US Markets: Finally .. Let’s Prepare for another Large Correction

The ride upwards was good, and smooth..
Now let’s prepare for another Large Correction.
Not sure when exactly it will start, but’s it’s better to be on sidelines (or hedged) at this point.
- Valuations, Sentiment, (P/Es, PEG ratios, upside Volatility) are all at un-sustainable levels, while
- rally-momentum is getting exhausted. (MAC, RSI, Stoch. indicators, VIX, VXO,)

Closer to the TOP

Today we’re pretty close to the TOP of this US Stock Market Rally that started in Mar 2009.
This rally had many factors and themes:
- Short covering and, ban on “Nake Shorting”, relaxing Mark-2-Market.
- “Better than expectedly worse ” nos. on various fronts.
- Money sitting on side lines pilling in towards late stage of the rally.

Since the corprate revenue nos., neither GDP, nor any economic no. are in +ve territoty (but mostly +ve than expected worse levels), reality is going to sink in.
Till then this rally might just be short of capitulation on upside.

Very soon, the negative surprises are going to kill, this technical overbough situation. Another week or so, I think.

Let’s enjoy the game.

Upside : Possibly One or Two more UP days left

The 9~10% correction that started after July 2nd, got quickly over within a week and upside started on July 9th.. Luckily this time I played downside and upside with almost perfect precision.

The Upside might be another day left..

There are signs of gradual accumulation happening on various strong stocks.. (not in general yet), but we need to see how that works out when indices hit their key resistance points of S&P500 : 1000 NASDAQ : 1950. Till then we’ll exit out of this ongoing upside, over next few trading days. PLus this was an options expiration week so upside was expected.

With : “Possibly One or Two more days” I mean these days could be any day of the next week and not necessarily Monday/Tuesday.

Is the correction Over ? – May be !!

The anticipated 10~15% correction on US charts, may pause here or may terminate around here. The correction may be over here (if markets are slated to be range bound) or may not be over (if something big bad stuff is cooking in the background).

But, for considering the rate of downward change in last 4~5 days I am covering my double inverse (short) positions i.e. selling QID,SDS, SKF, SRS. Selling only 1/2 of my DUG, as I expect Energy related vehicles may correct some more as they led this correction for last 3~4 days) and OIL may correct some more due to further $ strength.

I am not “YET” initiating large long positions. I will add into long positions once ‘full correction is over’ symptoms show up. There is always a time-gap between downside getting over vs. upside getting started. Till then, it’s a wait and watch.

Enjoying the game.

The much anticipated down cycles has started

Thoughts from market analysis on Wednesday (Jul 1st-2009):

The market correction that I had been anticipating for since a month or so now and had been preparing for.. I think has started now.. 2~3 weeks back VIX action kind of indiacted that it may start soon but market levels weren’t there as yet.

But now when I look at VIX, VXN, VXO, etc. and other market sentiment indicators, technical indicators, Various resistance levels on indices charts, I kind of feel strongly that the correction of 10~15% has started now.. or will start anytime from now (within next 1~2 weeks).

I have some positions in QID, SDS, SKF, SRS, URE, and covered positions in INTC, BAC.

This has further created opportunities to short
- US indices,
- also to speculate on major downside in US financial Houses, who esp. may be vulnerable to deleveraging related to consumer finance defaults and reduced payments.
- Overblown commodity leveraged funds.
- (A friend adds) Some overblown emerging market stocks that had rose too much, too fast in last 3 months (which in my mind was more of a pump and dump action by latge investment houses, and sold to common man as hope of quick upcoming recovery).

Enjoy the downhill game.

What Makes+Keeps – Countires and Societies Rich

A country is only rich, if it keeps suffecient share of created wealth for long-term growth and invested reserves for non-income years of the peoples’ life.

If all the income generated by people (as part of large cicrulation of money, exchange of hands), then things inflate and thus as a result disposable income is always tight. This creates illusion of wealth as everyone has decent spending power to lead quality of life, but not any extra income for retirement (non-income years) and into country’s growth requirements. Such illusion of circulatory wealth creates short term richness but long term it becomes tougher and tougher.

Many developed countries (US, Japan) fell into this mess, in last 20~30 years when all that was earned was spent on short-term pleasures,
and not on reserves to keep long-term goals also met. Developing countries are also falling into this mess, by over-spending and stretching.

Those who can create a good mix of :

1. “Decent GDP growth” (through Value creation and not illusory wealth creation)
2. Manageable Inflation of Quality of Life, and
3. Decent disposable income (through savings reserve for non-income years at societal level) and decent currency reserve to invest into future strategic initiatives that see for #1.

Will be the ones thriving for much longer than Western Countries. it will be interesting to see how the Asian emreging Countries manage this economic transition over next 30~70 years as they become richer and developed.

Market’s UP Move – Since Friday

Based on move in May I was quite sold to the idea that Markets are about to tumble very soon. However based on the kind of accumulation we saw on Friday afternoon, it seems the short side is a short-sighted strategy for now. The Anti-USD movement of capital may be causing another round of accumulation of stocks, gold, etc. and thus the market’s upside movemt nmay continue som more.. Dow hitting 9100 and SP500 hitting 950 won’t be surprising.

