Wednesday’s Trading
I am looking for a low-volume retracement of this week’s sell-off to set-up a nice entry point for adding short positions. This will probably take two days or so, but I hope we can have a sharp bounce today so that I can get some short positions deployed ahead of the unemployment-claims number on Thursday morning.
This is a good time to be looking for bear-flag patterns to short. In fact, the XLF already sneaked one in. August 12-13 was the initial move down, the next two days were the low-volume retracement, and Monday and Tuesday were the higher-volume drop to match the initial drop.
Watch the comments for updates throughout the day.
August 20th, 2008 at 2:50 am
Matt, you might get your bounce today. Asia (ex-China) started down, then up and now back to flat.
What happened that made it bounce up? The Chinese are considering a stimulus package. Shanghai dead-cat bouncing 7%.
Global Credit Crunch. Coming soon to your neighbourhood. From San Diego, via Sevilla to Shanghai.
Stimulus Source: Frank Gong, Head of Research China, JP Morgan.
August 20th, 2008 at 9:16 am
No much bounce in Europe so far. But maybe this will help later on (ok, it is not intended to have any impact, but what can you do if the market overreacts again
“The top U.S. securities regulator plans to propose a new short selling rule in the next few weeks which would be broader than an emergency order covering just 19 financial stocks which ended last week.
U.S. Securities and Exchange Commission Chairman Christopher Cox said on Tuesday the proposal will focus on market-wide solutions. He said it is not intended to have any impact on the direction of stock prices.”
http://www.reuters.com/article/businessNews/idUSN1929265720080819?feedType=RSS&feedName=businessNews&sp=true
August 20th, 2008 at 9:29 am
Goldman is keeping their $150-oil-in-Dec call. I really don’t see that happening. The dollar is gaining strength, but GS said the weak dollar had nothing to do wit oil, that is was supply and demand. I think that Goldman is looking more and more foolish. Call it chicken little: “The oil is rising, the oil is rising!” I don’t se how oil can make it past $130 this year.
CNBC said that Goldmand was donwgrading financials, but I couldn’t find any evidence of this.
I don’t see SPY above 128.5 or XLF above 21 today.
August 20th, 2008 at 9:38 am
everyone, remember that the oil inventory report is out at 10:30 EST. it steamrolled me last wk which is why i remember
August 20th, 2008 at 9:49 am
I just bought some SKF, just in case the market is unable to bounce. I will be holding this position for an eventual XLF move through the July low.
August 20th, 2008 at 10:02 am
Paul, we are chicken little. We called oil down when when it was 145. The sheeple hedge funds almost went broke following GS in July/August. What’s the difference between us and GS? We know what happens at the dark side of the money/credit bubble. They don’t. Go short, sit back and enjoy.
August 20th, 2008 at 10:15 am
Oil will hit 150 before 90,weak bounce today lets see what the rest of the day brings.
August 20th, 2008 at 10:47 am
Mike,
I know you bought into SKF this morning.. what would your eventual target be to take profits. I’m not sure if SKF can get past the highs it achieved during the July low that was reached given new short selling restrictions.
Thoughts?
August 20th, 2008 at 10:56 am
Mike, I don’t see where that’s coming from, unless there’s a war with Iran. You have to give us a reason? Do you see any shortages?
August 20th, 2008 at 11:16 am
Charlie,
The government has been trying to protect FNM and FRE, and yet they are both now through the July low. The government can do lots of things, but they can’t pass laws that force you to buy stock.
Matt
August 20th, 2008 at 11:16 am
Oil will only reach that level if there is geopolitical issues. It’s down over a dollar already cuz of people like Mike that jump on the latest headline of the day.
Oil is down over a buck. Imagine that?
August 20th, 2008 at 11:23 am
Personally, the commodity boom that was holding this market up previous is now over. Without strong sectors to hide money in like ferts or metals, this market lost it’s last legs to stand on.
I guess on your last point Matt.. I know there are bottom callers every step of the way and I have no doubt that something “very very bad” will happen for banks like MER, LEH, FNM, FRE or even C, but will it take the market to new lows or will it be already baked in.. that is something that I’m not sure about. I agree the situation gets a lot worse before it gets better, but with a forward looking market.. will the market react favorably? Not sure.. one thing I still haven’t seem though is a true capitulation event similar to when the dot.com bubble burst where good stocks like RIMM were just hammered down to like $12 a share. Will we see that this time? I’m not sure.. but I hope there is one.
