Friday - August 26, 2011

For some unknown reason, investors and the markets not only breathed a sigh of relief, but went on a buying spree today, as the the major averages posted their first weekly gains since July. For the week, the Dow Jones Industrial Average was up +4.3%, S&P 500 Index rose +4.7%, and Nasdaq Composite Index tallied a +5.9% gain. The indices finished Friday near their session highs after getting hit for a 2% loss on the announcement out of Jackson Hole. In fact everything with the exception of the U.S. dollar and the Swiss Franc closed higher on the day. Bernanke did not launch any new extraordinary policies, but the markets took his comments, that the FOMC would consider additional measures at its September meeting, as a signal more easing might be on tap. However, ECB President Trichet is also speaking on Saturday, which is certainly just as important as Bernanke's speech today, and more likely to produce something more shocking.

While a sense of calm has certainly settled in after the ES held the 1120 area, and bounced back up to the 1185 break-even area for the longs, the lack of leadership in the market should be of great concern to the bulls. On the NYSE and on the Nasdaq exchange new 52-week lows totals still solidly outnumbered the new 52-week highs totals. A rally that is sustainable should be accompanied by stocks hitting new 52 week highs. There has been much talk about the fact that the market experienced a distribution day soon after Tuesday’s follow-through-day. Historically, when a distribution day occurs on the first or second day after a follow-through day, the "uptrend" reportedly has failed 95% of the time.

On a day when the appetite for risk appeared to have returned, the gold and bond markets both came roaring back today, and appear poised to trade higher, while crude oil showed relative weakness to equities, and the DAX seemed ready to make new lows. The VIX continues to remain in it’s uptrend, even though the market rallied from 1110-1188, and may be forming a bull pennant, adding further evidence of bearish divergences. Whether the continued high volatility is caused by a lack of liquidity, or uncertainty about rapidly changing market fundamentals, or the lack of liquidity is caused by the high volatility, this negative feedback loop is sure to continue off-and-on, unless the Volker Act is repealed and the handcuffs are removed from Wall Street’s banks.

INVESTORS HUB - THE INQUISITION IS HERE TO STAY !!!

One of the real advantages of having my own blog on the Internet, is that it allows me to have a forum for my ideas and thoughts that is free from censorship. It also allows me to use any kind of language I may choose. If I want to say that someone is an asshole, then I am free to do so. I am liberated from the constraints of the morally upright, self-righteous hypocrites, that dominate much of the conservative world. 

These are the very same sanctimonious self-seekers that are the first in line to to censor critical thought and what they perceive to be distasteful or inappropriate ideas or language. Their condemnation is about moralizing, and not about the questioning of content, purpose, nor intent. It is exactly this kind of attitude, and narrow minded, intolerant behavior, that literature calls into question.
  
Censorship accomplishes nothing, other than the promotion of ignorance. "Those in control" often suppress the speech of others in an arbitrary, subjective, and prejudicial manner. A case in point, are the actions taken by the very popular trading forum, Investors Hub.

The management of this forum routinely censors controversial ideas and radical thought. They are overtly restrictive and arbitrary in their allowance for the use of sarcasm and other literary devices. If Mort Sahl, Will Durst, or Dennis Miller were traders, and had participated on this forum, I wonder how many of their posts would have been deleted for having been deemed as being inappropriate or offensive.

A recent experience of mine with Investors Hub, was the deletion of a one of my posts and my one week “suspension” from the forum by the IHub "nazis". The post in question contained a parody of the Mel Brook’s parody “Springtime for Hitler”, titled “Springtime for Larry”.

The Larry in question is Larry Stambaugh, the CEO of Cryoport ( CYRX:OTCBB).  The script pokes fun at the company because there are not any Jewish people employed by Cryoport, and suggests that if there were, the company might be doing better, due to the  alleged superior business acumen of Jewish people.


