5/13 Intra-day notes

...As I write this at 10:30 a.m., the Dow is down .07%, the S&P down .22%, yet the Nasdaq is up .69%. The action lately has been bizarre, to say the least. Today the charge is supposedly led by Dell, which reported blow out results last night.
...Dell is up 5.03% as I write this. I also checked MSFT: up .72%, INTC, up .89%, and CSCO up .80%. The reason I checked them all is that today's action is very reminescent of the bad old bear market days of 2000-2002. By the way, the SOX semiconductor index is up 2.08%. That is where the action is so far today.
...This is the kind of trading action we saw a lot of back in the bear market of 2000-2002. A lot of traders used to call DELL, MSFT, INTC, and CSCO the four horsemen. They were the vehicles the PTB would use to jam the markets higher, trying to crush the shorts and entice us small dreamers back into the fray.
...It made for a lot of good shorting opportunities. And that is what I suspect is setting up again.
...Back then I used a lot more technical indicators than I do now. My system has gotten simpler over time because I have come to believe that indicators do not work as well as they once did. The reason for that is simple. The big players, and now even more so with the proliferation of almost 9000 hedge funds, know what we are looking at when we trade based on indicators.
...They see the support/resistance lines. They see when the stochastics are overbought or oversold. They see the new trend lines. Not only do they see those things, too, and know how we will react, they even know how to paint the tape and make false signals.
...Investors Business Daily (IBD) has a system for calling for rallies that requires an up day on higher volume. Then, sometime in the next four to ten days, another up day on heavier volume that confirms the new rally. Not all rallies succeed, of course, but no real bull market has ever started without the rally and follow through. I noticed that in the last version I have of How To Make Money In Stocks, a book authored and periodically revised by IBD's founder, that he mentions that deep pocketed institutions can occasionally force a follow through day even when it is not real.
...I came to the conclusion back in 2000-2002 that it was more than occasionally. If memory serves correctly, I once saw over a half dozen consecutive rallies and follow through days that immediately tanked. They were all false signals, perhaps all generated by the institutions to bring liquidity into the market, both to make commission money, and to distribute shares to unsuspecting bag holders.
...10:44 a.m. The 10:40 turn has taken place, and now all the indices are rocketing up like they have been launched The Dow is up .20%, the S&P has gone green at .01%, the Nasdaq is up .90%. Dell is up 5.44%, MSFT .92%, INTC 1.45%, and CSCO up 1.34%. Amazing. The action recently has turned manic.
...I went completely to cash yesterday. I have been trading badly, worse than in years. When I go through a stretch like this, and I do from time to time, I go back to the drawing board. I get back to basics. Usually, I find that I have fallen back into bad habits, and have gotten away from my system. My system has proven profitable over the years.
...Already, just from a cursory check, I can see that I have been putting on too many positions, and have taken on too much exposure. I have also been making too many intra-day decisions. That doesn't work for me. I do best when I make my strategic decisions in the hours when the market is closed, then implement those decisions during market hours. My trading decisions made on the fly when the bullets are flying are emotional, and wrong too often. I do not trade for excitement or entertainment. If you are trading for any other reason than to make money, you have issues that need to be confronted.
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Links:
I believe the markets are in trouble right now. Most of the people I read regularly at least agree that we are stuck in a range. The markets are pretty much where they were a year ago.
...I also believe that something has changed for all us little guys recently. I think it may be due to hedge funds. Because they can be both long and short at the same time and in any kind of markets, they can force unusual action in the stock indices. And now, with 9000 of them out there, they jockey in the markets for a little bit here and there, and can really jerk the indices, and all of us small guys, around with them. A trader that I respect a lot, and who has an excellent track record established, yesterday lamented that she believes that it is becoming impossible for individual traders to make it in the markets anymore. She had just taken a large hit on a trade due to very strange action. I know she was feeling the pain of a trade gone bad, but more and more, I see trading action that just should not happen.
...I fear the hedge funds in particular because now there are so many of them, and they are all funded by rich people. So whether they are good or not, or whether they are smart or not, they wield signicant power. I don't like to think about what could happen if all these geniuses get on the wrong side of a trade that is leveraged to the hilt. Think it can't happen? Remember Long Term Capital Management back in 1998? The PTB had to step in back then to save the day when all those Nobel Laureates and rocket scientists who were smarter than anyone, and had built a system that could not fail (they thought), almost brought the whole house down.
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http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_gilbert&sid=aOteOmAo8ad0
...Link above is for an excellent article on Bloomberg.com regarding hedge funds. There is a rumor going around that several hedge funds got into trouble recently on GM, by shorting the stock and going long on GM bonds, figuring that the company would make good on the bonds, but that the stock wouldn't fare well. Supposedly, all the geniuses got burned when Kerkorian announced he intended to up his stake in GM and sent the stock price up, then the next day the rating agencies downgraded their bonds to junk status, so the hedgies got burnt on both sides of the trade.
...According to the article, hedge funds declined 1.75% last month, their worst month since September 2002. Also, the article says that the Dow Jones North American Investment Grade Index, which tracks the average cost of insuring the debt of 125 companies against debt default, shows that the cost of insuring $10M of debt against default for 5 years has basically doubled in the last couple of months. Do you suppose there is a reason for that?
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There are two compelling articles on the Daily Reckoning web site right now. http://www.dailyreckoning.com.
...The first is: Echoes of 1998 by Eric Fry, talking about the GM hedge funds rumors, the 1998 LTCM debacle, and insights on how regular people need to adjust their thinking in the brave new world of 9000 hedge funds.
http://www.dailyreckoning.com/RudeAwake/Articles/RA051205.html
...The second is Financial Madness by Bill Bonner, who I think is a very talented writer. I do not always appreciate his viewpoint or his irreverence, but I almost always admire they way he can turn a phrase. Mr. Bonner makes a couple of points that I fear that are important and true. Could the surprising trade deficit numbers earlier this week be bad news, and not good news? The numbers did not reflect that U.S. exports increased, only that imports decreased. When that is coupled with the fact that wages are going down and prices are increasing, it could be that the American consumer is finally retrenching, and that would be an uh-oh event, more than a gentle wind wafting against the economic house of cards.
http://www.dailyreckoning.com/Issues/2005/DR051205.html
...I have no association with The Daily Reckoning, but the site is required daily reading for me. They give a slant on the news that you will not find in the more traditional media.
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Oil: The XOI index, and my oil stocks, have been getting crushed in the last several days. In fact, I even sold out of my long term holdings, something I did not anticipate. I am quick on the trigger finger on trades, but try to be very patient on intended long term holdings. But when they all crash through important barriers on heavy volume, I honor that and act accordingly.
...I am still a long term energy stock bull, but in the interest of fairness, I ran across this article on the Fiend Bear website www.fiendbear.com. (Another of my favorite bear sites.)
http://www.fiendbear.com/Oil%20Prices.htm
The Obvious Is Obviously Wrong by Aubie Baltin CFA, CTA, CFA. Phd, 4/28/05.
Mr. Baltin makes the point that there is no oil shortage and won't be in our lifetimes. An interesting read.
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...XOI falling below 800 was critical, IMO. But I had said earlier that prudent traders (I tend to be aggressive), should wait until 850 for confirmation of what appeared to be a rally. The index could just as easily drop to 750. Time will tell. I may start looking for short-term shorting opportunities, but when I feel the correction is over in the energy stocks, I plan to go back in aggressively from some in the following list: VLO, XTO, SU, EOG, BTU and others.
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5/10 Pre-Market notes