– Charlie
August 20th, 2008 at 11:31 am
Matt and Paul, what is your assessment of today’s action and how will that affect your deployment of shorts? we are basically rallying on oil, however, the mkt could react favorably to a govt injection of capital into fannie/freddie and oil could continue to trend lower pushing stocks back into their upward trend (for the time being). i’m thinking of starting a small short position just in case this is the scenario that plays out. thoughts? i defnly dont want to miss the next move down which is going to occur at some point this year.
August 20th, 2008 at 11:36 am
Charlie,
bond and swap spreads are at crisis level again. Most of the write-offs are still outstanding, the crunch has not started in earnest. This is not priced in yet - in the stocks. But they will follow. This crisis is over when substantial amounts in prime mortgage and CRE portfolios have been written off. I expect ongoing government interventions now as the tide is not too strong, but time is an issue.
Yerk
August 20th, 2008 at 11:37 am
Suit yourself crash,short it all the way down to $60v with the rest of the crowd
August 20th, 2008 at 11:52 am
I’m with you Charlie. Capitulation will happen but it will be awhile.
I laugh when a headline comes out and uninformed investors take it as gospel. Those same investors were probably buying SDLI and JDSU all the way to the bottom cuz Battipaglia and Meeker and Blodget pumped up their own calls. Stick with good ol’ supply and demand.
Goldman has been getting killed on their oil call and their stock is in the crapper. I also noticed they downgraded every big investment bank this morning. GS is in panic mode.
August 20th, 2008 at 11:56 am
lol.. GS has been in panic mode for a while, but it seems they were caught flatfooted when oil started to fall. Thinking that was a safest bet in this market. Should have seen it coming though.
There seem to be no safe places for money now. What I did notice was interesting though is that solar has been mounting a rally in the face of falling oil.
Maybe that is where the next boom will be? Alt energy.
August 20th, 2008 at 12:11 pm
Charlie, I noted solar as well. But right now, given the turbulence in the market, I’m reluctant to jump in. Shorting financials seems safer to me… And I still expect a rebasement of the whole market. Tighter financing will take its toll even on the growth companies.
And yes, I don’t now GS but I do know that one of their competitors has lost its feeling for the commodities market. Too much variance in the system, old quant rules don’t apply… A crash seems to be the most likely event to reset the whole thing - but the govt does everything to avoid that. Interesting times…
August 20th, 2008 at 12:21 pm
Tony G,
I have been patiently waiting for some strength to short, but it just isn’t coming. I will probably add another medium-sized short position at the end of the day regardless of what the market does.
Matt
August 20th, 2008 at 12:23 pm
Hey Yerk, Matt and company..
Any thoughts on the upcoming presidential election? I mean for the market. Just wondering what your thoughts are and if you think that the Bush administration is hiding a lot of crap under the rug and the next president will come into the oval office and immediately say.. WTF..??!?? and the next thought will be .. what have I gotten myself into..
Not sure what history typically does when a new party/president enters the house or if there is any correlation at all.
– Charlie
August 20th, 2008 at 12:24 pm
imho….GS thinks, a panic out of anything debt related back into oil
in the next 90 days.
SRS is looking interesting to me , any thoughts ?
August 20th, 2008 at 12:27 pm
Hi Mike,
Oil stocks are outperforming crude oil futures. I like to use momentum favorites like Devon, Apache, Chesapeake as bellweathers and they’re all holding recent lows.
The inventory report was not bullish but I am hearing too much about oil going to 100 to think it may not happen…yet. Too dangerous to short oil here,IMO.
August 20th, 2008 at 12:54 pm
Shorting oil at this moment is way to risky. The recent move for oil is largely due to the move in USD so that should be the indicator you use to determine the direction of oil. If you think the USD can continue to move up or if the US economy will continue to strengthen, then short Oil, but right now, I think the move in the USD has been made and it needs to pull back a bit. In light of the recent economic news, I can’t see how the USD can continue to move up. The alternative scenario is that the rest of the world just goes into the crapper which in turn makes the USD more attractive. Hmm.. not sure if you can top the issues we have going on here though with the Credit Crisis..
