Market Monkey

27th April

What's it going to take to move this market down and make Monkey a little money?  The sub-prime write-downs are getting bigger by the day.  Bond insurer Ambac gets a one-day hammering of over 40% after shocking analysts with the size of its losses.  Courier company UPS tells investors that there's been a "dramatic slowing in the US economy" and that things "have become sharply more negative in the last two months".  Besides lousy fundamentals, the market is overbought on almost every technical level imaginable.  And the market's response?  Zip. 

Is that a subjective account?  Probably.  I'm short and while I try to keep an open mind, the brain can conspire against our best intentions.  For example, I was reading a few pieces the other day, both of which reaffirmed my bearish bias.  I came across the same articles a couple of hours later and noticed that the authors had in fact made as many bullish arguments as bearish ones.  It's pathetic really - we look for evidence that confirms our existing opinion and blot out conflicting information.  Anyway, it made me question as to whether my fundamental views were colouring my outlook.  A good fundamental investor can be right in his analysis and still lose money, so I've always tried not to have an opinion on the issues of the day.  After all, the bears had all the good arguments for the first half of 2007 yet the market's advance in that time must have had them pulling their hair out.  Sure, once the market cracked, the bears made money in spades but I know a few people who lost a bundle in the months preceding that break.

Point is, I might be right in thinking that the market has taken a sunnier outlook than is merited, but that doesn't mean it will be lower next week or even next month.  That got me looking at the technicals in more depth.  Was I blinding myself?

Eh, no.  It really is time to start going south.

Why?  Firstly, early this week saw almost 50% of stocks trading in what the good scholars at Bespoke (bespokeinvest.typepad.com) call "overbought territory" (that's defined as when a stock's price moves more than one standard deviation above its 50-day moving average, to use some awful technical jargon).  The last time that happened was when the market peaked in early October (similarly, the last time so few stocks were oversold was in the same period).  As the researcher says, "when individual stocks get this overheated, the risk/reward trade-off begins to favour the risk side in the short term."    

Secondly, Brett Steenbarger points out that "while we recently hit multi-month highs in the number of stocks trading at fresh 65-day highs, banking stocks remain solidly lodged within their February-March trading range" - a noteworthy divergence, as you'd have to assume that the beaten-down financials would lead any new bull market rally.

I also take note when ordinarily bullish bloggers of note turn bearish.  Tradersnarrative.com is a decent blog but the writer, a contrarian, tends to be something of a perma-bull.  Generally, he's bullish when sentiment measures are bearish, which has been quite a lot recently.  Anyway, while he's convinced that we've put in a long-term market bottom, he sees short-term pain in the meantime, pointing out that 82% of stocks were trading above their ten-day moving average recently.  That's very high and rallies tend to peter out at this juncture.  With the S&P 500 just below a strong resistance level (1400), he questions why one should "watch hard-won capital melt by riding the wave down when it is this obvious?"

Are there reasons to be bullish?  Of course - it's never that one-sided.  For one thing, a lot of bad news is clearly reflected in market prices - a host of banks have produced some dreadful results of late but ended up rallying.  Estimates of losses in the region of $1 trillion have been bandied about and the market has barely blinked.  Tech stocks have been doing pretty well, with decent results from Google, Intel and more than a few others.  On a technical basis, the Dow overcame strong resistance at 12,700 recently - kudos to the bulls for mounting that juncture.

Still, the evidence suggests some short-term pain.  I think earnings and poor economic data, rather than further credit shocks, are likely to be the source of that pain.  Many of the decent reports have been boosted by the weak dollar, with earnings from outside the US making up for lacklustre US performance.  The poor reports, on the other hand, testify to a real slowdown in the US economy.  As for the Dow breaching 12,700, I'm not too bothered.  It allowed me to get short at just above 12,800 - a more advantageous spot than I'd been envisaging.  The S&P has yet to clear 1400 and the Dow isn't going to head north until that changes.

Since going short, the Dow has just chopped around aimlessly.   I've never been down more than €200 or up more than €300.  It hasn't been riveting, I have to say.  The fact that we're in the midst of earnings season hasn't helped either.  At this time of year, it's normal for me to spot decent technical set-ups only to discover that the stock in question is reporting over the next few days.  A few more opportunities should arise as the season winds down.  I hope they do as I need to start making bigger bucks pretty soon.  It's either extra trades or bigger bets and I'm more comfortable with the former.  One stock that I'm looking to buy on a pullback is Elan, which has been very strong recently. 

