Bull and Bear – Part 2

My current strategy as laid out in the last post is to be bearish over the course of another two weeks or so. But as expected in the same post, the markets rose today.

Tepid average volume and negative Tick data were remarkable. The Quad witching seems to be playing a key role here in keeping the markets afloat. Therefore, to me this rally is suspect beyond this week and should falter.

The thing that was truly impressive is the market breadth and consequent momentum. I cannot discount that. If my thesis stands to fail by early next week, my existing long hedges and huge 40% cash position will buffer my fall. And I will then use the cash position to deploy towards longs next week in addition to trimming my shorts. If my thesis succeeds, I will still be scaling out of my shorts, albeit at a profit.

Because I have a good buffer and because I have conviction in my call, I am not giving up on my thesis yet. I am not planning to enter any new longs this week and let my big shorts ride it out.

We have now two near term gaps – one from 9/02 and one from this morning. Given the lack of a clear all out buy signal today from my perspective, I believe we have the makings of filling at least this morning’s gap in a matter of few days, if not sooner.

If you are more conservative, then my advice would be to just stay out this entire week.

Open Positions

Long

• DLTR – Letting half of the position ride after booking 100% gain on the prior half.
• DBA – Keeping it open for now

Short

• KKD – Keeping it open for now as a play on September seasonality
• QQQQ
• CRM

Cash

• Maintaining a 40% cash position.

As always, will twitter any change in my set ups or strategy close to real time. The tweets carry more details on the trades. Use stocks instead of options to mitigate risks.

StocksRider

Okay the futures are soaring on Chinese inflation and output data. And here I am stubbornly sitting on my shorts. It is stupid and yet I know that is the right thing to do. At least for now. I am 50% cash and 10% long to complement my 40% short positions.

My initial plan is to stand tall against crushing waves of the ape-shit long market this morning. If I start peeing in my pants, I will liquidate some of my shorts or trade for some very short term long positions. This is just so that I can make or preserve some coin before the tide eventually pulls back, and my shorts are vindicated.

Bottom line, I believe we will not go way too beyond SPX 1125 with the mean reversion effect still in place. Sentiment is riding high and it will start behaving like a giddy teenage girl tomorrow morning floating in the bubbles of China data. Of course I know that some of the China data is completely manipulated, especially the 3.5% inflation. It seems like a joke. Look at the individual components and you will know what I mean. Welcome to communism.

But the markets don’t give a fuck to this or any tin foil hat theories. And so the futures are rising as a result of that very data and because the uncertainty regarding some more banking regulation from Basel committee has subsided. In fact, I predict that bank stocks are going to jerk off just looking at each other this morning.

Here are a few more things to consider both sides of the coin:

Bull Case

• Triple Witching Expiration week. Per Schaeffers Research, this week has a 72% likelihood of returning positive returns.
• New NYSE 52 week highs have been trouncing the new lows for several days in a row now.
• Momentum in various indicators.
• None of the long leveraged ETFs are giving overbought signal. Normally this means that they will continue with the aid of momentum.

Bear Case

• Various sentiment readings are towards the high side and soon going into the giddy teenage girl stage.
• One of the esoteric signals – the lunar phase is pointing to a flat to down period this upcoming week.
• There has been more volume on down days than on up days since August 1.
• September seasonality.
• Macro risk – Retails data will be out this week.
• McClellan Oscillator reaching its upper band.

My conclusion

Market should rise and peak out in the next day or two, if not sooner and in an extreme case scenario, till Thursday.  If I was day trading I would most likely buy some sweet ass TNA to pair nicely with some TBT and then sell it in the course of 24-48 hours monitoring the direction. After that, momentum exhausts and we are back in the mean reversion. Longs rejoice while you can.

I remain primarily short along with a healthy cash position and selected long positions.  Let the bulls charge at me!

StocksRider

Short post ovah here!

Shorting this rally. We have a reversal of sorts shaping up. Bought QQQQ and CRM shorts. Twitter stamped. Several indicators are pointing to a flat to down phase with a more down phase dominating soon. Even if this thing rallies further for a bit, I will just sit patiently unless breadth improves significantly.

Parting thought – Sorry to digress but couldn’t help sharing thoughts about the planned Quran burning incident. I am not a Muslim. But I have lived in places outside of this country to tell you something with confidence. The uproar we saw after the Danish cartoon about Prophet Mohammed will look like a peace-fest compared to what can happen if this incident actually happens. What seems like a story that will be soon forgotten thanks to our short term memories, will have super large repurcussions in days to come outside of US and eventually impact US. Oh…and if this thing transpires, the intermediate term to long term scenario of markets looks shitty at best. In fact it would be the last thing we would be worrying about.

