Friday, July 11, 2008

State of the Market - 7/11/08

Another wild and crazy day today on Wall Street, and that's probably an understatement. Futures were down big this morning, as FNM and FRE were getting hit pre-market and oil was spiking to new record highs. The market opened sharply lower, but then bounced precipitously from there until around 10:00. When Treasury Secretary Hank Paulson released a statement saying that the government would NOT bail out FNM and FRE (does anyone really believe that?) the selling intensified once again and stocks drifted lower through the rest of the morning and the lunch hour. The market tested its morning lows around 1:10, and when those held, they bounced a bit into the afternoon before pulling back a little after 2:00. There was a super spike around 2:30 (I don't know why) that took the indices to their best levels of the day. They sold off briefly from there, but then bounced right back up on another super spike that took the Nasdaq to the positive side for a few moments. That spike didn't last either, and the indices sold back off, but bounced a little more into the close, finishing with moderate losses and pretty much in the middle of their intraday ranges. Crazy action today across the board.

Technically, all the major indices except the Russell 2000 broke their recent lows this morning, but the late bounce took them off of those lows. So now the obvious question is "well, is this the bottom?" We've seen reversal days like this quite a bit recently and eventually, one of them has to stick, right? Probably, but the problem is I have no way of knowing if this will be the one that does. Buying here could mean huge gains, or it could mean huge losses if something happens this weekend that spooks the market. Surprisingly, the put/call ratio was not as high as I would have expected today - it hung around 1.15 for most of the day but we have seen much higher readings than that recently. The VIX did spike in the morning, breaking above its recent resistance, but still could not even reach the 30 level, finishing well off its highs. My main Market Monitor ratio is STILL not at extremes.

I said last night I wanted a little more confirmation from the market before making any more moves, and when I thought we got some today, I did decide to take a few shorts. I shorted VLTR at $15.46 - this worked out well before the bounce. My only mistake there was not adding to the position around $15 - I thought about it but didn't. It was therefore not a large position. As you may guess, the late spike took me out of this, as I moved my stop loss up to lock in at least some gains. I ended with a measly 2% gain on it.

I also shorted CNX at $95.75 on the reversal. The spike didn't help me here either, as I was stopped out @ $99.06 with a 3.4% loss. I was also stopped out of SCHN and HK (SCHN - 0.5% loss and HK - 4% gain). I set my stops and when the market put in its fake reverse this morning, they were hit this morning. Kind of sucks, but that's the type of market we are in. It's a tough market to hold any positions for more than a few hours, it seems. I am a little disappointed with HK because I had a much bigger gain, and trying to develop that patience, held onto it as it bounced.

To be honest, I hope today teaches me a lesson. I am still focusing too much on strong stocks - commodity related mainly - and am not focusing enough on weaker stocks. I did this earlier in the year when I tried to short the solars and ags. Although I think these commodity stocks are dead for the most part, I may be fighting a losing battle because there are still a lot of bulls out there. I could have been focusing on RIMM (which I almost shorted at $114 today but passed) or NFLX (which I've posted for the last three days) and would have done much better. I still find myself getting locked into a particular outlook too often and letting that outlook control my trading decisions. Something to work on I guess. The specific lesson I can learn with HK is that if you get lucky to catch a top in a momentum stock, take the profits when you get them because there will be a lot of dip buyers out there waiting to push it up. I definitely could have played that one better, but I will learn. No trader is perfect, or ever will be perfect - all you can do is learn from your mistakes and try to not let them happen twice.

The only other move I made today was to add a little to my gold position via DGP at $24.65. It gapped above resistance today and held the same resistance level on the afternoon pullback. If oil keeps spiking, gold should continue higher, and if Congress does something to bailout the financials, the dollar will likely get hurt, sending gold higher. That's my theorem anyway.

Much like yesterday, I have really no strong feeling as to what is in store for traders come Monday. There are a lot of things that could happen - does the Fed announce a bailout, does Israel bomb Iran? There could be a huge gap up and rally, or another washout. I remember in January when we had the capitulation day on the 22nd, we actually traded much lower at the open the next day. How many traders thought the bottom was in on the 22nd and got rung out the next day? You just never know. Because of that, I am mainly in cash right now and will just wait to see what the market has in store for us. Sure, I had some thoughts about buying some UYG or shorting some SKF near the close today, but right now I am up about 67% for the year, and I don't want to give that back on what would basically amount to a 50/50 bet. There will be traders that make a fortune come Monday based on what they did today, but there will also be traders that lose a fortune. I guess I just don't have the guts to go all in right here on either side of the market - I prefer to think of it as common sense.

I think we are definitely getting closer to a tradeable bottom, but not all of the stars are aligned for that yet in my opinion. I would still like to see some more panicky type selling, much worse than today. Perhaps if that happens, maybe we will be looking at a great buying opportunity. Until it does, I will manage my current positions (DGP, short SOHU, and short SQM) and remain patient. Right now, I am going to get away from the computer and try not to think about stocks for a while - this week has been quite crazy. I'll be back at some point this weekend with some thoughts. Enjoy the next two days - I think we all deserve the break.


Anonymous said...

Just wanted to say first off I love your blog!! I read it everyday as you provide great analysis!
Just a question though:
Would it be possible for you to publish a short watchlist each day at the end of your blog on what you're watching for the next day. I'd really like to gain more insight into your trading.
Thanks so much!

Mac said...

Thanks for the kind words - I am glad to hear you like the blog.

As for the watchlist, you can pretty much assume that the individual charts I put up each night are the ones I will be watching tomorrow, or at least the ones I think look the best. Sometimes there are more charts than others, but if you read the commentary each night you should be able to tell if I am looking for longs or shorts the next day. Sometimes my watchlist includes both long and shorts, but usually I try to stay focused on one side of the market. I hope this helps. Thanks again, and feel free to ask questions if you have any.