How the Market Spent My Summer Vacation

So, did I miss anything?

I left for my vacation on Saturday, August 4th (had a fabulous time, thanks for asking!) and my comment on that Friday morning, with the Dow at 13,462, was "Usually when I take off I am filled with regrets as I hate to miss the fun in the markets but I’ve never been happier to lighten up on positions and take a break."  That was another in my series of "Chicken Little" posts where I warned that "the sky actually falling" as we saw the sub-prime issues gathering steam.

At the time we were "rallying" back from a visit to 13,200 that Tuesday and, while I hate to be a wet blanket, I had to say: "I’m not here to win a popularity contest so I’m really pushing the "better safe than sorry" school of investing this month as my best case scenario for the next couple of weeks is that we consolidate around 13,600 and my worst-case scenario is downright depressing!"

My timing couldn't have been better as that was the Friday that gave us a 400-point intra-day drop and Cramer had his little melt-down on national TV at about 2:30.  If you review the clip, bear (oops, don't say bear!) in mind that Mr. Cramer was freaking out about a correction from 14,000 to 13,400, a 4.2% dip after a 2,000-point, 16% run that began in mid March.  We at PSW were in a very different position than Mr. Cramer, having played that dip perfectly the week before so his comments seemed humorous to us as it was obviously way too early to play the Fed card.

We had been all over the place the first week of August as Happy and I called the bounce on August 2nd but, in the same post, asked the very timely question "Are the Brokers Broken?"  I do regret not being more aggressive with my broker puts but, as I mention in the article, I had been painfully burned before so I was patiently waiting for BSC to get near my $100 buy target rather than taking the very risky put side of the trade (as you never know when the Fed will bail them out!).

On Monday morning, a I still had reasonable web access in Barcelona, I had to pipe in but I confined my comments to the member site as Happy Trading and Option Sage had my full, and well deserved confidence to run things in my absence.  I reiterated my BSC play: "I think BSC is a better value right now. Hopefully they sell off to some extreme as I feel strongly that $100-$110 is a fair bottom for them. I’d be looking to begin setting up a nice ‘09 or maybe ‘10 play, perhaps the $110s with a 3/4 sell of current $10 out of the moneys."  We'll see next week whether or not we get a retest down there.

On Friday, August 3rd, the levels I didn't like the look of looked like this:

After watching the Asian markets, my 6am 8/6 note to members was: "Don’t forget that the Hang Seng is the market that was holding Asia up! The Nikkei was oversold by comparison and due for a bounce but the BSE dropped 260 as well so the 200 point “recovery” in the Nikkei is NOT something to hang our hats on. The dollar is getting worse, which is freaking out Asian exporters and don’t forget that makes declining oil even more significant in value terms."  I was a week early but both the Hang Seng and the Nikkei took 10% hits last week.  If they do not buy our Friday rally with their own bounce on Monday, we may have more troubles next week!

Today, August 19th, after my 2 week sabbatical, the Big Chart looks like this:

All I can think of here is the Peter Gabriel song, Biko, which goes:

When I try to sleep at night
I can only dream in red
The outside world is black and white
With only one color dead

You can blow out a candle
But you can't blow out a fire
Once the flames begin to catch
The wind will blow it higher

And the eyes of the world are watching now…

The eyes of the world will certainly watching the US markets next week but our eyes need to be on Asia and the engulfing sea of red that is still (despite Thursday and Friday's option expiration day rally) creeping up on us.  The Fed certainly did try to step in to try to blow out the melting candle on Thursday but the question remains whether the sub-prime issue is a "candle in the wind" or a bed of burning embers that  is still ready to ignite our tinder-box, house-of-cards market.

Also, on the morning of the 6th I called for FXI to make a good hedge and it lept up $5 on the 8th but that morning I felt compelled to put up the Big Chart over at the member site at 4am as I saw no substance in the Asian and European rallies and wanted to warn members not to get caught up in the excitement that I could clearly see coming that morning.  As I said there: "Don’t let a day’s move in the market’s guide your "investments."  We did gain 150 points that day but, as you know, Wednesday the 9th we suffered a VERY still reversal!

The evening of the 6th I advised: "Fed Trades: I would have said to have both sides ready but I think loading up on puts is prudent following that “correction.” If we have another 100 points tomorrow, I’m not sure anything the Fed says will justify 400 pts in 2 days… Obviously the DIA puts are the way to go, if we are up big again, the play would be to go with whichever Sept puts are a little over $3 just before the release and to either be ready to pull them if things go wrong or to roll them into insurance if you have sufficient bullish positions to cover them."  That certainly worked out well for a lot of our members as we got my 100+ points, all the way to 13,769 on Wednesday and dropped another 1,000 points in the next 5 days.

