Wednesday, November 25, 2015

A Moment of Truth

The SP hourly chart shows resistance at the 2095 level. 

Could be an expanding diagonal that will resolve itself on the downside at the 2050 level.  That would be the fifth wave of the diagonal with 1 - 2065, 2 - 2095, 3 - 2070, 4 - 2094 and 5 - ?

While I'm looking for a close above this level on Friday, I've been a bit concerned with dwindling volatility levels and apparent resistance at 2095 (210 SPY).  210.04 is the Friday close of three weeks ago, that I expect to be testing Friday. 

Thought that we might blast on through this level but nope.  It's not happening.  Could be that we will go through on Friday on extremely light, holiday volume, when the powers that be can whip the market around to their hearts' content.

While many are suggesting that we are in the final wave up in this long-term bull market, and the wave counters can show that yes, we are in wave 5 of the 5-wave bull market that began in 2009, I'm cautious and added some Dec 31 puts. 

A breakout above the 210 level on SPY would cause me to react with some call buying but what I'd like to see is a three-month test of the low at 191 in December.  A successful test the lows on the three-month basis would get me very bullish and prepare for a move to all-time highs.

As we stand now, it is possible that we will break through the 2095 level and go higher.  Momentum suggests that this will happen.  There is still too much inconsistency though.  As one looks at interest rates and commodity prices, being at multi-year lows, one must think that one of these days, the stock market bubble and bond bubble, will burst and stocks and bond charts will also look like the commodity charts.

But we have seen, Central Banks have done everything that they can to prevent this from happening.  Unfortunately, they will also have to be crushed if this scenario is to unfold.  It's inevitable, or so it seems.  But it also seems that they can continue the charade indefinitely.  Perhaps IMF will come out with a new global currency scheme before this happens.

Sunday, November 22, 2015

Market Strength Building

SPY surged this week, rising 6.77 points, 3.3% to close at 209.31.  I wasn't too surprised to see the upward momentum and was anticipating a buy signal on my very short-term indicators.  They turned up at the open and again added to my bullish position as price moved through an expanding wedge formation at the 206 area.

As one can see, we are well on track for making the three-week test of the highs next week.  It will be a holiday week so whether the market will continue surging as we move into holiday season, is still yet to be seen.  With this past week's surge, it's possible that the strength will continue.

Although my daily indicators are not showing increases in volatility, the weekly indicators are. 

A simple weekly chart with price moving against the 4, 10 and 20 week averages show the 20 week average (red) moderating and starting to turn up while the 10 week average (green) is ready to cross over the 20 after price tested this level a week ago.  The four week average is rising smartly.  Looling at these strengthening trends, it would hard to be putting too much on the bearish side, although I do have some longer-term puts in place as insurance, and a possible three month test of the low in December.

Another indicator I am starting to watch is the relationship between the 4 day average and the 20 day average.  I haven't back-tested this thought but am looking at it to add to an Algorhythm should it show some promise as an indicator.  The indicator is just starting to signal positive now, close to a point where I would normally be thinking about taking profits.  As we know, a key to profiting in the markets is cutting losses early and letting profits run. 


So as mentioned above, I also see the possibility of a three month test of the low occurring next month.

Who knows what words might come out of the Federal Reserve.  I saw some news that they will be having some kind of non-scheduled meeting tomorrow regarding bank reserves.  Something new, revealing the true state of the credit market could change everything in a blink of an eye.  And I suppose that is why I generally do not position myself 100% in any one direction.  While the market sentiment is bullish and the markets continue to rally, the underlying reality of the economy may not be as rosy as some believe. 

The Oil and Gas stock index is well off its highs as the price of oil remains suppressed.  Little discussion has been made about the debt situation of producers, especially those who require oil prices to be in the $100 range to be profitable.  For much of the decade, low interest rates have enabled bad businesses to continue on instead of failing, as they would if the cost of capital was at a realistic rate.

As rates are starting to rise in anticipation of the Fed's possible interest rate increase, capital is becoming harder and harder to come by for marginal producers.  Even Saudi Arabia itself is on watch by the rating agencies as they are facing continuing deficits to finance their society. 

There are certainly interesting times ahead.  As some question, should the market start going down, where would all this money move to?  One way to solve the problem is to open the market some 20% lower, destroying much of the wealth.  This would also destroy much of the debt that is supporting these elevated market prices.  In the end, where could one turn in an age of defaults?  Obviously, the goal of governments and central banks is to not allow this to happen.  Can they hold it off indefinitely?