(Update – The pastor called off his plans for burning http://www.cnn.com/2010/US/09/09/florida.quran.burning/index.html?hpt=T1&iref=BN1)

Folks,

I have to take off for a day or so due to my job demands. I should resume posting again sometime this week. Before I go, couple of thoughts:

From my perch and based on my indicators, I expect the market to show another reversal by the end of the week. If we don’t head down tomorrow, then I don’t see us going down till the end of the week. Obviously I am not taking a stance one way or other.  This is exactly why I am largely in cash and on sidelines with selected longs and shorts described in last post.  Tuesday and Wednesday’s market action could give some inking of which way the big boys are leaning towards when they return back.  As mentioned before, they might be closely watching any upcoming M&A action and Earning alerts announcements to decide their direction.

By the way, Schaeffers Research has some interesting statistics. In the last 20 years, the average return in September has been negative. But get this. In the last 5 years, the average return has been positive. Four out of last Five Septembers were positive. This is not my point of view yet. But for what it’s worth, I thought of sharing the stats with you.

Be well and I be seeing you soon.

• StocksRider

Sold 90% of my remaining longs into the morning rise.  Trades were twitter stamped close to real time.  Except for TNA that I sold on the downward slope, booked handsome profits after closing NTAP, IMAX and BZ.  Regular readers know that I sold off a big chunk of my longs into yesterday’s rise too including SPY longs.

Overall my portfolio shot up by 25% in a matter of a week and also covered some of my prior losses.  My portfolio is net positive since the first time I started writing on PG two months ago (update: it is up 21% since June end).  It has handily and significantly beaten S&P.  I hope to find time to post my results in more details sometime.  You can look up my twitter transactions that has details on all trades.

Open Positions

Long

• DLTR – Letting half of the position ride after booking 100% gain on the prior half.  This seems like a solid stock that has been defying the market downtrend due to its appeal in a perceived economic downturn.  I think it could have some more room to go.
• DBA – Keeping it open for now

Short

• KKD – Using The PPT seasonality screener, I see that it has a good probability of a down September.  Moreover, it is overbought and has a very small short float.

I am now looking to possibly add more short term shorts.  Stalking now.

Looking Ahead

Will the market go up from here?

As you know from the study I published yesterday, I expect the isolated short term high to be within two business days of 9/1.  Seems like it is working for now.  I am stepping aside for most parts, with a bias towards short term pull back.

Tuesday, the volume will return back to heavy as the big fat boys return.  That could give clues to the new short term direction.  If I was one of them, I will ask myself do I want to put money in this market to ride for the rest of the year?  While the first answer that comes to mind is no, they would be keeping an eye out for M&A deals and earning alerts.

I have a diversified stack now plus hedges both on longs and shorts.  So cannot lose much more from where I am.  The key is the market remains in mean reversion mode.  So until a trend is decided, I will  be in and out, and out and in.

Today is a day to celebrate for me.  I be seeing you, camels.

The Non farm payrolls data comes out tomorrow.  Consensus is a loss of 120K.  Briefing.com est is a loss of 106K.  More important number is private payroll data with briefing.com estimate that 10K jobs were added.

What makes tomorrow’s move hard to predict purely based on macro data is the fact that both bulls and bears can each argue about their position.  You know all about that,  as countless blogs and tweets have already mentioned – QE or no QE.  Of course, if the data is super good, which is not likely, bulls win the argument for the time being.

I am currently p0sitioned for moves in either direction.  I lighted up quite a few longs today.  I know that most on this site are pressing their longs.  Not in vehement disagreement with them, although my study posted in prior article suggests to be careful.  I am letting a few longs ride.  Having said that,  it would be stupid of me not to take some handsome profits off the table.  That is what I exactly did today.

Also I took one short position.  I used The PPT seasonality tool and an existing user screener to screen all stocks that typically experienced a down September month with overbought signals.  Then I went through each to find out which ones had the lowest short as percentage of float, just to ensure I don’t get caught in a rocket surge should the market go ape-shit upwards tomorrow.  I finally chose KKD (Krispy kreme).  I took a nice short position and will let it ride.

Any trades I do tomorrow will be posted close to real time on Twitter as always.

– StocksRider