Bulls Still At The Beach?

I can not find even one reason to be significantly long right now. The only people that I believe are making money in this market are those that are adept at shorting, and those that are successful at trading volatility.

I mean really, why be long, right now? Every where one looks, there is uncertainty. And I'm not talking about the kind of uncertainty that allows one to look beyond it. There are just some events which have to take place before the uncertainty can be discounted. The market is dying to see some pricing of the CDOs. Everyone wants to know how badly Goldman and Bear are going to be hit. More GDP readings would not hurt, either.

If dozens of weather people said they saw a large category 5 hurricane predicted to head towards your town, yet it was still months away, what would you do? Would you put a new roof on your house now? Would you schedule a vacation during the projected arrival? Would you spend your life savings on plywood and screws? Probably not. You would likely just keep your eyes on the news, and develop plans for multiple scenarios.

I think that is what it makes sense to do here. Undoubtably, going to 100% cash is probably hard for traders and investors. No matter how bad things get, it is very difficult to not keep dipping one's toes in the pool, testing the waters. And if you are not under-capitalized, and you are able to take quick losses, it is probaby okay to keep testing these waters.

For the contrarians, I have picked up the 2nd Edition of Irrational Exuberance. The fact that I'm reading this most definitive bear story might mean we are near a bottom. Nonetheless, the 2nd edition is updated to cover the housing boom (bubble), and I'm finding that section to be rather frightening, but thought provoking.



As for the Nasdaq, the bulls were unable to push the index to the 50 day average. That is very weak. For now, the downtrend is still intact. While volume has been slight, it can not be ignored. While normally, light volume would be the statistical equivalent of a small sample size, in this instance, I feel it means that more traders are choosing to sit on their hands, rather than trade. Looking at it in those terms, the large sample is choosing not to participate. This is probably what everyone should be doing. It is not as if the market is just going to come roaring back, with all the uncertainty mentioned above.

If one is able to trade regularly, this correction has been extremely tradeable with a swing trading style, by using the QLD, QID, and corresponding Dow and Spy inverse ETFs. It simply takes patience, discipline to enter positions near trendlines, and a willingness to take small profits, and smaller losses.

Today, my stop hit on my QLD position, taking me out above $91.00, for a very small (<$50.00) loss. I still have a very small position in ANAD, which, incidentally did see the volatility I was expecting (except in the wrong direction). Of course, I'm still long MVIS.

Updates to Blogroll

I'm adding Sierra Mountain Investor, The dk Report, and TSX Trends to my blogroll.

I encourage you to visit them, if you do not already.

I am especially impressed with the recent analysis of market action by DK. Sierra has a great grasp on the real estate market, and TSX is interesting to me because of the mechanical systems testing.

Weekend Update

I apologize for not keeping the blog updated lately. Its the same old story: work, work, work. I've had some major projects at work, and they have been making it very hard to get any time online, let alone make trades. Also, last week I was working 14 hour days, making it near impossible to do any research in the evenings. I have one more project to wrap up, and then things should get back to normal.

As for last week's trading, after the CFC trade, which ended with me selling it at the close before the BAC news was announced, I picked up another 50 shares of QLD. I now have a roughly 9% weighting in that position. Since I do not have time right now to really research anything, I'm sticking primarily with the index trades. However, I did pick up 200 shares of ANAD on Friday, simply because the stock looks ripe to become more volatile.

For The Chart Chompers: MVIS

I have realized that this blog has not had enough charts featured lately.

Lets take a quick look at MVIS.

First of all, the stock has held up remarkably well in the downturn. I feel the key point is the volume, or lack of it. It seems the sellers have dried up. If the stock stays at this level for a few more days, a volatility squeeze will be in order.

Another way to look at this is the descending triangle. Typically, these are bearish patterns. However, I think a case could also be made for a bull flag. It all depends on where you want to draw your lines...Ah...the beauty of technical analysis.