And then what???

Anyway, have a very Happy Thanksgiving holiday all.  Enjoy the good times while we have them.

Saturday, November 14, 2015

Markets Have Weekend to Mull Over Paris

Markets around the globe sold off this week with the Dow and SPX averages losing around 3.6%, ending a strong winning streak of six weeks.

While the market has provided great short term trading opportunities, especially with this week's downside action, I have not seen any signals on my momentum indicators to get me too Bearish.  The Stochastics indicator on the weekly chart above, shows that it's prudent and at least be adding some put options to any rallies, just in case.

I generally like to see three-period tests of tops and bottoms before I get secure in taking positions.  With that in mind, I would be looking for some opportunities to add call options to possibly test last week's closing price of 210.01 (SPY).

On the longer term, we can see that on the monthly chart, prices have come down to test the 20 month moving average.

Positive momentum still remains on the longer term so it will be interesting to see if this moving average holds.  One must be prepared for some kind of sell off to open the day Monday morning in light of the massacre that occurred in Paris. But more preferable would be a positive rally led by defense and bank stocks. 

As we look at the monthly chart, we can also see that there is a three period test of the low setup forming here as well.  September's close of 191.61 could be tested at the end of December, right in line with the execution of a Fed rate increase.

So my preferred scenario is that we moderate this coming week and make a push to take out the highs.  I had some short-term puts (11/13 and 11/20) that I closed out on Friday and started to nibble at some 12/4 SPY and IWM calls.  As mentioned last week, I will be looking for a higher level to make some longer term put and SDS/DXD positions.  If markets test the high on 11/27, and fail, then I would be more comfortable in loading up for Bear, establishing a position that would be closed out should we appear to be holding the 191 lows but also holding a longer dated put position targeting much lower price levels.

Current buy target, SPY 200 area.

Sunday, November 8, 2015

Market Climb Continues

SPY continued it's upward climb this week despite a much stronger than expected Non Farm Payroll report that showed upwards of 270,000 jobs added to the labor force last month.  SPY closed at 210.04, up 2.11 (1%) on the week. 

Precious Metals collapsed nearly 5% on the news while TLT, a proxy for the long term bond, fell more than 3%.

SPY weekly price continues to ride the four week moving average higher, so it's hard to see a case for any downside correction at the moment. 

Over the past several weeks, we've been watching the weekly line chart and noticed that it was facing resistance at the head and shoulders neckline.  This neckline was breeched this week and now we are at a slightly higher resistance level, the line connecting weekly high closes.  As market patterns generally mirror up and down moves, it's not inconceivable to believe that should price break through this resistance line, it could rally to the 230 level.

At the moment though, I don't see this breakout as likely.

As mentioned previously, volatility, while still at high levels, has reversed and continues to weaken. 

Also, the weekly rate of change moving average chart continues to hold at the 0 line showing that the moving average has stopped advancing.

This shows me that on the weekly data, the market, while continuing to eke out small weekly gains, is losing steam. 

For me, the biggest kicker is the view of the monthly chart.

I always like to look for the three period test pattern.  September's monthly close was at 191.61.  We advanced in October and should we maintain current levels throughout November, it will be a perfect setup for a December test of the 191.61 low.  That would coincide well with a possible Federal Reserve Rate Hike, which is now becoming more widely expected.

My best guess is that a rate hike would be crushing for the markets, even a token hike. 

Currently, I have no positions in the market but will be looking for an opportunity to position myself for next month's potential three month test of the low. 

Saturday, October 31, 2015

Market Makes Little Progress

Major US markets made little headway this week, advancing just 0.1% on SPY to close at 207.93.

While momentum appears to be slowing, price is still holding the 4 day moving average. 

As price has changed little, so have my observations, on the weekly basis.

The standard deviation chart still remains within the channel I've been watching for the past couple of weeks. 

Price continues to respect the head and shoulders neckline as seen on the weekly line chart.  It might have been testing the neckline during the day however, price broke down in the final hours dropping from 209.44 to close near the lows of the day.


The data shows price continuing to muddle along to the upside with no real evidence that a top might be near other than the possible resistance areas demonstrated above.  One other observation that might add to a downside case is the short term monthly chart.

I'm always looking for three period tests of something, and often they prove to pan out.  If we look at October's monthly close, it failed to take out the close of three months ago, 210.45.  That's not really a lot to go on though.  Monthly momentum has been strong so does it reflect genuine strength for the long term?  Or is it one of those "bear market rallies" that are short and swift?

