In keeping with my idea of shorting the levered bull ETFs instead of buying the short ETFs, I’m going to be selling UGE, which has barely begun to fulfill its downside potential:
Source: Yahoo! Finance
I am wary of a bounce here, so new shorts at these levels are in small sizes. I’d like to add at higher prices.
The MACD on platinum’s daily bar chart is giving a sell signal:
Source: futures.tradingcharts.com
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Platinum prices and sentiment charged ahead and made a new high a week ago as gold tried to get its mojo back and failed. When the metals complex turned lower, platinum fell hardest, a cool 100 bucks in two days. All of this talk about cars in China is swell, except that they are the only growing auto market these days and even their debt bubble is bursting. And besides, that stuff isn’t tradable information anyway. The fact is, platinum may as well be gold most of the time, since the precious metals move together with a very high degree of correlation.
I haven’t talked much about SRS and SKF in over a year, since I ditched my monster positions in them in late September ’08. I had good reasons in the shorting ban, counterparty risk (seen when some London-listed ETFs with AIG swaps were halted), and the compounding issue.
Now, inverse ETFs are nasty, nasty instruments that can wreck you if you hold them too long or don’t use stops. That said, they do have their place as convenient tools for a market timer without an options or futures account, which for better or worse, means most traders out there. But if you’re thinking about inverse ETFs and you are trading with more than 25k, ask yourself why you don’t have a futures account.
For a pure short position, there is nothing better than futures — you can put on an unlevered position or use as much gearing as any sane person could want, with no slippage, no fees and tiny commissions. Say you have a 100k trading account and you don’t want to risk it all. That’s fine, just short a single e-mini contract. With today’s index prices NQ (Nasdaq 100) is worth 37k; ES (S&P500) is worth 56.5k; TF (Russell 2k) is worth 63.5k and YM (mini Dow) is worth 53k. Some people who will put half their account into a 2x ETF think that is safer than futures. What nonsense! 50k in SDS (-200% S&P) is like selling two 2 ES contracts, except that you pay fees to ProShares and lose money if the market doesn’t fall immediately. You even lose money if the market trends sideways — how nuts is that?
Now, a 100k account could easily be blown to bits if you decide to go all-in and short a cool million worth of S&P contacts (which you can do), but then those 3x ETFs can do the same thing to you. At least with futures you know exactly where your account is going to be at any given SPX level. With ETFs, the way the market moves is as important as where it moves.
Ok, now you know what I really think. But here, for the brave or foolish or IRA-bound, is a chart of SRS and SKF:
Source: Yahoo! FInance
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I’m not saying I’d do it, but their underlying equities (as seen by IYR for REITS and XLF for financials) are some very overbought and tiring debt-addled zombies:
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If what goes down in the next round of credit panic is worse than 2008, and it very well could be, the counterparty risk in short ETFs will be very much an issue. If the markets do crash again and these ETFs soar, it could be prudent to just take the money and run on the first hard leg down.
Here is a 1-year view of platinum (blue) vs. gold (purple). PL made new recovery highs this week as gold and silver potentially finished up corrective rallies from their hard decline off their December highs. PL is the odd man out, and bullishness has been running very high here, mirroring the overall optimism about commodities. The parabolic rise in PL’s chart reminds me of gold’s peak last month. Also nice from a trading perspective is that there is a fairly tight stop available against the high.
Source: Interactive Brokers
Both are overbought on flagging momentum. Note the high and downsloping RSI (Relative Strength Index) since yesterday:
Source: Prophet.net
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I’ve been playing around with Tim Knight’s creation, Prophet Charts, and I have to hand it to him — this is the best assembly of technical analysis tools that I’ve seen. Stockcharts.com is still pretty good for a free service, though (I haven’t tried their subscription tools).
Also of note today is that the VIX has broken 20. Options are cheaper than at any point since the Summer of ’08. The lofty equity valuations, flagging momentum and sense of complacency remind me of the Goldilocks winter and spring of ’07, when prices drifted upward slowly in a narrow channel before suddenly cracking, first with a 400 pt decline in the Dow on one late February day, then with the seizing of the credit markets in late July.
As of early this AM, we have a trendline break on the hourly chart. Still none on the daily or monthly, but as we saw last week after a similar trendline break, this market is capable of cracking with little warning. This is a 1-month view of February gold futures. Last night’s high is the uncle point for the trade.
Source: Interactive Brokers
Gold is much more overbought than even at the March 2008 peak, when it first broke $1000:
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Even hard-core gold bugs like Jim Grant and Gary Savage are backing off for now. The smart money bought gold years ago, and I bet a lot of big players are hedging or pruning positions.
Here’s a 6-month shot of the S&P500 futures:
Source: Interactive Brokers
Looks like another good short set-up here, using a couple of points over today’s high as a stop and 1055 as a target (with much greater bearish potential of course). Like many bears, I’ve been expecting the 2009 rally to peter out since summertime, and I’ve been continually surprised by the stock-buying public’s recklessness, delusion and plain stupidity as evidenced by a PE ratio well over 100 in the face of 10%+ unemployment, shrinking credit, and accelerating foreclosures and bank failures.
