Things seem to be moving much more quickly recently. I had originally titled this post "Bad News Everywhere" on March 22, but in just a week, things don't look so bad anymore.
The big news since my last update is that the SPX successfully tested its January high of 1150 and broke the resistance level to set new highs. Unfortunately for stocks, things don't look so good. But in contrast to last week, things have gotten better for the stock market. Last week, there seemed to be a good possibility that the SPX would face a significant reversal; now, while it's likely the SPX will fall back to 1150, it is likely to find support there. In other words, this bull market still(!) has legs. The market had a key reversal day on Thursday, which lends to the short-term bearishness. More disturbingly, sentiment is near record levels of bullishness, which bodes ill for the short-to-intermediate term. Thus, while the intermediate trend is currently bullish (after having broken above resistance at 1150), there are plenty of caution flags that reinforce the belief that this stock market is not for buy-and-hold investors.
And yet plenty of people will be deceived to think that good times are back. The economy appears to be recovering, and people are eager to spend money -- even if the fundamentals are as bad as, if not worse than, 2008, and even if consumers are simply giving themselves more rope to be hanged with. So it may surprise some people that I predict the S&P will rise by another 60 points, to 1233 to be exact, which is based both on an inverse head and shoulders pattern that I mentioned sometime ago from a source I follow, as well as a 61.8% Fibonacci retracement of the S&P's 2007 high. I think this is the absolute ("absolute" being a relative term in this game) highest it will go. If the SPX manages to blow past this number, then the bull market will turn out to be far more powerful than any of us thought -- and it's already shown itself to be a force to be reckoned with. But I think 1233 will prove itself to be a worthy contender at stopping the advance. When might the stock market reach this level? My guess would be within the next two months or so, but when it reaches it is sort of irrelevant; when it gets there, we'll consider our options. In the meantime, we can continue to expect the same slow, relentless drive upwards, punctuated by a minor correction. Close trailing stops on SPY should work pretty well; just remember that the long-term trend is still down.
The dollar actually reached my target of 82, but just barely. With the target reached, the dollar has since declined. It now seems more likely that the dollar will continue to decline from here, at least for the short term. In this case, the intermediate trend is up, but we should expect to see some consolidation from the dollar. In particular, we should pay attention to two numbers. The first is 80, which is approximately where the 50-day moving average is. The second and more important number is 78.25 or thereabouts, as that is both the 200-day moving average and a 50% retracement. I still believe that the dollar will continue to surprise people, but at the moment it seems a decline is in order.
As I mentioned earlier, the situation in gold has cleared up quite a bit recently, and the declining dollar is another piece of good news for gold. The PM sector was formerly quite correlated with the stock market and not as much with the dollar, but lately gold has returned to its usual pattern of being highly negatively correlated with the USD. Since the dollar is likely to fall, this is very good news for gold. RSI and Stochastics are in favorable alignment, and the 50-day moving average is providing support. In addition, the big move last Friday likely marked the bottom. Strong price action in silver also suggests the end of the consolidation is near or has already occurred. Silver and gold stocks have both shown some vigor, and based on their tendency to lead gold, this portends well for gold prices in the near future. Gold has been very quiet lately, but I would not be surprised to see a quick move back to the $1200 level.
Finally, I'd like to comment on something I don't usually mention, US Treasuries. The 10-year Treasury has begun breaking down, as has the 30-year Treasury, which is bad news on several fronts. Falling prices mean rising interest rates, since bond prices and interest rates move opposite of each other. What do rising rates mean? First, rising interest rates will quickly kill any economic recovery. If consumers can't afford 3-4% mortgages and credit cards, there's no way they'll be able to afford a 5% or 6% or even higher interest rate. Second, rising rates are disastrous for the US government. The deficit is already at gigantic proportions, and this is at record-low interest rates. If rates continue to rise, the government will find it impossible to service all that debt. Interest payments will quickly devour the federal budget. Finally, rising rates portend the specter of inflation has returned. Is the deflation/inflation debate about to be resolved? Stay tuned.
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Wednesday, March 31, 2010
Thursday, March 11, 2010
Signs of a Golden Spring
So much has changed in only two weeks. I first started writing this update on February 26, when things were looking good for the precious metals market, hence the optimistic title. I put off writing some more until March 6, when I wrote, "Since then, things have deteriorated quite a bit." And indeed, since then, things have deteriorated quite a bit, which was proven this week with gold falling by thirty dollars since I wrote that line. But I'm getting ahead of myself here. Let's start at the beginning.
