THREE THINGS I THINK I THINK
10 March 2010 by Cullen Roche
46 Comments
- There’s an old saying that the dumb money transacts in the AM and the smart transacts in the PM. Are these morning rallies we keep seeing a case of the little guy jumping into the rally late or is this old saying meaningless?
- Am I a fool for being net short at a time when all of the big banks have a target of 1200+ on the S&P and remain powerful drivers of equity prices?
- The VIX continues to tick higher little by little on up days for the market. Is this a sign that the smart money is starting to pay up for protection as equities melt higher? Or is the prolonged downtrend in the VIX here to stay?
gold, oil and copper sure are trading heavy up here. i’ve also noticed the VIX rising the past few days. i don’t have the info available, but i’d be curious to see the put skew now compared with the put skew in early january. that can be more telling than the level of at the money vol.
The smart money is definitely starting to step aside here.
Great article here on the VIX. We saw the same thing happen in January when the smart money started to bail. Risk is VERY high here:
http://www.ashraflaidi.com/articles/s-p500-vix-ratio-usd-libor.asp
Thks. Very interesting.
yeah, its a good article. hes worth following.
“Am I a fool for being net short at a time when all of the big banks have a target of 1200+ on the S&P and remain powerful drivers of equity prices?”
fool no, wrong yes.
you dont have to be a zero hedge conspiracy theorist about this, thinking the banks are walking things up; it just seems apparent to me that equities are working here. big relief rally last year, a long pause from last year to recently, and now we are off to higher prices again. you seem to be fighting the tend, not to mention the fed. (i NEVER fight the fed).
here is the ? i would put to you. you have said that 1q numbers will be good. they start reporting in a month. that should give stocks a boost and make analysts push up their numbers for the rest of the year (whether you like it or not). so i see a net short now as a bet that there will be no catalysts for the next month. i don’t like that bet. your piece on doll is exactly what i see for the next month. there are some pretty heavy duty adults calling for a bullish 2010, eg biggs, now doll, soon to be others imo. so while i disagree with your thesis that the second half of 2010 is going to be challenged, even if i were to agree with it, i wouldn’t make your bet. just trying to see the world through your eyes, and i wouldn’t make that bet.
could things go wrong? damn straight. the fed could change their language next week. if they do, the scream you hear will be me. but net short now? the delta slope (or first derivative if i was like gaius and liked calculus) is pointing up.
You sound like the typical small investor. “buy because it’s sloping up”. lol!
i pointed out the trend mostly because only about two-thirds of the investment world follows momentum investing or uses technical indicators, which are heavily influenced by trends.
i just try to compare price and value, and with a 350bp spread between 6 month tbills and 10 year treasuries, it just seems to me that you have to be long, and overweighted financials, if you have any understanding of historical investment returns.
so fold it five ways fxbothead.
I am a forex trader, but i understand the equity markets. i dont know how anyone can feel comfortable here with a potential double top forming in the SP’s on the back of such a huge move. you are buying into the rally at its very riskiest point. IMO.
ive been in and out since jan 09, so i am not buying in here, bot. i have plenty of house money, but i keep on raising my stops because i like my house money.
i am not trading the S&P, rather i am long and leveraged to financials because of the yield curve and the fed stance. financials have outperformed the S&P significantly. it is not how is the market, it is how is your portfolio, yaknow?
but i am short the pound. what do you think?
Jim Cramer is pounding the table on the banks right now. Did you get this trade from him?
If you are relying on men like Bob Doll and Barton Biggs for your investment advice then I sincerely question your skill, expertise and experience as an investor. They have been bullish for 99% of their adult lives.