As I write, the market is poised to open lower on account of cautious guidance from Amazon and Apple.  Will that prompt another leg downwards?  Does it justify a decent down move?  Search me, although I certainly wouldn't protest if it did.  Give it up, stubborn bulls, give it up.

Weekly profit/loss; +€182
Overall balance; €20,821

20th April

Easy come, easy go. 

I was stopped out for a profit on both of my existing positions (Ebay and Dow shorts).  The overall market saw decent selling on the Friday of the week before last, bringing Ebay down to an intra-day low of $30.70.  I took profits on half of my position towards the end of the trading day.  Ordinarily, I'd have waited - one of my rules is that profits are not taken until my paper profit matches or exceeds my initial risk.  In this case, I was up around €350 but my initial maximum loss was in the region of €500.   

So why take profits?  Firstly, I was cognisant that Ebay had already dropped over 8% in just a few days (it had reached a high of $33.47).  Secondly - and more importantly - the stock was reporting its earnings in just a few days time.  I always exit in advance of earnings and it was reasonable to assume that the stock was not going to tank over the following days.  All considered, it would have been inflexible - dumb, really - for me to not take some profits here. 

As it happened, it turned out to be a decent place to sell and my stop order on the remainder of the position was hit on Monday. 

I should also say that I had already lowered my stop order to just above the $33.47 level within a day or two of entry, so this could hardly be labelled as a trade where my risk:reward ratio was badly out of whack. 

Still, you have to be careful not to take profits too early.  I know more than a few traders who score a high percentage of winning trades but still end up out of pocket because their losers are invariably much bigger than their winners.  Anyone who consistently risks €2 to make €1 is going to end up in trouble. 

As for my Dow short, my stop order was hit after the market enjoyed a strong day last Wednesday.  This was a trade I had intended adding to at successively higher intervals - scaling in to a full-size position.  As I related last week, it didn't happen and I was left with a small position.  As a result, I was pretty uninterested in its progress.  That was a mistake, as it nevertheless offered me some half-decent paper profits.  Instead of thinking, ‘Hey, I’m up €350, that’s not so bad’, I dwelled on the fact that I might have been up closer to a grand had I managed to secure a bigger position from the outset.  Consequently, I didn’t pay enough attention to the trade and ended up giving up more of my profits than I should have.  I should have locked in more profits by further tightening of my stop order.

Anyway, enough of that.  As I alluded to earlier, markets were very strong on Wednesday (Dow up over 2%, Nasdaq over 3%) after better than expected earnings from Intel, JP Morgan and a few other companies.  A decent earnings report from IBM after the session closed further fuelled bullish optimism.  Onwards and upwards?  Maybe, although I remain somewhat bearish.  Earnings season up until now has seen some pretty iffy results.  The euphoria markets exhibited on Wednesday was in stark contrast to the solemnity induced by General Electric’s awful report just a few days previously.  GE guided lower for the year and was well shy of analyst expectations.  The results were especially poor when one considers that the firm had been making reassuring noises over the previous months.  GE has a huge range of businesses and its report indicates that US economic conditions have deteriorated pretty swiftly.

I can understand the market regaining some ground after Wednesday’s aforementioned results.  Thing is, the market is now trading higher than it was previous to the GE results.  Also, a cursory glance at Wednesday’s news reports shows that a raft of economic negatives are being overlooked.  After mentioning the earnings beats, one report refers to the fact that “housing starts remained weak” (they’re at their lowest level since 1991) but “investors don't seem to care about this news since they're looking for anything that confirms their hope that the worst is over”.  Reference is also made to the fact that the inflation reading recorded on Wednesday is “outside the Fed’s comfort zone” but nevertheless “provided the market with some relief, as it was not as high as feared.”  Add in all-time highs being seen for crude oil and the euro and it’s hard to conclude that all is rosy. 

As Charles Kirk (Kirkreport.com) put it, “whatever concerns the market had over "the slowing economy," "credit crisis," and "inflation" were thrown out the window once things got going to the upside. When the market really wants to believe in something on a collective basis, there's little that can get in its way.”

Of course, one can interpret all this to mean that markets have priced in all the lousy news and that this resilience is indicative of higher prices going forward.  Possible, but I doubt it.  I think earnings season is going to throw up a few more wobblies and that we’ll continue to see market mood swings over the coming weeks.

Anyway, I’m well aware that the market doesn’t give a hoot about what I think.  It might continue to move up, even if the data doesn’t warrant it.  You’ll not find me fighting the market on a few fundamental misgivings. 

Fundamentals aside, my take is that we’re still in a bear market.  Until that changes, the obvious play is to sell the rallies.  The Dow has seen some good rallies in the last few months but all have petered out in the 12,700 area.  That’s where I’m looking to get short, this time with a decent sized position. 

