Vix hit my 72-74 target… take profits in shorts, move to longs

Hi traders.  The Vix hit my “buy” signal that I outlined yesterday.  Therefore, I covered some shorts, namely my best short MercadoLibre, Inc. [[meli]] , which I was shorting in the 20s.  I’m not saying to get real bullish here, but if you’re searching for a countertrend rally, I’d start digging here.  Using my strategy outlined yesterday, whatever oversold sector you buy today, make sure you set your stops to today’s low.

As for me, I bought Fly’s pick NOV, which has formed a nice 4-day base.  However, I shorted SKF.

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Hi guys, just thought I’d share you some of my notes.  I took a quick look at Fly’s comment section, and things are really getting out of hand.  It seems like there’s some kind of investor civil war going on.  Have we forgot, the “enemy” right now is the Market?  Instead of battling each other, we’re supposed to figure out how to trade this market.

Anyway, I have a few things to share with you.  Both good cases for the bears and bulls.

Why I’m bearish in the long term:

1)  The trend is obviously down

2)  American fundamentals everywhere is damaged.  Legislation takes too long to fix things, and the market is forward looking.  If the Government delays, the market will be short-sighted.

3)  My key correlation signals that I derived from the 03-07’s over-extended bull rally are showing it is NOT a good time to go long once again(therefore, I rarely recommend any swing longs lately).  For example, I noted about two posts ago that AAPL, GOOG, RIMM, and VMW (pre-earnings) are less than 10% from their 52-lows.  Know that these lows WILL BE taken out, but give it a few weeks.  Companies like AAPL, GOOG, and RIMM were the last standing leaders of the previous bull market.  Fly wrote an article of how commodity stocks are emulating the .coms of 2000 and will probably rally which supports my wave theory…  Well, GOOG, RIMM, and AAPL are already at their late stages of that “leader-rally” wave, and A LOT of people are dumping their shares.  Please remember, AAPL is the #1 mutual fund stock out there, and is therefore an excellent gauge of market sentiment.  Anyway, if you’ve followed me over at thehawaiitrader.com these past few years, then you’ve probably noticed how I used these companies to spot THE TOP of the multi-year rally that ended at over 14,000 on the Dow.  I’m still using them until they do something with their trendlines.

Why I’m NOT bearish in the short term (I’d hate to use the word “bullish”, because that doesn’t apply):

1)  For those of you who follow the Vix, note in the past few days how it is struggling to take out 70.  I put 72 as an important resistance point.  Please note that as volatility rises, it becomes increasingly difficult to predict the Vix using numbers.  Hence, if you follow my method of using the Vix, instead of using numbers, use the “spikes.”  They can either go up or down, and they are what I call the “extreme levels of market/herd mentality.”  The 72 spot is making it difficult for the Vix to notch another “spike”.  Pay close attention to the 5-day chart of the Vix: 

… notice the dramatic fall in the Vix from 80 to 50, which is an astonishing 60% move!  I haven’t seen that ever on the downside.  Now notice there are two consecutive spikes in the Vix from Tuesday’s close, and Wednesday’s close.  Actually, Wednesday’s close was not a true spike, but rather a steep parabolic move up.  The best way I can interpret that is that many people holding longs in the past week were selling stocks in blocks, perhaps expecting the market to rally, but sold at every fail.  Hope trades I guess.  Anyway, my observance of the Vix scares me to be short here, again for 2 reasons:  1) there’s some resistance on the Vix at 72, and 2) We had almost 2 spikes on the Vix in the past two days.  So what does that mean?  It basically means “the easy money on the short side” is temporarily done.  If you’ve been short, then cover at least half.  If you’re not short, then DO NOT enter here!  If you’re searching for longs, then WAIT!  The best way to play a “double spike” on the Vix is to buy the next market that opens gapped down.  A strong gap down will probably get the Vix in the 72-75 range where I’d feel comfortable getting long or shorting inverse ETFs.  This is a conservative approach that will help you with your entry point… watch how the market responds to the gapped down open.  If there is a temporary bottom backed by volume, then start getting long some really over sold sectors (like banks, tech, shippers, and commodities) as the market moves up.  Immediately set your stops to the day’s low!  This is VERY IMPORTANT.  It eliminates your deceptive gut feeling that “this is the bottom.”  I was an avid programmer in college, and for you programmers out there you understand why its best to approach this market as an algorithm, using basic IF-THEN statements.  In other words, “IF the market moves in your favor”, stay the course.  ELSE exit.

Right now I think the best move is to hold a lot of cash, and play a counter-trend rally.  There may be one coming up, and if it does, make sure you use leverage on your day trades, and keep your swing longs small (maybe 1/4 position).  Cover shorts on the way UP, and wait to re-enter shorts as many beat up stocks approach resistance points again.

