Thursday, May 20, 2010


We are getting awfully close to the bottoms endured during the "flash crash" of last week on May 6th.  I am anticipating a turn soon as the fear is so thick that it is palatable.  We have not seen the last of our friends at the FED and there should be an end to the unsettled issues of financial reform being thrown about in CONgress.

Did you catch that all of this weakness in the market occurred immediately after Goldman Sachs was hit with an SEC inquiry and that it has accelerated as talk of bank reform has gotten serious?  The banks are stilling leading the direction of the market and while they have shaken the market it will rise again like some phoenix from the flames.

I have a mixture of things I want to post so that you have a mid-month update of things to watch.  Clearly things look weak and shaken here, but I am anticipating a bounce here that will take us back to the 1160 to 1175 area.  Once that area is attained it is imperative that we clear the decks as the true wash out will have begun. 

I've been kicking myself because I have been identifying the end of April as my time frame for a significant drop.  When that drop didn't come in my time frame I questioned it and actually pressed more into what was continuing to work and extended my time frame for an end of May drop.  Within a week or so later, the first market drop occurred validating everything I've been writing for some time.  Well, here we are facing an almost 10% drop in the DOW and I'm suggesting that a turn could be coming with a decent sized rally only to be followed by a sobering drop in early to mid July.  

What I'm stating is that we are probably due to a reversal because that just what happens in markets.  A true market is not one-sided like the market we experienced over the last 14 months.  It waxes and wanes.  It oscillates.  Like a tidal wave of fear and complacency we have ups and downs.  Many have forgotten that and now the fear is here we must remember that we need to buy when we don't feel like it and sell when we are most jubilant.  In fact, I was selling my options today that were going higher as the market dropped.  (I won't mention the name of what I was buying because I firmly believe that that trade will reverse and if you bought it, it would be like playing with a loaded revolver).  I didn't want to sell at the close today because the greed within me was telling me that it just might go lower tomorrow, but the conservative manager within me was planning on scaling out so I could reverse when the market started showing a trend to go higher.  If we have continued weakness --- I'll probably be shorting, but I'll be closing out all trades by the end of each day.

Don't get me wrong --- nothing has fundamentally gotten better over the last two weeks that are not subject to reversing for a double dip recession, but price action should slow and reverse.  I mentioned earlier today or yesterday that the CPI data (as the government reports it) came in weak showing the absence of inflation.  This will allow the FED all it needs in terms of a go ahead to print more and inflate every asset class (even though it is working less effectively than before).

Ok, here are a few charts I'm looking at....

VIX - (fear index) is off the chart.  If you bought the VXX I recommended a while back and held it WAAAY past the stops I suggested you are in the money big time.  Again, I often see the trends but am looking at so many things that I'll identify it and move on.  It was pretty obvious that the VIX was too low as it dropped into the 16 level - so good for you if you make money here.  I of course suggest you sell the increased volatility now and be a disciplined trader.  VXX is now trading at $34.  Even my early identification of that trade was at $25, but you would have had to tolerate some pain to get to see the money!

Financial Conditions Index - Update
Didn't we just state the other day how this thing was showing that we were out of recession?  May's update said NOT SO FAST!  Today's print is not healthy.  There is a true collapse of liquidity going on and this thing is looking sick.  There had better be some quick intervention soon or we're going to begin seeing some stories about increased inter bank lending rates and distrust in the banking rates for overnight lending ---- ala Part II of the Lehman and Bear Stearn collapse.

My friend Guy Lerner at is still suggesting that there is time to go on this decline.  I would not bet against him, but I certainly am cautious especially since I've done pretty well on this decline.

Be safe and conservative here, no reason to blow your foot off.  If you have questions, let's discuss it, leave a comment!



  1. Hi Goatmug,

    I agree with you, although I would suggest for those who are playing it hedge (long/short) as is my case, to hold onto some puts. This thing starts to look a bit like 1987 (I wasn't on the markets but I'm reading around about it).

    Regarding a reversal (decent bounce), I'm with Guy on it: the sentiment is bearish but everybody looks for the 1050 (and hence try to buy there as it is support from Feb's decline); it might work, but as Guy suggests, we need a (fake) break of an important level (1050 for instance) and that, accompanied by speculators shorting creates the opportunity of a serious squeeze ahead.

    So how I'm seeing things: I think a break of 1050 will lead to more sell-off (maybe towards 1020 or so) followed by a multi-months bounce. The confirmation of the end of this cyclical bull we'll get it if the bounce we'll make a higher low and starts selling; if it's the case, it's going to get ugly.

    Also, if it's "a la" 1987, we might sell-off to below 900 on S&P (something like 20% drop from these levels); it's less probability I think, but if you look at AAII last report, you will see that despite the last sell-off, bulls barely moved: from 47% to 43%; not good for a decent bounce.

    Good trading!

  2. Not clear

    "The confirmation of the end of this cyclical bull we'll get it if the bounce we'll make a higher low..."

    I meant a lower high :); if the next bounce will produce a lower high than starts selling, it can get ugly.

  3. Dacian,
    Well said. I think what I'm seeing and feeling here is still denial that the economy and markets are showing larger signs of failing (in discussions with normal people - not doom and gloomers). In fact, I've said it before people are largely oblivious to risk and the fact that portfolios could go to -25% or lower in just a few days, so a hedge or put position is now almost necessary. Think about it, with the advent of the flash crash - stops are rendered useless so puts almost have to be the solution. Unfortuntatly not many folks employ the use of these tools at all. Perhaps a constant QID in the portfolio is required (in small amounts mind you).

    I do believe that we'll get our sea legs under us and we'll see that lower high you are calling for (like I said and stall to the 1160 area would fit the bill nicely) for a descent into the abyss.

    At least that is how I'm trading it. (I'm long KSU this morning in size).

  4. Oh yes, - also long QLD calls.


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