Nothingness

Sometimes doing nothing is just as important as doing something.

Right now, I am doing nothing.

Disclosure: No positions in any of the securities mentioned.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

Adios FAS!

I just sold all of my FAS and cancelled all of my FAS buy orders.

The more I read about the fundamentals of the financial sector going forward, the more I am convinced that the FAS will not return to its post crash high of 40ish even if the SP500 gets back to 1500 over the next few years (which I don't see happening either).

After the SP500 and the FAS bottomed in March 2009, the FAS ran up to around 40. Now banks have to discontinue their proprietary trading activity, which historically has been a large profit center. Additionaly, they will have to increase their capital reserves, which will ultimately decrease their return on capital. For the overall health of the financial system, these are probably prudent things to do. However, market players will probably no longer pay higher premiums for this sector, and it will be much harder for the FAS to return to its spring 2010 highs (when market participants were not factoring these fundamental issues in).

I am still interested in buying the FAS if the fear of the financial system collapsing returns to the forefront of investor psychology. If the financial system does collapse, in my view it does not matter what paper assets anyone owns, they will be worth significantly less if not worthless. Based on this idea then, buying the financials into a market panic about the financial system crashing, is almost a risk-less trade.

With the FAS currently trading in the 12's, I do not find it a compelling value. There is always the chance that the Europeans create a multi-trillion dollar fund to backstop sovereign debt issuers and holders, which could send the FAS soaring in the intermediate term. But I also think there is just as good a chance that in the longer term, this fund will not solve the fundamental issue of too much debt held by nations, corporations and consumers. Buying the FAZ right now does not make a lot of sense either, because if the European fund materializes, then the FAZ could take a huge hit.

In any case, I think that at some point in time within the next few years, the FAS will retest its 2009 lows (around 4). When it starts trading in the mid single digits, I will get more interested in it.

Trading the FAS and the FAZ over the past 3 months has helped increase my IRA by 26%, a pretty good return for a short period of time. I am going to keep watching how things play out and keep my powder dry. I will also start identifying other sectors that have 3x leveraged long and short ETFs, and see if I can spot some intermediate to long term opportunities in them.

According to ECRI, the US is probably in a recession right now, and I believe the 2012 US Presidential election is going to decrease investor confidence that the US can get its budget and debt situation in order.

The next 12-30 months are going to be very interesting from a social, financial and political standpoint. Paying attention to what is going on will be important.

Disclosure: No positions in any of the securities mentioned.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

Sold some FAS, Monday 10/17/11.

Yesterday I was pretty bullish on the financials based on numerous technicals that I monitor. My only caveat was if European sovereign debt concerns began to mount. Well this morning, Germany shot down a swift resolution to the crisis. So at 8:01am, I changed my FAS sell from limit 13.65 to limit 12.45 and was filled at 12.50.

I am still long 2 lots at an average cost of 10.30, and am bidding for a 3rd lot at 9.35 and a 4th lot at 8.35. In all, I can work up to 6 lots.

This article on the risks to France's AAA rating caught my attention tonight.

 Disclosure: Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

Has the market turned?

In my view, the odds continue to grow that the Financials have put in a short to intermediate term low.

This week, the FAS put in a higher swing high on the daily chart, the SP500 has made a marginal new swing high, the Volatility Index has broken down below support at the 30 level, and the US Dollar Index has given up all of the gains of its recent breakout. And though the market has been short term overbought as per the NYSE McClellan Oscillator, the market has still risen. Some of the European banks have also put in higher swing highs (DB, BCS). These are all bullish signs, especially since it is happening in the month of October, which is often times a bear killer.

To me, all of these things strongly suggest a short to intermediate term low has been put in, and dips can be bought. However, I beleive that part of the bullish move over the past week or so has been predicated on Europe getting serious with how it deals with its sovereign debt issue. They have been making the case that a new plan will be revealed at the next G-20 meeting, scheduled for November 3. I will be watching market activity leading up to and after this event. If the European plan fails to impress the market, then a retest or break of the early October lows would be increasing possibility.