Springtime for Larry

narrator:

cryoport was having trouble
what a sad, sad story
needed a new leader
to bring it some glory

nothing but bad news
not very happy and gay
that’s why they hired Larry
it was their hope and pray

this strategy had to work,
there was no other way
they hadn’t been producing
just letting the investors pay

so, here’s a little tale
about larry and cryoport
a company and it’s ceo
with not much to report

larry was brought on to
generate revenues and sales
and turn CYRX into one of
the next great business tales

standing by his new BMW
in scenic orange county
surveying his rich land
and all it’s wonderful bounty

worried that his master plan
had gone so terribly wrong
if he was still the same man
why it had been taking so long

when it came to his mind
that nowhere you could find
a cohen, greenberg, or saul
just a bollinger, muller, and doll

it was just a flash thought
a fact he did contemplate
what the struggling Cryoport
had been missing to date

conspicuously absent
were any children of Zion
although I’m sure it’s not
for any lack of larry’s tryin

but not one on the board,
or in upper management
not one damn jew in sight
in the whole establishment

johnson, mc’dowell, and o’toole,
the return of the master race
pass the white bread & hellman’s
please don’t forget to say grace

chorus:

hey larry stambaugh
whad’ya say
have you hired
any jews today

i heard what they say
just might be true
they’re good with money
know business and fair value

larry:

I’ll give it a try
c’mon, vhy not?
hire a token
maybe the stock gets hot

I’ll make it done,
a fait accompli
a jew from l.a.
can set me free

like Moses before me
his people he led
a jew might just save me
get Cryoport out of the red

chorus:

it’s springtime in lake forest
Mexican’s are crossing the borders
ve'll get us some cheap labor
to handle the increase in orders


Parody is a frequent ingredient in satire and is often used to make social and political points. Shakespeare often used a series of parodies to convey his meaning. While I am no Shakespeare, I appear to be in good company when using this form of literary expression to convey a message. My comments were neither a personal attack nor off topic. On the contrary, they were factual and accurate observations.


According to The administration of Investors Hub, the purpose of the suspension is so that I can “cool off”, figure out what I did wrong, and eventually get re-instated. In the ultimate act of hubris,  they went so far as to offer me, a "plea bargain" in which I could  “plead guilty” or "no contest" to the transgression committed against Investors Hub, in return for a promise of a recommendation of leniency in sentencing to be made by the Investors Hub administrative team. 

In the IHub version of the auto-da-fe, they even offered up this script as an example of an acceptable way of expressing my penitence."Yep, guilty as charged. I acknowledge and regret my actions and I am prepared to accept the consequences. I commit to modify my bad behavior in the future." 

Inquisition's Hub

when on the Investors Hub
careful what you say
cause they are judge and jury
even have their own auto-da- fe

tow the IHUb line
just give up your belief
say “guilty as charged”
and it’ll be a relief

just say you were wrong
c’mon its time to confess
admit they we were right
just say yes, yes, yes

don’t say no, no, no
cop a plea, pretty please
give them some thanks
now get up off your knees

forget your self-respect
change your p-o-v today
because IHub and not you
are here to stay

hey IHub what do ya say
burned any members
at the stake today?
changed their opinion
forced their position
does the “I” in IHub
stand for “Inquisition”?
like Torquemada before ya
vs. the Muslims and the Jews
don’t let'm express an opinion
but, always make'm pay their dues

I wonder if Matthew Brown, the head of Investors Hub came up with IHUb's pre-scripted quote? This is of course the same Matthew Brown, that was sentenced to four years in prison and ordered to forfeit $4.78 million in illicit profits for his alleged involvement in multiple “pump-and-dump” schemes. Maybe when Matt is on the receiving end of multiple "pump and dumps"  in prison, he'll commit to to modifying his  bad behavior, but I certainly won't, because my behavior was neither bad, illegal, nor immoral.

Are the people at IH so arrogant and egotistical that they think I will sell out by cutting a deal with them? Do they really expect me to forget about all that I have worked so hard to develop - my ideals, my beliefs, and my self-respect - just to expedite my return to Investors Hub?

That's why I'm glad, I'm free to tell them - they are assholes !

MARKET ANALYSIS & COMMENTARY

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For the sixth consecutive day, the market revisited the 1333-1336 area, only to be summarily rejected and sent packing to lower levels, coming within a few ticks of filling the aforementioned gap and testing the 50% retracement level (1300-1337). This of course leaves us wondering, “ Are the bears finished, or is there more to come?” In any event, the bears must certainly feel emboldened after today’s performance, as they head into next week’s earnings season, options expiration, and CPI report.

Meanwhile, the dollar continued it’s descent and closed near the 75.00 level, while bonds found support near the monthly S1, and in what may be considered a very liberal interpretation of an inverted H&S formation, may be hammering out a short term bottom.The bulls meanwhile, might be starting to doubt themselves with crude topping $113.00 a barrel, gold reaching 1475.00, and the CRB index making new all time highs.