The daily data shows that even as prices have stayed elevated, momentum is quickly dwindling.  Yet on the very short term, price continues to hug the 4 day moving average even on the quick move down at the end of the day/week/month. 

I closed out my November long calls Friday and established an initial position in SDS, a 2 time inverse ETF on the SPX index.  I'm still maintaining the long January 200-215 call spreads acquired when SPY was below 195.  Not really sure what will happen next.  My gut tells me that we are near the end but seeing how markets often react sharply to any Central Bank activity, anywhere in the world, and how it tends to ignore seemingly important negative situations, it's hard to totally commit to the downside.  I suppose that if the Fed read that comment, they would be thinking

Saturday, October 24, 2015

CB Business as Usual - Markets Surge

Last week, we were looking at shriveling volatility but sure enough, European Central Bank President, Mario Draghi, confirmed that he will do whatever it takes to keep the party going.

China, not to be outdone, lowered their benchmark lending rate by 0.25% to 4.35%.  Party on.

Stock markets responded rallying more than 2% for the week.  SPY advanced 4.24 pts to close at 207.51.

Last week, we looked at the standard deviation chart and projected that perhaps SPY could move to 209 if standard deviation hit the top of a declining channel.

Almost made it.  A little more surge can reach this level but a continued big surge could move prices back to the 212 level, testing new highs.

We looked at this last week as well, the neck line on the weekly line chart.  Technically, when breaking a head and shoulders neck line, price generally rallies back to test.  If it fails, then continued downside can be expected.

Similar to our analysis last week, volatility on the short term is rising but on longer term measurements, it is declining.  This is not that abnormal though considering how dramatic the down move was in August.

Here, for example, is the 20 week volatility chart.  Still at a high level, it could quickly moderate to a +5 or less level.

This chart reflects the change of the moving average.  This indicates that the 20 week moving average is flateening out after declining sharply.  Right now, the moving average is at 203.76.  Assuming that it stays flat and the volatility declines, a 2 standard deviation move above the 204 moving average could bring prices to 212 - 214.

So, interesting things to come for sure.  Will the Fed players make some comments to pile on?  Another decent weekly move could shift momentum across all daily and weekly levels and move markets much higher.  But there should be enough resistance coming in at 209 and then again at the previous high levels. 

Just to be safe, I added some Nov 200 SPY calls to build on previously placed January 200-215 call spreads.  I also have some 200-185 November put spreads as I was expecting a possible move down to 185.  While the excitement is on the upside, I'm not yet ready to give up my puts.

Friday, October 23, 2015

And Now We Know

Mario Draghi saves the day.  Other Central Bankers do their part.  Market does what the market does best.

Wednesday, October 21, 2015

Sunday, October 18, 2015

Market Rally Continues

SPY continued its rally this week closing at 203.27, up nearly two points on the week.  The rally appeared to be incited by continued Federal Reserve Bank inaction and comments from Fed Governors suggesting that rates won't be raised at least well into 2016. 

With the Fed's market PUT in place, one could only expect continued currency devaluations contributing to strengthening asset prices, including stocks.

While stock price momentum continues to increase on the short term (4 day average), across other time frames, momentum is falling indicating that reversion to the means is probable.

The above chart shows SPY weekly price approaching to 20 week moving average after nicely bottoming with a three week test of the low on September 25 at the 192 level.  When the successful test occurred, the question was how far the rally could go?

As the chart indicates, the 20 week moving average is declining and appeared to be the first level of strong resistance.  The second area considered as resistance was the 204 level as on the daily bar chart, that appeared to be the neck line of a head and shoulders top formation.  This can be seen in the first chart.


On the very short term, the four day standard deviation has sometimes approached 1.50 on very overbought occasions.  As my four day momentum indicator continues to rise, it is possible that another thrust forward can occur.  Something powerful will need to occur to push prices above the 20 week moving average and break through the apparent head and shoulders neck line.

It is possible.


As we see in the second chart where the SPY weekly close interacts with the 20 and 100 week moving averages, the weekly price has regularly risen against the 20 week average.  This chart here shows the standard deviation around the 20 week moving average.  Should my super imposed channel line plays out, the 20 week standard deviation could rise to around 0.63. 

