Your children will study THIS WEEK in their history classes.

Congratulations everyone. You’ve made it through one of the biggest financial stories in the past 50 years- the Credit Crisis. A weekend filled with bailouts, buyouts, and bankruptcies. Imagine if you didn’t have iBC to hold your head above the water. Let’s recap:

Here’s what happened over the weekend:

After failing to get a government bailout, Lehman Brothers (LEH) filed for bankruptcy protection.

Bank of America (BAC) spurned Lehman Brothers (bad week for LEH) and instead agreed to acquire Merrill Lynch (MER).

Insurer AIG (AIG) begged the Federal Reserve for as much as $40 billion of assistance.

As a result, we’ve had a huge splash caused by government liquidity action, which your kids kids will study in their economics 101 class, and in their US History text books:

$29 billion to fund JPMorgan’s takeover of Bear Stearns

Up to $200 billion each for nationalization of Fannie Mae/Freddie Mac

Up to $85 billion for AIG

$50 billion to insure money market funds

Approximately $300 billion of Fed liquidity measures this week alone.

And a package that will basically add to these bailouts. More to come!

One last note. The probability for a market crash just went up on my calculations. Two important ingredients for a crash have been added: 1) You have to think crash when everyone is in euphoric state. Therefore, I would not hold any longs when the Vix gets under 30. And 2) a lot of government intervention, or an experiment to attempt to fix a financial problem, adds to the risk of failure, and therefore panic. I honestly don’t think we will crash, but make sure you accumulate gold as the Vix drops, or enter some hedges, and hope those hedges turn red. o_0

Folks, pat yourself on the back! You’ve made it through your first official crisis (or third)! These events are bigger than the dot-com bust. Bigger than Black Monday in 1987. Bigger than the oil shock of the 1970s… well, that’s up for debate.

As Fly would have said… “you’ve been baptized”. Welcome to the era of the Fly and company.

Aloha! Have a good weekend.

-gio-

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Completely sold longs:  FSYS ( +9.01% at 50.65, bought at 46.48)

Added to longs:  SKH (16.55), CNQR (44.30) FAST (53.6), QSII (45.91)

New shorts:  MELI (30.00) 

New longs:  BABY (25.8)

Stocks I’m watching: 

• TIE at 13
• Got in a little early on re-short for MELI. 
• LULU vs UA.  Under Armour, Inc. [[ua]] down hard today, while [[lulu]] managed to get back green.  I will buy puts in LULU soon.

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Two of my favorite stocks to trade.

The “easy” money on SKF long side is done, and for now you should not trade SKF until it gets settled.   [[skf]] is now a contrarian stock, since the short-interest ratio won’t work for financials right now; therefore, with SKF trading near my $85 target, I think its not a good time to be fully positioned in longs related to that sector.   SKF hit its peak of 200 when BSC collapsed, but tanked back to 100 on government intervention.  De ja vu, with SKF peaking above 150, and now tanking back under 100 on government intervention. 

Finally, I was lying about FXP, but I do think you should keep an eye on those crazy Chinese stocks since they are good swing trading candidates, and you probably forgot about them.  What I’m looking for is a surge in volume.  That would give you a good chance to buy some of these stocks that have fallen to their 52-lows on low volume.  No volume, then this sector will be the best one to short due to today’s big bounce on miniscule volume. 

Best candidates for swing long:

China Life Insurance Company Ltd. (ADR) [[lfc]]

New Oriental Education & Tech. Group Inc [[edu]]

The9 Limited (ADR) [[ncty]]

Focus Media Holding Limited (ADR) [[fmcn]]

LDK Solar Co., Ltd. [[ldk]]

Best candidate for swing short:

Baidu.com, Inc. (ADR) [[bidu]]

[[cea]]

China Southern Airlines Limited (ADR) [[znh]]

The9 Limited (ADR) [[ncty]] ..again.

Keep an eye on volume!

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J3apoe asks:  Where do you think we go from here, with all the news flying around?  1. banning shorts  2. RTC rumor.  I think they are significant events and would have huge effect on the market.

hi japoe… if i were to take a few steps back, i would call this nothing but a bearish rally… these HUGE rallies occur in every severe bear market.  So, actually, today was a “good day” for bears.  You want the spikes so you can short more.  however, you’re right, the short term shows we could rally for a few more days.  There’s not much resistance for a while.  I think its best to keep your trades tight, not keeping most of them overnight. 

… banning shorts, and the RTC plan does not fix anything overnight, and the stock market is forward thinking, so you will need more signs of broad economic recovery before signalling a good reason for a reversal.  Any new policy as drastic as the RTC must first past Congress (expect delays), and will be followed by intense speculation as to whether it will work.  So yes, expect a lot of volatility on that speculation.

Remember, EVERY new bull market has leadership.  Ask yourself, what will our new leaders be?  Forget all those leaders you’ve been trading since 2003, like AAPL, GOOG, TASR, BIDU, GRMN, HANS… they’re all done.  Those leaders are what CSCO, QCOM, AOL, NSCP (netscape) where from 1998 – 2000. 

Get down, and look for the NEXT BULL!  Its out there… I’ve been telling my readers to search in alternative energy sectors as well as health-care sectors since these are at the early stages of a powerful trend… also, technology is a good spot to dig, but be more focused, don’t just look for computers, phones, and chips… find innovation like companies like GEOY that put stuff in the air, or even VMW which owns the best internet content software (VMW is near its ipo!).