“If you are relying on men like Bob Doll and Barton Biggs for your investment advice then I sincerely question your skill, expertise and experience as an investor.”
read and think for once.
my post talks about these guys as respected eminence grises (which they are) who support a bullish view (which they do). i said in the post that you are running the risk that until 1Q #s come rolling in (which you think will be good, mind you) the market will be increasingly influenced by these (and more to come imo) respected veterans (which they are irrespective of your view).
why you would take this risk/return over the next month, thinking as you do that 1 Q will be good) is beyond me; you are beginning to sound to me like just a short suffering from PTSS. i did not say i look to them for advice.
you are looking at red numbers on your screen and you are not thinking straight. that alone should be enough to tell you to get out of your losing short.
“read and think for once.”
This is a blog Chris. It is my thoughts. You are the one that reads. There aren’t 1 million people coming here every month because I am some shill who doesn’t know his ass from his elbow.
If you want to start your own website that includes a real-time record of calling the equity crash, the housing crash, the earnings crash, the March 8th bottom, the government run rally, the earnings rallies, the China bottom, etc then be my guest.
I have a substantial background in financial theory and portfolio management. My portfolios are up over 100% over the last 5 years during a time when the S&P is negative. I am running a Sharpe ratio north of 2 and a Sortino north of 2.5. Do not ever lecture me on risk management unless you can post your real results and risk adjusted returns.
Until then, you are just some guy who came here a few days ago and started bragging about how you called the bottom in the banks. The market is up 2% since then and you are talking to other readers like you struck oil.
Your tone, quite frankly, is obnoxious and that’s saying a lot because I rarely get irritated with any user of the site.
you just put on a stupid risk/reward short and you ask for feedback. i give you my thoughts, you disagree with them, and you lecture me with a stupid comment dissing biggs and doll rather than deal with my analysis.
you dont believe my returns, why would i believe your returns.
you should be thanking me for increasing your pages views…so you can sell more day trader ads.
block me if you want since as you say this is your blog. if i am going to read your posts and they dont make sense to me, i will tell you what i think, not cheerlead like 99% of the other posters here. apologies to gaius.
I’m a nice guy Chris. I’m not going to ban you. But you’re irritating other readers and I have to deal with their emails coming to me complaining about you. And then I have to waste half my day explaining to you why you need to stop bragging about your 2% S&P gain and telling other people how to invest when you clearly don’t know nearly as much as you think.
I’m done policing you and wasting half my day in the comments section. I don’t have time for this shit so if you can please just tone it down and stop irritating other users then there will never be a need to ban you.
Is Jim Cramer calling himself “chris” now?
Heads up on a new contrarian indicator turning down, suggesting massive financial selloff, see: chris.
(Rest assured TPC, this guy is about as sharp as a marble.)
doesnt seem to be much room for error here TPC. if first quarter earnings are good as you suspect then the market will likely stay up into earnings. no one is going to sell into earnings when we all know the analysts estimates are too low.
If I had to bet, I would say Chris makes most of his transactions in the AM…
loser
Who the hell do you think you are? You have been commenting on this site for what? A few weeks and you come here and lecture the author and its users how to invest?
I hope this market plummets just so you can eat crow.
not the cheerleading type i guess.
you are the definition of a long cheerleader. its all you do!
I’m net short as well and I think I started to build the position earlier than you. May be we’ll be wrong -not fool- From my experience these kind of positions are more often wrong than not, but when they work they usually are highly rewarding. My feeling is that the rebound we’re having from the recent low is corrective and we should be building a top somewhere around the current levels to retest at least the 1040 area. If not I’ll book a reasonable loss and rethink.
TPC I am still short the RUSSEL 2000. I am amazed, really. However, I only add small positions each time so I am not all in or anything. However, let me say this, the Russel did break out of its channel which may mean it goes higher from here (it is basically a straight line and has been down like once in 20 days) or it fails. Sentiment is definitely now changing drastically. If we gap up yet again tomorrow I may contemplate covering and short higher later. It is purely insane how overbought things are getting. Jobs claims tomorrow will prove to be hard for the markets to gap up in my opinion considering if jobs claims are bad, then that means things are recovering very slowly and if they are great then tightening fears may take hold. All I know is there will be a big tumble and it will be fast and furious very soon. It will be funny and amazing as it always is seeing how sentiment changes so furiously in response.
