The Important Matter Of What To Do After Calling A Long Term Bottom.

Nat gas is now very overbought, but since it was down for years it is more than possible that it remains overbought for some time just like the market did following the March 2009 low. The indicators on a daily basis don’t really consider what the action has been for years and years before that.Perhaps taking some of profits out now would be a good idea. However, we saw this coming and lets refresh what was said after the bottom call.
http://ibankcoin.com/hattery/2012/04/16/hat-buy-ung-options/

“Volume really feels like capitulation and bottom looks to be in for now. The reason I am so excited about this bottom is because super oversold moves tend to rally longer after bottom. So don’t worry about if it hits overbought, I would hold this THROUGH overbought.”
We are overbought.It’s easy to claim a win after you made a great call. But how many people who called the top in 1929 lived to wait it out until 1932-1933 when it really bottomed? How many people that called the bottom in 2009 or top in 2007 lived to take advantage of the 09 bottom and the entire rally after? Taking some profit off the table is not a sin, but exiting a position that is going to multiply it’s investment 10 fold when you don’t even have a double is.

Patience is certainly a virtue that I am not naturally blessed with and need to remind myself vigorously to just chill out sometimes. I gotta get my contrarian mindset right.

see Jessie Livermore’s book, Reminiscences of a Stock Operator
In it, he describes an old man named Mr. Partridge who would always walk around telling people “it’s a bull market you know”.

“Why, this is a bull market!” The old fellow said it as though he had given a long and
detailed explanation.
“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this
is a bull market as well as you do. But you’d better slip them that stock of yours and buy
it back on the reaction. You might as well reduce the cost to yourself.”
“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now
I’d lose my position; and then where would I be?”

Jessie Livermoore: “And right here let me say one thing: After spending many years in Wall Street and after
making and losing millions of dollars I want to tell you this: It never was my thinking
that made the big money for me. It always was my sitting. Got that? My sitting tight!”
How many people made 100% since the 2009 bottom?

Well this isn’t an endorsement to hold forever, in fact the market is shaping up to get pretty volatile over the next coming months into the dangerzone of late summer into the fall with October historically being the worst of all months and meanwhile with euro crisis still shaping up to be full of plenty of grenades and landmines…. But it’s one of conviction. Know what you said when you bought it and what your plan was and stick to it. This mindset is DRASTICALLY opposite than what it is for a swing trader which is one of being completely flexible. And if you are going to be quick to do anything, make sure it’s quick when cutting losses, not taking profits. Your profits not only have to be enough to give you a comfortable rate of return, but also to make up for any past and future losses you may experience. While you can’t hit one out of the park every time and may have to know when to take what the market gives, most definitely your gains should be larger in magnitude than your losses, unless they are the same size and you are taking high percentage gains. There is a style for everyone, but one law that you cannot beat is the law of mathematics….

If you have a strategy of using your entire bankroll and taking profits at 30% gains and cutting losses at 10%, winning 1 time after 3 losses actually isn’t often enough. Because 1 10% loss 3 times will put you at 72.9% of your total and a 30% gain will not make back 3 consecutive 10% losses. a 30% gain will put you back to 94.77% of what you started with. If you want to beat the odds, you have to have a much greater edge and/or superior money management so that you risk close to the same total dollar amount each time without risking an increasingly larger percentage of your total.

One great way to do that is to ride out your gains to give yourself a much greater upside than downside. If you are willing to ride out your UNG bet and take a 100% loss, then you really need to ride out your gains to make over double your money and that is if you assess that you have a 50% chance of losing it all and 50% chance of a double. Of course, if you are using options and leverage your probability of a 100% loss is greater, but the amount of gain needed to produce a double is also greatly reduced.

However, with that being said, reducing the position size to what it once was is still not a terrible idea. If you had say a 10% position in natural gas through UNG and the price has increased 40% to 14%, reducing it back closer to the 10% position you started with is okay. However, don’t forget what you set out to do, and that is find a BIG winner and continue to hold it until it greatly appreciates in price, so unless you need to raise cash from somewhere, and can’t find a better area, you probably really don’t want to reduce your position all that much. But if you bought options your gains are larger and selling a bit more if it works with your rules or risk management system is probably just fine. I still think we go higher, but a pause at some point is not out of the question. In fact, it’s still possible we have not bottomed yet, I doubt it, but it’s still possible.

