January OpEx Week.

Here we are, start of the OpEx week which normally has been a red week.

While the indices want to go higher, short term, they are bit over extended and a healthy pullback is needed before the journey can continue higher.
Today we had just a tiny mini less than 2 points correction in SPX while DOW was green. Nasdaq was red mainly because of Apple. The McClellan Oscillator is still high and further immediate upside may be limited although not totally ruled out.



On 10th January, Tom Demark predicted in Bloomberg that SPX will peak at around 1500 and will fall 5.5%. demark-sees-s-p-500-falling-5-5-after-peak-near-1-500.html
Now Tom Demark is the guru of the Hedge Funds and he charges a pretty penny from anyone who wants to use his system. And yet his success rate off late has been around 50:50, as good as tossing a coin. Last year, around same time he predicted the market top many times and the top never came. Which goes to show that even the best have to eat a humble pie sometimes.

Today was my day to eat humble pie. My trade on Nat. Gas is not working out the way I would like it and I would most likely close this trade tomorrow. But against that, the long trades in Gold and Silver are doing fine. We are also long on selected commodity stocks and ETFs. That explains why we should not put all our eggs in one basket and why we should diversify and spread out the risk.

I may have mentioned before, I expect the market to correct in the next 5/6 trading sessions and I would love SPX test 1450 before the upmove again. While there is a short term top, the bigger cycle is up and unless SPX closes below 1450, the buy signal remains intact. Here I agree with Mr. Demark that we will see at least an intermediate term top around 1500-1510 but my time line for that is still few weeks away. Therefore I would not short the market at this point. The memory of last year is still very fresh in mind.

Elsewhere, the fight between President Obama and GOP is heating up. Again, folks do remember the last debt ceiling show down and the market sell off after that. It promises to become much more ugly this time round.

And last but not the least, the following Tweets are worth a read:
(H/T Ryan Detrick, CMT. Schaeffer's Research)

 Sunrise Trader – “Don’t trade out of boredom, have a plan and see it first. Days like today are often best spent studying.”

• Amen.  If there is nothing good to trade, don’t force it.  This is easier said than done, but trading just to trade will do nothing, but churn and burn your account.  Let things line up and come to you, then load up.

Eddy Elfenbein – “Since 1990, the S&P 500 has annualized 14.1% when the VIX is below 13. When it’s 13 or more, the annualized return is 4.9%.”

• Great point.  We’ve heard so much the past few years how a VIX of 15 is ‘low’ and this means we are due for a pullback.  Yet, looking longer-term this isn’t the case.  This tweet spurred us to do some research and we found similar results.

 Chris Ciovacco- “Our perspective, forecasting brings bias & ego into the decision making process – better to pay attention with open mind & adjust on fly.”

• Love this quote.  Trading can KILL you if you have an opinion and blindly stick to it.  We are all wrong in this game.  In fact, we are usually wrong a lot.  The key is being able to bounce back, learn from it, and live to fight another day.  Another key component to trading is exactly what Chris said above.  DON’T have a bias and only trade what is in front of you.  Our minds can trick us if we let them.  If you think you know it all or have everything figured out, Mr. Market is about to crush you.

And I completely agree with Chris. That is why I am ready to admit mistake ASAP and change from long to short or from short to long or close a trade based purely on price action  or adjust on fly, as Chris says. Ego or faith in the system has no place in preservation of capital. 

That's all for to-night. As always , trade safe and stay safe. 

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Gold

One of the finest chart analyst whose work I respect is : Peter L Brabdt.
Peter posted a note on Gold which I thought is worth sharing with you all.
Presented without comment:
What-the-gold-market-is-doing/
Look forward to your comments.

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What Is A Cycle?

Many readers are baffled by my constant use of the word " Cycle".
For me, it is a mathematical algorithm of time and price which repeats at regular interval. It is different from "seasonality" and has its own variations.
"Cycles" were first introduced by  Nikolai Kondratiev (also written Kondratieff) and later popularized by  Joseph Schumpeter . Many theorist have worked on cycle theories over the ages and the latest are Harry Dent  and JEFFREY A. HIRSCH . 
Then there is Gann, and many others : Stock_market_cycles
Normal Fosback has a system where by  he would buy at month end and sell at early next month and he was able to out perform the market.
You can read more about Kondratieff here: Kondratiev_wave
You can also develop your own model and now-a-days it is so easy to gather all the data from the internet.
However, most folks who develop some kind of theory about cycles tend to be rigid. But a long cycle top or bottom need not be at the same point/time. Nature's time keeping methods are little different than humans. We humans have decided that winter comes on December 21. But in some year winter comes early and in year it is late or mild. Its same with cycle tops or bottom. I use it more for direction and when I see that cycles are matching with seasonality, Technical Analysis and cash flow, it sets up a high probability trade. Nothing in life is "Guaranteed' and neither are cycles. They just help to stay away from unnecessary risk.