http://www.cross-currents.net/charts.htm

http://www.cross-currents.net/charts.htm
Once in a while Cross-Currents.net, a subscription site, puts out a free report for public viewing. They are always worthwhile reading, whether you agree with them or not. Their charts are compelling, and reflect a little different take on things than most other sites. The 5/2 report is entitled Mania Still In View. There are many interesting sections and charts in this article, and I recommend taking a few minutes to review it.
...A couple of the most fascinating from my viewpoint: First, in the past two years program trading has increased until it now constitutes the majority of the trading action on the exchanges. This comes as no surprise, and I think explains a lot of the 'strange' action that occurs on many market days. More on that some other time.
...Second, they show graphically the effects of the old saying Sell in May and go away and how that strategy compares with the buy and hold mantra we constantly get from the funds. If you go to the link, you can review the chart and the full explanation, but here is the gist of it. If you had put $10,000 into the market on November 1, 1950 and never touched it, at the end of 2004 your account would be worth $10,264.
...On the other hand, put that same $10,000 into the market on November 1, 1950, sell out every April 30, and re-invest it all every November 1, and your account would have grown to $496,630.
...Stock have averaged over 15% annually from November-April, but just about zero from May-October. The figures don't take into account dividends, but as Mr. Newman of Cross-Currents points out, they also don't take into account the ravages of inflation.
...By the way, Cross-Currents believes there is a good chance the tops for the year are in, and they rate as even the possibility of Dow 8500, SPX 960, and Nasdaq 1000-1100 this year, possibly in August.
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http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID641835
BrainFood on StockCharts.com site is looking for the market to roll over starting today.
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...Some thoughts on the markets:
...Last year on ClearStation's message boards, one of the traders opined that the trading game has changed a lot recently. I totally agree with that. I have just come through one of the worst periods of trading I have experienced personally in years, and that has been frustrating. I know the game is played out by humans with emotions (or at least until recently - computer program trading now accounts for over 50% of trading volume), and the game always changes. But there have been a lot of things that I have seen over the past year that just do not seem to make any sense.
...The ClearStation trader's opinion is that the hedge funds have found a way to game the market by forcing the mutual funds to defend their turf and the markets. That makes sense to me. Consider this. Hedge funds can go long or short or any combination of both, in any market or arena, anywhere in the world at any time. Most mutual funds, on the other hand, are bound by their charters to be long only in the stock market, cannot short, and can only have certain percentages of their assets in cash. They must be invested long in accordance with their charters.
...That is sort of like the old Bill Cosby comedy routine from years ago about the Revolutionary War being a sporting event. The revolutionaries win the pre-game coin toss, so they get to wear whatever they want and hide behind rocks and trees, while the British have to wear bright red uniforms and march in the open in straight lines. That's how I see hedge funds vs mutual funds.
...Anyway, the theory is that the hedge funds by shorting, can force the mutual funds to defend the market by buying, whether they want to or not. The mutual funds need the markets to stay up in order to stay in business.
...Hedge funds also may account for some of the 'that makes no sense' trading action that seems to be occurring much more often than usual recently. If they can be short the market, or segments of the market, or even just certain stocks, at the same time they are long currencies, bonds, or anything else, then that can account for some of the screwy action in the markets. That may be the reason why we are seeing things in daily market action that we shouldn't be seeing. It may be why the markets are up, down, up, down, up, down one day to the next as they have been recently. And even why there are huge runs in the market for an hour or two, followed by a complete tank job the other direction, followed by another huge run.
...Hedge funds have a lot of ammo. They are only for the wealthy. And now there are thousands of them. Even more fun for all us little guys!
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...The new high/new low numbers have improved a lot for the NYSE. Yesterday was 102 new highs, only 29 new lows on the NYSE. The Nasdaq still has work to do at 52 new highs and 75 new lows. Volume is still light.
...Happy trading all.