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Funny video of flash crash recorded live by the guy who freaks out. I’m sure this has been played before but is entertaining

WE”RE IN BEAR MARKET

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With TLT overbought at new highs, could it be time to cut and run, or even consider TBT? I would not own TLT. However, I’m not ready to bet against it just yet. The dollar will benefit from the debt crisis everywhere else and be the last to go as long as it is the reserve currency. The money fleaing the Euro, and then the Yen has to end up somewhere. I don’t know if people will want to lock their money up for 30 years over a temporary crisis or if they do they may regret it.
Nevertheless, I think TLT/TBT is something that I will stay away from in favor of UUP as unlike TLT it has failed to break it’s 2010 highs. Although I am not in favor of either at the moment. The strong selloff in May strikes me as a short term buying opportunity into June even though the chart looks like crap I will venture out a bit into risk and buy FCX,aapl,goog,cmg,MLST,TJX,V,ALXN. Stops below 2 or 3 day low.

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I am saving up my IBC dollars to purchase a FAZmobile from which I will perform drivebys. I am building up my arsenal and am ready to launch an attack on he who steps on my turf. I carefully await to make a big leveraged deal from which to buyout other members and shit.

In other news, my large cash position in real life is being deployed now into various “risk” names and my UNG play is working. Got a long term natural gas bet for sure.

I’m ready to earn some dollars and build an arsenal of “game items” or whatever is necessary to survive in the new IBC jungle introduced by Jeremy the IT guy.

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Whether you are a day trader or a long term investor, I still suggest you respect trends. I suggest you do it on multiple time frames…
How might you respect the trend? The first step is setting parameters. Trends are never 100% reliable, but they do offer a considerable edge. The thing about being 100% invested is that if stocks go lower you miss out on opportunity as a value investor. Whether it’s the stock you bought or if another great company goes on firesale and is available for a great offer. Not to mention the possibility you are entirely wrong and the trend is false and perhaps even the stock is a value trap…

As a day trader, you have a higher probability of failure and need more cash anyways. A stock you are short ripping 10% higher in a few minutes or a stock you are long shredding 10% lower in a few minutes is still possible. Trading being halted due to fraud, the types of pitfalls are still possible as a day trader. Cash will prevent a “black swan” event from blowing you up or at least reduces the likelihood. In addition you live to fight another day and if you lose fully invested and lose big, there is a HUGE gain that needs to be made up forif you lose. It’s exponentially harder to make up for a loss the greater it is. A 1% loss needs only a 1.01% gain to get back to even a 90% loss needs a 900% gain. Having more cash prevents you from getting to this impossible condition. So set parameters. It’s better to be in cash and 2 relatively independent bets (or safer yet, pair trades) and be leveraged than it is to be 100% long. I say a 25% cash minimum or more makes sense.

You also need a minimum exposure to stocks. Now those willing to go short instead will have a “maximum short exposure” (and minimum cash while short).

In general if you expect the move to the downside to be roughly equal to that of a move to an upside, you probably don’t want to be any more than 75% long or any less than 25% long. That would imply you can be accurate over the long term with this method 75% of the time (unless the move when correct makes a significantly larger move than when incorrect).You may want to throw in some bets to reduce dependency on the direction of the market…
Some ideas:
Earning plays (betting on earnings as well as post earning drifts)
pair trades: (i.e.long copper short copper miners or vise versa based on a thesis)
Arbitrage: This could include a lot of different things)
Value stocks on a very long term basis (over that time frame could outperform and protect you against a brief downward move eventually but also reduce your exposure short)
Shorting soon to be doomed stocks that aren’t priced that way
Day trading stocks,Swing trading and betting for and against stocks on different time frames.
selling puts and holding cash rather than using that cash to buy stocks, or selling calls and holding cash rather than using that cash to short stocks
calender spreads and other option strategies to profit from the function of exponential decay in options.
The lower your correlation between individual stocks and market direction, the better off you will be. This can be explained mathematically when considering what one of the simulations using the kelly criterion showed. It showed that using half the kelly results in 3/4ths the turn with half the volatility. This means lower draw downs and better return on your risk, and you can position yourself more properly for leverage. Think about it this way. a portfolio that returns 6% with a 2% drawdown is better than one that returns 8% with 4% drawdown. You could leverage the 6% return 2:1 and pick up 12% return with the same drawdown (slightly more because of leverage costs).