VIX has to be viewed in the context of it’s long term historical range, not just the recent range, recent being defined as the last couple of years relative to say the last 20 years – vix traded in a range of 10-20 throughout the 90′s. So what is the appropriate range for vix? It is currently below it’s very long term (monthly) moving average with the ma also pointing down. Does this indicate a long term period of lower volatility which presumably would indicate gently rising markets. Thinking we are in a secular bear, as has seemingly become close to consensus, does not mean we are in a secular bear and even if we are, cyclical bulls within secular bears can last several years. It’s hard to be short against the trend.
Let us not discount the fact that the VIX “long-term” historical range just happens to cover what was likely the greatest secular bull market (and likewise optimistic period for investor sentiment) ever experienced in human history.
I say that, if one desires to put timing aside, simply going long the VIX at its current levels is a very attractive trade, and will likely be proven so throughout the year.
short case:
1)overbought, technical extreme.
2)policy can only go tighter or keep as it is. Especially after the meetings in China end this weekend.
3)everyone know Q1 will “beat expectation” , but this game did not work well in Q3 and Q4.
But,
1)overbought, technical extreme could easily be solved by sideway or 1-2days small drop.
2)market tone is so positive, even very rare in the weird past 12 months rally. Any bad news could be interpret as good, and good news interpreted as very good.
3) Seems people start to build short around S&P 1400, but without big volume to sell, small volume can easily push it over 1500, and short cover will continue to push to higher.
possible result: like Sep-Oct and Nov to 2010/Jan, stock will move marginally high and sell on news will start at the beginning of Q1(after banks report Q1).
possible strategy: 1)not chase the rally 2)not cover short if just short around 1140, 3) gradually add short position when Q1 approach.
Great thoughts as always TPC. I think you’re betting against the big banks though. They’ll sell the rally around 1190 S&P.
How do you know they aren’t selling now and it is the retailers buying for a quick trade to 1200?
Wow, one of the more (most?) interesting comment threads I’ve ever seen/read here! Maybe that’s a function of how much the market seems to be confusing everybody on both sides of the tape! Inevitability of the unsustainability of what we’ve witnessed since Mar 09 yet the irrisistable pull of that drunken elixir we call liquidity!!
For what it’s worth (probably very little), my general thought is that markets must go up if they have no reason to go down. I’m trying to figure out what that reason is, even at SPX 1,150. We just weathered two rather significantly negative catalysts (Greece, China tightening) and have the luxury of looking forward to better than expected earnings through 2Q10. My thought is that pure, good-old earnings/guidance warnings are the only thing that can derail this train now.
With all this being said, I’d prefer not to be the asshole who gets caught trying to snag the last 5%-10% given history, which suggests at least 25% downside within the next year (though that’s the average cyclical pull-back, initial pull-backs post generational declines are usually 10% larger).
One of my favorite charts is the marginal propensity of each new dollar of debt’s ability to create an incremental dollar of GDP. Our current placemnt within the context of the historical trend shows you how sustainable this whole “reinflation” process is.
“And then I have to waste half my day explaining to you why you need to stop bragging about your 2% S&P gain”
you want me tone things down, i will tone things down. it’s your show, but i wont refrain from pointing out posts you make that are misleading attempts to talk your book. see http://pragcap.com/the-ads-business-conditions-index-rolls-over
as for the 2% S&P gain for the year, you are needling me again. i have mentioned that i don’t invest in the market, i invest in what i consider a smart portfolio…which i think is overweight financials.
i have a proposition for you tpc: let’s you and me set a $100,000 portfolio tomorrow, keep it for one month, and see who has the better return. real simple, your best ideas against mine for the next month. we publish it by the end of the day tomorrow and we look at return 4/11. no trading allowed, as i think that gets cumbersome. if you beat me, big tip of the hat to you. if i beat you, you will have some excuse no doubt.
you game?
I’m your huckleberry.