Weekly profit/loss; +€130
Overall balance; €20,639

13th April

When your profits for the year double inside a week, it can mean either one of two things.  One, that you've had an incredible week of market partying or two, that your profits for the year were tiny in the first place.  Unfortunately, the latter is true for me although in a week as slow as this one, grinding out a few quid is probably all you can ask for.

What's happened the markets?  After months of manic movement, things have slowed to a crawl of late.  It's been like watching paint dry.  The calm before the storm, no doubt - the issues that have caused massive volatility up until now have not gone away so it's only a matter of time before trader heartbeats start beating hard once more. 

Still, it might have been different.  "I coulda been a contender. I coulda been somebody, instead of a bum, which is what I am", Brando opines in On the Waterfront.  Now, you'll never get old Monkey admitting to be a bum - have a bit of pride, you crybaby - but just missing out on a lovely Anglo-Irish short did leave this this impoverished primate dreaming of what might have been.

Last week saw me place a limit order to get short at 9.70.  The damn order came within ten cents of getting filled before drifting lower.  It took a pounding the following day and continued to fall south over the following days, hitting a low of 7.88 this week, or almost 20% below my order.  Awful, bloody awful.  Was I too picky in my order placement?  I don't think so.  I wasn't screen watching that day - I placed an order, with an attendant stop in place, and left.  My limit order was below the highs of the day, so it's not as if my placement was unrealistic.  I thought it was damn bad luck to come as close as I did. 

Anyway, it's a pity, as Anglo offered up some easy money over the last week.  It's been in a downtrend for a long time and the recent rally, furious as it was, was always likely to be a brief one.  You had to see it as a rally occasioned by shorts covering their positions rather than one catalysed by a fundamental reappraisal of the stock.  The ISEQ is in a bad bear market and it's hard to see why that should change any time soon.  Besides, Anglo peaked just shy of its February high and there was a lot of technical resistance in the 10 region.  For bottom fishers who had profited from the recent upswing, this was an obvious place to take profits.  It was also a good place for shorts to load up once more.

One final word on Anglo.  A friend of mine made a few quid in the stock recently but was irked that he left too much money on the table after closing his short too quickly.  We all know that feeling.  Getting a good entry on a stock can be easy but exits are a tricky business.  In Anglo's case, however, there was no real excuse for getting trigger happy - anyone who went short last week should still be in the trade.  Why?  Because they've been given no reason to close it.  One obvious means of locking in profits while keeping the short open is to lower one's stop to just above the previous day's high.  Since its recent dip, Anglo has failed to close above the previous day's daily high.  On Tuesday of this week, Anglo's high of the day was at 8.21.  It peaked at 8.20 on Wednesday and was hovering around the same area on Thursday.  Any dunce can see that this makes an obvious stop placement area.  By the time you're reading this, Anglo may very well have surmounted this level.  Then again, it might not.  As traders, we never know.  All you can do is act logically and try to be as methodical as possible.  Trailing your stop in the above manner is one simple but effective way of managing an exit. 

Anyway, enough of Anglo.  My order to short Ebay at 32.40 was filled.  The stock's been very strong recently but its long-term downtrend is intact and with its 200-day average just ahead, I had no hesitation in getting short.  I was underwater for the first couple of days, with the stock's momentum carrying it to 33.47.  Nothing critical about that, but I was irked that I was down a few hundred on this position while I hadsimultaneously managed to miss out on a big winner with Anglo, which was tanking just as Ebay was flying.  Anyway, the stock has since pulled back, dropping a couple of dollars off its high.  Tuesday's high was 32.30, which happily coincides with my breakeven point, so I've lowered my stop to that level.  However, while it's always nice to be in a trade whereby you're insured against a loss, it's a lot nicer to actually make some money.  I'm up a few quid at the moment but it's small beer at this stage and I'm hoping for a bit of downside movement over the next few days.  Ebay reports earnings next Wednesday so I'll have to be out of the trade before then.

I'm still short the Dow.  Unfortunately, my position remains tiny.  The market has shown little movement over the last week, so my order to add to my original position was never filled.  On any normal week, it would have done so (and I'd consequently be showing a decent enough profit) , but things have just chopped around in a very low-key fashion.

Going forward?  I wouldn't bet the farm on the short side but I'm still leaning in that direction.  The strongest sectors have been energy and commodity stocks while the financials have been retracing their recent gains.  Nothing bullish about that, nothing bullish at all.

