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I sold out of my SPXL and SCO this morning at the open. SPXL was a 6% position at cost basis ($91.23) and was sold for break-even. QE3 was supposed to be escalator going up for the S&P but the escalator feels like it’s not working correctly. There’s also this post that I came across over the weekend; http://eminiaddict.com/?p=5982
At the open this morning I also sold out of SCO. It was a small position at 1% of capital at cost basis ($38.50) and was sold for a 3% gain. I will continue to hold UCO as I believe it is only a question of when and not if Israel bombs Iran. I also still have the TZA, TVIX and UVXY I had purchased earlier this summer when death and golden crosses appeared to be imminent.
Momentum has come down quite a bit in $RUT and $Silver. To the point where the next rally in each will set up a pretty clear negative momentum divergence on the chart. I will be looking to start positions in RWM, VXX and ZSL as $RUT and $Silver approach their recent highs.
If you’re like me, the announcement today of QE3 got you wondering. Wondering specifically about how long could the indefinite nature of QE3 really go on at $40B of mortgage-backed paper being taken down by the Fed month after month after month after month…….
According to this website http://www.sifma.org/research/statistics.aspx there was at the end of Q1 2012 $8.4T of mortgage-related debt outstanding. Assuming all of that mortgage-related debt could be securitized there, my friends, is the theoretical upper limit of QE3. Now, according to this other website http://www.federalreserve.gov/releases/h41/current/ the Fed already owns $844B of mortgage-backed paper as of yesterday. So, it’s $844B down and only about $7.6T to go. At $40B per month, QE3 could go on for another 189 months or 15.7 years if one makes the simplifying assumption that the amount of mortgage-backed debt stays flat over the next 15+years. And really, unless banks start lending again (to anyone, let alone subprime borrowers [ie, people who shouldn't ever be able to get a mortgage in the first place]) it’s probably not a bad assumption to make.
That appears to be the key takeaway right there. It’s not QE to infinity. It’s QE for the next 15 years. Although I don’t think QE3 will last even a tenth that long. During QE2 the Fed injected $600B into the capital markets (you’re kidding yourself if you think it went any place other than the capital markets or bank balance sheets). During the duration of QE2 $WTIC went from $71.63 (closing price on 8/24/10) to $113.93 (closing price on 4/29/11). That was a gain of 59%. In other words, for every $10B of QE $WTIC gained 1%. At $40B of QE each month $WTIC should go up 4% each month. After a year of QE3 expect that $WTIC should be around $155 per barrel. That means that after a year of QE3 expect that gasoline should be between $7 and $8 per gallon. That’s the effect of just QE3. Now imagine how high the prices of $WTIC and gasoline would be if Israel were to bomb Iran sometime within the next 12 months.
The Fed itself is on record as saying that one of the key pre-requisites of a recession is a spike in oil prices greater than the inflation-adjusted high over the preceding 3 years. The unadjusted high in $WTIC over the preceding 3 years is $109.95 (intra-day high on 2/24/12). With $WTIC closing today over $98, at 4% per month expect the inflation-adjusted high in $WTIC to be taken out around the time the calendar turns to 2013. Should the Fed insist on carrying on with QE3 after $WTIC has crossed $110 per barrel and gasonline prices have cross $5 per gallon, the recession that will result will make 2008 look like a day at the beach.
Bought some SPXL on the QE3 news. SPXL is now 5% of my assets at cost basis ($91.22). I had sold the remainder of my legacy URTY position last Thursday on the OMT news out of Draghi. I still have a couple of long calls in TNA (the 10/20 expirations at $75). And as I mentioned before, UCO is 6% of my assets at cost basis ($32.99).
I am still slightly net short due to my long positions in TZA, TVIX and UVXY.
As I had mentioned in previous posts, Tony Caldaro made a pretty compelling argument that every $20B in QE results in a 1% gain in $SPX. I did some research myself and found that QE2 showed that every $10B in QE results in a 1% gain in $WTIC. So now with an open-ended QE3 at $40B per month we should expect to see a 2% gain each month in $SPX and a 4% gain each month in $WTIC. Or a 6% gain each month in SPXL and an 8% gain each month in UCO. Assuming QE3 remains in effect for 12 months we should see $SPX over 1,800 and $WTIC over $150 a year from now. $150 $WTIC should put gasoline prices over $7 per gallon in the US. The Bearded Clam is truly a maniac.
Sold all of my TNA that I had bought the last week in June. Was a small position that I booked a 28% gain on. I still have all of the UCO that I bought in May. UCO is 6% of my capital at cost basis ($32.99). During QE2 $WTIC gained 60%. So while the S&P gained 1% for every $20B of QE2, $WTIC gained 1% for every $10B of QE2. So if we get QE3 (I still don’t think we do), I’ll benefit plenty. And I’ll test drive some SPXL if we do get QE3. If not, I’ll gain on my short $RUT and long vol position.
$WTIC had a nasty little pullback yesterday from its 200dma. MACD is still in a strong uptrend and is showing a nicely positive divergence having exceeded the May 1st high while price is still well below the May 1st high. But RSI is overbought and May 1st was the date after which $WTIC rolled over hard. $WTIC is still in a longer term downtrend from its February highs and the last time RSI was overbought was at those February highs. In addition, unless $WTIC is able to continue higher, the 200dma will become downward sloping.