http://www.cross-currents.net/charts.htm

5/9 Pre-Market notes

This Is What The Wrong Way Crowd Is Doing, link to Yahoo Finance.
http://biz.yahoo.com/tm/050505/12566.html
It is a fact that most of us small traders are wrong most of the time. Right now, odd lot short sales are at their highest levels ever. And specialists short sales are at their lowest in decades. That's the key point in the article.
...That factor alone may be all we need to know about which direction the market is heading in the short term.
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...The PTB were able for force their follow through day on the Nasdaq this week, and also closed the S&P at 1171, finally breaking through the huge resistance at the 1163 level. 1163 now becomes important support. As long as it holds the bulls have a chance at a near term run to the upside. If you are a very short term trader, shorts look to be the wrong place at the wrong time now.
...But in the more intermediate term, I think there is still a lot more downside coming.
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The Russian Trader,
http://www.russiantrader.com/trading_room
has become one of my favorite sites. Although he trades options and I don't, I enjoy his take on the markets. His latest comments were posted 5/7 in regard to the S&P 500. He had expected the latest rallies and now expects that the S&P needs to consolidate in the 1160-1180 range. However, he doesn't believe the move is for real. As he explains it, "...the last session shows us how weak the market is. It's not the way how da bulls run. It looks more like how da bears die. That means that we're in the process of much larger distribution."
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BrainFood on StockCharts.com,
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID641835
another interesting link, is the home of The Week Ahead Report. If you want to check them out, you'll need to do it fairly soon, it appears. He announced plans to his report subscribers over the weekend for setting up an independent for-pay website. He says he has 2000 subscribers now, and is hopeful that perhaps 300 of them would be willing to pay for his services.
...Anyway, he also expects a short term bounce to the upside, very short term, preceding a much larger move to the dark side. His charts are interesting, and if you go to the site, he explains in detail his reasoning.
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...I agree with both the Russian Trader and BrainFood sites at this time. I have been expecting a bounce, and we are getting it now, but I am not at all convinced that it is for real. I still think the markets have much lower prices in their future. I am not seeing enthusiastic institutional buying, and the new high/new low numbers, while improving, are still not bullish.
...I think we are seeing stealth distribution. The big guys, the ones who really matter in the markets, are skittish. A couple of very strange things happened last week that smacked of both apprehension and intervention.
...The Chinese appeared to put a toe in the water last week regarding floating the yuan. Immediately, the markets started reacting in a nasty manner. Then came the announcement that rate change was merely a clerical mistake, and reverted.
...Then, after the Fed announcement last week following the latest rate hike, the markets once again started tanking. Apparently, the PTB were disturbed by the market action, because five minutes before the close of trading that day, they announced another clerical mistake, a typo, if you will. One sentence had been inadvertently left out of the press release. Whew.
...I don't know about you, but I don't buy either one of the clerical mistakes listed above. Then there was great news on GM which sent that stock up rocketing up, only to fall back to earth the next day when their debt was downgraded. How's that for distribution from inside, connected money?
...They say the markets like to climb a wall of worry. If you believe that, then the markets should do just fine, because there is certainly a lot to worry about out there. Personally, I think the bear market is back. As always, time will tell.
...Happy trading to all.
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