Anyway, both the RSI and the MACD are showing signs of a bottom, even though the price is not. I'm going to go out on a limb here, and predict that, due to the lack of sellers and the volume drying up entirely, that news is expected very soon, perhaps within days.

Let me temper that prediction with some rational discourse and state that should support at $4.50 be broken, MVIS could see the 4.20s very quickly, much as I dreamed about the other night. However, I would think that if the sellers wanted to take it there, that they could have easily the last few days. Thus, I'm sticking with news coming, soon.

Evening Wrap Up

T0day I had the chance to trade a little. I bought 300 CFC, 100 shares at a time, to average around $20.50. I wish I would have bought more. I unloaded 200 shares around 21.60s, and then bought another 100 shares @ 21.83. I'm going long 200 shares into the morning. It is definitely a gamble due to headline risk, but one I'm willing to take as I feel there will likely be more short covering.

I also picked up 50 shares of QLD @ $89.66. A nibble, if that.

With the Dow and Comp trading above their 200 day moving average, and the SPY still beneath it, things are still very sketchy. I still do not want to be significantly long anything overnight.

Also, I'm starting to see some good shorts develop, such as GES and ODFL.

I was reminded about BEXP, my hurricane play. I sold it all Monday a.m. in the pre-market @ $4.55 for a small loss.

I Had a Dream

So I dreamt last night that MVIS traded in the 4.30s today. It was probably because the last thing I looked at before sleeping was the MVIS chart. We'll see if it comes to fruition.

Yesterday I was out of the office all day, and did not make any trades or get to watch any of the action. I'm still in 80% cash with MVIS being my only holding.

***10:30 Update***

I just took small positions in QLD and CFC. I will update Stockalicious with prices as a get time.

You Do The Math

Over at Money Skater's blog, in the comment section (link here), a blogger posted his trading record. I have cut and repasted the record below.

Total trades.......123
Wins...............123
Losses.............0
% Return on Capital 26.2%
From 20 July 2007

This record provoked doubt in the minds of the blog readers. The probability of such a string of trades was questioned. The blogger responded, "Mathmatically [sic.] impossible you say, not at all..."

Since the mathematical likelihood of such a string of trades was briefly addressed and promptly dismissed, I decided that it might be illuminating to examine the probability of making, in a row, 123 winning trades.

First, we must assign a probability for a trade being a winner or a loser. My own trading record shows that 4 out of 10 of my trades are winners (40%). A record of 70% winners would make an outstanding track record for the majority of traders (assuming the 30% losers were not greater than the winners). For the purposes of illustrating the mathematical improbability of 123 winning trades with no losers, I will give this blogger/trader a generous likelihood of success by assigning a 95% probability that every trade he makes is a winning trade.

Be sure to understand what this means. I am saying that with every trade he makes, there is a 95% chance that he will win. This is clearly improbable, especially when considering that we are going to let him make 123 trades in 21 days.

Now to the mathematics: Below I will list the probability of a string of 123 winners with no losers, based on decreasing winning percentages.

Winners _________Probability of 123 in a row
95% _________________.173%
90% ________________0.0002118708%
80% ________________0.0000000001%

As the number of winners is decreased, we quickly see the improbability of making 123 winning trades in a row. For the purposes of argument, lets assume this trader's system generates 99% winners. Still, the likelihood of him having 123 winners in a row is only 28.76%.

Still, I feel there is more to this story. This blogger did post the results of his paper trades, on his own blog, in May. The following is what he posted:

Total Trades…………………………..11
Wins…………………………………….8
Losses………………………………….3
Win%…………………………………..62.5%

Lets take his winning percentage of 62.5% and calculate the probability of a string of winning trades with 62.5% winners.

Winners In A Row__________Probability
5 _____________________5.96%
10_____________________0.568%
20_____________________0.0052%
30_____________________0.000047%
40_____________________0.00000043%

Obviously, the results show that it is absurd to go any further with these calculations.