So imo.. oil will go up a bit before it goes down.
August 20th, 2008 at 12:55 pm
The NYSE TICK has just taken a turn for the worse, so I just put on large positions of SDS and SPY puts (SPYUV). The market’s failure to rally off of short-term oversold conditions, lower oil, and a stronger dollar is rather glaring. Maybe we will get a rally on a blip down in unemployment-claims tomorrow, but on balance, there will not be much good news in that report for months.
August 20th, 2008 at 1:03 pm
Vix on the road to 35. 2 mths to get there? I will cover then.
August 20th, 2008 at 1:16 pm
SPY has been suspiciously steady around $126.75 for 1.5 days now. I think that the big funds are holding the market up, and trying to ignite a rally to sell into. So far, only the first part of their plan is working. The market may eventually be able to bounce, but ultimately, it goes lower.
August 20th, 2008 at 1:40 pm
Matt, how do big funds hold the mkt up? you mean they just don’t lean on it?
August 20th, 2008 at 1:58 pm
Tony G,
Today is just like a month-end mark-up. The big funds bid underneath, buying any of their holdings that are falling. They are praying for some good news to come along to spark a rally off of the “base” that they are painting on the charts. Then they will sell into that rally. They want out and are just trying to find some suckers to dump their stock upon.
Ironically, they got some good news last night with HP’s quarter. But that wasn’t enough to draw in buyers. Everybody wants out.
If the unemployment claims number is bad tomorrow morning, the big funds will likely give up at this level and fall back and try to hold the line at a lower level.
I don’t like to go short when the big funds are propping things up. However, while they are powerful, they are not invincible. They desperately need good news, and that’s a scarce commodity these days.
Matt
August 20th, 2008 at 1:59 pm
Matt,
Any reason you didn’t split your shorts between SDS and QID? I think QID relatively outperformed SDS on the rally and therefore has further to ‘catch-up’ on the downside. I’m holding both.
August 20th, 2008 at 2:03 pm
Alex,
With SDS I don’t have to worry about sector rotation. If the big funds think that tech is a good place to hide at the moment, then holding SDS is easier. Also, there are no banks in the Q’s.
Matt
August 20th, 2008 at 2:07 pm
Thanks Matt; Good point re banks, I overlooked that one. Tech does seem to be acting as a refuge but I think when things get going it will be shown to be false (people will want to lock in profits when they get scared enough - and tech seems to be where they are currently….)
August 20th, 2008 at 2:35 pm
Tony,
I was out of contact for a while. I bought SKF when XLF hit $20 ans started losing money immediately.
Larry,
The VIX is down today. I am wondering (as I was mentioning yesterday) if we haven’t hit a new low volatility period. Let’s put it this way:
If you drop a live frog in a pot of boiling water, it will immediately jump out. If you slowly raise the temperature, the frog will cook alive (kids, don’t try this at home). I think the market will slowly die. Obviously, big events can cause volatility jumps (March), but we amy not see “no news” plummets (July).
GS still looking weak, even when XLF was rallying. On the other hand, it did fight yesterday (but was still down).
August 20th, 2008 at 2:44 pm
added to my qid earlier today, avg cost 39.70
August 20th, 2008 at 3:08 pm
FYI: From Reuters
“Russia, the world’s second largest oil producer, said on Wednesday it would respond with more than just a diplomatic protest to a deal between Poland and the United States to base part of a U.S. missile defense system on Polish soil.
The statement described the missile shield as “one of the instruments in an extremely dangerous bundle of American military projects involving the one-sided development of a global missile shield system”. ”
Some people are saying Russia will disrupt its energy supplies to the West.
August 20th, 2008 at 3:23 pm
Average Guy, et al,
I trade SRS. It’s last swing high is around the 50 MA which acted as resistance. You could wait til it clears $96.46 or go in at a pullback to it’s 20 EMA which it cleared, at $90.38. The surrogate to watch also for tech info is the $djr, with support around 238.
Fundamentally I believe commercial real estate is an area to short.
As SRS goes, it swings around a lot intraday so be prepared for that, I keep some nitroglycerin tablets around when I trade it
Hope this helps anyone with SRS on their radar.