Translated to price, that would see SPY rise to 208.  Should that move happen in the next week or two, it could result in new dynamics coming into play which could result in short term SPY prices rising as high as 221.

Another view of the SPY weekly line chart shows that the head and shoulders neck line here comes in around 209.  So looking at the potential for the 20 week standard deviation to move up to 0.63 and reach the top of its channel, this weekly line chart would also show a test of the head and shoulder neck line.


Seeing that on the momentum side, it is declining on nearly every time frame, premium selling on price spikes looks to be the best strategy.  Credit spreads can be employed to limit possible event risk.


Saturday, November 29, 2014

Why I'm So Confident

You might have noticed that I haven't posted in awhile.  Is there any reason to?  I lived in San Diego for awhile but having been born and raised in the Midwest, I could never really get my arms around the "forever the same" weather.  I could never understand what purpose the television weatherman had.  Nothing really changed - ever.

Totally bored with the lack of seasons, after two years, I returned to the North, where during the summer, it was hot and the winter cold.  In Chicago, where I grew up, there is a saying, "if you don't like the weather, wait 24 hours." 

As the chart above shows, for some 30+ days now, the market has done nothing but go up, almost every day.  We certainly hit new records in number of days above the 5-day moving average.  Many of the days appeared to be down days, but in the final minute or two, a big surge of volume would come in, probably more than the entire day's worth of volume, pushing the market back to the highs.

So, being as useless as a San Diego weatherman, with the market being 100% predictable, there is no need for commentary.  I was somewhat amazed (no not really), that despite the huge selloff in energy stocks, the Dow still managed to close at a record high.  Albeit, based on the final minute of activity.

Everyone who trades the market sees this.  I'm sure that the regulators see it too.  Don't they?  It seems to be a given that since many receive bonuses based on how stocks close out the year, one can expect that this pattern will continue through the end of the year so that the "players" and CEOs can maximize their bonuses.  And then of course, all of the new IRA money comes rolling in throughout January.  By then we will see that the economy is still weak.  Europe and Asia will probably be in depression, so Central Banks will continue printing money and goosing the markets ever higher.  It is the reality that we live in and the governments sit idly by, while the players game the markets.


One thing that caught my interest today is a story about the Ponzi scheme that governments  are pulling off.  Well, if you didn't realize this, then this will be interesting reading.  If you are a market trader and are aware of how things work, well, it's an interesting story none-the-less.

Ponzi: Treasury Issues $1T in New Debt in 8 Weeks—To Pay Old Debt

November 28, 2014 - 2:37 PM

Treasury Secretary Jacob Lew
Treasury Secretary Jacob Lew (AP Photo)

The Daily Treasury Statement that was released Wednesday afternoon as Americans were preparing to celebrate Thanksgiving revealed that the U.S. Treasury has been forced to issue $1,040,965,000,000 in new debt since fiscal 2015 started just eight weeks ago in order to raise the money to pay off Treasury securities that were maturing and to cover new deficit spending by the government.

During those eight weeks, Treasury took in $341,591,000,000 in revenues. That was a record for the period between Oct. 1 and Nov. 25. But that record $341,591,000,000 in revenues was not enough to finance ongoing government spending let alone pay off old debt that matured.
Record Revenue through Nov. 25, 2014

The Treasury also drew down its cash balance by $45.057 billion during the period, starting with $126,568,000,000 in cash and ending with $81,511,000,000.
The only way the Treasury could handle the $942,103,000,000 in old debt that matured during the period plus finance the new deficit spending the government engaged in was to roll over the old debt into new debt and issue enough additional new debt to cover the new deficit spending.
This mode of financing the federal government resembles what the Securities and Exchange Commission calls a Ponzi scheme. “A Ponzi scheme," says the Securities and Exchange Commission, “is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors,” says the Securities and Exchange Commission.
“With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue,” explains the SEC. “Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”
In testimony before the Senate Finance Committee in October 2013, Lew explained why he wanted the Congress to agree to increase the federal debt limit—and why the Treasury has no choice but to constantly issue new debt.

