What Could Have Been

A sore spot with myself and with many of you was the sudden demise of the TVIX trade we entered on March 14, 2012.  We entered this trade based on a base that was forming on the VIX volatility index.  The stock market at the time was on an unbelievable tear at a better than 50% annual return which we all believed was unsustainable.  That happened to mark a high in the stock market.

It also market the low of the VIX.  On the day we purchased TVIX, the VIX was near its March 16 low of 14.39.  Today, the VIX reached a high as of this writing of 26.02 for a staggering return of just over 80%.  We should have realized a gain in just under 3 months of near 150%.  Unfortunately as you well know, we as a club and I myself are underwater on this position still.  Click here to learn more about what happened to TVIX.

The good news for this position is that the market is tanking, and TVIX is rallying.  The S&P 500 is now below where it started the year and fear is growing.  That said, it is but a matter of time before Uncle Ben provides the economy a third round of QE which should remove fear from the market place and send TVIX lower again.  I expect there are thousands of trapped investors such as ourselves who will welcome an opportunity to get out, much like the trapped silver longs were last summer.

The BLIC gave me discretion to exit this position as conditions warranted.  When/if the VIX moves into the target area, my plan is for us to exit out of this position with a small gain or loss.

I do wish to remind the club that the risk on this trade was defined at the onset.  We only risked a little more than 1% of the total portfolio value on this position.  Position sizing is one way to manage risk, along with stops which we have used with mostly poor results.  Had this instrument performed as advertised, it would have essentially been a hedge against our unprotected long positions in the portfolio, which is another way to manage risk against what is happening today.

Apple Computer Top Is In

The Apple Computer chart below shows a pattern where price closed near the bottom of a large trading range on high volume.   Apple has been trading parabolic since mid January.   This is a topping signal.

Lay this against the backdrop from the previous two posts I made last week and I think we are going to witness a top in the overall stock market.

“When the facts change, I change my mind. What do you do sir?”

That was actually a quote from John Maynard Keynes.  Anyway, it seemed appropriate for what I am about to say.

First of all, in case you missed it, Bernanke said Wednesday that the Fed is ready to step in to prevent price deflation if need be.  This flies in the face of what he had said only a few weeks ago when he said there would be no stimulus for the rest of this year.  I think this means that if you long the dollar, you need to be very cautious.  Should he decide to crank up the printing press, the first thing to take a hit would be the dollar.  IMO, the safest trade to own currently is a long dollar trade.  Obviously, this would change all that.

This dollar strength has been amazing, yet not unexpected.  The dollar formed a second bull flag this past week and broke out once again.  This may be all the fuel that is necessary to push stocks down near 1000, and gold into a buy zone.  This may create all the deflation necessary to get Bernanke back into action again.

I said in the post last weekend that there was no doubt we were into a D Wave.  I had also mentioned that the gold sell off happened far faster than even I was anticipating.  What this has done is cooled the bullish sentiment to the point where gold has now become attractive again to commercial buyers.  This information is available at various sources on the web through COT reports (commitment of traders).  The Blees rating, which shows how bullish or bearish commercial traders are over the previous 18 month period is now at 100, which almost always marks major bottoms.   A 100 is the most bullish signal.  We got that this week.  That, in conjunction with a very bearish sentiment report has the makings of a bottom in gold.  I am hoping it can wait another week or two, but I may be recommending another long metals position at the next meeting.  So, despite me feeling very bearish on metals and stocks, some facts are changing right now that could set the plate for a major rally sooner than later.  All we now need is for Bernanke decide to begin printing again.  If he prints next week, it could avert the D Wave from completing.  I guess my recommendation is to buy gold immediately should he announce QE3, or to wait till our next meeting date should there be no QE3 and gold is allowed to complete the D Wave.

