Matt Trivisonno’s Blog

At the beginning of his “Mad Money” TV show on THE SHOUTING CHANNEL today, Jim Cramer told his viewers to sell their energy and minerals stocks tomorrow (Thursday):

“We raise some cash buy letting go some of our huge winners in oil & gas, in copper, in coal.”

Cramer went on to tell his viewers to “ring the register”, don’t be greedy, don’t be a hog, and that you don’t have gains until you take them off the table.

“Retail” investors like Cramer’s viewers got sucked into the March-to-May bear-market rally in large numbers. This was the first time net money flowed into US stocks in a year - see the chart here. Only the masses can cause a move like that.

How much of this retail money has bugged-out already? There’s really no way of knowing that, but I’ll bet that it isn’t done yet. Cramer is usually late to catching onto what the market is doing, so he may be kicking off the final, though perhaps biggest, wave of selling.

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I don’t pretend to know what bureaucrats will do, however if we get the widely expected jobs-disaster, and ECB-disaster tomorrow morning, the market will likely gap down through the March low.

What happens after that? Probably something like what the XLF did after it broke below its March low on June 20th: it plunged, reversed, and then rallied back up to briefly re-capture the March low three days later. Then it flopped over and plunged even harder.

If that scenario plays out with SPY, I will open fire with both short-selling barrels when SPY rallies back up to $126, perhaps on Wednesday.

(Note: Just like with XLF, many shorts will have stop-loss orders placed just above $126. When the brokers run those stops, SPY will likely spike a bit above $126. So, keep an eye out for that.)

If enough traders read this scenario, it won’t play out, so don’t tell anybody!

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I recently defeated Doug Kass in combat over whether or not the XLF would hold the March low. And today, we were once again at odds on the market.

Last night, I went to great lengths to talk traders out of buying into Tuesday’s “rally”. I also spent time in the comments trying to dissuade my readers. I sure hope you people were listening…

This morning, Doug Kass posted a piece on RealMoney.com titled: “Look for a Rally” which he started off with: “I now expect a rally in equities.”

Kass, once again, got it exactly wrong.

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How did I do during the market’s worst June since 1930? While the S&P 500 was falling 8.6%, my trading account advanced 48.8%, and my retirement account advanced 32.7% (according to my broker’s website).

Pretty snazzy, huh?

Who can top that? Cramer? Kass? Kudlow(ha, ha)? Buffet? Lampert? Heebner?

Ha! There’s a new sheriff in town!

But seriously, I only began actively trading again in May after a two-year break. And while I had a rather egregious bear-market rally to profit from in June, I’m actually a much sharper trader than I was at the beginning of the month. So, maybe I was just lucky in June and will take a beating in July. However, in July, I think I will have a rather sickening market crash to profit from. So, don’t be surprised if I do far better this month.

Note: It looks like a good number of my readers will be trading against here. Are you sure that you want to do that?

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Sentiment was indeed negative this morning, but that’s all changed now. The bulls chattered away all day in a state of euphoric-bliss about today’s massive 5-point “rally” in the S&P 500. One could say that this euphoria indicates that all the traders who were intending to buy at this level have already done so, and it is now time to fade this extreme in sentiment…

But I’m not going to make that argument. Instead, I will mention that the exact same thing happened only three weeks ago as the XLF tested its March low. The initial bounce off of the low was met with popping champaign corks in the bull camp. So, let me warn the bulls, yet again, as I did before the XLF flopped over:

“The birth of a lasting rally is met by skepticism, not jubilation in the bull camp.”

As much is I like to poke fun at the bulls here in this raging bear market, I have been looking out for them. In one of the earliest posts that I published on this blog, Bulls in Denial, I wrote:

“If you are a bull planning to ride out the recession, you have to seriously consider if you are missing an opportunity to sell here and buy your position back at a lower price in the future.”

If any bull would have taken my advice, they could be buying back their positions right now at a very nice discount.

The market did exactly as I expected this morning: As soon as the big-funds finished trying to prop things up to make their quarters look better, the bottom fell out of the market and we opened with a frightening gap down. Today’s bounces off of the lows were almost certainly shorts buying-to-cover and taking profits. I wasn’t one of them. While I have taken lots of profits recently, each time I did so was wrong. While I still have huge short positions, I also have way too much cash from said profit-taking.