Another element of this record, not before questioned, is why was it not posted on this trader's own blog? It seems to me that if one experiences such a phenomenal success, it would be posted on his own domain, rather than in the comments section on another blog. Furthermore, the fact that this blogger has never divulged a strategy, or even posted a single actual trade, in my opinion, casts doubt on this record.

What can we take away from this discussion? The most important take-away is that every trader can calculate the probability of experiencing a string of losers. For example, since I have 60% losers, there is a 1% probability that I will have 8 losers in a row. If I'm betting large on every trade, I need to know what my likelihood is for a series of losers. However, it is also important that traders understand the Gambler's Fallacy when seeking to use probabilities to increase their profits and decrease the likelihood of a blow-up.

Update: Our blogger/trader has updated the comments section to state that his practice of arbitrage is 100% risk free. Certainly, true arb is risk free. I'll leave it up to the intelligence of the readers to determine whether or not they believe that 123 trades, even with 99% win rate, can be executed without a single loss. Probability at 99% win rate is 28.76%.

Fed Cuts Discount Rate

Fed Cuts Discount Rate

Wow, holding GS and QLD overnight turned out to be profitable after all. As I type this GS up almost 10 points from my purchase price.

***Update*** Just sold half my GS in the pre-market @ $177.89 When the market gods give me almost 9 points overnight, I have to take some of it back. I'll let the rest ride a bit today, and see what happens.

***Afternoon Update*** Sold my other half of GS @ $174.23 and my QLD @ $86.35

I also bought another 250 of BEXP @ $4.60

At the close, I added another 500 BEXP @ 4.64

This Looks Like Panic To Me

Picked up 100 GS @ $160.86 and 100 QLD @ $83.15

Wow. That was quick. Stopped out on both QLD @ 81.75 and GS @ 158.09.

***Update*** That really hurts. Those stop outs had me miss a 10 point move in GS and a 3 point move in QLD. Ouch.

***Update*** Well I got back in the office to find the indexes trying to go green. I jumped back in GS 100 @ $169.17 and QLD 100 @ $84.97.

I'm holding both of them overnight. I'm about ready to throttle myself for setting my damn stops so tight on the earlier trades.

I'm expecting a bounce here. Nothing more. I think, as I've said for two weeks now, that this type of sell-off is not going to V-bottom back into new 52 weeks highs. There is likely more downside, and at the very least, consolidation, before any kind of sustained move upward. The fact that I didn't short this down on the last bounce has really pissed me off, as that was what I had planned to do, and didn't. I'm going to try and catch a bounce here or sacrifice another 500 bucks or so trying.

Hurricanes and Bounces

Yesterday I picked up 500 BEXP for a Dean Hurricane play.

This morning I bought 500 SWHC @ 18.00. I'm looking for a quick bounce from 20 day support. There is a tight stop under both.

***Update*** Added 250 BEXP @ 4.6775

***Update*** Sold 500 SWHC @ 18.08. I've got a meeting at 3:00 (right now) and don't want to stay long over night.

MVIS Institutional Holdings Decrease in Q2

Today is 45 days after the end of Q2. If the Nasdaq site is up-to-date, the above graphic should accurately represent institutional activity for MVIS in Q207. The Nasdaq site shows the breakdown.

I was wrong when I commented on another blogger's site that institutional activity would show an increase in holdings.

The graphic is posted in two parts, meaning you will have to click the upper and lower parts separately to enlarge them.

I Think This Guy Is Going To Get Spanked

August 10, 2007

Dear Valued Client:

Panicky investors are continuing to make mountains out of molehills. Even though risky sub-prime mortgages are a small part of the total mortgage market, this "sub-prime mortgage market meltdown" is having a big impact - way too big an impact - on overall markets. As the Federal Reserve (the Fed) noted in their Monetary Policy Report to Congress on July 18, the riskiest mortgages - sub-prime variable rate mortgages - are about 9% of mortgages outstanding, and they have adelinquency rate that had risen to about 12%. Mind you, not a default rate of 12%, just 12% behind on payments. The delinquency rate on subprime fixed rate mortgages was steady at about 5%, while prime rate mortgage delinquency rate was steady at about 1%. Sorry to drag you through the numbers, but as I see it, it adds up to a molehill. And, suppose the numbers do double. The delinquency and default rates would still be below historical highs, so maybe we get foothills.