Trading or investing today is not about winning everytime but rather about not losing everytime and everything. So whatever helps us to avoid risk, is welcome. Just remember nothing is perfect or works 100% of the time.

Hope you all are having a great weekend.

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SPX At 5 Year High

Yesterday for the first time in seven days VIX rose by a huge 0.25 vol. and while it was still below 14, the blogosphere came alive with the story of imminent market top and collapse thereafter! And yet, today we have SPX at a five year high. Goes to show that we really do not understand (me included) how the market works. People and media make a fortune trying to find a logical reason and answer "why". And there is no clear answer. I think this exercise of finding logic in market movement is futile.

I do not know if we have a top or bottom but surely we need a good correction to get a better entry. Today SPX broke the range and cleared 1470 convincingly. Common sense says that it is better to sell here than buy but everyone is taking that trade and it is a crowded trade to say the least.

My ideal correction for entry would be in the range of 1450 which is about 20 points below from where we are now and that would convince everyone that the world is ending, only to deceive again. I do hope we will see some correction next week to shake out the weak hands but I also remember what happened last year. We never got a chance till March.

But our long positions in PM sectors are doing well with the break out today. While it was nice, the fireworks have not yet started and more are yet to come. Last night I sent out email to the subscribers stating that I expect Natural Gas to re-test $ 3.20 and stop/fail there. Fortunately, Nat. Gas read my email and behaved accordingly! (just kidding). I am hoping for another kind of fireworks here.

Coming back to equities, I do expect some kind of pull back shortly but that would normally be a buying opportunity. Couple of days back I wrote that SPX may test 1475 before any pull-back and most did not believe it. Today we closed at 1472 and the up momentum is still there. So another 3 points intra-day tomorrow is quite possible. By that logic we should see the correction next week.  Do I want to take a short trade for 20-25 points in S&P 500? I would not but then I am not a day trader and my time frames are different. There are folks out there who do monitor the daily ups and downs but all I can say that patience is very important. You get the chicken out of the egg by hatching it, not by smashing it.

That's all we have time for today. Hope you have been on the right side of the market and did not front run it.  Do share this post with your friends if you think they will like it. As always, thanks for stopping by.

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First 5 Trading Days of January

2013 has got off to a good start. Santa delivered 2% gain and the first 5 days have delivered 2.2% gain in SPX. The following is from Stock Trader's Almanac:

The last 40 up First Five Days were followed by full-year gains 34 times for an 85.0% accuracy ratio and a 13.6% average gain in all 40 years. In post-presidential election years this indicator has a solid record. Just six of the last fifteen post-election-year’s First Five Days showed gains. Only 1973 was a loser at the start of the major bear caused by Vietnam, Watergate and the Arab Oil Embargo. The other four years gained 22.8% on average (1961, 1965, 1989, 1997, and 2009). 

There are couple of nice posts in Bloomberg about the money losing short trades in 2012:

I lost my shirt with short bets and by listening to ZH

Quants are no better than coin flipping

Okay, the headlines are mine but you get the idea.

Does it mean we can now buy some calls on SPY and forget about the market for the rest of the year? Not really. It is going to be a challenging year to say the least. Taxes have gone up. Net consumer earnings will go down and world growth remains a distant memory. At some point markets will catch up with fundamentals. Million dollar question is: when? Well, honestly, no body knows and I am no exception. But at least I have been steadfast in saying that do not short the market and even when I had taken a short position, I was quick to get out. In my heart I am a big bear but I also know that economy and stock markets are two different animals:

So right now I am long and waiting to add to long on weakness. There is only one short trade in commodities . Earlier I would normally deal in indices but this time I have a bunch of  individual stocks and ETFs which I think will do better than the average market. Let us see how it goes. 

The Godfather of Low Volatility investing , Bob Haugen passed away. I would like to share the following with the readers which resonates with me very well and is actually very similar to my principle of "Relaxed Investor":   http://www.marketwatch.com/story/remembering-the-father-of-low-volatility-investing-2013-01-07

Coming back to markets and away from equities, I think coal has made a bottom and coffee is in the process of making one. Normally Crude takes a dive in January but so far this year, it has held steady. Similarly, gold and silver are also making a base. Grains are still few weeks away from making a tradable low. 

This week, so far the equity indices are in a consolidation mode and is digesting the gains. We are close to the highs of 2012 and SPX is facing resistance. I would have liked the correction to be little more deep but it is what it is. May be we will get few more days of small reds. Then again, these days I find more opportunities in commodities than in equities. Bonds are out of bounds for me for now because they are moving in a range.