Since you’re on my turf I am going to set the rules. I am long a portfolio of VIX (you can track this on stockcharts.com via $VIX) and short the Russell (tracked via IWM). You are the inverse. The VIX closed at 18.57 today and IWM at 67.55.
This doesn’t accurately reflect my portfolio, nor does it accurately reflect any great talent of mine or yours, but you seem to think it will prove something. Either way, this will be fun. Maybe it will make you feel smart since you don’t really understand how “cash on the sidelines” works or how the Volatility Index works.
The rules:
I can sell (and cover) at any point in the next 30 days. But my portfolio has to be up at least 3% in order to do so (36% annualized – not bad). If I lose I’ll eat crow, congratulate you and you can continue to annoy everyone on the site with your childish comments. If you lose I am going to ban you forever from the site. And….GAME ON!
that was way too slick.
identify your portfolio to all on the site clearly in name and dollar terms so that it can be tracked with transparency. what are you afraid of? i will do the same. you should open it up to any and all comers. we need to agree on a total portfolio dollar amount for comparability purposes, no?
if you want to have a one time cover, you have to announce it in real time.
if you lose you can pass on the crow…that is so junior high.
I am not going to spend all the time I do on this site preaching risk management and then set up some short-term game for you to entertain yourself with and then lose to someone who doesn’t understand how “cash on the sidelines” works because you juiced your portfolio with a bunch of high beta stocks (we all know your portfolio will be a bunch of banks). That’s just pure BS and tells us nothing about your investing skill. It will just prove you got lucky on a directional bet and have no risk management skills.
The bet is as I set it. It’s a purely bull vs. bear directional bet. It’s more than fair. Game on Chris.
play with yourself; as you say this is your site. i am sure if you play with yourself, you will win.
as for your claim of high beta bets, this is actually an interesting point. you do risk management at a macro level. i do risk management at a micro level. i think you have to get the direction right, then place your protection. i am still not sure what you do.
you are the one backing out; i offered a two man contest. you are backing out by doing it solo. as usual, you say one thing and do another. you must have been a broker in the past.
I like how you keep making personal jabs as if I did something horrible to you. It says a lot about the kind of person you are. Oh well….
This is a fair directional bet. I know how stock picking contests work. The monkey with the highest beta portfolio wins. It tells us nothing.
You are bullish. I am bearish. So we make a directional bet with a mildly complex instrument.
Good luck Chris.
hey chris…start your own blog and we’ll let the market decide how your genius ideas work out, maybe somebody will comment on it and point out your shortcommings….maybe…
damn fat fingers… shortcomings
You’re not a fool to be net Short, though only time will prove if you’re wrong. Personally, I’m pretty much there with you…but chris is right on about momentum/resilience/technicals/etc…which is why I think it’ll be even more about execution (rather than opinion) than it normally is.
There’s clearly been some fraying at the edges in terms of the data/market movements, including:
- Commodities haven’t rallied much in the bounce (though we’ll see what impact the overnight news from China has)
- Economic Indicators (ECRI, ADS, etc) seem to be topping out/falling again.
- The AM/PM divergence you mentioned
- Earnings: As has been mentioned before, estimates for 2010 are all back-end loaded (based on V-assumptions)…at some point it becomes “Show me”
- Liquidity: The various FED liquidity programs are slowly rolling off. To my mind, they were one of the largest drivers of asset prices in the last 12months, lets see how the market does without the stabilizers.
Like some of you guys I too am net short and I might add I’m taking a couple body blows in the process. Obviously Chris is net long. he’s made that very clear and at the moment the price action is clearly on his side. Can’t argue that – it is what it is. Who is going to be right when the music stops? I guess we’ll know in the fullness of time.
TPC, what’s up brother? I’m away for a week and things get crazy.
I am with you all the way here buddy.
Things are good prescient. Hope you got healthy time away.