Since my last update, things have more or less gone as I predicted. Stocks continued falling and actually did reach my target of 1037 before reversing in a bullish hammer candlestick pattern on February 5. However, the correction in the stock market was strong enough that according to almost all of the sources I follow, the intermediate trend has turned bearish. While that doesn't mean the stock market can't keep rising (and in fact, it's been rising for several weeks now), that does mean it has to prove itself before we can say the stock market will post new highs. That being said, the S&P is now inches away from its January 19 high of 1150.45 and is ready to test that high.
Tomorrow is going to be a big day. As I said above, the intermediate trend is bearish. In order to turn that trend bullish, the SPX must break above that high and stay above it for three consecutive days. If it does that, then we can say with a fair amount of confidence that the bull market is alive and well and will continue to rise. (Even though from a fundamental standpoint the stock market is outrageously overextended....) Although volume has been declining -- a bearish sign -- the past few days, volume has been increasing with the new highs, which is a bullish sign. In addition, the Dow is about a hundred points from its January high, meaning it needs to catch up, although it's possible we could have a scenario where the Dow catches up and the S&P posts a new high but fails to hold it for the requisite three consecutive days.
If the SPX does not break the January high (i.e., tests and fails), then it is likely that today's high marks a double top, which is very bearish. The most important support level to look at is around 1115, as that is both the 61% Fibonacci retracement level and the 50-day moving average. Using retracements, the next support would be around 1105, then around 1090. The 1090 level also marks an old resistance/support line. I expect the 1115 level to be relatively strong -- if it breaks easily, then stock bulls better be careful. In any case, no matter how you look at it, it's best to be cautious and see what happens before taking positions on either side of the market.
The PMs also did what I expected, though they did fall a bit more than I had thought. However, in keeping with the title of this post, it's not all bad, as things are looking more positive for gold than they have compared to December or January. Unfortunately, as I said at the beginning of my post, the situation has deteriorated quite a bit. The biggest sticking point is that sentiment is excessively frothy considering the rather lackluster price action we've seen in gold. While it's most likely February 5 did mark the beginning of the next bull leg (and hence likely marked the bottom), gold is going to have to take a breather. The nearest support is $1110, which is where gold is at right now, then $1102, then $1093, then $1080. My feeling is that gold will fall below $1100, as sentiment has not improved even though gold has fallen by over thirty dollars. Fortunately, RSI is neutral, and Stochastics are falling rapidly, suggesting the bottom is not too far way, perhaps a week or two from now.
The situation in silver is similar to gold, but the most interesting thing is that silver has shown relative strength. The PM sector has been highly correlated with the stock market lately, more so than with the USD, which is both good and bad, as I will explain in further detail when I talk about the dollar. However, silver has been particularly tightly correlated with stocks. Stocks have been strong, and so silver has been strong. If the SPX breaks out to new highs, then we should continue to see continued strength in silver. If it bounces off resistance, then we could see a rapid decline in silver to match gold's decline. One worrying aspect is that while RSI is neutral, Stochastics are overbought. Thus, I think there's currently more downside risk than upside risk with silver. With that said, my feeling, though, is that we will continue to see silver leading gold. (As an aside, typically silver underperforms gold at the beginning of a bull wave, then outperforms towards the end. Is silver's current outperformance a sign that we can see a strong bull leg in the future?)
Gold stocks are generally mirroring silver's price action, showing relative strength compared to gold. Similar to silver, Stochastics for HUI are also overbought, and thus the near-term downside risk is greater than upside risk. However, as with silver, I think the strength in HUI/GDX is a good sign for the intermediate and longer terms; during the bull run we saw last fall, gold stocks were weaker than gold, which is the opposite of what we normally expect, and an overall negative sign. If they continue to lead gold, then we should see a powerful bull run in the coming months.
Finally, we come to the USD. The dollar reached the upper bound of my target and since then has been consolidating in a flag-like pattern. Both RSI and Stochastics are neutral. I have a feeling that the dollar will continue consolidating for at least a few more days, but my next target is 82. I'm bearish on the dollar over the long term, of course, but I think for the intermediate term things aren't looking so bad. The intermediate trend is bullish, and a bullish golden cross has appeared on the chart. Interestingly, it's possible that a rising dollar will not have much of an effect on gold. One major issue lately is that it's been unclear whether gold would follow stocks or the dollar. We've gotten some clarity lately, as gold and stocks have been rising in concert in spite of the rising dollar. Of course, correlations can change, as we've seen these past few days, as stocks have kept rising while gold has fallen. Nevertheless, barring a euro currency crisis with Greece in the next few weeks (note that I called out Greece as a "looming problem" before the crisis broke!), I don't expect a strong impact from the dollar on gold.