That said, the market since summer has given us a series of fairly clear short-term sell signals and has obeyed them with a series of 4-6% declines. Unlike previous rallies that powered through resistance into solid new highs, the rally since the latest interim bottom (November 1-2) has stalled out well within the price range of the previous top (mid-October). Not only that, but the distribution (choppy) pattern within this three-week plateau has exhibited a much wider range than previous ones. Might this instability indicate a pending phase shift, such as when a top gets wobbly before toppling over?
Oil
I want to show some basic charting here with crude, which is supposedly falling because of the supply report today, an explanation that I consider hogwash. Rather, the chart offers some examples of a very simple sell signal: the broken trendline. Yesterday’s signal was classic: it broke a very clear uptrend at a couple of different degrees, attempted a re-test, then fell hard.
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Here in the 2-day view you can see the smaller trend and how its break lead to the break of the larger one:
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This reminds me of last week’s mini stock panic, which was supposedly because of Dubai World. Funny thing is, as EWI noted, stock futures made their high a few hours after Dubai made its announcement.
Markets have rebounded feebly from their early November bottom, with speculative interest focused in fewer sectors than in earlier risk binges. The hot money is now concentrated in big-cap US stocks over small-caps, and in gold over silver, reflecting a shift in preference for quality over junk.
With upside momentum taking a breather, we’re in another distribution zone, where assets move from early buyers to late comers. The put:call ratio, my favorite indicator of complacency, has backed off its recent highs and could approach the extreme lows we’ve seen recently if stocks remain at these levels for a few more sessions. That would be another excellent short-entry signal.
Souce: indexindicators.com
Here’s the last month of trading in the December S&P 500 futures contract:
Source: Interactive Brokers
If precedent holds, we could chop around up here for another week or so and test the highs a couple more times before rolling over. What’s important is that we have made no net progress for three trading days, and that we have a clear stop for a short position.
The moonshot in the Dow has not been confirmed by any other indexes, though a few of them have made minor new highs. The Russell 2000 remains the laggard, remaining well under the October and September highs. The Nikkei is similarly weak, and crude oil has just been working its way down a channel:
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I also suspect that gold’s run is over or nearly so. I’ve never heard so much talk of gold on the financial news and in other contexts. 19 traders are bullish for every bear. This is about as lopsided as it gets, and we’ve had a huge parabolic rise. It is hard to nail down where these ramps will end, but like oil in 2008, when their momentum stalls, they can fall extremely fast.
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For another take on things, here’s the ratio of gold to the US dollar index:
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Clearly the above trajectory is unsustainable. This is the kind of market action that draws everyone in and forces most shorts to cover. When that process is over, an asset can fall under its own weight. Conversely, the most fear and despised currency appears due for another bull run in 2010, in large part because of all the new debt that has piled up this year in the corporate bond frenzy and renewed carry-trade (borrow dollars and buy anything).
That said, gold should continue to outperform most every other asset class for years, since as professor Roy Jastram showed, its purchasing power increases in deflation when there is a gold-standard and when there is not (it is money, after all).
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Well, we’ve hit the first common Fibonacci retracement level (38.1%). We’ve now rallied 350 S&P points after a 904 point fall (1570 to 666). This is the best shorting opportunity since 12 months ago, IMO.
Source: Interactive Brokers
Nasdaq is nicely lagging, and the dollar is looking good. China could have topped already. The chatter on the boards is of scared bears and confident momentum chasers.
Next week could be nasty, maybe a drop to 950 before a rally to test 1000 again soon thereafter. Or maybe we slowly roll over and don’t break 950 til almost Labor Day (first week of Sept — when summer vacation ends in the US).
If this really is wave 3 down, it should be another 5 wave move, like wave 1. During the first wave, and even the second, most won’t believe the top is really in. Wave 1 could start from right here, since the momentum guys would be buying in on the decline and there would be few shorts to drive a squeeze to new highs. It would be seen as a “healthy correction.”
Still in favor are Dec 2011 SPY LEAPS of various strikes, and today I’m eying market darlings Apple and Goldman. The chatter on these two being recession-proof is reaching a fever pitch, and while there is a kernel of truth to that story, their stock prices leave no room for error at these levels. Actually, even if these companies continue to prosper, their stocks will deflate as the market assigns lower multiples to the earnings of its strongest as well as weakest components.
REITS (proxy IYR) can’t hold up much longer either, their short-squeeze having run out of steam while rents start to plummet in earnest.
The question of the summer is how high this market will go while the global reprieve in mood lasts. That the NASDAQ is leading the pack reminds me of late 2007, when the market had started to roll over but the “tech horsemen” (AAPL, RIMM, AMZN, GOOG) kept on rising, against all reason. The fact that it has already reached such heights is a big warning sign. It has almost filled its October gap, a very nice target for a corrective bounce.
Above chart from google finance. BTW, check out wikinvest if you get a chance. It’s got a lot over google and yahoo’s stock pages.
Elliott Wave theory holds that corrections move in three waves (impulse moves in five), so this current push could be viewed as the C-wave in an A-B-C move. When it exhausts, a sea change may ensue, not just a minor reversal. With no fundamental support above SPX 400 (and weak support there), just such a paradigm shift is very much on the table.