“Every week we roll over approximately $100 billion in U.S. bills,” Lew told the committee. “If U.S. bondholders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance.”
“There is no plan other than raising the debt limit that permits us to meet all of our obligations,” Lew said.
“Let me remind everyone,” Lew said, “principal on the debt is not something we pay out of our cash flow of revenues. Principal on the debt is something that is a function of the markets rolling over.”
The vast amount of debt that the Treasury must roll over in such a short time frame is driven by the fact the Treasury has put most of the debt into short-term “bills” and mid-term “notes”—on which it can pay lower interest rates—rather than into long-term bonds, which demand significantly higher interest rates.
At the end of October, according to the Treasury’s Monthly Statement of the Public Debt, the total debt of the federal government was $17,937,160,000,000.
Of this, $5,080,104,000,000 was what the Treasury calls “intragovernmental” debt, which is money the Treasury has borrowed and spent out of trust funds theoretically set aside for other purposes—such as the Social Security Trust Fund.
The remaining $12,857,056,000,000 was “debt held by the public.” This part of the debt included $517,029,000,000 “nonmarketable” Treasury securities (such as savings bonds) and $12,340,028,000,000 in “marketable” Treasury securities, including bills, notes, bonds and
Treasuring Inflation-Protected Securities.
But only $1,547,073,000,000 of the $12,857,056,000,000 in marketable debt was in long-term Treasury bonds that mature in 30 years. These bonds carried an average interest rate of 4.919 percent as of the end of October, according to the Treasury.
The largest share of the marketable debt--$8,192,466,000,000—was in notes that mature in 2,3,5,7 or 10 years, and which haf an average interest rate of 1.807 percent as of the end of October.
Another $1,412,388,000,000 of the marketable debt was in Treasury bills, which carry “maturities ranging from a few days to 52 weeks,” says the Treasury. These $1.4 trillion in short-term Treasury bills had an average interest rate of 0.056 percent as of the end of October, according to the Treasury.
The continual rolling over of these short-term, low-interest bills helped drive over the $1-trillion mark the new debt the Treasury had to issue in the first eight weeks of this fiscal year.
The Treasury has taken out what amounts to an adjustable-rate mortgage on our ever-growing national debt.
If the Treasury were forced to convert the $1.4 trillion in short-term bills (on which it now pays an average interest rate of 0.056 percent) into 30-year bonds at the average rate it is now paying on such bonds (4.919 percent) the interest on that $1.4 trillion in debt would increase 88-fold.

Saturday, November 22, 2014

China Rate Cut Sparks Market Rally

Another day, another Central Bank action somewhere in the world.  Weakness in China resulted in a rate reduction, but China's interest rate is well above rates in Europe and US so there is certainly more news out of China to come in the future as the race to devalue world currencies continues.

The S&P has gone up for five straight weeks now without a pause.  Friday marked the 26th consecutive day that the SP closed above its 5-day moving average.  This has only happened one other time since 1950.  There is no indication that the market will sell off next week as we approach the Thanksgiving holiday.  Trading activity will likely be slow enabling the market to rise ever so higher with little to no resistance.

The dramatic move up is illustrated also in the Standard deviation chart, with price going straight up after reaching oversold levels.  The last time S&P reached the -2 level, it also rallied back up to the +2 oversold level before finally regressing back to the mean.

Size, more commonly known as Band Width continued to rise but could possibly be meeting some resistance based on the downward trend.  The basic rule remains, when Size is rising, stay with the trend.

Finally, the rate of change in the moving average may also be reaching a resistance level.

I'm not sure that it's possible for the market to have any down move anymore that isn't interrupted with some Central Bank action or Federal Reserve comments which causes the computer programs to ramp up the market. 

I'm not sure what is going on in the market anymore.  Many suggest that Central Banks are actively buying stocks and that is troubling.  There appears to be an unlimited supply of money that can be directed towards the markets and at this point, few sellers.  Volume has been light and it would be interesting to see the actual volume of individuals as opposed to computer algos.  Not sure that it is a market that average people should be in.

Many people practically "harass" me as I refuse to have my 401(k) money in anything other than cash.  Everyone is so convinced that earnings are great, the Federal Reserve has their backs, there is no inflation, etc.  The power of the press I guess as they are by no means market experts.

I remain with large put positions having expected some retracement by now.  I had only a few November puts with the bulk of the position in the December series and some "recovery" spread positions to recoup my put investments should the market move drag on out until next year. 

Last week, it appeared that the market would run up to 207 based on the 4 week standard deviation.  It appeared at that time that a test of the STD high would bring the SPY to 207.  Looking at the 207 level, I saw that Size continued to be expanding so I bought some Dec 205 calls.  At this point, I'm going to let things ride until we see a reversal.  I'm not quite sure anymore how deep of a retracement we could get.  After six years of steadily rising prices without a 10% correction, it's my opinion that the market will probably go parabolic, perhaps even doubling from current prices before the move finally ends. 