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One of the common trends that we all have heard is “sell and may and go away” but should one really sell in May?

It is an election year, so perhaps we are better looking at the normalized performance during election years.

In an election year, buy in may looks like a better strategy…

In the decade cycle, it looks like the low will occur after May, but that 2012, maybe sometime in the summer, is a great time to buy.

The last 40 years:

Sell in May is not a bad strategy, the amount gained from May to October or November is almost nothing, and perhaps it’s not worth the volatility. However, Selling in early June or late August can produce a bit stronger results.

Unless we are looking at the Nasdaq:

It looks as if Nasdaq will be good until July.

There may be something too this Sell in May strategy as buying in October and selling in May certainly produces results, Additionally many won’t manage the volatility through the summer as well, so avoiding that may provide superior results from a return on risk perspective. However, I don’t know that the sell in May is strong enough to overlook a “sell in August” strategy. But stocks aren’t the only thing we are looking at here.

However, certain areas certainly show selling has been best in may, such as Copper, although March or April would also have been good selling months.

Or Coffee:

Or Corn:

Or Live Cattle:

Soybeans in June:

Perhaps another reason to sell in May is that bond interest rates are higher at the end of May

Now the mutual fund cash levels are lower

July 2011 3.3% cash
August 2011: 3.4% cash
Sept 2011 3.8%R
Oct 2011 3.5%
Nov 2011 3.5%
December 2011 3.5%
January 2012 3.6%
Feb 2012 3.6
March 2012 3.3% (compared to 3.4% in March 2011)
Mutual fund cash levels have not been this low since July 2011, before stocks dropped 15-20% in a short time period. At this point, other than increased liquidity from the Fed, which isn’t happening yet, the only thing that can push the market higher is corporate cash being put to work, and the retail investor sending more money in. However, there’s a problem with this…. The “turn of month effect” is ending right now (5/3 after close), turning things negative.

Turn of month effect is the effect of stocks outperforming during the last 4 trading days of the previous month and first 3 of this month.

Here’s a look at the average daily gains.

Day	Daily Gain	Stand Dev
Fourth to Last	0.068%	1.064%
Third to Last	0.021%	1.055%
Second to Last	0.071%	1.037%
Last	0.088%	0.997%
First	0.118%	1.117%
Second	0.168%	1.065%
Third	0.155%	1.077%

For non stat buffs, standard deviation measures the range. As a general rule of thumb results have a 68.5% of performing within 1 standard deviation of the sample mean and a 90% chance of performing within 2 standard deviations, and a 95% chance of performing within 3. Each of those can be broken in half, so that a 34.25% of the results occur on the lower end and 34.25% on the higher end of the 1 standard deviation range. What’s more, that assumes “normal distribution”. In other words…

Day	Low Range	High Range
Fourth to Last	-0.996%	1.132%
Third to Last	-1.034%	1.076%
Second to Last	-0.966%	1.108%
Last	-0.909%	1.085%
First	-0.999%	1.235%
Second	-0.897%	1.233%
Third	-0.922%	1.232%

Basically, a fancy way of saying, we really don’t have enough evidence to conclude with any sort of confidence that the turn of month effect really exists and is not just an anomaly that has occurred. If you look at enough data, you’re bound to find a mild correlation. You could flip a coin several thousand times while looking at your watch, and if whenever the second hand is on 30 heads occurs 60% of the time, you could easily think that the time has something to do with it, but it could be nothing. But there is a greater probability than not, that there at least is a positive return over this range, and a return that is greater than over the remaining time period. So although we can’t make any conclusions, the odds are slightly better that you may have an edge over this time period. The edge isn’t even that great if it’s true, but it’s still slightly more probable than not that one exists.

One Trend that is Shaping up is dow/nasdaq. Dow is very cheap relative to nasdaq as it was last month.

10 year Treasury prices remain around at all time highs as yields are below 2%. Bond Yields are in “contrarian” range in that they will eventually rise as they have fallen very significantly so since the early 80s.