A little later that evening I said: "Possible rally theory – by taking the market up 280 today, they can tank it 500 points in 2 days following the Fed so they can blame “tight policies” for wrecking the brokers and not their own very poor risk judgment. Who drove today’s rally? Brokers! Look how much of a set-up this is to push Bernanke into a corner. Cramer already vilified him in one of the most watched videos of the year (and Poole too) so now they are walking into a minefield tomorrow."  On the 7th we were very concerned with GS's Global Alpha fund problems and we got exactaly what we expected from the Fed – nothing!

At 3:34 on the 7th, with the markets rallying I commented: "Just walked in (to my hotel) and I’m just walking out but this doesn’t look like much of a rally with brokers and big oil leading a bounce. No SOX? Not good… At least the Russell's moving a bit."  Later that night, I had a chance to review the day's action and I said: "I have to lean cautiously into the “where there’s smoke, there’s fire camp” and stick to mainly cash at the moment, and not just because I’m on vaca but if we get a real Nasdaq break over 2,575 (I suppose over 2,600, I really have to wing these numbers as I’m down to about 10% of my normal screen space) then I’d want to nibble a bit on the laggards. On the other hand, if CSCO can’t get us over 2,600 during the day and can’t sustain 2,575 EOD and the SOX continue to drag (CSCO not a member)… then shorting the Qs may be in order – along with the rest of the market they could drag down!" 

We missed my targets so early (12:28) on 8/8 I said: :"Yesterday’s internals: Nasdaq: 1147 Advancers to 1598 decliners, NYSE 1810 / 1564 Advancers to decliners.  That is not good folks! Major grain of salt should be taken with this “rally.”  When the WSJ starts putting “Debt Bomb” in boxes with pictures of a burning fuse, we are getting into Lot’s wife-sized salt grains!  Great article on how we got into this mortgage mess." 

My call of the day on the 8th was a nice triple for the week as I said (answering a question on whether I still liked the DIA Sept $137 puts at $3): "Mattress Plays – from 4,000 miles away with no web access and no access to the markets (oh yeah, no Bloomberg/no CNBC – worse than jail!) I would still say that had you asked me last week if I would buy the DIA Sept $137 puts for (I’m guessing) under $3, I would have been happy to liquidate half of my short positions to buy them. I’m not getting the impression that anything major has changed, just some jawboning of the markets."

Pre-market on the 9th I said: "I’ll do some reading after breakfast and let you know what I think in general, we really need strong follow through to this move or it will just make our markets look flaky and uncertainty may be fun for those of us who are quick on our feet but it does tend to drive the real money to safer harbors."  As we know, money flew into treasuries last week, driving down rates and accomplishing for the Fed a cut without them having to cut prime.

After completing my promised research at 7:02 am (I love being on EU time!) I decided: "I’m a lot more concerned with GS and other Quant fund losses as it clearly indicates that the models are breaking down and, thanks to all this computer technology, the hedge fund industry is woefully understaffed with human traders who are prepared to trade a flat market – yet alone a choppy one! It’s a tough set of decisions for a fund that runs off a system that breaks down because you’d be amazed how many have contingency systems backing them up (the number “none” comes to mind). These guys spend millions a year “perfecting” the system they have and pretty much nothing developing systems that say “suppose everything we believe in is wrong.”

Despite a too-early injection of cash by the Central Banks, the markets continued to fall for the week, putting a real test to my decision not to trade at all for the week.  Sage urged continued caution in his Thursday wrap-up and, as Happy said on Friday morning: "This is what happens when a nervous market gets bad news!   Until we know where the market is going to go, the safest thing to do is perhaps still to hold cash."  Great advice – as I said, I could not have left the site in more capable hands!

Kudos again to Happy Trading for turning in a PERFECT week with 14 winners and no losses in a VERY tough market. 

Sage posted a weekend article on doing something while I posted a weekend article on doing nothing that, strangely, did not disagree with each other as both urged planning and prudence.  My inaction for the week led to a 7.5% gain in the Short-Term Portfoilo and a 25% gain in the $10K Virtual Portfolio along with solid performance across the board, a testament to Sage's excellent advice on "Vacation-Proofing Your Virtual Portfolio" which I followed prior to taking my trip in conjunction with my usual hedging strategies.

I'll leave week one at that.  We finished Friday actually UP 50 points from Monday's open (13,183), at 13,236 but confirming some structural damage in trying and failing to get back over 13,600 mid week.