Market Monkey

September 14th

Every now and again the market goes a little bit loco.  This week qualifies as one of those occasions.  Traders were falling over themselves to buy on Monday in the wake of the Fannie/Freddie bailout and dizzy market commentators were pronouncing an end to the credit crisis and an imminent return to gazillion percent annual returns (a slight exaggeration but you get the picture).  On Tuesday, the butchering of Lehman Brothers saw the market promptly suffer its biggest one-day decline of the bear market that had been given the last rites the day before.  Those same traders and commentators were now promising that further falls are inevitable and that the world is coming to an end.

Another slight exaggeration but you get the picture.

The exuberant reaction to Phoney and Fraudey initially surprised me.  Was it a cause for celebration that the US government was essentially forced to take over the US mortgage market?  Secondly, markets are meant to experience big moves when traders are caught off guard by a major and unexpected announcement.  This was major news, sure, but it wasn't unexpected.  Both stocks had been tanking on the presumption of nationalisation.  Less than a month ago, US magazine Barron's asked 'Is Fannie Mae toast?'  Yes, it said, flooring both stocks in the process. 

Still, after checking out the plan in more detail and reading what the major players had to say about it (most were very positive), I thought we might be in for another decent bear market rally that would eventually peter out. 

I didn't think the market would roll over the very next day.  Government intervention has led to shorter and shorter rallies all year but Hank Paulson and co. surely thought they'd get a bit more market mojo from this one.

Me, I garnered a few more quid for the kitty this week but none of it was gleaned from the Fannie/Freddie chaos.  I closed the remainder of last week's short position in the days before the announcement - a nice trade that netted me a quick grand.  After that, I steered clear of things.  Volatility can be good for traders but I couldn't get a handle on this week's craziness.  On Monday morning, Rob Hanna discussed how to play the massive gap up in the futures market.  He found that of the 16 occasions that the S&P gapped up by 2% or more since 1998, it closed lower on eight occasions and higher on eight occasions. 

Other studies were similarly inconclusive.  "Hard to remember a time when such interesting action has led to such dull results", Hanna concluded.

No edge, no trade.  I made a bundle in a boring but predictable market environment in August.  Donkeys looking for excitement might like to jump in and breathe in the excitement of it all but I'd prefer to make money. 

Going forward, the market appears poised to take out July's bear market lows.  I'm looking for signs of capitulation in key technical indicators but I'm not seeing that yet.  If new lows are seen and capitulation appears nigh, then I'll look for a spot to get long.  In the meantime, shorting any rallies should boost the coffers.

One overlooked by-product of this week's action has been the ongoing devastation of value fund manager Bill Miller's reputation.  Up to 2005, Miller had beaten the S&P 500 15 years in a row.  Since then, he's been pulverised and Freddie Mac's implosion is just the latest blow. 

Blogger Felix Salmon points out that last December, Miller owned 15 million Freddie Mac shares trading at $34. 
By March, Freddie had fallen to $25 and Miler owned 50 million shares. 
By July 31, Freddie had fallen to $8 and Bill Miller owned 80 million shares - 12% of the company. 

The writing was really on the wall at this stage.  Not only did Barron's tell us as much, fellow value manager Warren Buffett had warned that "the game is over" for Freddie.  Instead of getting out, Miller's fund last week disclosed it had bought another 30 million shares.

Freddie is now a penny stock. 

Oops.

Is averaging down ever excusable?  Yes, if you're a long-term investor and a smart cookie who's spotted something the market's overlooked.  Miller's bet, in contrast, made little sense. 

Generally, doubling down is done by saps and bad gamblers.  Next time you're tempted, think of Bill Miller.  Don't do it.

Weekly profit/loss: +€314
Overall balance: €23,592

September 7th

For a while, it was looking like this would be an ugly week for Monkey.  Things then turned in my favour and it was shaping up to be another week of sweet, sweet gains.  The market calmed down, however, leaving me with tasty, if not mouth-watering profits.  I'm not cribbing though.  August was a great month and September's started well.  Keep trading this way and the money will keep pouring in over the following weeks and months.

Almost all of my recent gains have been made by going long.  It felt natural, however, to switch back to the short side of things this week.  Markets are headed lower over the coming months, I'm pretty confident of that.  Using my recent  method of scaling into trades, I opened a Dow position last week by getting short at 11,610.  Stronger resistance was at the 11,700/750 level but I wasn't sure if it would get that far.  Initially, it looked like that wouldn't be the case and I was in profit early on. 

Hurricane Gustav changed all that, however.  New Orleans, according to one website, is "beautiful and beguiling, eccentric, exciting and enchanting" - just the kind of place that this cultured chimp would appreciate.  Watching the relieved news reports detailing how the city had emerged relatively unscathed from Gustav, I was left pondering more ignoble thoughts.  Is oil going to crash?  Will the Dow pop?  Very sad, I know. 

As it happened, oil fell much more heavily than I expected, plunging from $115 to a low of $105.  Blogger Felix Salmon pointed out that this was well below where oil was trading before anybody even knew a hurricane was imminent.  "Can hurricanes cause oil prices to fall?", Salmon asked ironically.  Anyway, the Dow soared past my limit order to add at 11,710 and came within touching distance of my next sell order (11,810).  I was down almost €600 at this stage.  That never feels nice but to be honest, I wasn't particularly concerned.  Oil has been plummeting for two reasons.  Firstly, a bubble has been bursting.  Secondly, demand is falling because of the slowing global economy.  The second, you might note, is not remotely bullish for equities.  With markets up against strong resistance levels, I was confident that any bounce would be short-lived.

That said, I didn't expect the bounce to disappear so quickly and was assuming that markets would finish the day with decent gains.  Accordingly, using the daily Dow contract, I went long for the purposes of a day trade when the Dow fell back to 11,700 (I was simultaneously short in the September contract).  I was up a few quid initially but the buyers soon disappeared, stopping me out for a loss.  My irritation was short-lived - markets sold off heavily, ending the day around 11,500.  It's very rare that you see an index gain 250 points or so only to end the day in the red ('gap and crap', as traders call it).  "The nuttiness of this market makes your head spin," one observer was quoted as saying.

I wasn't complaining.  A one-day turnaround of €1200, why would I?  I closed half of the position near the closing bell.  Since the, markets have chopped around.  I'm holding out for bigger gains while progressively lowering my stop, ensuring that my existing profits are protected.

I came perilously close to shorting IL&P this week.  I'd an order to get short around €6.70 (resistance area).  It was nearly hit before the bank sold off, falling by 10% within a day.  The buyers came back, however, pushing the price back to €6.70 within hours.  I pulled my order.  The way IL&P spent a number of days consolidating around that level left me uneasy.  Looking at the daily chart, IL&P was beginning to look like it was poised to break out.  On Thursday morning, it did.  As soon as resistance was breached, the bank roared ahead to €7.10, taking out a load of stop loss orders in the process.  A real breakout or a head fake?  I don't know but the price action justified my change of mind. 

Going forward?  Usual story.  Over the last fifteen months, traders who shorted when the S&P closed higher two days in a row and sought to exit under specified criteria would have been presented with 43 trades.  41 would have been profitable (quantifiableedges.blogspot.com).  Sell the rallies, bank the cash. 

Weekly profit/loss: +€460
Overall balance: €23,278