I am still long 3 lots of FAS, at an average cost of 10.32. I have open orders to sell 1 lot at 13.65, 15.65 and 19.65. Depending on how the FAS chart sets up over the coming days and weeks, I might add 1 or 2 lots to my current 3, or if my sells get filled, I might put those lots back on. To me it all depends on the chart and the news flow.

Since this summer, my IRA is up about 15% on closed trades, and is up about 10% on the open trades. This has definitively been a good run. I want to stay focused on the charts and the news flow, and ideally book some profits at higher levels.

Disclosure: Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

Some issues impacting the longer term profitability of the Financials.

As I continue to trade the financials via the FAS and the FAZ, I am reading more about their fundamental issues going forward. The overall tone of the news and regulations is that the financials will be much more regulated, and will rely more on fee and commission income and less on trading income. This could impact the longer term profitability and the profit growth of the industry, and thus the trading multiple that investors will be willing to pay for shares of the financial companies. This might impact a return to the mid 30s in the next 2-5 years for the FAS.

I will still continue to trade the FAS and the FAZ, but I might have to adjust my longer term upside targets.

Here are some recent articles that caught my attention:

• Banks brace for fallout on earnings
• With Volcker Rule, Wall Street Braces for Change

Having said that, Slovakia voted no on the Europe Bailout today, but the financials did not take a big hit. Perhaps some of the bad news is priced in on a short to intermediate term basis.

 The market is also relatively overbought on a short term basis, but did not sell off today. I wonder if this is another sign that most of the selling in the short to intermediate term is complete.

Disclosure: Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

The other side of my brain: emotions.

I haven't commented on the other side of my brain lately, the emotional side. Emotionally, I am trying to stay focused and relaxed. I am not trying to force the trade, and am just watching the market action and the news flow, and then responding in a manner that is consistent with my beliefs and my plan.

For 12 years, I sat in front of my trading screens nearly all day, and had very good success for the first nine. The last three were quite difficult though. Now that I am working in IT during the trading day, I check the market around 8am, and again around 6 pm, and once in a while will check in during the day. Overall, I am no longer caught up in the action and the drama of the day. I am much less likely to get in or out of trade because of shorter term jiggles or news flow. I think this has helped me maintain a longer term focus.

I have also noticed that the 'edge of my seat' anxiety that I used to feel while watching markets intraday, has been greatly reduced. It is still there to some degree, but the volume level has definitely been turned down. At this time, it feels better to trade in this particular manner.

I am reading a great book, Incognito: The Secret Lives of the Brain by David Eagleman. The author does a fantastic job in describing in laymen terms how lower level neural functioning significantly shapes how we perceive the outer world as well as how we make decisions based on our inner world processing, with much of this activity taking place at subconscious levels.

I changed my mind again, Sunday 10/9/11

On Tuesday I had open orders to sell 1 lot of FAS at 11.65, 15.65 and 19.65. I began weighing the possibility of a continued downtrend in the FAS, which would suggest selling somewhere below the declining 20 MA is warranted (11.65) vs the possibility of Europe putting together a $3-5 trillion dollar fund to address their sovereign debt issues, which in my view would send the financials rocketing higher for perhaps weeks, months or even longer. I am also aware that the Best Six Months of the Year switching strategy popularized by the Stock Traders Almanac, is due to generate a long entry signal any day now. 

Putting all of this together, along with targeting large swing trades gains over multiple months instead of smaller swing trades gains over multiple days, I decided to pull the order to sell 1 FAS lot at 11.65. On Friday morning, the FAS hit a high of 11.67 around the open and then sold off pretty much the entire day until the close. My order would have been hit, and I would have pocketed a 10% gain on that lot which would have been nice, but I am still fine with having pulled it. Based on the current chart and my view of what might happen over the coming days, weeks and months, I would rather be targeting 50%, 90% and higher gains over this time frame. If the downtrend continues, then I still have 3 more lots to buy, and I am confident that I can manage the average cost in an advantageous manner.