Now technicals point to monthly overbought and possibly starting a downtrend. Weekly mixed signals so we will call it neutral, daily possibly about to turn bearish from overbought on further weakness. Early-Mid June points to a turning point.

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Here is what I am looking at

Very large volume, over the last few weeks the entire amount of outstanding shares of UNG essentially has been traded with a HUGE spike on a day that gives me a sense of capitulation. Then the UNG made a big spike on increasing and well above average volume. Stop set at 52 week low of 14.25. The upside is so tremendous that it is worth attempting here. This is different than a contrarian position in which I continue to add lower, this is my Speculative bottom cal in which I make a leveraged bet using some options. I buy enough time to be able to cut the trade with still plenty of value on the contract and rie the contract out for a very significant gain if we do not stop out.

All the signs of a tradable oversold signal are there.  momentum turning positive and MACD turning up, the Slow Stoch and RSI coming off of oversold.

Weekly chart looks good as well and could shift out of oversold as well.

Volume really feels like capitulation and bottom looks to be in for now. The reason I am so excited about this bottom is because super oversold moves tend to rally longer after bottom. So don’t worry about if it hits overbought, I would hold this THROUGH overbought.

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On S&P

Monthly.

The monthly RSI has came down from overbought signalling a bearish signal.  Monthly slow stochastic is overbought but has yet to cross.

MACD is bullish

Weekly

The weekly parabolic SAR is bearish. Weekly slow stoch is bearish coming down from Overbought after a cross and close to a slow stochastic bearish trigger. MACD is bearish too.

Daily

Daily has been bullish since 4/11. Parabolic SAR and MACD are close to turning bullish but not there yet.

Conclusions, sell into strength for now and raise a bit of cash. Consider adding a hedge.

 

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The reality is that as an oversold asset gets sold to lower prices, there remain fewer and fewer sellers that can keep the entire area down forever. On a shorter term oversold such as a weekly or daily oversold, you do not want to hold for much longer if the longer term downtrend breaks and you may wish to drastically reduce your position either immediately or on the next bounce. On a longer term oversold signal such as a monthly chart being oversold and the RSI being oversold, you will rebalance your position and increase it over time as stocks go lower. Your general rule of thumb is to aim to add only half your position as the asset declines, and add the other half on the way up to where you started, but the half may not be added in even increments. However, you should really aim at a position size you can deal with. If your normal position sizes of entire assets are 10-20% you would instead aim for maybe a 5-10%
I considered accumulating a position in natural gas around $4, but now it’s at $2.5. I normally don’t consider buying a “contrarian” purchase until an asset is down 75% from it’s highs altthough it appears on my radar when stocks are down 50% from their highs. Well Nat gas I am now buying in my personal account an initial purchase. on paper I started a bit ago. However, depending on which peak you use, natural gas has declined significantly from the peak, more so than usual.
This is an older chart, but it shows that such drastic declines are not uncommon and can be followed by a drastic increase in price over the next few years. That doesn’t mean it’s inevitable, but possiblle. Either way, the value is presenting itself here. If you want to accumulate say a position of 5-10%, you want 2.5 to 5% to be accumulated on the way down. Well the max you expect it to decline is 90% from the peak, that is just more than your normal post bubble decline and it is very rare to see a 90% decline. So you might aim to acquire half of your position or 5% by that point. How gradual or how aggressive depends on how prudent you are. If you are willing to potentially miss out, you may do a very small position now, and put in a much more aggressive one if it drops.

 

That’s not to say that the supply can’t increase dramatically and it may not take awhile before the demand consumes the supply, or that an area may not lose interest, but the opposite can happen as well. By holding multiple positions on different time frames both representing risk and risk aversion, you should be able.

90% from the peak, we will put the peak around 14 even though in it was higher in 2005-2006, it failed to make a higher high and hit near 14 in 2008.

