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***

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***

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***

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***

The US Dollar Index is breaking out of it's recent range, but does it mean anything to the US Stock Market?

The US Dollar Index is breaking out of its recent range, but does that imply a high odds move in the SP500 in a specific direction?

When the US Dollar Index rallied from mid 2008 - early 2009, the SP500 (SPY as proxy), dropped. When the US Dollar Index rallied from late 2009 - mid 2010, the SP500 chopped sideways in a sloppy action. Now that the Dollar Index has broken out of 6 month range, if it begins to trend upward, does that portend sideways/downward action in the SP500?

Based on market behavior for the past 6 years or so, it does.

Disclosure: No Open 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***

The Financials: Current Thoughts.

• it is my belief that the financials will continue to be a tell for the longer term direction of the overall market, with the SP 500 eventually moving in the same direction as the financials, though the financials will be more volatile...
• at this point in time, i believe the there is 35% chance that the FAS, will retest its March 2009 low (around 4.00), sometime by the spring of 2014, and that there is a 65% chance that it will then go on to retest its February 2011 high (around 34.00), 2-4 years after it hits whatever low it puts it....
• i am focusing on swing trading the financials as a means to profit from the above thesis: FAS (triple leveraged long, goes up 3:1 when the underlying securities go up; FAZ (triple leveraged short, goes up 3:1 when the underlying securities go down); the underlying securities are those contained in the Russell 1000 Financial Services Index....
• I believe there will be tremendous opportunities to profitably trade the up and down moves in the financials and that the FAS and the FAZ can facilitate that...these vehicles are not without risk, as they are not really designed for longer term trades, but rather for shorter term trades...but even with these risks, i will be using them for trading purposes, and if they begin to trade significantly out of synch with their underlying index, then i will re-evaluate them as trading vehicles....FAZ and FAS has traded out of synch with the underlying on numerous occasions, so past pivots points appear to have less relevance for present day trading, especially for the FAZ....the XLF could be another useful proxy for financial service company index....

 

Disclosure: Long FAZ.

***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***

Tuesday February 15, 2011

• had a dream this morning that the s&p 500 was trading around 1400 and would soon break above long term resistance at around 1550....
• during the dream i also recognized that breakouts of a well established range, with the current move coming from the bottom of the range, tend to fail...and even with this recognition, it felt as if the breakout would hold...
• interesting....
• here's a link to a SPY chart that dates back to 1993...the scale on this chart is 1/10th the s&p500... 

***this is an illustration of what i am trading and/or what i am 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 ***

The SPY tended to trade bullishly on the day before the FOMC interest rate announcement from 1/1996 - 11/2001, but has been bearish since then.

Trading the Odds posted an interesting study on the behavior of the ES on the day before the FOMC announces their decision on interest rates:

• from their study (S5), the key takeaway for me was the Profit Factor of 1.70 over the course of 156 trades...this peaked my interest, so i wanted to see if i could build a systemic trading model based on this behavior...
• their study uses the ES datastream and the FOMC interest rate release dates from 1990-present...i had somewhat easy access to the SPY datastream and the FOMC interest rate release dates from 1996-present, so i began there...
• my study identified the date which was 2 days prior to the FOMC interest rate announcement, purchased $100,000 worth of the SPY at the close of this day, and then sold it the following day (the day before the FOMC rate announcement) at the close...i did not use any other filters and i did not use any stops...
• my study came up with 106 trades and a Profit Factor of 1.42...there are less trades primarily because my study contains 6 less years of data compared to Trading the Odds study...the FOMC announces a potential change to interest rates 8x/year, which would amount to 48 additional instances over the 1990-1995 period...adding those 48 trades to my studies 106 trades, would make a theoretical set of 154 trades, which is pretty close to the 156 trades in the Trading the Odds study...this is close enough for me for a preliminary review of the SPY behavior...
• once i completed my study, the thing that jumped out at me the most, is the Equity Curve chart:

• the equity curve peaked at trade #46 (11/05/2001) and has been basing, with a recent downward bias since then...
• this equity curve suggests to me that while the SPY had a bullish bias on the day before a FOMC rate announcement from 1/1996-11/2001, there has been a bearish bias since then...
• even though the Profit Factor from my study is a bullish 1.42, it has been on the decline since 11/2001...
• even if i added the performance data for the 1/1990-12/1995 period, it would not change the equity curve from 11/2001-present...
• i will not be building a systemic trading model based on the behavior of the SPY on the day before the FOMC interest rate announcement...
• the purpose of this post is to add some color to the setup that Trading the Odds posted...it is not meant to discredit the great work they do...on a daily basis, i look forward to reading their research...it has been a great addition to my knowledge base and to my trading...
• the following is the list of dates that are two trading days prior to the FOMC interest rate announcement that i used in this study:
  

The S&P 500 is approaching an important pivot on its Monthly Chart: 1060-1080.

• above is a monthly chart of the S&P 500 ($INX) dating back to 1990....
• the S&P 500 has been trading in the range of 700ish to 1500ish since October of 1996...13 year trading range!!
• 950 has been a major pivot during this range...
• 1060-1080 has also been an important pivot during this range...
• the 4 yellow ovals mark the occassions that 1060-1080 acted as major pivot from 1997-2004...
• the S&P 500 is now trading in the 1050's, quickly approaching the 1060-1080 area...