Short Interest at Multi-Year Lows

After peaking last fall at multi-year highs, NYSE short interest has collapsed to multi-year lows. The only time it has been this low over the past coupla yrs was, yep, the deja vu period last spring.

You can see from the chart that low short interest is not a good predictor of near term trend reversals. But it is a data point in support that this rally is in its late stage and that there's a fade trade on the horizon.

position in SPX

Bullish Patterns

Am noticing lots of cup-and-handle patterns in many large cap equity charts. Some of the patterns span a few days while others are multi-month in nature.

Moreover, the action 'feels' bullish. The tape is consistently bid. Weakness is being bought regardless of news.

Feels too risky to be net short here. As such, I've been adding some long side exposure to balance things out. I've been buying some of my fave blue chip names (CSCO, JNJ, PG). Today I added a little commodity exposure via DBC.

To be clear, I'm in 'rent' rather than 'own' mode here. But I want to reposition my near term stance in this bullish tape. I'm now a coupla percent net long.

position in CSCO, DBC, JNJ, PG, SH

Bullish Sentiment Approaching Extremes

Wanted to record that Jason's sentiment indicators are getting pretty stretched toward bullish extremes--both near term and long term.

When sentiment gets lopsided, then a trend reversal often approaches.

Couple that with Demark indicators signifying trend exhaustion on multiple timeframes, and it seems time to get cautious.

Personally, I added a bit to my index short positions today.

position in SPX

Leveraged ETFs

Decent demo of the slippage or tracking error that occurs when holding leveraged ETFs over time. While these vehicles may be useful for trading, the tracking error erodes long term returns, making them undesirable for investors with long time horizons.

no positions

More Gold Weakness

Action in precious metals continues ugly. New lows for the move today. Peering thru a longer time horizon lens, however, finds the yellow metal just now touching its multi-year uptrend line--a defined risk set-up for bullish traders.

One apparent takeaway from a macro perspective is that gold is not buying the thesis that the financial system is reliquifying--particularly w.r.t. the EU. Instead it is behaving like a wave of deleveraging, deflation in in the cards.

position in GLD

USD Trade Closed

Sold my small UUP call position this am into this morning's spike higher in the dollar.

Resistance is approaching dead ahead. Plus possible double top.

Just tradin' 'em...

no positions

Central Banks Announce Coordinated Measures

This morning central banks around the world announced coordinated measures to enhance global financial system liquidity. Coordinated measures like this imply that central bankers see something severely wrong with the global financial system.

Their perceptions of systemic probs are correct, although as usual they are behind the curve.

Unfortunately, the planned approach--i.e., 'more liquidity'--does little to remedy the underlying problem, which is one of insolvency.

Nonetheless, the news jacked markets around the world. Domestic stock markets have opened about 2% higher. Gold jumped $30 on the money printing spectre.

My inclination is to 'fade' (read: sell) this news and will be looking for an opportunity to add to short side exposure.

position in SPX, gold

Reducing Short Exposure

Tossed about 20% of my SPX short to the trading gods in respect of the move lower that we've seen. Technically, we're approaching what might be thought of as a 'minor' support level at 1160ish.

More substantial support rests at about 1120ish.

Will look to piece out more short exposure on extended weakness. Will also look to add to my metals exposure should they continue weak as well.

position in SPX

Flag Pattern in SPX

The eyes of many traders are glued to the 'flag' or pennant' pattern forming in the SPX. Among the traders that I follow, it seems that most anticipate an upside resolution to the pattern.

Classic technical analysis says that chance favors resolution the direction of the previously prevailing trend. Yes, we've rallied off the early October lows, suggesting that the prevailing trend is up.

A counter view is that we've been experiencing only a bear market rally since October. A broader time horizon suggests a series of 'lower highs' since spring--in which case the primary trend could be interpreted as down.

In any event, we should get an answer pretty soon...

position in SPX

Bullish Silver Pattern

Silver appears to be tracing out a cup and handle-ish pattern. Added to my SLV position this am and may add a bit more around here.

Should SLV start to 'fill the gap' precipitated by the mid Sept meltdown, then a trade 'works' to 38ish.

position in SLV

Making Sales

Sold most of my Cisco (CSCO) position. Did some yesterday and then lion's share this am into the EU bailout euphoria. Will keep a small 'core' position bought at much lower levels. I do think that the stock reflects decent value here but I also think chances of buying it much cheaper in the next few months are good given the macro set-up.

After the sale, my overall risk position is pretty much hedged. My remaining position in CSCO coupled with some commodity exposure (GLD, SLV, RJA) is offset nearly one for one by an index equity short (SH).

If prices continue to rip higher from here, then I might sell of bit of commodity exposure or add a bit to my index short. If prices reverse lower from here, then I might add some more precious metal exposure or shed some of my short position.