So, if by some miricle, there are enough bulls to buy in front of Thursday’s jobs number, not to mention the ECB decision, and spark a rally, I will short into it with all of my cash. Then I will sail through the March lows with a full cargo of short stuff. But that is only a dream, and I need some bulls to help me fullfill it. So,

Who Wants to Go Long in Front of the Jobs Report?

Would any bulls like to come forward and announce long-side trades that you will make on Wednesday?

But before you do that, let’s review what happened after the last jobs report. You remember the 400-point drop on the Dow, right? And the $10 spike in oil, right? Pretty scary, right? Now stop and think about all the major industries that are practically shutting down: gaming in Las Vegas, auto-making in Detroit, iBanking in New York, Wacky-Banking in Charlotte, air lines, home-builders, etc. What do you think the outlook for jobs is? And just by coincidence, today is the day when governments across the country will be slashing their budgets - you didn’t forget this New York Times article, did you?

Now, let’s go back to that $10 oil surge. Why would a poor jobs report trigger that? Because it means that the Fed can’t tighten and the dollar is doomed, and that the world’s new reserve currency, oil, strengthens. Of course, surging oil leads to a heavier crushing blow to the US economy, which causes more job losses, which…you get the idea. Is this not the most astounding viscous-circle in economic history?

So yes, sentiment was very negative this morning. But that’s what happens when the wheels come off of America. American voters have chosen to not produce energy. American voters have chosen to roll back capitalism. This is what it looks like.

So! Let’s hear your trades for tomorrow you bulls!

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The first Blog Motto (shown at the top of each page under the title) that I put on this blog was “The S&P 500 Bear-Market Rally is Almost Over.” I put that on in early May.

Then, I updated the motto to “The S&P 500 Bear-Market Rally is Over. Look Out Below!” I announced that change in a post titled: I Called the Top on May 21st. Yep, I knew it was the top only two days after the fact. How did I do that? Frankly, I didn’t really do anything more than basic chart-reading with techniques that are at least a hundred years old.

Now that the March-to-May bear-market rally is clearly over, it is time for another motto update. This one I don’t expect to last very long:

“The S&P 500 Will Take Out the March Low Soon”

By “low”, I mean the lowest intra-day print on March 17th of 1257. By “take out”, I mean that the S&P 500 will close below that point. After it trades underneath 1257 for three days and confirms the break-down, I will update the motto again.

I’m posting this late Monday night because I think the low can be taken out at any day now, including Tuesday, July 1st.

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On June 11th, when the XLF first approached the March low, it snapped back hard and rallied for three days in a vicious incineration of late-coming shorts. That bounce didn’t make a lot of sense because the BKX banking index had plunged through its March low previously. Why did anybody think the XLF would be different? Beats me, but we still had a lot of bottom-fishers at that time.

If you compare the current SPY chart to the XLF chart on June 11th, you will see that SPY’s bounce is being rather conspicuous in its absence. We should have had a strong bounce today. We should have had late-coming shorts running around in flames like you see in the movies. But it didn’t happen.

In fact, it looks like SPY was levitated solely by funds trying to get energy stocks onto their sheets before the quarter closed so that they could show their investors how smart they were this quarter. (Of course, if you look at the XLE chart, you will see that energy stocks are clearly being distributed as all the recent high-volume bars are red. So, don’t think that energy stocks will hold the market up going forward.)

It also appears that a lot of bears were keeping their powder dry until the quarter-end window-dressing was out of the way, and they rushed to get their short positions on before the close.

SPY’s bounce off of its March low has gone missing because traders have seen this movie before. The XLF bounce will not repeat because traders already know how such a bounce will turn out.

Bob Pisani kept telling us today how the beginning of July has historically almost always been positive, and that is certainly the case. But the beginning of this particular July is going to be tragic - for the bulls, that is.

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In my last couple of posts I mentioned “late to the party” shorts. An example of this is Pete Najarian, who on Thursday’s edition of “Fast Money” recommended QID to short tech. If you took his recommendation and bought some QID in the after-market, or Friday morning, you are already under water on the trade, and may count yourself amongst the “dumb money” crowd.

Why are you dumb? Because you shorted tech at a moment when the market was very over-sold and sentiment was very negative. The only time that makes for a good Fast-Money style short-term trade is right before a true crash. And how often does that happen? Not very, right? If the market crashes on Monday, consider yourself lucky.

