sidelines.

The Stock Market Just Got Harder

I was willing to get long this week if we became deeply oversold but it appears the market took off before that happened. The short term direction of the market has become even harder to predict now that we are no longer oversold and earnings are just over the horizon. I am patiently waiting for an easier setup. Have a good night.

Logic, Shmogic

  • GM's stock finally stopped trading today. As of Friday it was still trading at $1.15 on volume of 70 million shares a day. Today, anyone who owns it is out of luck.
  • The fact that GM kept trading so heavily despite it being obvious that the stock was worthless, shows that much of what goes on in the stock market has little to no logic. Those that try to explain everything the market does through news stories and logic don't understand how markets work.
  • The market did not go to an extreme on the latest move down. In the past few years it has paid to wait for extremes, but that may be changing. In such an environment it will be a lot harder for me to make money.
  • If Goldman reports great earnings will anyone be surprised? Does that and Meredith Whitney throwing in the towel make them a sell?
  • Maybe, but that's a battleground I am happy to stay away from.

The Test Lower

I did not like the setup at the opening today. The market was gapping up because of excitement over GS being upgraded and a bunch of other upgrades. That is not typically how a healthy rally starts. I would much prefer a bunch of downgrades. The best outcome would be a washout, but a test lower was a necessity even if the market decides to rally today.

Reasonably Priced Stocks

Many readers were interested in the individual stocks that I am considering for purchase. Over the weekend I compiled a list of reasonably priced stocks that have little economic sensitivity. Reasonably Priced Stocks

Looking For A Bottom

Good Morning. The positive aspect of last week's decline is that there was a buildup of put buying and yet the market did not give up too much ground. Additionally, the market is now somewhat oversold. The excessive optimism that was pervasive a few weeks back is now gone.

While a rally now would not surprise me, another large down day would set up a better risk/reward trade from the long side as we would get a much better oversold reading. Also, there are a bunch of support levels that the market is clinging to. Breaking them would likely shake out some weak hands.

Stuck In The Middle

The best opportunities in the stock market occur when participants are losing their heads. In March, the herd was convinced that stocks were toxic and could not be owned except for double short ETFs. Dow 5,000 predictions were a dime a dozen. In June, after a 40% run there were S&P 500 at 1100 predictions.

During both periods of extreme sentiment I was happy to take the other side of the trade. Today, we find ourselves in between both extremes. From a price perspective, valuation perspective and a sentiment perspective the market is in between. I have little edge in this market and sometimes the best move is to do nothing. Have a great weekend.

Hitting The Reset Button

I had a bunch of positions in my portfolio, even though I was market neutral. I decided to clean out my portfolio and unwind almost all of my positions. I have little conviction, long or short and want to start fresh. My sole remaining positions are the PFE/WYE arb trade and some preferred shares.

I did not have much conviction in any of my positions and they were distracting me. My best trades often come after I have been on the sidelines for a while and am able to think with a clear head.

China Applying The Brakes

Good Morning. The markets are set to open lower this morning. I would consider taking a trading long if the market sold off over the next few days. That would get the market maximum oversold and likely put sentiment into deeply negative territory.

There are news reports out of China that they are trying to put the brakes on the economy there. Since China got everyone bullish, maybe that is the story that will move everyone to the bearish camp.

We Won

Both the bulls and bears will declare victory today. The bears will say that we are working off the short term oversold condition by going sideways. The bulls will counter that they have quietly mounted a 2% rally off of yesterday's lows. All the while sentiment has remained decidedly bearish.

I would tend to side with the bulls in the short term. However, I am content to stay on the sidelines. While I believe the market is likely headed higher in the very short term, I believe the downside risk is greater than the upside potential. Have a good night.

Slow Ride

  • Same store sales for the month of June came in lower than the already low expectations. Fundamentally, there are few signs of end user demand improving.
  • The stock market feels like it wants to rally. The energy sector is very strong despite the fact that crude is flat. The financials are strong and there is a decent amount of put buying. In the short run I have no desire to fight this market.
  • While it would be nice to have a slow Summer, fighting off boredom and learning to sit on my hands will be quite a challenge.
  • My views are not set in stone. If the short term trading signals don't line up with my intermediate term bearish view I am happy to stay flat.

Technically Speaking

Good Morning. Everyone on Wall Street has become a market technician. Yesterday, the widely watched head and shoulders topping pattern was triggered with a break of the neckline at 880 on the S&P 500. I used that break to move my portfolio to a neutral position after being short for the past few weeks. The break seemed doomed to fail as everyone was watching it ( hat tip to the reader on the message board who pointed that out). When an extended market breaks an important technical level, the move tends to be more of a climax than the beginning of a new leg. The market was deeply oversold in the very short term.