Gold will probably not go to the low end of the buy zone I outlined last week.  Heck, it may not make it into the buy zone at all if Bernanke starts money printing again, but if gold can at least tag the 200 day moving average, I think that will satisfy as being a D Wave and a purchase of gold, silver, or mining stocks will become a very profitable trade.  In fact, I think it could be the most profitable position our club ever makes (sorry Apple).   There will be no opportunity better in any of our lifetimes to buy gold and gold related stocks than at the end of this D wave.

Speaking of Apple, check out how stocks have reacted in the past when Apple computers touched the trendline.  Not saying this means anything.  I just thought it was interesting that recessions follow that event.

Ohhhh, and congrats to you ladies that picked up some FFKY this week for $1.50.  You are already down almost 7% this week.  The thing that made no sense to me about buying more FFKY at this great undervaluation is that if it is so undervalued, why isn’t the bank buying back more of their own shares?  They should be backing up the truck, shouldn’t they?  The directors of the bank have not purchased any more shares since the summer of 2010.  If it is not good enough for the folks that know, then it is not good enough for me either.

I have nearly completed a story on bubbles that I will post either tomorrow or early next week.  It is pretty interesting stuff!

Steve Jobs: The Thomas Edison Of Our Day

Despite the fact that I do not own a single Apple product does not diminish the respect and admiration I have for Steve Jobs.  It was sad to learn that he resigned as CEO of Apple today.   We have witnessed an epic journey by an epic leader.  He started a business, lost early to Bill Gates, gets outsted as CEO, starts Pixar, falls in love and gets married, sells new business to Apple, gets rehired by Apple, slays the music industry model, slays Motorola, Rimm, Nokia, Microsoft, Dell…….

I hope you will take a few moments to enjoy these Bloomberg videos of Steve Jobs.

Another Tough Day

This has been our worst day yet.  So far this month, we are down around 18K over 6 trading days.

I am going to fight very strongly against selling any or our stocks at the next meeting with the exception of Gold which is up nearly 8% from when we bought it a few weeks ago.  It may well follow the way of Silver back a few months ago, and I don’t think any of us want to see those kind of profits disappear.

The good news is that sentiment is near an all time low which means it is time to buy.  Just as I expect gold to strongly correct to the downside, most stocks should bounce rather strongly.  September  will be a much better time to take more money off the table.

The following is something that occurred to me as I was studying the S&P 500 from the previous drop in 2008 to this one. Notice the similarities in the patterns from the previous market high back in 2007 and the high back in May of this year?  This past cyclical bull market was much steeper due to all the free money the Fed threw at it.   Besides having a steeper trend line,but both patterns show a prolonged and choppy topping pattern.  Once support broke, the market dropped precipitously.  It then bounced back strongly.  This is the point I labeled 1 on the chart below.  This would be the point we are at today.  This is part of the reason I think we should expect a strong rally for a few weeks.  I think the S&P could rally back to the 1300 area I have labeled 2.  After that,  I hope we can re-position our portfolio into something with a lot more cash in it, and perhaps more gold again assuming we are able to get out of our current position before it drops.

If You Want To Keep Buying Stocks, Here Is A Great Idea

What A Day

Our portfolio suffered a $5000 hair cut in one day with energy stocks lagging the worst in our portfolio.  Energy stocks are suffering in general due to the impending recession reducing demand for energy.  For much of the day, Kraft Foods was the only traded stock that was positive.  In a very strangely trading range, Kraft opened near 36 on news it was splitting into two companies much like Altria did.  A domestic and a international division.   Ultimately, it closed lower by 1.5%.

Overall, the portfolio suffered a 3,79% loss.  First Federal closed even on the day.  By comparison, the dow closed lower 4.31%, the S&P 4.78, and the NASDAQ 5.08%.

On the plus side, I think the market is poised for a strong rally after tomorrow’s jobs report.  Already, SPY, the S&P 500 ETF is showing up high on the Buy On Weakness list.

What happens from here?  Really and truly, only Ben Bernanke knows the answer.