One thing that I've learned from more than 35 years of market activity is that the market will find a way to take everyone's money.  I have yet to hear the cab drives, barbers or other neophytes telling me how much money they've made and how good they are in the market.  Well, I've heard some but not what one hears at market extremes.

Good luck.  It's OK to play the market to go up, but continue to buy protective puts.  While it might be money out the window at this moment, when the market finally cracks, there will be no short covering profits to be had as all of the short sellers will have been out of business.  It's going to be nasty.  But who knows when?  Not me.

Thursday, November 20, 2014

Another Day, Another Record High

The market pattern continues much the same as the last wave up.  Should the market replay exactly the timeline that it ran through last time, SPX should hit its final high on Wednesday, November 26, the day before Thanksgiving.

If volume is any clue, perhaps we will again see a volume surge at the next high.  The Inside money knows exactly when to sell.


Another View:  While it can continue to drift higher, is this worth buying here? 

Breaking through this channel which has persisted for years would be major major major. 

More likely that prices will eventually head down to 170 and 155.

However, another round of QE could push prices out of this channel.  Market would then go parabolic, perhaps even doubling.  So while I remain bearish, I will continue to hold a small number of call options - just in case . . .

Tuesday, November 18, 2014

Bears Throw in the Towel

After 8 days of sideways trading with SPY closing within a tight range between 203 and 204, price broke out to new highs closing at 205.55.

In many of the blogs I read, commenters are hugely bullish now and it seems that only a handful of Bears remain.

In reviewing the chart setup, price still remains within the broadening top formation so until it does I'm not sure that it's yet time to expect the market to go higher.  A break above the upper trend line should be followed up with a test of that trend line before going higher still.  While I did buy some calls last week considering the possibility that a continuation of this rally could unfold, I'm still not convinced.  I continue to hold December and January puts and will continue to add to my put portfolio, with a more distant expiration date, should I see overbought levels on my standard deviation charts.

But on the contrary, I've seen all of my indicators (on the daily basis) roll over.  So today's rally reminds me to some extent of the rally we saw just before the market dropped hard.

Much of what I have been reading has centered on the Central Banks world-wide, talking up stimulus measures.  But quite frankly, I'm starting to believe that this rally might be something different.  There could be some real cycles at play here that just happen to coincide with Central Bank activities.  I'm not quite sure but I'm starting to think that there is something more here at work and I will strive to find out.

I spent much of my flight time returning from Mexico today working on my data set, gearing it up to study the cycles.  One of the things that I want to investigate is the problems involved with capitalization-weighted indices.  Many cite that the Advance-Decline line is terrible.  Many more stocks have been below their 200 day moving averages so is the SP index really a good proxy for the market?  A decent move in just one or two of the top stocks in the SP could turn a big down day into one of these moderately up days that we've seen.

Lots of questions to answer.  I still am holding to my potential low day coming December 19.  Updates to come.

Monday, November 10, 2014

Is This the Top?

Cycle low expected on December 17 should the cycle repeat.

Wednesday, November 5, 2014

Was Today the TOP??? SPY Thoughts

Changing of the Guard.  Republicans gain enough seats in the Senate last night to now hold a majority.  The market could have gone much higher as the upper line indicates, but it didn't.    None-the-less, the market gapped up on the open.  SPY closed up 1.27 to close at a new all time high of 202.34.

While the market may not yet be exhausted, I certainly am.  I saw that it was up early in pre-market and saw the open, up some 12 points.  This rally has persisted for three weeks now and seeing the same thing, day after day, stocks up, gold getting dumped, it's lost its appeal.  Just downright boring.  My put positions are concentrated in the December 19th expiration with a growing position in the January 16th time frame. 

The chart above includes after hour trading and shows a three day topping formation.  While today's high was higher than the high of three days ago, looking at the daily movements on the standard deviation chart shows divergence.

You can see that today's standard deviation high was just a slight up.  Often this test of the high is just as valid as a price test.  With that in mind, I hold out hope that this might be a top.  Other momentum data shows continuing strength however so I am not so confident that the market will fall tomorrow.

But again, the move is really long-winded but if you look at the standard deviation chart, you can see that the last big move we had, off of the August lows, looks just as persistent.  The wave structure is very similar with a base and then four peaks before falling back.  So let's see what happens.