While I believe the market has not yet seen the bottom, a sideways range bound market is also a distinct possibility. The market appears to be roughly at fair value and a slow Summer would not surprise me. I want to leave room for that scenario. As such I will slowly increase my short positions as the market bounces back but also might be quick to cover as we test the bottom of the range. I believe the market will see a stern test this Summer but I want to leave room for other outcomes.

Fear Makes Its Return

  • I believe it is safe to say that fear has made its return into this market. Which leads to the question why am I not getting long yet?
  • Valuations are fair but are hardly a bargain, especially considering the economic uncertainty.
  • Sentiment was extreme to the upside and a lot of people likely bit off more than they could chew. It will take some time to unwind those positions.
  • I believe the intermediate term trend is lower. When I am going against what I believe the trend is I want a perfect entry point. We are not there yet.
  • Have a good night.

Low Risk Entry Point

If the market continues to melt until next week, the market will be maximum oversold on Tuesday. That is the next low risk entry point on the long side, if it happens. Sentiment would likely be extreme if the market headed lower until then.

In the shorter term the heavy put buying is continuing and the bears are getting bolder. For what its worth I still think we will see a bounce sooner rather than later. However, I have not put my money where my mouth is. My portfolio is market neutral.

Back To Neutral

  • My portfolio is now in a market neutral position. While I believe we will see further downside, the easy trade on the short side is over for now.
  • The Bears are getting louder and we are seeing put activity.
  • On a very short term basis the market is now very extended to the downside.
  • 880 has broken and the head and shoulders pattern has officially triggered. 875 is the most important support level in my opinion.
  • Speaking of chart patterns, it looks like the Golden Cross turned out to be more of a golden shower.
  • Sometime stock selection helps and sometimes it hurts. Buying Verizon at the close yesterday falls into the latter camp.

Mob Mentality

Good Morning. I can't help but think of the stock market when I watch the Michael Jackson saga. Michael Jackson is being mourned and revered as "The King of Pop" by adoring fans. A few weeks ago the same people were calling him "Wacko Jacko". Crowds are always fickle. An important aspect of successful investing is to recognize that dynamic and not get sucked in to the mob mentality.

The S&P 500 had its lowest close yesterday since May 1. That means that the majority of people who bought in the past two months are now under water and a correction is well under way. There was a lot of emotional buying in the past two months. The day after the stress test results and the day when the 200 day moving average was broken come to mind. I believe those emotional buyers will fuel further downside during the remainder of the Summer.

However, the market rarely goes anywhere in a straight line and there will be ups and downs. It appears to me that the market is setting up for a minor bounce. However, I would not get too excited as I don't believe we are set up for major upside.


I am using this late day weakness to buy some Verizon. The S&P 500 is approaching its strongest level of support at 875. I would characterize my positioning as slightly short. I don't think the market is ready to mount a sustainable rally but we might be getting closer to a bounce. Have a good night.

Bing, Bang Zune

  • There seems to be the perception that in order for there to be a retest of the lows we need to see catastrophes on the scale of Lehman Brothers. What about plain old low valuations?
  • I have been researching individual companies, trying to build a shopping list in case we get a retest of the lows. For the most part it seems that companies are fairly valued, with few bargains to be found.
  • The knee jerk reaction was to think that Microsoft's search engine Bing would be the Zune of search engines. My understanding is that Bing is getting rave reviews.
  • Microsoft loses over $1 billion a year on search. If Bing helps them to break even that would do wonders for earnings. A profit would be icing on the cake.
  • To buy an ugly close or not to buy? I am considering doing some buying on the close to offset my short positions.


  • The market seems to be edging closer to a bounce. We are seeing some put buying today and sentiment seems to be moving in the right direction.
  • I would like to see 888 on the S&P 500 convincingly broken. A break of support would likely shake out some weak holders.
  • How far could a bounce take us? Not very far. I could see a one or two day relief rally.
  • Lowry's put out a negative report yesterday on the stock market. They have a heavy institutional following which might account for some of the weakness today. I am not familiar with their work but my understanding is that they have a good track record.
  • The large banks said they will stop accepting the California IOUs this Friday.
  • The banks are looking strong today with Bank of America, JP Morgan and Wells Fargo positive

No Man's Land

Good Morning. I continue to believe that the market is in no man's land. It is likely too late to short but too early to buy. The market might attempt to rally at some point today. The bulls are likely emboldened by the fact that the bears couldn't get the market down yesterday. However, I don't believe that the market has had enough of a washout to sustain a rally.