In no way am I telling you to buy now… but always keep an eye for the next bull market.  Always remember the trend is still down.  That trend will turn when leadership rises from the tape.

Notes:  Dow +400  (nearly +600 range in the day)

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I absolutely nailed the market reversal today.  I quote my post from yesterday’s cautionary post:

“A bear market rally is very near, and my numbers point to tomorrow (Thursday’s) final hour of trading as a good place to look.”

If you are interested in my comments on the Vix, I posted a detailed report last night stating the danger of shorting into Thursday, as well as the great opportunity to get long for a massive day trade squeeze.  This is a day trader’s dream market, and if you are paying attention to the Vix with iBankCoin, then you are making loads of money.  What else can I say?  We have a huge opportunity to make money on these swings.  Don’t just sit there and complain about the market.  Do something!

Here is my post from yesterday.  Pay close attention to my rules about the “Vix Double Spike”…

Caution: Vix double spike on the 3-month = probability for rally is high

by Gio on September 18th, 2008 at 5:22 am

Fear fear fear fear fear fear.  I’ve been waiting for this setup:

1)  a break above 35 resistance

2)  a “double spike”, where “spike” = > 12% move.  One from 26-32 = 23% spike, and one immediately from 30 – 36 = 20% spike.  That leaves you with a total move of 38%  in 3 days (wow!), and a staggering 94% jump from the September lows.  WOW!  This is epic fear fellahs.

How to read this?  There are several points and theories to consider:

• First, remember a real bottoming process takes weeks, perhaps months.  I manage a number of SEP retirement accounts and a lot of these people are foolishly and desperately closing them out.  It will take a few weeks before the last of the rats jump ship.  I use my own clients as an indicator… how evil!
• Second, the talk of fear in the media has reached very high levels.  I want them ALL to say uncle.
• I tell you this, pretty soon the Inverse-ETFs will become a better indicator than the put/call ratio.  Well, maybe not better, but at least a strong contrarian indicator.  You heard it hear first.
• Every Vix double spike does NOT lead to a bear market rally, but almost EVERY super bear market rally occurred after a Vix double spike.  Its a probability thing.
• A bear market rally is very near, and my numbers point to tomorrow (Thursday’s) final hour of trading as a good place to look.  Therefore, it would be MORE BULLISH for the open with a large gap down, to give the market a chance to fill the gap. 
• In my plan, I always had Vix40-50 as the ultimate bottom.  But lets say the “next double spike” above 40. 
• How to trade this?  Ha, I knew you would ask… a Vix double spike means nothing more to me then:  Do not short here.  Cover your shorts if you have them, the “easy” money shorting is done.  Sometimes, it will mean more… if VOLUME increases on a double bottom on any of the 3 major indexes, then I will get long or short an imbalanced inverse ETF.  Oh yeah, I always go into the day thinking the scenario will NOT play out.  That way if it surprises me, then I’ll make a move.  Given the current economic status of our country, we could very well continue to fall… but I like the chances for a wall of worry here.
• Hence, I will wait for first, an intraday reversal, and maybe if there is follow through, I will play a multi-day squeeze.

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What is our government thinking?  Bailout after bailout.  Even a bailout for you, the consumer, through Bush’s stimulus plan.  I remember Ragin asking me what I was going to do with my stimulus check, I told him I was going to use it to short consumer stocks.

Right now, one of the key elements to fixing our economy is in the hands of the consumer.  Our market is fueled by consumption of goods.  The more people spend, the more our economy grows.

There’s just one HUGE FLAW with our system… credit abuse.  Too many people are living beyond their means, and our greatest lesson in that regard is the housing bubble.  In my line of work, I get to see how people spend their money, and let me tell you, majority of them do not know how to budget.  I prepare financial statements, and the debts people are running are huge!  I mean the numbers just don’t add up… how can you have a $900,000 mortgage on a house declining in value, with an anual household income of $60k?!  These people are -$30k on their mortgages!!  Simple math my friends.  But wait… WHO in their right mind approved of their loans?  Greedy loan officers, real estate agents, home builders, bankers, all abusing capitalism, ignoring the fundamental laws of supply and demand from every angle.

Right now our country is greatly divided.  Consumers in fear is a bad formula for our economy… plus you have government infusing more money, flirting with inflation.  Double ouch!  But again, lets focus on the consumers.  Money MUST be spent for the economy to grow.  Money spent, is just a fancy way to measure “demand.”  I don’t think we’ll head into another depression- the crisis is sector focused (banks, financials), and America has a lot of innovation in tech, alternative energy, and other strong sectors- but for us to hit a bottom, we need our consumers to regain confidence.  One way to measure this is through the MSCI index, which right now is at extreme lows.  What will get our confidence back?  Well, for one, all those who greedily abused the financial and banking and housing sectors must pay for their sins.  The whole house must come down.  Second, consumer confidence must be restored… something drastic must unify us.  The $ must be back.  Who knows what that will be?  What cured the Great Depression was a World War.  Maybe we’ll need another attack on American soil (like 9/11) to get us to forget about all this mess, and start spending wisely. 

The market ALWAYS re-balances itself.

 

-gio-

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