If bonds firm up and accept, and rates fall while the Fed maintains it’s near ZIRPolicy, then equities and commodities will still make sense to own from an asset allocation standpoint (for the near term), and barring any surprise disappointments in earnings, the market should make new material highs next week. Technically, the market is very strong across all time frames. Price has been in a virtually linear advance since last July, and is now hovering just below the next Fib level (see chart above). Since the post crash bottom was made in 2009 price has been turning at major Fibonacci retracement levels, and a break above that level would be near term very bullish, with little to no resistance clear on up to the 2007 top. But, on the other hand, a turn down from that Fib level would mark the end of this uptrend.

MARKET ANALYSIS & COMMENTARY

As was anticipated in last night's commentary, the market flushed out the weak longs, stopping short of the weekly pivot @1320, as the low 1320's were aggressively bought and finished off with an immediate bull reversal. There have now been 5 days where the market traded above 1330 and failed, leaving us with the burning question, "Are we stalling at the highs, or refusing to pullback even enough to fill last Wednesday's gap up opening (before moving higher)?

As short interest has dropped off significantly and today's flash break was far too quick to trap any new shorts, it does not look like there will be any kind of short squeeze taking place. Therefore, we must still remain vigilant of another shakeout that would fill the previously mentioned gap and perhaps test the 20EMA@ 1315.00, (with the last line of defense still @1300.00 at the confluence of monthly PP and 50EMA). The dollar still looks poised to test 75.00 while today's quake in Japan will put more pressure on the yen, both of which are short term bullish U.S equities and supports the view for new material highs.

While QE2 may end in June, the Fed’s near zero interest rate policy(ZIRP) may continue ad infinitum, or at least until inflation is actually the result of income growth and economic growth instead of monetary policy. Once again, Keynesian money printing/credit creation has been substituted for actual wealth creation. And once again, it has led led to massive debt across private and public sectors, as nominal income not only remains flat, but in real terms is contracting at a 2.3% annual rate. True, corporate profits are up and are close to all-time highs as a percentage of GDP, but this does not necessarily reflect a robust economic recovery as evidenced by the still depressed housing market. Strong control over the balance sheet and cheap labor costs due to wage concessions and layoffs, has resulted in lower unit labor costs and higher productivity. However, while there has been an extraordinary recovery in corporate profits, top line growth has not been spectacular, and bottom line growth has not led to job creation.When QE2 ends, the business cycle should return to normal, and just like the market does so often, profits should revert back to their mean, leaving nowhere for valuations to go, but down. The burning question now is, " Is that going to happen tomorrow, April 27th, the end of June, in 6 months , or a year from now.

THE MEAN TRADE

Chart 1: 15M w/ VWAP and 3SD - ZBM from yesterday, which was a typical trend day down. The market opened near it's high price of the day session and worked it's way lower through the day, closing near the low of the day. The market stayed below the VWAP for most of the day and the VWAP had a downward slope.

Chart 2: 15M w/VWAP and 3SD - ZBM from today, which was a typical range day. The market traded around an average price value with relatively low volatility (traded evenly +2SD or -2SD) through the day, closing close to both the opening range and the VWAP. The VWAP was essentially flat through the day.

THE MEAN TRADE

Of course, we would all like to be able to buy the low and sell the high of every move, but this is a reality that can only be realized when practiced in hindsight. In real-time there are very few traders that can pull this feat off with any kind of real consistency. To catch the beginning of a trend implies that we must either anticipate price exhaustion and the subsequent reversal of the previous trend, or anticipate and catch the breakout from a trading range. What makes this task so complicated and frustrating is that there are so many false reversals and false breakouts.

In practice then, catching the beginning of a trend may not really be the optimal entry. If you are going dance with the market, you want the market to lead. So it is often best to wait for buyers/sellers to make their move and show their hand before you enter the market. That doesn't mean you chase highs and lows; rather you buy/sell the first pullback from an initial push as your entry. Of course, you always buy weakness in a strong market, and sell strength in a weak market. If you're patient and wait for after the initial thrust that kicks off a trending move, you have a natural stop loss point: if market participants are truly rejecting price at the start of that move, you shouldn't see that price again.The key to making this execution approach work, is being patient enough when you're a buyer to let sellers "take their turn", and when you're a seller to have the patience to wait out the buyers' next bounce. You want to see those sellers and buyers get trapped on the next leg of the trend so their exits will help your position.