I look at this senseless, indiscriminate selling as a smallish problem relative to the great big, generally stable, credit market. True, some dumb and/or greedy mortgage lenders, hedge fund managers, hedge fund investors, and lenders to hedge funds are getting spanked for their actions, but that is what our financial systemis designed to do - discipline excessive risk taking. And some other parts of the credit market are less liquid, as traders mill around trying to figure out what the precisely right price for a bond should be. Meanwhile, the Fed is doing its job -injecting reserves into credit markets to hold the overnight bank lending rate at the target of 5.25%. They adjust reserves every day; they've just used bigger numbers the last couple of days.

To reiterate. I think economic and company fundamentals are strong. We just completed an excellent quarter for economic growth and company earnings and I am confident that the third quarter will show similar results. Company balance sheets are robust and interest rates remain low. Consequently, I am equally confident that this downdraft in the equity markets will pass. It is precisely this kind of market turmoil that makes the case for a well-diversified portfolio that avoids excessive risks associated with big bets on exotic, highly risky securities. As always, please call your financial advisor with any questions or concerns.

Sincerely, Lincoln Anderson
Managing Director, Chief Investment Officer, Chief Economist
Linsco/Private Ledger
Member NASD/SIPC

Good Morning World

Good Lord, everywhere I turn there is a national media outlet doing stories on the sub-prime mortgage and credit crunch. When I start to hear National Public Radio, the Glenn Beck show, and the early morning T.V. news stations airing bits which are ultimately more complicated than their average viewer can comprehend, I begin to wonder, is this a bottom? Or is something much worse in store for us?

I still think there is more downside left. I feel this way because of all the media attention. Likely, Joe Chucklehead is beginning to catch-on that something is happening (but you don't know what it is. Do you, Mr. Jones?). I think that the public, whether they are retail investors or mutual fund owning 401Kers, need to panic a bit, and do some capitulating.

Also, everyone is waiting for the other shoe to drop. Who is willing to go 100% long until we see some honest reporting from the major financial institutions? Personally, seeing a major bankruptcy / blow-up will make me start wanting to put more money to work. Bottom line: investors need to see the worst-case scenario. Once our greatest fears are realized, then we can move forward.

Called In Sick

I need to take care of some stuff at home today. Later on, a nap will be in order.

Meanwhile I'm attempting to daytrade ALVR. I'm in 1K @ $11.54

***Update*** Closed out the trade for a small loss, selling 1K @ $11.43

Being Wrong Never Felt So Right

Read it over at Fly's place.

Good Morning World

I dumped ALGN on the open, incurring a small loss. It just does not make sense to be long here, until we get a clearer picture.

I will continue to hold MVIS.

Beulah the Market Hag

Can anyone identify the 5 Fat Girls candlestick formation?

Why not just go for a 10% percent correction?

What really scares me is that the fundamental credit crunch may over-ride the technicals, even after falling 10%. However, it seems likely the asshole dip buyer will at least make a showing at that level. We'll just have to see how many more Countrywides out their skeletons.

Nibbling On Select Stocks

Nothing major.

I bought 100 shares of ALGN. I've been doing some DD on them the past week, and I like what I see. I also like the charts. I will add to this when appropriate.

I should mention that my strategy of selling the first bounce would have been profitable. However, due to numerous factors, some of which have nothing to do with trading, sentiment, market psychology, etc., I did not follow through.

***Update*** Bought another 100 shares of ALGN @ $26.99

Great Day for Longs

As I noted earlier, I was unfortunately not able to really watch any of the action today, or trade. I was stuck on some crappy DOD computer with an old 15 inch CRT that made my eyes go dizzy. From there, I was able to check Yahoo, and could see the action in the indexes. However, if I tried to blog, or send comments, check email, etc., the network security would not allow it. Believe me when I tell you that there is nothing worse than listening to a bunch of government losers telling you stuff that you don't give a rat's ass about, while getting streaming quotes (15 mins delayed) through Yahoo, all the while knowing the markets are splitting the fricking skulls of the short-sellers.