It took the market about six weeks to fall from the top last time.  If we follow a similar scenario, that would bring us right to the December 18th expiration date. 


If I may steal a chart off of Lara's Elliott Wave page, one thing that she notes is that SPX broke a well established trend line at the 1914 level.  She suggests that this indicates a shift in trend.

Got to think that the market will quickly test this level, which comes in around 1940 now.  If it does break through this trend line, then a test of the lows would be the next stop and then the potential for a range of Fibonacci retracements that could go as low as the 145 SPY level.   My minimum objective is 170.


This to me is sufficient reward potential to stand pat with my put positions.  As I discussed in a previous blog, I really don't feel too comfortable playing the market to go up.  Yes, here are many stimuli into the market, including possibly tomorrow with the ECB weighing in on the equation.  Some expect that the currency wars will continue as Japan went all in with the money printing, causing a dramatic drop in the Yen.  Will the ECB follow suit and attempt to do more stimulus?  Well, I wouldn't be surprised to wake up tomorrow and see the markets up sharply again on ECB stimulus.  It is a broken record here, playing the same track over and over and the market continues to react strongly on any positive word out of any Central Banker's mouth. 

I can't buy into that.  It's not real.  It's computers reading headlines and entering orders, manipulating the prices higher and higher.  There is no intrinsic value here.  It's all air.  Free money buying massive positions.  As we saw last time, there is no risk for these entities to borrow as much money as they can and buy as many risk assets as possible.  Heads they win, tails, they don't lose, they get bailed out.

But since the 2008 crisis, nothing has changed.  In fact, it has gotten worse.  more and more credit in the system.  How can the system stay afloat?  It is truly a Ponzi scheme, continually borrowed money props up the market.  If an entity is close to default, they just borrow more money.  The worst junk on the market now trades as a virtual risk-free asset.  In fact some government securities put out by countries in far worse shape than the US pay lower interest rates than the "risk-free" US Treasuries.

So my money will continue to be on the downside because there is far more profit potential on the down side, in the long run, then on the upside.  At least that is how I perceive things.  This could change, if the system finally gets cleansed.  But for that to happen, we will have to go through lots of pain.

I worked in the financial industry in 2000 and 2008 and the market melt-downs always resulted in my getting laid off.  And the worst thing about it was that I was even calling the market correctly.  So I should have been buying puts then to hedge my income.  The way I see it now, as long as the market continues to rise, I have very good financial security with my professional position.  Should the market again crash, my job security could be in jeopardy.  So quite frankly, I'm not so concerned if I'm wrong right now with my put positions.  I won't be worried even if they expire worthless.  I will keep adding to my position in further expiration dates. 

Should the market again crash hard, I'll be the one shouting out, "Looking good, Billy Ray!"

Saturday, November 1, 2014

Central Banks Distort World Financial Markets

Unbelievable!  In a mere 12 business days, the S&P along with other major markets skyrocketed back to the highs without even taking a breath.

Those who have been following it know that the recent move down to 1820 quickly reversed when a Fed Governor suggested that QE 3 should not be terminated, but extended.  That was in light of the fact that much of the economic news had been played up in a positive light.  None-the-less, that was the signal to go all-in.  I for one couldn't believe it even though my own system hinted that the downside momentum was shifting.

The rally continued to surge, despite the Federal Reserve Bank ending QE 3.  Many thought that the end of the QE would result in market weakness as it has each other time the Fed stopped a stimulus program.  But Nope.  The market kept going up and up and up.

Finally, on Friday, we awoke with the news that Japan's Central Bank is going "all in" on stimulating their economy by buying huge sums of their own government bonds.  Also, they will be buying Exchange Traded funds not only in the Japanese market but also in foreign markets.

Truly, how can anyone believe that stocks have any true value when they are propped up with money that is created liberally, without limits.  For us, money has a cost and the cost is high.  For banks and other financial institutions, the cost of money is virtually free.  They can borrow limitless sums of money and buy stocks, continually pushing up the prices.  Central banks as well can literally create money and buy limitless amounts of stocks. 


It's not only the Central Banks and their army of investment banks that are roiling the markets, we also have to look at what is happening with the computerized High Frequency Trading and other Computer Algo trading.  On Thursday, some Japanese headline (an old one at that) hit the wires and the computers grabbed it with huge buy orders.