That's all for this evening. Hope you are having a great time and thanks for sharing my thoughts. Stay nimble and good luck trading.

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Official End of Santa Rally

Santa Rally officially consists of last five trading days of December and first two trading days of January. It seems this year, Santa's elves and reindeer gang were on strike and Santa was late in coming to Wall St.

Santa was hanging near the cliff and somehow made peace and arrived just in the nick of time. Now that we have the end of Santa Rally, SPX is up 1.5% during this period. During this period we have also seen back to back accumulation days which A/D ratio at 17:1 and 12:1. Very robust to say the least. Consider this, SPX is 14% higher today than it was at this time last year. And still we want to make money shorting the market?

Next we need to see the 1st five trading days of January and we want them to be positive.

Does anyone remember last January? The market kept grinding up and up till March and everyone kept shorting the market till there were no bears in town. I suspect this year we will have a repeat because already  I am hearing about folks shorting the index and talking about over bought. They forget that overbought can remain overbought for a long time. While I do expect a short term correction, I do not want to short the market because cycles have bottomed and is up for quite a while. Any correction will be an opportunity to add to the existing long positions.

It is a fool's errand to predict the future but if I have to make a guess, I would think that correction would come towards the end of next week. The market may just grind around this level for few days, consolidating and correcting in time if not in price. SPX may even target 1475 before correcting back to 1450 level for the next upward journey.

I am yet to see anyone who is happy about 2012. The beginning of the year was a wash for TA enthusiasts who kept calling for corrections day after day. The 2nd half was a massive meat grinder with chops and whipsaws. Almost all of Wall St. got 2012 market calls wrong : http://www.bloomberg.com/news/2013-01-04/almost-all-of-wall-street-got-2012-market-calls-wrong.html

Coming back to Friday's market action, the most notable thing was the collapse of VIX.

This is a weekly chart and as you can see VIX has not been so low since 2007. If you remember my last post (only few days back) I wrote that I expect VIX to reach in low double figure and we still have 3 more points to go before we reach bottom.  And no, I am not going to buy UVXY or TVX even if VIX goes up a little by middle of January, because the dominant cycle for VIX is pointing down. I would never trade against cycles, even if I have to give up some trades or profits because I believe in "safety first".

So how was your market return in 2012? I want to share an article written by Phil Pearlman, executive director and investor of Stocktwits: Successful market participation is a gruelling process, a marathon. There are so many components and it is such a complex challenge that you must spend years improving while facing serious stress and financial setbacks. You will need to master multiple skills and it will take time.

For 2013, you will not need to or  be able to conquer it all.

Instead, choose one critical aspect of this craft to improve on and then make it your mission to crush that one thing.

For some of you, this will mean risk management but it may be something else like managing trades once you are in them or trade selection.

But whatever you choose, that one important thing, devour it, become it, crush it…

Focus on that one thing with religious fervor. Learn everything you can, seek guidance from those who have been successful, read about it everywhere, consume yourself in it, think about it when you should be doing other things and cultivate your own process.

Then practice practice practice that one thing you will improve in your trading until it becomes so automatic and so much a part of your routine that you do it every single solitary time as a function of habit.

Very Prophetic! For my part, I am working on risk management and preservation of capital. What is your goal for 2013?

We have scaled in our positions and will add more on weakness. I think Gold and Gold Miners have made a bottom. Although I have not taken any position in GDX, I thought it would be interesting to share this chart of gold miners with you:

(H/T: Arthur Hill, Stock Charts.com)

Seasonality also favours the PM sector.

That's all for this weekend. Thank you for reading the blog. Please forward it to your friends who may like it. I look forward to your comments and suggestions.

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2013 Market Outlook.

The lesson from 2012: We can ignore the Mayans, ZH and many other preachers of doom and gloom. Everything ends and the world will also end someday. We can't get caught up in bear talk all the time and not live a normal life. This dysfunctional central bank liquidity fuelled market will again enter crisis zone someday but we can't short a rising market without risking loss of capital.

The other life lesson: We can't predict future. If that was possible, the fortune tellers and gurus will all win the lotteries. So I am not even going to try. But I follow a system which analyse the past, takes inputs from the money flow, takes into consideration the seasonality patterns and tries to determine the next move, where the "puck" is going to be. Along the way, we apply risk management and only look for high probability trades and even then follow a stop loss system.