So what did we do with our positions in QID, SRS, SDS. For now we’re still holding the bag aof losses in these. Although the market reversal from recent ~40% gain on indices is imminent, but it seems that this is going to take some time. But certainly The Big Money knows something that allthis new upside buying has started.

We’re actively watching the action, to see if we should cover out of our Inverse ETF positions, or stick in while waiting for the eventual move to downside.

Enjoy this tough stomach wrenching game.

Way To Go – Away ?

I think for us the time to go short has come, and we’re starting to ride
vehicles like QID, SDS, SRS, so we’re 20% Long Term stock, 25% short, 55% cash
and rest all cash. Let’s see how this plays out. Is it “Sell in May and Go” or not, time will tell.

Just for the record.

Market Trend Spotting and it’s elements

A friend recently asked me: Do you still think market will head down in big way or it has more less stablised around this level ?

And here were my thoughts: Based on recent over-bought levels, It has to head down, big way or slowly, can’t say Even if it seems to have stabilized for now.
I am still wary to go long. as it’s still as over-bought as it was in mid-April. I am rather short starting last few weeks so I am staying hedged.

Within a day the answer was coming to its roots, and
I hope he was getting the context of my answer, by watching the markets in following days. My answer would not have made sense right then or during last week or 2 weeks back, as sentiment (common man level) was still very good.

Some might question that just 2 days going down is data not trend yet. But I think it was not safe to get in, till that correction happens
I think the correction started this week.. and showing it’s true colors this+next+next2~3 weeks.

It may still show some +ve momentum for a couple of days more, but till the correction (from the big 9-weeks in Mar~Apr hope-rally) completes, it’s not safe to get back in the the world of mid-term “momentum trading” and “market direction trading”. (Ofcourse, in buy-and-hold approach, none of this applies).

And these are my thoughts, not any thoeries that I had read anywhere, so they have their own immaturity and naivete to them.

These days the feeling is worst is over or very close to bottom
But that’s the common man feeling based on what media is comfortable pushing at us. The reality is far deeper and needs much more study, which we don’t do
And we’ll see all this unfold truly by year-end. For now sentiment is depending on what government and financial community wants they can push to common man. And common man is buying based on recent spike which was primarily bounce from over-sold conditions short-covering and then profit-making momentum from recent TARP money through hedge-fund actions.

Having said that, I should add that with our current approach to look at sentiment indicators to predict trend reversals, I don’t think we can even catch day-to-day or even week level trend.. but we try to catch the next one~two month trend or even next 6~12 months trend, assuming no underlying assumption changes.Bcoz if underlying assumption changes, then no trend catching works.

Further, One thing that should be applied besides ‘sentiment trend catching’ are the contexts in which markets was operating, like Obamania, Govt reform, bank attitiude, etc.. to determine the strength and probability of strength of any trend.  Currently I use day-to-day and weekly level charts and financial numbers to decide on these trend spotting.  I never trust news to judge for good reasons, as it’s a trailing indicator and that it’s manipulated.

I am yet to learn putting in the context of sentiment into it, which would be interesting to do, provided I had time and priority on that. So with whatever limited I know, all this doesn’t work beyond 6~12 months, bcoz in long-run financial-fundamentals and underlying business sentiment drives market direction. Sentiment saturation indicators work only to catch short-term sentiment reversals.

I must admit, that my short term returns are good.. but long term returns are average..

Thus to have better long-term returns, the market-context, sentiment-context part and “big-economic-picture” part becomes very important. Markets are sticky as it takes time to make everyone convinced that things are over-bought or over-sold. Financial community 1st plays the markets to their advantage and then uses media to influence fear and hope and that’s what “common man feeling” becomes to be. All this recent sentiment facade of “all if good and getting better” created by govt. and financial community, is being used to distribute stocks after biug gains to common man accounts (401k, trading, IRA, LongTerm buying opportunity, etc.)
The feeling in smart-money, which matters more is much more imp. to catch the waves early.

The most rich and savvy market timers I have come know, are saying (not sure how true) are sitting outside since April-end. “Understanding which they direction they want the market to go” is also interesting part of “Context”.

So in summary, we need to start adding weight of the following elements To our current approach for market trend detection.
- “market context”, govt policy, financial community, money-flow,
- And resulting “sentiment context”,
- “big-picture investing”
- “financial fundamental shifts”
- “direction momentum”,
- “markets are sticky” behaviour,
- “pause” between ‘trend reversals’ (due to ‘time required by big/smart-money for gradual-distribution-to-common public after-capturing-gains from previous trends’)

A close watch on Jan~Feb correction and then March~April rally and its imminent reversal in May, taught us a lot.

Enjoy the Game.

BSE – On a Short-Term TOP !!

I think Indian Stock Indices have already made a short term top last week (along with various developed world stock markets – Possibly due to some FII and HF money-recycle action).

So exit of some part of stock exposure in your portolfios is recommended. Hope this chart helps explains the psychological top that “has already formed” or “is about to be formed soon”.