I just arrived back from a Prepaid Legal Leadership conference in Las Vegas. It was a great trip. I broke even if you count the free drinks while playing. But I left Breckenridge a much wealthier man than when I arrived in Las Vegas. I traveled on Wednesday and Thursday. During that time the market ran through a number of my bearish calendar positions. I realized, that I have no idea how the average investor could sleep at night if they knew what was happening to their wealth if it is locked up in long only mutual funds.
Now how would you like to be be the running for the President of the US? Me neither. We have a number of issues.
So you say that you want to get back to Small Town Values_
Before I recap my last 5 days (except for today) of disasterous trading. I was simply bitch slapped by the market without mercy, a draw down of 12% in 3 days (big downward volatility for me). I want to lay out a quick scenario of which we should all be aware.
Generally I am neutral to bearish on the market, however with the commodity prices and inflation in general possibly subsiding (don’t get me started on $3.93 gal gas), I don’t put it passed the Fed to lower by 50 bps at the next meeting (or as an emergency).
This move would certainly shock the markets and force mass short covering. Would it really help? MAYBE. Here is why. With the recent socialization of FNM & FRE, the market responded by tightening credit spreads. This has in effect lowered interest rates, and a further rate cut may lower interest rates again. This could spur a round of real estate purchases and refinancing (if enough people qualify).
For the time being Inflation risk is off the table, so that is no longer the Fed’s worry. Upon this Fed move I would give it a day or two, and then I would be fading the weakness of the dollar into the British Pound and the Euro, as well as the temporary strength in Gold and Oil (DBC and DBA).
The bears will react with outrage, and the market rips through their stops. And after the shock and anger, they will retaliate by saying, “The Fed wouldn’t cut unless they were worried about something. The economy is in the worst shape since the great depression.” And you know what? They may be right.
Quick recap of a crushing few days in the mkt.
On Thursday I bought a few UST calendars for each or my acct.
UST Oct/Jan for 1.00 to 1.30. I put a few orders in after the close, and then later than night I thought I took them off. Well, evidently I didn’t. Just prior to the open the WSJ announced takeover rumors. The stock shot up and I picked up a few more calendars for .80 while on their way to 00. I was furious. As of this time I am taking very near a full loss on the position. 3% of the portfolio.
FNM- I still have some 2.5p spreads. Fortunately I sold the majority (800) of various other spreads. But at this moment, I realize this 1% position of 2.5s may end up worthless. We will see. The stock moving down to .73 on Monday was expected, but not welcomed.
I was whipsawed pretty hard on my combination of index positions. I used my lizard brain to exit my SPY 125 and 127 for very small gains rather than perfectly timed exits. I was on the road as the SPY moved through 127, then 125. By the time I was able to adjust the SPYs were below 123. Of course my MNX 190s were destoyed in quick fashion too. My IWMs were in good shape but Monday’s strong move hurt me some. Tuesday made it all better.
Other trades that raked me over the coals were COF, UNG, BJS, and XLE. I am mentally well equipped to deal with 1, 2, or 3 positions going bad at the same time. But EVERY position was wrong on Wed, Thurs, Fri, and Mon. It was insane. Fortunately I keep my risk to no more than 3% on any one position. However, at my worst point I was down 12% from my acct high water mark.
I was quite gun shy this morning. But as the positions moved my way I started to loosen up.
COF – Covered my short Sept 45/50c for 2.28.
UNG – Covered short Sept 33/35p for 1.00.
C- Covered short 17.5/20c for 1.50
IWM – just prior to the close I bought the Oct/Nov 75c for .82 with underlying @ 70.58.
As we move into Wednesday and beyond, there is a feeling of panic in the air. There seems to be a few forced liquidations in play. I felt as if that is what happened at 1:30. The selling hit the market hard, and did not stop. Commodities were ravaged. At some point there will be a bounce. It will probably be strong, but it will still only be a trade.
DBC– Commodity index- Today a support level @ 35 was broken. I don’t see another level of support until 31.30-31.70. There is some pain to be had in the shippers and commodities. But I will be looking for a bounce in the 31.70 area. Some of the Major Holdings in this fund are Oil, Corn, Wheat, and Gold.
DBA – Agriculture Fund – A very similar chart in the Ags. 31.60 is a level I am looking for a technical bounce. But the sell it again @ 33. There is a huge air pocket under this sector. Real support doesn’t take place until 26. That is a long way to fall. Corn, Sugar, and Wheat are main holdings here.
SPY – I have not been looking enough at this charting package. The lines I have on this chart tell me much. I was short @ 130 two weeks ago, and that was good. Unfortunately I hedged much too early. There was a Wave 4 doubletop, which has provide terrific sell signals in the past. The 50 MA provided resistance on the Friday and Monday rebound. I see our next downward target @ SPY 119. This would coincide with the 50% retracement from the 2003 lows. I would not doubt that we eventually see SPY 110 lows (61.8%) retracement. But first things first. I wouldn’t doubt that we see VIX spiking above 30 on downward move to 119. I will be selling into further strength (SPY 127) 50 day MA. LEH failure could be the catalyst to drive the SPY down. Then I anticipate we have the analysts calling another bottom. However, lower highs, and lower lows do not a bottom make.
IWM – I have been playing this an my strong side range trade. We are undeniably in a long term downtrend with a 58% retracement. The 50Ma is still below the 200 MA which infers sideways to down. However, the price action was strongly above the 200day MA. I can see one more bounce tomorrow, which is why I got net long at the end of the day today. However, if my SPY thesis holds true, I doubt the IWM will be fully spared. There has been strong support in the 70p range. Currently I hold a number of positions here. 75c calendars, 70p and 68p calendars in multiple time frames. Sept/Nov, Sept08/Nov, and Oct/Nov. Also a 67/69p 76/78c double double. I have a few ideas about further adjustments.
Over the past two months I have been adding to PTRAX to get some intermediate bond exposure, and as a round about way to fade the rallies in FNM. It gets 4% yield, and now that the socialization of FNM has taken place It received a nice 4% appreciation. It will further appreciate if we see a reduction in the Fed Funds rate.