FAZ appears to be carving out an ascending triangle since August. Ignoring the news and just trading off the technicals, suggests to me that the correct side of the Financials trade is to still focus on the short side. But for the reasons noted above, I am currently focused on the long side.

The European Financials that I have been tracking continue to carve out a basing pattern (UBS, BCS), or a pattern of higher highs and higher lows (DB).

The US Dollar Index continues to break out higher from its base, while the SP500 continues it choppy move down.

Gold looks like it is trying to hold onto its daily uptrend, but Silver looks like it is continuing its downtrend, with a series of lower lows and lower highs.

Disclosure: Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

I changed my mind....

Three European banks (DB, UBS, BCS) have stopped making new swing lows, and in some cases are making new swing highs. After reviewing this, I have changed my mind and will replace the FAS sell order at 12.65 limit with 19.65 limit. I need to work on holding a piece of my position for larger gains.

I believe that a majority of the current pessimism towards the US financials is related to European sovereign debt issues. If some of the European banks have stopped going down, then the pressure on US based financials might be easing a bit (at least from this catalyst). There are other numerous other issues for US based financials, but we might see decent bounce, especially if the Europeans can setup that $3-5 Trillion dollar fund.

Disclosure: Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

Trading update, Tuesday 10/4/11

Yesterday I edited my FAS entry order for a second lot, such that I got filled at 10.55 around 8:01 am. I got filled on a third lot at 9.35 just before the market closed.

I had an entry order for a fourth lot at 8.35, and today's low was 8.43, so I just missed that one. I am currently long 3 lots at an average of 10.32, just above the 10.16 after hours close.

I am currently offering 1 lot at 11.65 (just below the declining 20ma), 1 lot at 12.65 (just below the last daily pivot high) and 1 lot at 15.65 (just below the high of the current daily range dating back to mid August).

The FAS is still in a downtrend, but if it begins to make higher highs and higher lows, I will consider holding for a longer period of time. I have no problem building my position back up if the trend appears to change from down to sideways or up. A move tomorrow above today's high of 10.30, would be a sign that the selling pressure might be over, at least in the short term.

Disclosure: Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

Economists are useless unless their names are Lakshman or Anirvan.

I generally find that most economists are useless and do not add anything of value to the conversation. Paying attention to lagging indicators only tells me where I have been (ie, revisions to Q Economic activity), kind of like looking into a rear view mirror. Paying attention to coincident indicators (ie, Monthly Retail Sales) only tells me where I currently am, and any fool can do that.

But looking into the future, and seeing where the economy is probably going, really adds something to the discussion. Lakshman Acuthan and Anirvan Banerji of the Economic Cycle Research Institute use leading indicators (ie. SP500, Weekly Unemployment Claims, Mortgage Application activity, Commodity Prices, etc) to identify turning points in the economic cycle. Yesterday, Lakshman stated that a US recession can not be avoided.

Jason Goepfert at Sentimentrader crunched some numbers on the how much the market falls during recessions, and found a median decline around 25% in the SP500, with the largest decline around 55%.   The SP500 is already down about 15% from its summer high, so some of the stock market fallout has already occurred.

I love the work that Lakshman and Anirvan do at ECRI, and that Jason does at Sentimentrader. I have been following them for about 10 years. Their research, and how I have been able to apply it to my trading, has been a big part of my trading success.

Speaking of trading, my order to purchase a second lot of FAS just above Thursday's high was not hit. I have edited the order such that a break above Friday's high (11.95ish) or a drop down to 10.35 will get me long a second lot of FAS.

The Volatitility Index (VIX), looks like it is setting up for a retest of it's summer high around 48. If there is not a significant positive news event out of Europe over the next few days-weeks, I would expect the market to be trading lower over that period, with an increase in the magnitude of the swings. It might be good to make a quick run to CVS and pick up some Dramamine. Having said that, I am looking to buy that weakness in piecemeal fashion, rather than sell it. According to the Stock Traders Almanac, the best 6 months of the year tends to begin with the September/October low. Monday is the first trading day of October.

Disclosure: Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***