Unfortunately though, markets are in a trading range 80% of the time, which means that markets are trending only 20% of the time or approximately 4 days a month. Markets like the ES and ZB which are heavily arbed and dominated by HFTs and algorithmic trading, are often lacking volatility, and are choppy and directionless. This has proven to be a major challenge for short term traders, who often find themselves faked out on seeming moves that reverse. It would make sense then, that following a momentum based strategy as the mainstay of your methodology would not be optimal. It would seem that not only including, but concentrating on a strategy that offered you the opportunity to capitalize on current market conditions would be economically prudent.

The general idea is to find points in the market in which bulls or bears are trapped. They have committed to positions, but can no longer move the market their way, and the market has become over-extended. They then have to exit out of their positions and the market reverses which provides a trading opportunity. Because traders often presume that breakouts will continue in their direction without actively planning for the possibility of retracement, we should take advantage of this dynamic and actively build a scenario for a possible reversion trade.

As a rule traders are drawn to movement and momentum. They like to trade breakouts from ranges, and they like to see clear signs of strength or weakness before they buy or sell. A lot of the passive algorithms are programmed to take advantage of these tendencies by selling the new highs and buying the new lows. Now consider that there are thousands of these programs on thousands of computers, and each one is programmed to work offers at X period highs and work bids at X period lows--and if you imagine X as scalable across all time frames, then you can get a sense for what drives markets over the short time frame when directional, institutional traders are not active. Small wonder why the markets rarely trend, and are often range bound instead!

The predominant benchmark for AT is the VWAP or volume weighted average price. The VWAP is simply the average price of a security traded over a period of time. It is essentially a tool for investors that want to be passive in their execution, and are seeking the average price based on volume, i.e., a guaranteed VWAP execution. The implementation of the VWAP was in response to the decimalization of the market and the proliferation of algorithmic trading that resulted from this change, and became popular as a way to reduce transaction costs and the impact of large institutional orders on the market.

Knowing where we are trading during the day relative to that day's VWAP is very helpful in identifying the kind of day that we're in. The VWAP can be thought of as the market's evolving estimate of value. In a weak trending or non-trending market, we will tend to move away from VWAP to probe trader/investor interest. If that interest is lacking, we will tend to gravitate back toward that VWAP value level. In weak trending markets, you want to be fading moves away from VWAP. In a good range trade, we'll tend to see a narrow value area (volume will be transacted within a narrow price band) and moves away from value will tend to return back to (and usually through) VWAP. In a true range trade, we'll also see little slope to VWAP, as we transact volume relatively evenly above and below that average price. We can take advantage of this tendency for the market to move 1, 2, or 3 standard deviations away from the VWAP and then revert back to the mean, by fading the moves away from the VWAP and covering the trades when they return back to the VWAP.

MARKET ANALYSIS & COMMENTARY

WEDNESDAY - APRIL 6, 2011 -  MARKET ANALYSIS & COMMENTARY

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ES came within 2 ticks of reaching the 1337.00 target that I had been looking for since last Friday, and as anticipated, sold off early in the day filling the day gap to the tick at yesterday’s low of 1327.00. The market then staged a 7 point afternoon rally which tested the low of the opening range, only to sell off after the end of the cash trade to close in the lower half of the day’s range. Bonds were destroyed, as was the bearish sentiment in equities that I highlighted last night. In the latest Investor’s Intelligence survey, bears declined by 32% from 23.1% to 15.7%. As was mentioned in the Bespoke article, "Going back to 1975, there have now been just 16 other periods where bearish sentiment declined by more than 30% in a single week." The chart below illustrates the S&P’s performance following these large drops in bearish sentiment the past 11 times they occurred. The average performance over a 1-10 week period was -0.92% to -2.07%. I have also included a chart of the market leading TF to demonstrate a confluence of Fibonacci levels at the 860.00 level. Along with the 61.80 Fib extension that is shown in the chart, is an even more important 1.27 Fib extension, from the January lows to the February highs to the March lows, that comes in at 860.00 also. However, in direct opposition to the possible-market-top theory, is a chart of the 6J that shows a dramatically falling yen, which should insure the yen-carry-trade remains strong and further funding for the U.S. equities rally will continue. That being said, earnings season begins next week and it is still very early in the month of what is a seasonally bullish month. Therefore, there is still plenty of time for the bulls to assert their dominance. If indeed, this is not the top, then based on today’s price action I would expect a quick flush of the weak longs down to at least the weekly pivot @1320.00 if not all the way down to the low 1300’s, followed by an immediate bull reversal. 1300.00 should be the last line of defense for the bulls.