August 20th, 2008 at 3:35 pm
GS @ $157: Whack-a-mole
I wasn’t sure if it would hold at $155, but it looks like it will go to at least $150
August 20th, 2008 at 3:38 pm
Paul
You may want to take a look at JPM as well, it has some air between it’s current price and $32. I’m short Wachovia around $16.
August 20th, 2008 at 3:39 pm
GS: sorry, $152.25, the July low. It should breach, but who knows when (maybe September)
August 20th, 2008 at 3:41 pm
eli,
I have a put spread between OCt $40 and Sep $35 on JPM. Until a high voulme SPY day, I don’t want to get too aggressive. I do think JPM will see $30, but it might be October.
August 20th, 2008 at 3:54 pm
Apple has been holding up the market again, but its volume is minuscule. My trading program doesn’t even show a bar on the daily chart. XLF will also finish strong, but with less volume than yesterday.
August 20th, 2008 at 3:57 pm
GS and other financials bouncing off of their July lows. Don’t forget, the first two approaches to a support area usually hold, and the third one falls through.
August 20th, 2008 at 3:58 pm
The big funds finally got their bounce - right in front of an unemployment-claims number. Good luck with that…
August 20th, 2008 at 4:12 pm
Matt which bounce is this
August 20th, 2008 at 4:19 pm
Pooch,
This is the bounce that the big funds will sell into. The technical term is “distribution.”
Matt
August 20th, 2008 at 4:28 pm
This comment is from Crimson Ghost, which was posted on a page from last week by accident:
“Energy stocks bounced hard today despite another rise in the buck. XNG jumped 3.5%.
This does not augur well for the longevity of the rally.”
August 20th, 2008 at 5:01 pm
Eli
Thanks for the help
August 20th, 2008 at 5:06 pm
Anyone have thoughts on the FNM/FRE situation ? I find it hard to believe the market held up today with more significant downdraft in these two, but, alas, it did…
August 20th, 2008 at 5:43 pm
I’ll start with a repeat disclosure that I am short GS. Even so, this is really funny for anyone:
“Lehman managed to trade up 4.8% to $13.70 even though analysts at Goldman Sachs and Sanford Bernstein suggested it and a host of other brokers would take hits in the third quarter…The Goldman report maintained that Merrill Lynch would be one of the hardest hit in the third quarter as a result of its exposure to the collateralized debt obligation market. Yet, Merrill jumped 2.5% at $24.41. Goldman also lowered estimates for JPMorgan Chase due to the hit it took on auction rates securities. But JPMorgan gained 4% to $37. And the analyst even called for a short position in Citigroup, but that bank held its own and ticked up 1.8% to $17.49.”
So the finacial stocks that Goldman panned all traded up today. There was one finacial that didn’t do so well:
“The one name that the Goldman analyst maintained a long position in was Morgan Stanley, which tumbled 1.8% to $37.40.”
Ouch.
August 20th, 2008 at 5:59 pm
eli,
actually, I ralized that I have DEC 40 puts (not Oct 40) on JPM, because the Oct ones were non-standard ones (maybe from BSC).
August 20th, 2008 at 7:03 pm
after,
I was just checking out the various financials, and I don’t understand it either.
Q) Why were the GSE’s stokcs hammered?
A) They could be nationalized, leaving the stock holders with no equity.
Q) Okay, but why would they be nationalized?
A) They may not have enough capital to pay the mortgage bonds. If they default on their mortgage bonds, it will throw the US financial system in the blender.
Q) Right, but they just pay off the bonds with payments from the housing loans, just like they’ve been doing for years.
A) With home prices crashing, many home-owners are defaulting on their loans.
Q) So what you are saying, is that without the US government backing the bonds, the GSEs would default on their bonds because homeowners are defaulting on their loans.
A) Exactly! Now you get it.
Q) So what about the commerical banks that issued MBS, and the investment banks that issued CDOs based on the MBS? Don’t they have the same problems as the GSEs?
A) ….
August 20th, 2008 at 7:38 pm
Hoho
August 20th, 2008 at 7:45 pm
Paul,
That’s a good explanation of the situation. FRE’s bond auction yesterday was also a disaster. Here is what the Wall Street Journal said:
“The five-year notes were priced to yield 4.172%, or 1.13 percentage point above yields on safe Treasury notes, the highest “spread” Freddie has ever paid on such debt.”
So, bond investor’s opinion of FRE is at the lowest point ever.
Matt