Weekly gain/loss: +€256
Overall balance: €20,509

6th April

Mr. Market, you're quite the pup.  With Swiss bank UBS reporting that it expected a fourth quarter write-down of $19 billion and Deutsche Bank chipping in with further grim news (a write-down of $3.9 billion), you might have expected Tuesday to be a down day for US markets.  Instead you get a one-day jump of almost 400 points.

OK, I'm being selective - there was some good news.  Lehman Brothers helped quash liquidity concerns by announcing that it had raised $4 billion in a preferred stock deal and a manufacturing survey provided a little encouragement.  Still, anyone who is new to the game would be hard pressed to have predicted that news of billion dollar losses would be the springboard to such a massive one-day gain.

In reality, such a reaction is typical of the market.  Markets often greet bad news as good news and vice-versa.  In this case, traders bet that the news was already in the price, that banks were finally facing up to the extent of their losses and that a bottom is in place for the financial sector.  Throw in a flurry of short-covering and you've got a rally.

I didn't participate.  I'd been waiting to short the Dow at a designated spot.  Mind you, you'd have to be a proper donkey to step in front of a runaway train on a day like that, even if you believed that the move was unmerited.  In fact, I was looking to get long for a day trade as it was obvious that a strong trend day was in the making (you can be long on the daily contract and short on the quarterly contract at the same time). 

Anyway, markets just didn't pull back and I never got in on the action.  That was frustrating.  Brett Steenbarger (www.traderfeed.blogspot.com) reported the next day that he received "an unusual number of frustrated emails from traders" who were "not able to capitalize on the trend day".  At least I wasn't alone.  According to Steenbarger, "waiting for the trending market to pull back before participating in the move" is a "common version of perfectionism".  So poor old monkey is a perfectionist (he's right).  Steenbarger suggested that traders "redefine the notion of pullback" on one-way markets and outlined a way of getting into such trades without sacrificing one's basic method.  He also quoted some research showing that there have been more of these 'one-way traffic days' over the last year than over the previous decade, so there's no question that I'll have to modify my day trading criteria if I want to catch those profits.

Anyway, the previous days had been plain boring.  No edge from either the long or the short side.  No edge, no trade.  As  mentioned last week, I'd been looking to short the Dow at its March highs and finally managed to do so near the closing bell on Tuesday.  Thing is, the market's show of strength was too impressive to ignore, so I decided to scale into my trade rather than taking my usual initial position size.  My guess is that markets are not out of the woods yet.  That doesn't mean they won't go higher in the coming days.  If they do, I'll add to my position (note that there is a big difference between scaling into a trade and averaging down on a trade).

Of course, I'll be left cursing if the Dow heads immediately south, as my position is a tiny one.  As I said, however, Tuesday's show of force from the bulls was an impressive one and I wouldn't be surprised if this trade goes against me in the initial stages (so far, it's gone nowhere).

The blogger at www.tradersnarrative.com made the point this week that the "primary nature of trading is that it is a waiting game. Most people, especially those new to trading, imagine it is a frenetic exercise in yelling "Buy, buy" or "Sell Dammit!" into the phone or a flurry of keyboard presses and mouse clicks. I suppose they have this perception of trading from Hollywood.  In reality, trading consists of long bouts of (near) boredom, interspersed with spikes of adrenalin induced action".

I've often said the same - you have to bide your time and pick your spot.  That doesn't mean that I'm not capable of doing something dumb.  When you get bored, the desire to make some money can overtake you and cause you to force an entry.  Not only that, the fact that I write a column about trading further increases the desire to make some trades - any trades.  It's not ideal.  On several occasions recently I found myself about to hit the buy or sell button for no good reason.  Rather than make half-baked index trades, I opted to widen my horizons and take a look at some stocks.  A good index trade might not present itself for weeks but there's always an opportunity or two amongst individual stocks. 

As a result, I have a couple of unfilled orders at the moment and my balance is likely to be significantly altered by the time this goes to press.  I'm looking to short Ebay at $32.40.  The stock has done well recently but it's in need of a breather and that's a good spot for it to rest (200-day average).

I'm also looking to short Anglo-Irish Bank.  I rarely bother with Irish stocks but I checked out the chart after all the recent hullabaloo about market manipulation and the concomitant volatility.  Man, I thought banks were meant to be boring.  Anglo's a right little mover.  Anyway, the stock enjoyed a rise of over 50% in recent weeks but the long-term downtrend is intact so I'm hoping to short around €9.70 (just missed out on Wednesday). 

Add in the fact that I have further orders to short the Dow and it's obvious that I could get too exposed to the short side, so I'm looking for some longs to balance things out a little. 

Weekly gain/loss: +€26
Overall balance: €20,253