Wednesday, August 26, 2009

If a Bear Growls in the Woods would anyone hear him?

If you have been following my on my blogs, or Stocktwits you would know I am not a bear or a bull. I trade off combination's of micro and macro factors. I went "all in" back in March, and was 300% invested in the bank stocks for the entire month. I remained fully invested the following months playing themes such as China and Solars. In late May I went long 3x Inverse ETFs (shorts), and killed it short as well. In mid August I started putting on short hedges against my long beta. Fast forward to earlier this week, and you would see that for the first time since the March bottom, I have liquidated 95% of my long positions (in all three accounts that I manage). This is a sea change for me, and here are the reasons why;

If you have followed any of my charts, note that as earlier stated we are at inflection points in many major averages. As examples of inflection points, I would suggest you look at daily's of the QQQQ and SPY indexes. QQQQ's are at a 50% retracement level of it's highs - and 38.2 retracement for the SPY. We actually have gotten by some of these important points just enough to get bullish... And just as a few weeks ago, everyone was calling for a 10% correction - now all I hear is 'next stop' is Dow 10000, or SPX 1200 etc.

The past few days have shown a lot of Dojis. You can Google that, but in layman's terms, a Doji is a reversal day - where price gets rejected and markets subsequently close unchanged. This makes me think back to Ralph Block (Technical analyst when I worked at Raymond James), who used to say "Volatility is the precursor to a change in trend.

Cash held by professional money managers (the *wink* smart money) is at lows not seen since September 08 (we know what happened shortly after that).

Look what is moving in the market... AIG, Fannie May, Fredie Mac making stupid moves (the junk of the junk) All these little biotechnology stocks are having 'goofy' upside moves. Yesterday, the deciding factor (for me to sell everything) was a little penny stock I owned, Vonage whose stock price rose over 300% in two days. This is all late rally price action.

Short interest is at multi year lows. Put call ratio is also painting a bearish picture, with more than 50% more calls being purchased on CBOE.

How about China, whose insatiable appetite for every commodity has mostly driven this entire boom? China Aluminum (the state run Aluminum co for China) came out last night and stated "We have enough oversuply that will take three years to work off".

We are just starting massive weekly bond auctions, that will require China et al to increase their appetite for US bonds by 10x just to absorb the excess supply. Let's see how these go.

The number of stocks trading above than their own 10 week Moving Average, on the New York Stock Exchange (NYSE) is almost 88%. That is the highest level since this data has been collected dating back to 1994 and indicates an extreme overbought condition.

We are now concluding Q2 earnings season - The last time I was net short (late May) was just after earnings season ended...recall how those following weeks went for the stock market (down).

And the biggie is the US Dollar ... The Dollar looks like it had a reversal day, and has put in a bottom (If you follow my Tweets you know I heart the dollar now). If the dollar breaks out (which it looks like it is), look for this Oil and Commodity based bull market to reverse.

I will add more reasons as I am able, but these are a few that should give you caution.

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  1. The other 'tell' on China is the Baltic Dry Index, which is down 45% from its June high.

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