There are generally people that call the bottom a bit too early, and you have to recognize you probably won’t get the actual bottom. However getting stocks below there prior longer term trend line and around the last bottom after a 50-90% decline is usually going to be in the general range of “low prices”. You will someday look back on this and say “even if I had bought well before the bottom, it would have been a good idea.” That is… if you have the ability to withstand the decline and hold on on the next increase and wait long enough.
Well a 90% decline from 14 puts you at 1.4. Prices are currently below 2.5. So you have from 2.5 to 1.4 to accumulate a position that makes up around 5% of your portfolio. a decline from 2.5 to 1.4 would be a 56% decline from current prices. Doubtful, but still within the realms of the low end of the range in what could be expected from peak to trough.So a contrarian investor may have to absorb an incredible amount of pain. This is why you see Buffett holding tight to his BAC position. He was prepared to endure that kind of pain. This is why I do not use a very big amount of my portfolio in such bets, and have assets in risk off and risk on and “neutral” that can provide me with more stability and gains to compensate so I am not to worried about a single position having such a large decline.

You can break it up into a handful of purchases that use a fixed dollar amount until you make your adjustments
price – total position size as a percentage
2.5 2%
2 3%
1.4 5%
———–
1.5 6%
1.5 8%
2.5 10%
———–
Or instead, you might use a percentage increment such as roughly every 16% you increase your position size by a percentage point
2.5 2
2.1 3
1.764 4
1.481 5

Either way if it hits bottom early, you just deal with having a smaller position size
On the way up beyond your 10% aim, you might maintain your 10% position and only reduce after the trend has played itself out.

Contrarian purchases basically have no stops and rely on the already large sell off and tremendous upside over a long period of time to put the amount you gain when you produce a “win” drastically higher such as 4 or 5 times higher than the theoretical 100% loss. The greater issue is time and how it does relative to other investments in terms of overall gain per year. It might take a considerably longer period of time. However, this is just one of your many tools in a portfolio.

I gotta say, I’m not a huge fan of contrarian plays. They aren’t exciting, and they require a pretty good tolerance, but I think they are good and healthy to have. It hel you keep your other loses in perspective and also gives you a drastically different investment which should have very little correlation with anything else. You will be in and out of quite a handful of trades and shift allocation in and out of risk dozens of times by the time you are done with your contrarian play

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Although the market has been overbought on a weekly basis for awhile now, we are showing some early signs of perhaps a mild correction here.

The daily chart shows a mild bearish divergence with stocks making higher highs and higher lows as the RSI and slow stoch made lower lows and lower highs. It also is trending down from overbought conditions.

The weekly shows a bearish crossover of the slow stochastic from overbought conditions and we potentially could be breaking down from a rising wedge pattern and trendline break.

The monthly is a bit overbought, but only a bit and has yet to make the bearish cross over

July 2011 3.3% cash
August 2011: 3.4% cash
Sept 2011 3.8%R
Oct 2011 3.5%
Nov 2011 3.5%
December 2011 3.5%
January 2012 3.6%
Feb 2012 3.6

Still low cash levels in mutual funds, although corporate cash levels remain high as well.

Well this either is an excellent time to buy the dip or we are ready to break down through the longer term rising channel. Short term we have just barely broke the rising wedge to the downside, suggesting lower prices. Longer term we still are near support of a rising uptrend, suggesting higher prices. One of them have to give. I predict Bulls successfully defend here, but bears pierce an early warning sign of a correction, with a fall back to support somewhere above 1300 with secondary support around 1200-1250.
here is dow/nasdaq. It has been very rare for Dow to be undervalued enough relative to nasdaq (or nasdaq overvalued enough relative to dow) for dow/nasdaq ratio to get below 4.5

Perhaps growth can continue on for a long time. Perhaps nasdaq will one day be more valuable than the dow like they were saying in the 90s. Growth stocks are certainly not neglected right now though. Another way to look at it is relative PEs. I will have to do more work on this. Right now Nasdaq 100 has PE around 27. There are two ways the nasdaq can be overvalued. One can be through justified price appreciation that while justified by it’s previous earnings growth may not continue in the future. If either slower expectations or slower actual growth results in the future, even though the PE may be reasonable, the nasdaq still may be overvalued relative to the dow. If earnings expectations grow causing price to grow while the PE gets higher rather than staying the same, this is a sign of over enthusiastic market. It may be helpful to look at the dow PE divided by the nasdaq PE over a long period of time to see where we are at in comparison , but that can be done at a later time.
I believe that when the nasdaq is priced high, it generally is either a sign of over enthusiasm about the future (betting on future growth that won’t be there), or over enthusiasm in price caused by short sightedness with regard to current multiples vs the forward PE. (betting on the present without taking into account the inability for the company to maintain high rates of tgrowth in the future). But there are too sides to the coin, and that means that it could be a function of the dow being cheap either due to future growth that isn’t priced in, or low PEs because value stocks are being ignored.