QID is at $44. The cost basis for my QID position is $38, and while I was building that position, I didn’t hear a peep about it on Fast Money. So, that makes me the smart money, and Fast Money the dumb money. Funny thing is that on the Friday episode of Fast Money, they put up an intra-day chart for Apple heralding a potential reversal. I predicted that traders would spot a potential reversal in tech in my last post which I published just before Fast Money came on the air Friday.

So now Fast Money got you to short tech on Thursday, and then warned you about a potential tech reversal on Friday. What should you do? I think the chances are very good we will get a short-squeeze rally on Monday. And the more late-shorts that piled on, the more potentially vicious the short-squeeze. If you want to remain part of the dumb-money crowd, you can barf up your QID at a loss and go long with some Apple. That would be really dumb.

However, if you want to get smarter, hold your tech shorts. Endure the pain until you feel like barfing up, and then add to your position. Yep, being the smart money is that hard, and few traders can do it.

Fast Money also had a guy on who told viewers to ignore oscillators. More dumb. Oscillators aren’t magic; they are just another technical indicator. While there are zillions of technical, fundamental, and sentiment indicators, and we must chose which ones we use since we can’t watch them all, none of them are evil - especially oscillators. In fact, I would hazard to say that most traders could dramatically improve their entry points by not looking at prices and blindly trading based on a sort-term oscillator.

In fact, I used an oscillator to top-tick tech on June 5th. That’s right, I bought a tranche of QID right at the very top. Pretty snazzy, huh?

Take that Fast Money!

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Today’s drama was whether or not the Dow would close in “official” bear-market territory of 20% below the high set on October 9, 2007 of 14,164. The magic number was 11,331, and though the Dow dipped under that number, it was able to close above at 11,346.

This is important because the big mutual funds were desperate to prevent the giant “BEAR MARKET” headlines in the media over the weekend. There will still be headlines, but they won’t be as big and as highly-placed. So, the funds won a tiny moral victory after taking a brutal beating during a period when they are usually able to paint happy faces on the charts.

So far, it doesn’t look like the public has begun to pull its money out of mutual funds in a panic yet. They poured money into the market during the March-May bear-market rally, and will surely pull it out soon.

Over the weekend, we will probably hear stories about how a bear market was narrowly averted, and that the S&P 500 successfully tested its March low. That, of course, is BS, but it may be enough to hold back the tsunami for a few more days.

While it is illegal for funds to run their stocks up at the end of a quarter, they are allowed to bid underneath, at that is what they did today. When the market did not crack, some late-to-the-party shorts got nervous and bailed out. So, if you look at the charts, especially the QQQQ chart, you will see what looks like a nascent reversal pattern.

A good deal of traders will look at the charts over the weekend and conclude that a short-term bottom is forming. And with the big funds bidding underneath again on Monday, the last day of the month, we could get a short-squeeze rally.

The market burned off a good deal of its over-sold condition by going more-or-less sideways today, but it is still over-sold. In this state, the market looks for an excuse to rally. Late-to-the-party shorts with some gains are easily spooked, and when they buy-to-cover they push prices up frightening more shorts, and that’s how a short squeeze is ignited.

The big funds cannot push stocks up on Monday, but their support could spark a rally. Or we could have another sideways day like today. Of course, if the public decides to panic, then the market could dive on Monday as redemptions flood the mutual funds and force them to dump stock.

The SPY calls that I bought this morning (see previous post) are under water, but don’t worry about me. My large SDS and SKF postions kept me flat on the day. If the market is able to rally early next week, I will sell my SPY calls and use the cash, plus all my remaining cash to go fully short. The economy, outside of the tax-rebate checks, continues to decelerate and I don’t think it is possible for the S&P 500 to hold the March lows.

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I just bought a few SPY call options to play a potential short-squeeze rally today. This is only for fun, and my portfolio remains dramatically short overall.

The market is very over-sold at the moment, and every trader “knows” that we are going down some more. So, this looks like a good time to fade the crowd. Also, don’t forget that the quarter is not over, and while the big funds cannot take stocks up here, they will bid underneath and that will discourage shorts.

With both oil and bonds up this morning, stocks should be falling, but they are not. That means the big funds are probably at work.

My trade was at 10:30am, and I bought the July $129 SPY calls at $2.56.

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