Since this is a longer post than usual, I'll summarize: stocks are at a critical juncture, gold needs to fall some more but is otherwise building a nice foundation for the next bull run, and the dollar might continue to surprise a few people. The overall theme is to be cautious and let things play themselves out before committing to being long or short the market. After all, in this game, you can always catch the next ride.
Since my last update, things have more or less gone as I predicted. Stocks continued falling and actually did reach my target of 1037 before reversing in a bullish hammer candlestick pattern on February 5. However, the correction in the stock market was strong enough that according to almost all of the sources I follow, the intermediate trend has turned bearish. While that doesn't mean the stock market can't keep rising (and in fact, it's been rising for several weeks now), that does mean it has to prove itself before we can say the stock market will post new highs. That being said, the S&P is now inches away from its January 19 high of 1150.45 and is ready to test that high.
Tomorrow is going to be a big day. As I said above, the intermediate trend is bearish. In order to turn that trend bullish, the SPX must break above that high and stay above it for three consecutive days. If it does that, then we can say with a fair amount of confidence that the bull market is alive and well and will continue to rise. (Even though from a fundamental standpoint the stock market is outrageously overextended....) Although volume has been declining -- a bearish sign -- the past few days, volume has been increasing with the new highs, which is a bullish sign. In addition, the Dow is about a hundred points from its January high, meaning it needs to catch up, although it's possible we could have a scenario where the Dow catches up and the S&P posts a new high but fails to hold it for the requisite three consecutive days.
If the SPX does not break the January high (i.e., tests and fails), then it is likely that today's high marks a double top, which is very bearish. The most important support level to look at is around 1115, as that is both the 61% Fibonacci retracement level and the 50-day moving average. Using retracements, the next support would be around 1105, then around 1090. The 1090 level also marks an old resistance/support line. I expect the 1115 level to be relatively strong -- if it breaks easily, then stock bulls better be careful. In any case, no matter how you look at it, it's best to be cautious and see what happens before taking positions on either side of the market.
The PMs also did what I expected, though they did fall a bit more than I had thought. However, in keeping with the title of this post, it's not all bad, as things are looking more positive for gold than they have compared to December or January. Unfortunately, as I said at the beginning of my post, the situation has deteriorated quite a bit. The biggest sticking point is that sentiment is excessively frothy considering the rather lackluster price action we've seen in gold. While it's most likely February 5 did mark the beginning of the next bull leg (and hence likely marked the bottom), gold is going to have to take a breather. The nearest support is $1110, which is where gold is at right now, then $1102, then $1093, then $1080. My feeling is that gold will fall below $1100, as sentiment has not improved even though gold has fallen by over thirty dollars. Fortunately, RSI is neutral, and Stochastics are falling rapidly, suggesting the bottom is not too far way, perhaps a week or two from now.
The situation in silver is similar to gold, but the most interesting thing is that silver has shown relative strength. The PM sector has been highly correlated with the stock market lately, more so than with the USD, which is both good and bad, as I will explain in further detail when I talk about the dollar. However, silver has been particularly tightly correlated with stocks. Stocks have been strong, and so silver has been strong. If the SPX breaks out to new highs, then we should continue to see continued strength in silver. If it bounces off resistance, then we could see a rapid decline in silver to match gold's decline. One worrying aspect is that while RSI is neutral, Stochastics are overbought. Thus, I think there's currently more downside risk than upside risk with silver. With that said, my feeling, though, is that we will continue to see silver leading gold. (As an aside, typically silver underperforms gold at the beginning of a bull wave, then outperforms towards the end. Is silver's current outperformance a sign that we can see a strong bull leg in the future?)
Gold stocks are generally mirroring silver's price action, showing relative strength compared to gold. Similar to silver, Stochastics for HUI are also overbought, and thus the near-term downside risk is greater than upside risk. However, as with silver, I think the strength in HUI/GDX is a good sign for the intermediate and longer terms; during the bull run we saw last fall, gold stocks were weaker than gold, which is the opposite of what we normally expect, and an overall negative sign. If they continue to lead gold, then we should see a powerful bull run in the coming months.
Finally, we come to the USD. The dollar reached the upper bound of my target and since then has been consolidating in a flag-like pattern. Both RSI and Stochastics are neutral. I have a feeling that the dollar will continue consolidating for at least a few more days, but my next target is 82. I'm bearish on the dollar over the long term, of course, but I think for the intermediate term things aren't looking so bad. The intermediate trend is bullish, and a bullish golden cross has appeared on the chart. Interestingly, it's possible that a rising dollar will not have much of an effect on gold. One major issue lately is that it's been unclear whether gold would follow stocks or the dollar. We've gotten some clarity lately, as gold and stocks have been rising in concert in spite of the rising dollar. Of course, correlations can change, as we've seen these past few days, as stocks have kept rising while gold has fallen. Nevertheless, barring a euro currency crisis with Greece in the next few weeks (note that I called out Greece as a "looming problem" before the crisis broke!), I don't expect a strong impact from the dollar on gold.