In the bigger picture I believe that investor's are whistling past the graveyard and ignoring many potential landmines:
  1. California is bankrupt and other states are not in much better shape. Municipalities will need to cut spending and this will have a negative effect on the economy.
  2. The Citigroup preferred conversion is at the end of the month. The market will be flooded with Citigroup shares. This is negative because it is additional supply and because Citigroup is a psychologically important stock for retail investors.
  3. The possibility that the financial crisis returns and a large bank is effected. Bailouts have become political landmines and the next bank might not be treated so well.
  4. The possibility of continued equity issuance. Companies have been issuing record amounts of stock. I believe the new stock has been absorbed so well because investors were sitting on record amounts of cash and used the issuances to deploy that cash. I believe we have reached the limit of what the market can bear.
  5. The H1N1 virus is spreading. Schools in Brazil are closed for the entire month of July.
  6. Geopolitical tension. Pick your poison.

Can We Get A Bounce

Earlier, I thought we might be setting up for a bounce tomorrow. However, I am not certain we have had enough of a washout to get a good bounce. I was entertaining the idea of picking up a long position for a trade but have decided against it.

This is the third time we have tested the 875 - 888 area on the S&P 500 in the past two months. Every time a support level gets tested it gets weaker. I believe we will see further tests in the coming weeks. Have a good night.

Summertime Swoon

  • The strangest thing on my screen is that treasuries have been down all day despite the higher dollar, lower commodities and lower stocks.
  • Bank of America is leading the financial sector lower. While the stock sure does seem cheap on "normalized" earnings, I have rarely seen a stock so widely loved.
  • I believe that analyzing financial stocks is an expertise that few possess, myself included. That does not stop people from speculating in them.
  • The put call ratios are still showing complacency, but I am hearing more bearish chatter than I did last week.
  • There are a number of important technical levels in our vicinity. 888 , 880 and 875 are the most prominent.
  • The 40%+ rally off the March lows was the largest rally without a correction since WWII. In hindsight, wasn't it obvious that we would get at least a correction?

Troubling Signs

I never like to make too much of one indicator but the put/call ratio is showing little fear from market participants. I suspect that we need to see some fear before this decline is over. The VIX is jumping today, but part of that is technical after a three day weekend.

Monday Morning Musings

  • The vast majority of people follow the herd. The smarter people just find more clever ways to justify it.
  • Once the market is already down, what will be the justification for the green shooters to get bearish? My best guess is the long after the fact realization that California is bankrupt.
  • Where do I think we are? Too late to short, too early to buy.
  • Where do I want to start building exposure? I want to start buying below 800 on the S&P 500 and be fully invested if we get to 600.
  • If the S&P 500 reaches previous valuation troughs there is room on the downside to 450 on the S&P 500.
  • Why then would I get fully invested at 600? I am more than happy to be invested when the market is only 25% away from the cheapest prices ever. Waiting for the lowest prices ever is greedy and there is no guarantee it will happen.

Weekly Strategy - Bears On Offense

Last week the bulls had the wind at their back. It was the seasonally strongest four days of the month and they came into the week with the market slightly oversold. The bulls fumbled the opportunity and it was by far their worst showing since this rally began in March.

This week the bears are on offense. The seasonally strong period is over, while the market is still slightly overbought. I believe in order for this week to be considered a success for the bears they need to make an assault on the 880 level on the S&P 500, if not outright capturing it. Otherwise, it becomes more likely that we will stay in the range that the market has been in for the past two months.

What Happened At AIG

This Vanity Fair article by Michael Lewis gives an excellent explanation for what may have happened at AIG.

vf article

Taking Some Profits At The Close

I sold July 88 SPY Puts against the Aug 92 and 93 SPY puts that I'm long.

Do You Remember When

  • Does anyone remember the trading session before Memorial Day when they jammed the S&P 500 up 15 points in the last half hour of the day?
  • The only hint of a turnaround is that breadth has slowly been improving all afternoon.
  • A market trading on its lows at 2:30 before a three day weekend is not the type of market I want to be long.
  • Why do people only notice what is wrong after the market is already down?
  • Have a great weekend. Happy Fourth of July.

Risk Ignored

The situation in California is largely being ignored by the market. In addition, Argentina has now closed its schools for the rest of the month because of the H1N1 virus. I don't want to be alarmist and these both might amount to nothing. However, little risk is priced into this market and there is the potential for these stories to get bigger.

Get Your Hot Dogs Here

It is getting late in the day and the market can't manage a meager bounce. I suspect that if the market does not turn up very soon it will turn down and few will want to step up before a long holiday weekend.

The good news is that breadth has slightly improved over the past two hours but is still 5 to 1 negative. However, looking at the options market it seems that investors are somewhat complacent. The next few hours should prove interesting. When's the last time that happened before a long holiday weekend?