Hope this helps!
Aloha,
Gio

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“Expectations were very low. Good for them,” said Jefferies & Co. analyst Katherine Egbert. “It’s a relief rally.” –Link

… does that sound like a compliment?  What a jerk.

Anyway, good for VMware, Inc. [[vmw]] indeed.

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(…short it “again”, that is.)

With all numbers and fundamentals aside, I had a major short signal on Google triggered last week and today based on my correlation models.

1) AAPL and YHOO’s sell off today on high volume less than 10% from their 52-lows is NOT good. It didn’t help that Yahoo decides to cut 10% of its workforce today… in which we probably won’t see the ripple effects into other .com companies until after the holiday season. Regardless of what AAPL reports afterhours, I will be looking carefully at the price action for the next two weeks because we’re still very near the 52-low, which means we need some serious follow-through. That should tell you how investors truly feel about the company… not what happens on the first day.

2) And today, GOOG got sent back at the 20-day, signalling a large lack of buying power on the short term and long term time frames.

I hope these triggers are wrong, but I won’t bet against them. GOOG is still the top inovative company out there, but so far, like Apple, a lot of their latest products have not wowed us enough (probably because they set the bar too high). For example, Google Chrome and the Google Phone hype is anticlimactic, and the 3G iPhone didn’t have the celebrity status of the first generation iPhone.

So, as oversold as the NDX may be, I’ll be looking to re-short the tech giants again on every spike or when the relief rally play is done. Deep down inside, I hope I am wrong because I would rather play the NDX on the long side, and we really need the economy to pick up as we close out 2008. Tomorrow, all these stocks should move up, but don’t get bullish on any spike if the volume is not there. If you’re looking to hedge this play, I would look into buying in-the-money calls on the Qs.

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Wow, that was a long title.

As I’ve stated a few weeks ago, I think the Dow’s relief rally will take us above 10,000 in the short term.  On the rough ride up I will be shorting the inverse ETFs for a swing trade, while getting long them on a day trade as a hedge in the case that the market decides to drop. 

[[fxp]]   …hit my “under 100” target.  Will re-short closer to 100.

[[skf]]   …short on weakness

[[srs]] … don’t swing short.  This one has the smallest “premium”.  Rather, get long for a day trade hedge.

And I’ll ask the question you were going to ask me, “why don’t you just get long UYG instead of shorting SKF, or get long FXI instead of shorting FXP?”

Answer:  They don’t truly follow each other in a perfect inverse fashion.  I trade off of ETF imbalance, and right now, the inverse ETFs are at a bigger imbalance or “premium.”  Case in point, the Dow is up +400, but:

[[fxi]] is not as good as shorting [[fxp]] .  And [[uyg]] is not as good as shorting [[skf]] .  See, there’s an imbalance and the general acceptance is that SKF and FXP have higher premiums.  One day these inverse ETFs will become good contrarian indicators such that as the put-call-ratio.

…for these reasons, I also outlined another strategy to play this relief rally, which was to short FXP at 80% as your primary trade and short FXI at 20% as a hedge. 

Aloha!
Gio

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Yeah, I hate October.  Not only do I have to prepare a bunch of tax returns for procrastinating businesses, but now I have to prepare their 3rd quarter reports by the end of the month.  What also irritates me… I think everyone is concerned about the recession hitting the islands, and they want to raise their prices while asking everyone else for discounts.  Wow, they’re asking for too much. 

Anyway, I’m starting to see the slow down here in Hawaii, and usually I see these economic patterns way ahead of everyone else.  Its a nasty domino effect, and if you understand the chain of these businesses, then you can calculate what area in society will get hit next.

For example, I ordered a couple of car parts, and its taking forever to get here.  Apparently the docks are slow, and shipments seem to be too light to be profitable, so they wait until they get a certain capacity.  Speaking of cars, the car dealers here looked to be way over-supplied.  What concerns me most in Hawaii is the construction industry, which I have many indirect connections into… the word from the top builders is that in about a year and half, the unions are going to get hit with layoffs, as the last of the scheduled projects are completed.   I actually think the timeframe might be shorter, since what usually happens are projects get cut even before they’re done, and builders seek to recover at least the cost of their expense, afraid that they’ll get nothing the longer they wait.  Anyway, apply laws of supply and demand, I expect Hawaii home prices to drop significantly in 2009-2010, as we have managed to over supply our state with a bunch of homes in our latest construction boom, and now credit is tight.  Ooops. That’s a lot of empty houses.

The only big Hawaii project we have left is our mass-transit system that’s been in the drawings for quite some time.  I’ll keep you posted.

These recession periods are tough to get through.  This happened to Hawaii in the early 90s when I was still in grade school, so I don’t quite remember it or didn’t care (missed those days).  What I do know is that people still do what they gotta do to get through the day.  People still buy stuff, sell stuff, eat stuff, play with stuff.  It will be interesting to see how our local community reacts to our coming economic woes, and see how they survive it.

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