Since this is a longer post than usual, I'll summarize: stocks are at a critical juncture, gold needs to fall some more but is otherwise building a nice foundation for the next bull run, and the dollar might continue to surprise a few people. The overall theme is to be cautious and let things play themselves out before committing to being long or short the market. After all, in this game, you can always catch the next ride.
Saturday, January 23, 2010
Memories of the Panic of '08
For investors grown complacent by the steady grind upwards in stocks, the dramatic fall these past few days has certainly been a wake-up call. In the past three days, the Dow has fallen over 500 points. Gold is down $40, and the US dollar is surging. The impact in the news that these declines have been generating is somewhat reminiscent of September and October 2008. Is this going to be the beginning of the big fall? While I've been saying for a long time now that the stock market will eventually test and fail the March low of 666 in the S&P, until we see a decisive break downwards, I'm not holding my breath.
I've been bearish on the stock market for a long time now, even though the stock market hasn't been willing to oblige. At the very least, however, it did need a breather; the last correction was back in October. The SPX is down a little over 5% from its high, but a healthy correction often sees a 10% decline. In that case, we could see the market decline to around 1035. More realistically, I would look at 1070 first, which would match better with the previous decline, which was 6.5%, and forms a support level based on a trendline from the two previous lows.
Suppose the market bounces off 1070 and begins yet another rise. What could we expect then? One source claims a long-term reverse head and shoulders target of around 1200-1230, around 15% higher from 1070. I'm slightly skeptical of the justification used for this target (mostly because the volume doesn't really confirm), but we should keep an open mind. And if support at 1070 fails? Frankly, this market has been so (suspiciously) powerful that I won't become bearish until something dramatic happens. If the market breaks through the 200-day moving average, currently at 1007, then I'll reconsider, but until then, I'm begrudgingly bullish on the stock market, at least for the medium term.
Though commentators have been concentrating on everything from disappointing earnings to uncertainty surrounding Ben Bernanke's reappointment as the cause of the recent decline, perhaps the driving factor in my mind is the US dollar, which recently broke out of a flag formation and is surging upwards towards a target of 80-81. This has triggered a sell-off in commodities such as oil and gold, and consequently led to the stock market decline. Considering that we are only about halfway to the target (the dollar is currently at 78.23), I expect more pain ahead.
The recent dollar rise has certainly been the major factor in gold's decline, but gold has been consolidating since its peak of $1225 in early December. Gold is now down about 10% and is likely close to the bottom. However, there's still some room for it to fall, as both RSI and Stochastics are not yet into oversold territory, and it may be another week or two before gold finishes its correction. Bear in mind that though gold has entered into a seasonally weak period, winter overall is gold's strongest season. By the end of its run, gold should post an intermediate top much higher than the recent high of $1225.
Like gold, silver has been consolidating since its early December peak, though its movements of course have been more volatile. Currently at $17, I expect silver to fall a bit more from here, perhaps down to $16.50 or $16 before beginning its ascent. By the end of its run, possibly in April or so, it should easily take out its December high of $19 and perhaps even take out its 2008 high of $21.
Finally, gold stocks, as represented by the Market Vectors Gold Miners ETF (GDX), which is very similar to the AMEX Gold Bugs Index or HUI, have so far suffered a 23% correction from the December high. Stochastics have just entered oversold territory, and RSI at 34 is close to oversold as well. One source claims that the PM sector will likely take a breather of at least a few days before declining some more, and personally, it seems like GDX is serving as a leading indicator. Today, while GLD and SLV both fell, GDX actually slightly rose. GDX is currently at $43.79, but it might need to fall to around $42 or so before it can begin the next bull run.
Gold sentiment got a little too frothy in the past few weeks, but the current correction (which is merely the second part of the larger overall correction) should serve to bleed out bullishness. Gold stocks seem to be slightly ahead of the pack, leading the decline, so we should pay attention to GDX to see when the PM sector will renew its ascent. Silver is lagging gold both financially and temporally and has more to fall, but towards the end of the next bull run, it should begin to outperform gold, as it usually does before intermediate tops.