Sticking With It

The option markets are sending mixed signals. At the ISE we are seeing heavy Call buying while at the CBOE we are seeing heavy Put activity, making a read on sentiment difficult. My inclination is to stick with my short position. We have passed the seasonally strong part of the month and the market is actually overbought.

Buy Fear, Sell Greed

  • I continue to be of the opinion that the best way to make money in the stock market is to sell when they love stocks and buy when they hate them. I refuse to follow the crowd.
  • Its hard for me to understand why a Jobs Number with a huge margin of error can make the stock market sell off by 2%. I am not complaining though.
  • While I suspect that stock market participants are overdoing it today and we could get a bounce, I believe it likely that we will get a test of the recent lows (S&P 500 880-890) next week.
  • Will the secondary offerings return next week when bankers return from vacation?
  • If there are large secondaries next week I believe it will be lights out for this market.

Covering Some Shorts

I am covering the shorts I laid out yesterday morning into the "disappointing" Jobs Report. I remain short via August SPY Puts.

Top Value Investor

Good Morning. Seth Klarman is likely the best value investor of our time. In my eyes Warren Buffet had that title but he veered from the path in recent years. Here is a link to an excellent article which lays out Seth Klarman's view on the current investment climate.

More On California

For those following the California situation the Calculated Risk blog has a good update.

The Last Chance

I happen to think the Employment Report is not of much value as a leading indicator. Both because of its huge margin of error and the fact that employment is a lagging indicator. The market doesn't care what I think as the Employment report is a market moving event and it will likely influence trading tomorrow. This effect could be amplified by the low volume.

I think this week has been disappointing for the bulls as they have not been able to use this seasonally strong period to their advantage. Tomorrow is their last chance. Have a good night.


  • We are seeing heavy call buying today. Recently, this has been a good sign that the market is close to a down move.
  • Oil has turned hard today and so has Amazon while Google is slowly deteriorating. The hot stocks from last quarter don't seem to be working today.
  • On the plus side the financials are not bending and market breadth is 4 to 1 positive. This argues against a turnaround today.
  • Will the government just bail out California?
  • I see both sides of the inflation/deflation debate. On one hand the government is printing money but on the other hand people are willing to work for less money. Both have never happened before.
  • I believe the outcome is not written in stone and will depend on how we react to future problems.


Is it me or does it feel like everyone flips from being a bear to a bull real quickly these days? Yesterday, when the market was down it felt like the whole world was bearish. Today, when the market is up it feels like everyone became bullish. My sense is confirmed by the options market where we saw put buying yesterday and call buying today.

Using The Strength

I am using today's strength to add to my short positions.

The Municipal Crisis Is Here

California is the elephant in the room that nobody seems to be noticing. Why worry when the stock market is up? The stock market knows everything. Today, the state of California will start paying people with IOUs. I don't believe this situation is sustainable as people will not work and take money out of their pocket in return for a junk piece of paper.

California is a great microcosm for the problems this country faces. They are always delaying the hard decisions and kicking the can further down the road. In my opinion, these IOUs are likely to be the last kick of the can. It is a matter of time before the situation escalates. In the short run the hard decisions that California will need to make are not good for the economy, but they a necessary step to get towards an economy where we live within our means. The Municipal Crisis is here.

John Roque Uncertain

One of the best market technicians out there, John Roque, is also uncertain as to the direction of the market. Here is a link to the video. He does seem to be leaning bearish.

Yesterday's Action

In isolation I would say yesterday's action was constructive. There was some put buying and it seemed that optimism morphed into pessimism. At the same time the market did not give much ground.

However, yesterday was the last day of a quarter where the powers that be had large gains to protect. They also had the money and confidence to do it after a very strong quarter. I am not sure how much of yesterday's "resilience" was a result of quarter end antics. As such, I don't want to read too much into yesterday's action. I believe it will take until next week to see the true color of the tape. Volume will be very thin going into the holiday weekend.

The Waiting Game

Good Morning. It is hard to get excited about the current investment opportunities, both long and short. I calculate fair value on the S&P 500 to be 880 using normalized profit margins and a normalized P/E ratio. In one of the most uncertain times in US economic history I would expect to be able to buy stocks at a discount, but no such discount exists.

In past bear markets, the S&P 500 has gone as low as 40% below fair value, which implies a potential price for the S&P 500 of 500. While I am not predicting that will occur, I do not rule out the possibility. Dividend yields are historically low and the potential downside is more than I can handle. Not to mention that I believe it will take years to work off the imbalances caused by a massive debt bubble.

While I currently own put options on the S&P 500, it is hard to justify taking a large short position. After all, the S&P 500 is only slightly overvalued. I make my living from the market and the hardest thing to do is nothing. If I have no positions on I have no chance of making any income. However, I believe that is the best course of action. There have been plenty of times when I thought there would never be another good trade and there always is.