After reviewing today's action, I think my plan needs modification. Specifically, this market still looks very unprofitable for a short-seller. For whatever reason, it seems to want to go higher. Sub-prime and credit crunch be damned. However, my inaction as of late, while it has allowed me to get a great deal of work done and meet some deadlines and not lose too much while the market dropped, has cost me some $$$ in terms of opportunity. Had I stayed with my winners (SWHC, ALVR), and just dumped losers, I would be a few percentage points higher for the year. Note to self: in times of market weakness, dump losers, but consider giving winners a wider berth.

My plan was to get short on the first bounce. Well the first bounce is here. Looking at the strength of the bounce, I'm not sure that getting short is a good plan. It is beginning to make more sense to me to wait for a pullback, and then get long. The question that I will be seeking an answer to is whether it makes more sense to buy potential breakouts, or to buy good stocks that have been beaten down during this correction. What say ye, readers o' this blog, on this matter?

On a side note, my 401-K is signed up for automatic portfolio rebalancing. Typically I catch it before it does it automatically, and I choose what funds I want to sell or buy. Well it rebalanced without me, and it looks like that mother humper sold some of my 3 index funds (S&P, Nas, and Dow) at the absolute bottom and moved the money over into bonds. What the hell?

Update: After reviewing charts and noticing the Nasdaq stopping its advance at the 50 day average, it looks as if there might yet be many shorts out there ready to play for more downside and longs who are selling into the strength. As much as I want to get back to trading, sitting on my hands until there is a clear picture (will there ever be?) is probably wise, although right now it really sucks.

Its Good To Be Back Home

Well Fly is back from vacation, so I am back home at Trade While Working.

Today I have a meeting out-of-town and will be away from the computer and the markets until this evening. I know it must always be coincidence, but I always feel like the days when I'm not able to watch the markets are days that could be pivotal. For example, I'm very curious to see whether the market extends its bounce, or fails. I would really like to pick up some QID if it fails. Alas, I will not be able to.

Anyway, look for this blog to get back to business as usual, soon.

Blogging In Flydom

For the weekend, and the first few days of next week, most of my posts will be up over at Fly On Wallstreet. Even the Fly has to take a vacation once in a while.

I will continue to journal my trades at this Trade While Working, but my market commentary and any other sort of ruminations will probably be posted over there, until he returns from vacation.

Good Morning World

Another busy day at work; another volatile day in the markets. This means that today will be another day that I will likely not trade anything.

If you follow trends, the short term trend is still down. However, a bounce from oversold levels is to be expected. I still expect the bounce to get sold, and that's how I will play this until something changes.

Here is a really funny read on the Plunge Protection Team.

Also, Bill Rempel has published an excellent article showing what can happen after the S&P has a 4.5% down week:

What Usually Happens after Big Down Weeks.

***Update*** I just sold my 1K @ $5.00 of MVIS that I purchased yesterday. This was a quick traded netting around $260.00 There was 50K sitting on the ask at $5.00, and I decided to take my money and run, which puts my MVIS position back at just less than 1/4 of my capital.

***Update*** On the odd morning that I don't check the news, I missed this- Coverage initiated on Microvision by Merriman Curhan Ford

Looks like I sold into the coverage.

Morning Update

I bought 100 more QID @ $46.01

Just a few minutes ago, I sold all 300 shares @ $47.08, banking about $400.00 bucks. The market is putting up some resistance at these levels. Depending on the rest of the day's action, I may buy the QID back.

On a side note, MVIS is punishing me. ARgggggg

***Update*** Added 1K shares of MVIS @ $4.73 I don't know why the heck this is selling off so much. I do know that there is a bright future ahead, and I want to be long for it.