I’ve continued to hold my UCO longs as a way to play the possibility of Israel bombing Iran. I will continue to hold my long UCO shares as that airstrike can happen any time. I’m thinking though that I should take a very small position in SCO to hedge my UCO.
*update* I did buy a little SCO 5 minutes befor the close. 1% of my capital at cost basis ($37.87). Not sure if I will add to the position or not.
The last couple of mornings on CNBC have featured various Fed Board members as “guest hosts” on Squawk Box. I don’t recall the name of the particular Fed person who hosted earlier this week but I do recall something he said. What he said was (paraphrasing) that he (truly) believes that higher stock prices trickle down to the general economy. The implication being that the Fed has been and will continue to do what they can to ensure higher stocks. I have never seen any empirical data to back the claim that higher stocks cause and are not just correlated to higher gdp and have my doubts as to its veracity so if somebody reading this post has, please share.
Since watching that sordid episode, I’ve been mulling over why the Fed seems so terrified of letting the indexes pull back from here. Ie, why have we gotten a correction through time and not price? Looking at the moving averages for the major indexes it is apparent that a normal, ie average, pullback (10% to 12%, depending on the index) begets 2 things; the first is a death cross of the 50dma and the 200dma and the second is a declining 50dma.
Now, our Chairman of the Board and Editor-In-Chief is very vocal in pooh-poohing technical analysis. But there are enough people out there who will pay attention to a death cross and/or a declining 50dma and will let it bias their position. Even our esteemed Co-Director ChessnWine has gone on record saying he pays attention to the slope of the 200dma when determining whether he is inclined to be long or short. The point being that deteriorating technicals can become a self-fulfilling prophecy. And there is the risk the accompanying selling pressure creates a vicious cycle lower.
The $RUT chart inserted above (courtesy of stockcharts.com) shows a failed breakout above a double top at $RUT 820 (see area encapsulated by oval). Could turn out to be a textbook bull trap. If today’s $RUT weakness persists going into the close I may sell the long TNA shares I have been holding as a hedge for my larger short $RUT / long vol positions. I am up a bit more than 15% on my long TNA shares and it would be a shame to give back those gains, even on a small position.
My limit prices on my legacy URTY position were hit this morning. The position is now 1% of assets and that last 1% will go at the limit price of $67 URTY.
Still have the all of the UCO I bought in May as $WTIC experienced that nasty pullback to $78. My only regret being that I lost heart and did not average down more in UCO to get the cost basis into the high $20′s rather than the $32.99 that I stopped at. I also still have the TNA I bought in June after the Bernank disappointed the masses by not rolling out QE3. However, it’s a small position and was bought as a hedge for my larger short $RUT/long vol positions. Speaking of, if the stochastics on $VIX get back into the single digits shortly before the close today I will add a bit to my UVXY position to average down. I may not get the chance as it looks like Turnaround Tuesday may live up to its nickname and vaporize the gains. Some of which have already been given back as I write this at 1200 Eastern.
As I said last night that I would, a few minutes before today’s close I sold some of my legacy URTY position (leveraged long $RUT) and used some of the proceeds to average down my TZA position. TZA is now 8% of my assets with a sub-$20 cost basis ($19.64).
As I survey the landscape of sentiment indicators, I have to note a distinct dearth of bears.
On June 4th $RUT reached a 2012 closing low of 737.24. That week’s Investor’s Intelligence % of bears was 26.6%. Since then the II % of bears has been in a range between 24.5% and 27.7%. Going back to 2004, the average % of bears in the weekly II reports has been 27.8% with a standard deviation of 7.7%. Per II, sentiment isn’t considered bearish until the % of bears exceeds 50%. Coincidentally, the reading for % bears this week was the same 26.6% that it was at the recent $RUT low.
Since that June 4th low in $RUT, the weekly NAAIM % has steadily risen from a reading of 49% then to 76% in the most recent report. Since early June, the “professional” money has pretty consistently been putting money to work in this market. The 49% level cannot be considered bearish since the average going back to 2006 has been 51% with a standard deviation of 23%. This week’s reading is now more than 1 standard deviation above the mean.
The CBOE Equity Only Put/Call Ratio is currently 0.69 as of today’s close. Since the June 4th low in $RUT, there have been 52 trading sessions and only 5 of those sessions have seen the CBOE Equity Only Put/Call Ratio close higher than 0.80. Since 2003 the average daily value of the ratio has been 0.66 with a standard deviation of 0.09.
Last but not least is $VIX. Going back to 1990 the average daily closing value of $VIX has been 20.52 with a standard deviation of 8.18. We are now getting close to 1 standard deviation below the mean.
If $RUT is up going into tomorrow’s close I will scale out of some of my legacy URTY position and use a small portion of the proceeds to average down my TZA position. Many of the indicators I follow are showing signs of a top in stocks; the lack of any real rather than imagined bearishness out there, the NYSE ARMS index closing today almost 1.5 standard deviations above it’s mean value going back to 1995, $RUT stochastics are approaching overbought while $RUT is in a downtrend and the % of Nasdaq Composite stocks above their 50-day moving average nearing 1 standard deviation above the 3-year mean value to name just some. Any further upside in $RUT favors a high probability bet on a pullback. The only question in my mind is whether this apex in $RUT is a top or the top.