  So what are the dominant themes for investment / trading in 2013? Lets look at the positives first:

• Energy independence in USA. With the fracking USA is producing surplus Nat. Gas and shale oil the cost of energy in USA is less than 50% compared to Europe or Japan or China. More and more companies are realizing the benefits of the cheap energy and companies are moving manufacturing to USA. It is a long term secular trend. We will not see any immediate impact tomorrow or next month but if we suddenly wake up and compare the manufacturing landscape in 2020, we will find that lots of manufacturers who require high energy inputs have moved to USA.
• Change in Manufacturing: Manufacturing itself is changing. Since industrial revolution labour cost has been one of the most significant part of cost of production and it is the lure of cheap labour that has move manufacturing to China and shut down the plants in the rust belt. But moving production to a far off place which is 1000s of miles away from your market has its own set of costs and problems. There is cost of transportation, inability to respond quickly to changing markets and of course corruptions in a developing country and loss of intellectual property rights. But now even the manufacturing process is changing. Robotics are slowly taking over the production process and replacing the blue collar workers. Take a look how Telsa Motors making cars: http://vimeo.com/43083157             Slowly but surely Robots are replacing humans from Warehouse management to complex shopfloor production. In future production lines will have fewer people who will be highly skilled technicians. The flip side is, there will be no market for unskilled labourers except flipping burgers. Even that will be challenged. With this change, the cost advantages for off-shore production will be gone and you will find more companies are relocating back closer to their markets, thereby cutting down costs of transportation and other headaches. I think, long term that spells trouble for China and Good for USA.
• New Technology: 15 years back, internet changed the way we do business.  Now something new is coming up which will again impact the whole manufacturing process. That is 3D printing. Companies will be able to manufacture what they need in quantities that they need in a much more cheaper and efficient way. 

Now the Negatives:

• Structural Challenges: For too long USA has been living beyond its means. It has over $ 16 trillion debt and much more in unfunded liabilities. There is no way in hell or heaven that it can balance the budgets. Even if USA changes 100% income tax , it will not be able to bridge the gap. The problem is spending and USA is not able to address that. With the interest rates at today's artificial low level, it has borrowed more and more and with looming deflation, Barnenke is pumping more money. This will inevitably lead to inflation which in turn will push the interest rates higher and the cycle will come full circle. The era of low interest rates are coming to an end soon.
• Structural Unemployment: The unemployment problem will continue to trouble USA and much of the Advanced world. It is a structural unemployment where skill set required is absent in a large section of the population while demand for high skilled workers remains high. The level of education, particularly math and science till grade 12 is pathetic compared to some other countries and cost of University education is becoming more prohibitive. It will no longer be sufficient to have a basic grade 12 education and hope to get a factory job. More and more factory jobs will require good knowledge of math and science.
• Political Paralysis: Or partisanship. All that politicians are interested is how to get re-elected and they are playing to their base. While the cliff thingy has been kicked down for two months the real issue will come up in February when the debt ceiling collides with cliff. That is a major headwind for 2013.
• Global Slowdown: Every country is trying to prosper through export and debasement of currency. If everyone if trying to export who will be left to buy? American consumer has long supported the world but how long they will buy the stuff they don't need with the money they don't have? 
• Geo-Political Problem: I see major issues coming up in middle east and far east which can have serious negative impact.

  Final Thoughts:

While I have a long term bullish outlook for USA, I expect 2013 to be a bumpy ride. While Wall.St. pandits will again scream as to how cheap equities are, the fact remains that we are at the upper end of the range and the forward looking profitability of the companies are not going to be great. I expect SPX to test 1500 in the 1st half of 2013 and correct from there.In the next few months I expect VIX to trade lower from here and reach low double digits. The exact timing of moves are a matter of interpretation and left for the subscribers. I expect to see better risk/reward ratio for commodities and would be watching Oil, Nat.Gas, PM sectors and other soft commodities like Soya bean , coffee, wheat etc. I think there are very few longer term investment opportunities in equities in 2013 and whatever opportunities are there, would be short term trading in nature. Because of the economic headwinds the time frames will be much shorter. But opportunities will be both on the long side as well on the short side. So let's not get married to any one idea. Like in 2012, the coming year will continue to frustrate investors with whipsaws and folks will have to be very nimble. Even if there is no recession, the growth opportunities will be limited and US economy will at best muddle through. 

If "Muddle Through" economy is the most likely scenario of 2013, combine that with the fact that the 1st year of the 2nd Presidential Election cycle, when an incumbent is re-elected and you will see that the prognosis is not that great. Precisely the reason I am calling for a short trading/investment time span, take the money and run approach.

We have immensely enjoyed the Fiscal Cliff Circus and we are now getting ready for the next part which is "debt ceiling' drama. But for now, we have removed some uncertainty and  markets in general do not like uncertainty. We would be scaling in various positions from this Friday, long and short. Today it might be little volatile with wild ups and downs. All in all, an interesting beginning for 2013.

Stay frosty and good luck trading all.

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