Just a new reader who takes all of my negative articles personally and conveniently ignores the bullish ones. I should have just banned him a week ago, but in an attempt to be nice I gave him a few warnings. I’ve wasted two days fielding emails from other readers and moderating this stupid comment section.
I’m about on my last nerve with it. This is not why I started the site. And quite frankly I don’t have the time in my day to deal with some permabulls BS.
TPC or informed reader,
Could someone please tell me:
The GSEs guarantee their own MBS. Do the GSEs guarantee private-label MBS?
And if so, how does that work? Does the SPV or underwriter pay a guarantee fee to Fannie/Freddie, and then they sell their private-label MBS with the GSE guarantee?
Or does the buyer of a private-label MBS pay a guarantee fee to Fannie/Freddie for a guarantee on their investment?
The reason I ask is I am trying to understand the results/consequences of the GSEs buying delinquent whole loans.
Okay, so GSEs are buying these loans because they have guaranteed the MBS they are pooled in, and so have to pay interest income to investors even when they cannot collect on the loans. Right?
And Bernanke likes this because the belief is investors will get back their large outlay, and will reinvest somewhere else right? And there’s a large argument about whether Fannie/Freddie making investors whole sooner rather than later will supplant the Fed’s expiring MBS purchase program right?
Okay, okay. So why is it that Invesco adjusted its portfolio, selling GSE MBS and buying private-label MBS?
http://www.housingwire.com/2010/02/18/fannie-freddie-predictions-boost-invesco-10-5m-earnings/
What’s the thought process here? Does Fannie and Freddie guarantee private-label MBS, and will focus their delinquent whole loan purchases in those pools (especially because private-label is more toxic than GSE MBS and so they are losing money faster with the PLS)?
What does this mean for private-label MBS that sits on the books of banks? They were able to get rid of agency MBS through the Fed MBS purchase program right? The PPIP was supposed to get rid of the private-label stuff? But it didn’t much get off the ground?
Is the govt. using or can the govt. use Fannie/Freddie to… if not remove toxic private-label MBS from bank balance sheets, at least reduce the toxicity of those private-label MBS by buying out the delinquent loans contained within?
Apologies if some of these questions are basic or entirely off the mark. I don’t have a background in anything finance related, and am just trying to get my head around new things I learn / attempt to learn everyday.
TPC – As your site increases traffic, more chris type characters will appear. I am shocked you have spent this much time interacting with him. Ignore him and he will move on to another site in attempt to get the attention he is seeking.
De,
You’re 100% correct. I am not a website moderator nor do I have the time to be. I am light years behind on my work this week because of Chris….Quite frankly, it’s embarrassing that I even interacted with him. I don’t know why I thought my site might be different, but it’s obviously not. I just don’t want to have to ban people, but Chris is persistently obnoxious and I need to realize there are going to be lots of Chris’s out there. The trials and tribulations of starting a website for the first time….Live and learn. Thanks for the comment.
Best,
TPC
AS with most elements of this rally the past year (vol, vix, etc.) the patterns we’ve seen haven’t matched conventional wisdom. While the VIX appears to be struggling to make a new low while the market climbs higher, a look back actually shows that the VIX has done this before and while there were short periods of sell offs the market continued to move higher. Perhaps the most notable is the period from July through Sept where the VIX would not fall belolw 22 while the SP surged ahead some 50-60 points. Again in Sept-Oct the market rallied ahead while the VIX bounced around 22. Oct to Nov and through Jan was different where the VIX registered a new low. This rally has similar elements to the July ’09 white swan rally given the angle, the volatility (or lack thereof) and persistence and perhaps the VIX is behaving similarly. At any rate, I’ve come to believe that selling short is fighting the Fed. And that’s not to say shorts from around 1145 won’t work out at some point this year it’s a question of what happens in between. Fighting the trend esp this trend has left so many by the wayside, I’ve just decided that it’s better to let some momentum in that direction develop first rather than sell into strength. Every one can see we’re at a potential double top just like everyone could see the head and shoulders developing last July. We know what happened after that. Maybe this time it will be different.