Meanwhile I wanna sit back and observe for a while.

position in CSCO, GLD, SLV, RJA, SH

Minding the Gap

Bought some DBC early last week when prices were falling into the abyss. My thought was that if markets reversed higher, then this might be good for a trade up to about $28.

Why $28? Because once prices broke below that level last month, $28 defines a formidable resistance level. In the context of technical analysis, resistance defines a price level likely to retard further price advances due to the presence of latent supply--such as all those people who bought around $28 early last month and are now trying to get out at a price that lets them come close to break even. Short sellers may also lean on this level and sell come shares short with tight defined risk (i.e., if prices go north of $28, then shorts consider that as an indicator that this was a bad trade, and subsequently stop themselves out).

Moreover, gaps similar to the one that reflected the price breakdown in mid Sept often serve as magnets if/when prices retrace. Indeed, there's a saying among technicians that 'all gaps are meant to be filled.'

To add one more tidbit of rationale to my DBC sale, short term stochastics (e.g., the MACD shown above) were looking pretty toppy, suggesting an 'overbought' condition in the near term. Markets tend to ebb and flow between optimism and pessimism on multiple time frames; presently we may be approaching an excess of optimism in the near term.

As such, when DBC lifted into the gap area today, it was time for me to go.

no positions

Rallying to Resistance

Stocks have tacked on close to 5% off Friday's lows on the back of Fed chair Bernanke's Jackson Hole speech. We're now coming up on the SPX 1225 level that led the spill once breached nearly a month ago.

Will be interesting to see how things behave at these levels, as that 1225 now serves as resistance.

Personally, I've been fading (read: selling) this rally--unloading longs and adding to shorts. Have worked my net long stock exposure (longs minus shorts) down from about 22% to 13% of liquid assets.

Still sense that we have a date below w/ SPX 1025 in the not too distant future. As such, I want to use strength to reduce my net long position.

position in SPX

Gold Breaks Out

Pretty much lost in all of the theater this week is that gold marked another all time high this week. Very impressive, as it seemed that the late April high would not be surmounted, and weakness near the end of June suggested that a major break was imminent.

Because gold is essentially a bet on disorder (monetary, fiscal, social, etc.), there could be many interpretations as to 'why' the breakout right here. Most scenarios end with the argument that more money printing is likely.

Late last summer I initiated a position in SLV to exploit a breakout in silver wherein I added more shares as prices went higher. Such pyramid trades are usually not how I roll, but it can be an effective way to play a strong trending move while using higher prices to help manage risk.

In the next week I will be looking for entry points in both GLD and SLV using a pyramid design.

position in GLD

Managing Real Risk

Last week's RISE conference reiterated my sense that portfolio managers generally do not manage tail risk well. They have been raised on the portfolio theory concept and know how to manage idiosyncratic, security specific risk. But they are largely unprepared for systemic risk that takes all risky assets down in a correlated fashion.

Coincidently, this morning I happened across this article on John Mauldin's fine site. The author distinguishes between trivial risk and real risk. Real risk is the risk that can wipe you out. He argues that many measures of risk in the mainstream finance demand (e.g., beta, standard deviation, VaR) do not capture real risk.

He includes the above chart to demonstrate that severe stock market losses occur much more frequently than predicted by normally distributed models (we've shown similar data in class).

He offers the interesting concept of birthday risk. Most people have a 15-20 year window for serious investing. Depending on when you were born, this window fall over a 15-20 year period where risky investments go thru the roof (e.g., 1981-2000), or when risky assets tread water at best (e.g., 1966-1980).

He implies that the argument that 'stocks always go up in the long run' is an impractical one. It won't matter for investors who by chance are dealing with the 'wrong' investment window and who may not be able to stick around for the 'up' cycle.

He concludes with some ideas on how to manage tail risk, including the potential value of market timing and considering asset allocation in terms of assets that are truly uncorrelated.

Overall, an interesting and recommended read.

position in SPX

SPX 1300

Interesting battle shaping up here at SPX 1300. The S&P 500 has rallied over 30 handles in three days.

It is now hitting its head against resistance at 1300, which also corresponds to the 50 day MA.

I added some short exposure in here given the tight defined risk parameters. Should the SPX decisively chew thru resistance here and motor higher, then I'll humbly stop this trade out.

position in SPX

Trading Crude Oil

FYI, sold a chunk of crude exposure into this morning's spike higher.

Could oil move higher from here? If unrest continues to heat up in the Middle East, the answer is most definitely yes. On the other hand, if peace suddenly breaks out, then crude will likely take a sizeable hit.

If oil does march higher from here, I have some 'secondary' exposure in the form of DBE and RJI that I have 'tagged' w/ longer horizon intentions.

Meanwhile, seemed prudent to reel in a portion of this trade after a gappy 10% move in crude.

position in DBE, RJI