Notice the craziness of trading that occurred after 1 pm on Thursday.  A huge e mini S&P futures trade of over 15,000 contracts hit the market in just one second causing the market order system to literally break down.  The markets continued trading even though bid/ask information was not accurate.  No doubt, someone made billions on this SNAFU.  My quote system was down and I was unable to do any trades.  It's a bit scary if you ask me.

We similarly had a "Flash Crash" in May of 2010 when the Dow fell 1,000 points in just a few minutes.  It was at that point that I personally got out of advising people as for sure, this is not a market for us mere mortals.  When it breaks, those who are smiling as the markets continue to soar, will be outraged as their life savings will disappear.

Even for me, I am solidly positioned in the Bearish camp convinced that the risk of a market meltdown are high.  But I have seen time and time again, that those who position themselves right often don't benefit from being right.  Should the market collapse, it would probably close and instead of letting prices fall, no trading would occur and my puts, that could possibly have made me fabulously rich, will probably not be allowed to be closed out profitably, most likely because some banks that did not have actual collateral to sell these instruments to me could not back up their losses. 

It's happened before and it will happen again.  It's hard to see anyone getting out of this intact.  The Bulls will get destroyed but so will the Bears.  How does one protect themselves?  My long term though has always been buy buying physical gold and silver.  You would think that with the continued amounts of fiat currency being created around the globe, that gold and silver would catch a bid.  After all, in India, China, Russia and all across the world, common folks (and rich ones too) are buying massive quantities of gold and silver.  Even here in the US, record numbers of US Gold and Silver Eagle 1 ounce coins have been sold again this year.  The demand is incredible but the price continues to plummet.

It broke though key support levels and is dropping like a rock.  For me, it's a buy.  Many are calling for it to fall even down to the $600 levels but I still recommend buying it on a regular basis.  Silver is even a better value.

In the good old days, the Silver/Gold ratio used to be something around 15 ounces of silver equal 1 ounce of gold.  This is the approximate ratio of silver that is produced for each ounce of gold in the mining process.  But now, the silver gold ratio is 72 ounces of silver to 1 ounce of gold.  And what's more, silver is an important metal in the manufacturing sector.  One would think if the economy was really doing well, silver would be strong along with other industrial metals.  But nope.  Not happening.

If this chart is any indication of the strength of our manufacturing economy, then we are surely in trouble.

Conversely, what is strong is the US Dollar.

This strength is expected to continue for a long time to come, which is good for me, as I spend a lot of time in Mexico where my dollar will be buying more pesos.  Similarly, it will be buying more silver and gold coins and perhaps real estate as well.  It's important to diversify into hard assets if you haven't already done so.


To me it's all quite clear what the eventual outcome will be.  All the Central Banks in the world have been printing massive amounts of money in an attempt to stimulate their economies so that they can have inflation.  Unfortunately, the world may be in a cyclical phenomenon that even the Central Banks can't eliminate.  Here in the US, many are carrying too much debt or into the 2008 cycle carried too much debt, wound up losing their jobs and now either have no credit available to them or no longer chose to use credit.  Many have the luxuries they desire and don't need to frivolous things anymore.  How many large screen tvs can one own?  The only thing that seems to fly off the shelves are the new Smart Phones. 

The younger generation now is coming out of college already saddled with a huge debt burden with limited job opportunities.  The Fed longs for wage growth to signal inflation but corporations continue to consolidate and lay off.   It's hard to see how this is all going to turn around.

Yet the market continues to soar.  The wealthy continue to get wealthier while the middle class gets extinguished.  It is a very scary scenario.

The last thing the economy needs is a stock market melt down and the Federal Reserve will do all that it can to prevent it.  Chances are, they will have to once again do another stimulus program and continue to print more money.  This will go on until the game is over and the true value of the dollar is revealed.  The true value of the dollar of course is derived from the taxing ability of the US Government.  Ummmm, elections on Tuesday?  How will that play out in the markets?

Stay tuned.  Chances are the markets will hold up through Tuesday, election day.  But then what?  If Republicans rule the day, will the markets be spooked?  Will the Fed ever get audited?  So many questions to be answered. 

So while it is not the correct and timely call to make, I myself continue to purchase puts along with gold and silver coins.  Well, I'm always early but I have my convictions and understandings of the current situation.  The great thing about buying the gold and silver is that I never look at my treasure chest and say, um, gold is at $X,XXX today and I have $XXXXX.  No, it's I have X ounces of this, X ounces of that, X of this, etc.  It is a store of wealth, not a productive asset, a store of wealth.

Good luck on your trading and investing.