Dow is really undervalued here, I think, more so than nasdaq being overvalued. But that is only due to all the cash tied up in bonds that is coming out and all the cash around the world that is migrating into the US due to the weakness in Europe and Japan.

You have to realize, although a weakening dollar may mean increasing asset prices relative to dollars, what does it mean for the price of those commodities priced in another currency? Probably it will stay the same (or go down even). If the dollar is weakening against their currency and they hold the assets measured in say Yen, then that means the yen is strengthening relative to the dollar. A stronger yen means it can buy more than it could of a particular asset as it strengthens, so if that asset is gold, that means that gold is cheaper in yen, or the price is going down. So a weaker dollar actually is bearish but everything trades on a relative basis so that is very masked by the fact that everyone else will follow the us and weaken their currency. If they didn’t, they risk a speculative surge which can prop things up very high and result in excess speculation and leverage and ultimately eventually take them lower as a country, and have capital eventually migrate away from them more than they can handle which could cause a collapse.
Well, I don’t know if the economists really “get it” for the most part, because they are looking at things from the perspective of an “island”economy. They miss the part in history books of the great depression where rates skyrocketing around the world and nations around the world defaulting starting with Austria resulted in skyrocketing rates and capital drew itself away from the US to other strong currencies and assets, globally.
October 1929 was when the Bank Austria (central bank) cut off discount window financing to the BodenKreditAnstalt and forced it to merge with Credit-Anstalt. In other words, Austria cut off cheap money in another part of the world. It was the failure of the new entity that was to kick off the acute phase of the crisis in 1931. So there is a direct continuity between the events of 1931 and those of late 1929.
So one should also consider the international aspect, since Europe was in many ways the epicentre of the crisis. The BodenKreditAnstalt had trouble financing itself as early as October 1929 when the Bank Austria (central bank) closed the discount window. The forced merger with Credit-Anstalt created the new entity that was to kick off the acute phase of the crisis in 1931. The bond market, much larger than the stock markets around the world began defaulting. Well cash was scarce internationally and so capital was drawn from anywhere possible. My understanding from what Martin Armstrong suggests is that the crash of 1987 was due to the G5 (now G20) announcement that they wanted to take the price of the dollar 40% lower. Much money was drawn out of the stock market from foreign investors, as they would rather hold cash in their currency that would get stronger against the dollar, and then they would be able to buy dollar priced assets cheaper.

If you held a bunch of real estate in Japan and you knew suddenly they were going to weaken the yen, this would be bullish only for Japanese real estate investors who choose to hold real estate rather than yen. For you, it is better to move to Dollars and the dollar will get stronger against the yen while the yen gets weaker. The improvement of real estate prices or whatever priced in YEN is not due to say rising wages, but instead increasing credit, then the fundamentals actually get weaker just as we saw with the subprime market getting pumped up in 2000 and then crashing later on, even though the price got higher priced in dollars initially, it perhaps didn’t priced in another currency, so the appreciation would not have been experienced relative to an external currency, but the crash may have. So for this reason, weakening the dollar internationally may actually have the opposite as intended consequence.

If the US suddenly wishes to devalue the dollar by 40%, the Japanese investors would move out of US stocks and assets.
A weaker dollar is not all that great, really. However, what is good for assets is if there is inflation in the dollar while globally there is inflation as well. This is what is happening, so stocks are SUPPOSED to be higher.
If China would start increasing rates and Europe would start strict austerity measures to strengthen the euro rather than inflate it, and the Yen got strong as Japan strengthened rates as well, the dollar would be the odd man out, and capital would migrate from stocks and US bonds out to other countries and foreign bonds and foreign assets… The attempt to weaken the dollar by say, lowering rates would just make US bonds less attractive to invest in, and also those holding US assets priced in a different currency than Dollars… Foretunately for us, every single commodity IS priced in dollars, even though there are some attempts to make sure that doesn’t happen.

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