As noted above, the target for the dollar is 80-81, but I'm still bearish on the dollar over the long run. In the intermediate term, though, we should not discount the fact that the US dollar is still the world's reserve currency. If there is another financial crisis (and there are many looming problems to choose from: Greece, Japan, the UK, Spain, to name a few potential currency crises), we could see a repeat of the Panic of 2008, with a flood of money into the "safe haven" of the USD, causing a surge in the dollar index and Treasury prices and a collapse in stocks and commodities. If that should happen, and it will again one day, all bets are off.
I've been bearish on the stock market for a long time now, even though the stock market hasn't been willing to oblige. At the very least, however, it did need a breather; the last correction was back in October. The SPX is down a little over 5% from its high, but a healthy correction often sees a 10% decline. In that case, we could see the market decline to around 1035. More realistically, I would look at 1070 first, which would match better with the previous decline, which was 6.5%, and forms a support level based on a trendline from the two previous lows.
Suppose the market bounces off 1070 and begins yet another rise. What could we expect then? One source claims a long-term reverse head and shoulders target of around 1200-1230, around 15% higher from 1070. I'm slightly skeptical of the justification used for this target (mostly because the volume doesn't really confirm), but we should keep an open mind. And if support at 1070 fails? Frankly, this market has been so (suspiciously) powerful that I won't become bearish until something dramatic happens. If the market breaks through the 200-day moving average, currently at 1007, then I'll reconsider, but until then, I'm begrudgingly bullish on the stock market, at least for the medium term.
Though commentators have been concentrating on everything from disappointing earnings to uncertainty surrounding Ben Bernanke's reappointment as the cause of the recent decline, perhaps the driving factor in my mind is the US dollar, which recently broke out of a flag formation and is surging upwards towards a target of 80-81. This has triggered a sell-off in commodities such as oil and gold, and consequently led to the stock market decline. Considering that we are only about halfway to the target (the dollar is currently at 78.23), I expect more pain ahead.
The recent dollar rise has certainly been the major factor in gold's decline, but gold has been consolidating since its peak of $1225 in early December. Gold is now down about 10% and is likely close to the bottom. However, there's still some room for it to fall, as both RSI and Stochastics are not yet into oversold territory, and it may be another week or two before gold finishes its correction. Bear in mind that though gold has entered into a seasonally weak period, winter overall is gold's strongest season. By the end of its run, gold should post an intermediate top much higher than the recent high of $1225.
Like gold, silver has been consolidating since its early December peak, though its movements of course have been more volatile. Currently at $17, I expect silver to fall a bit more from here, perhaps down to $16.50 or $16 before beginning its ascent. By the end of its run, possibly in April or so, it should easily take out its December high of $19 and perhaps even take out its 2008 high of $21.
Finally, gold stocks, as represented by the Market Vectors Gold Miners ETF (GDX), which is very similar to the AMEX Gold Bugs Index or HUI, have so far suffered a 23% correction from the December high. Stochastics have just entered oversold territory, and RSI at 34 is close to oversold as well. One source claims that the PM sector will likely take a breather of at least a few days before declining some more, and personally, it seems like GDX is serving as a leading indicator. Today, while GLD and SLV both fell, GDX actually slightly rose. GDX is currently at $43.79, but it might need to fall to around $42 or so before it can begin the next bull run.
Gold sentiment got a little too frothy in the past few weeks, but the current correction (which is merely the second part of the larger overall correction) should serve to bleed out bullishness. Gold stocks seem to be slightly ahead of the pack, leading the decline, so we should pay attention to GDX to see when the PM sector will renew its ascent. Silver is lagging gold both financially and temporally and has more to fall, but towards the end of the next bull run, it should begin to outperform gold, as it usually does before intermediate tops.
As noted above, the target for the dollar is 80-81, but I'm still bearish on the dollar over the long run. In the intermediate term, though, we should not discount the fact that the US dollar is still the world's reserve currency. If there is another financial crisis (and there are many looming problems to choose from: Greece, Japan, the UK, Spain, to name a few potential currency crises), we could see a repeat of the Panic of 2008, with a flood of money into the "safe haven" of the USD, causing a surge in the dollar index and Treasury prices and a collapse in stocks and commodities. If that should happen, and it will again one day, all bets are off.
Wednesday, December 23, 2009
Not Even Close to the Top
Not too long ago, The Colbert Report had a segment on gold, poking fun at the relationship between gold buyers (or more accurately, sellers), and conservatives. Apparently Glenn Beck, among others, is sponsored by a gold investment company. I too find it interesting that there seems to be a connection between conservatives and gold, though those of you who know me well know I'm certainly no conservative, not even close to one. (In fact, I would like to ask, where were these people in the Bush days?) But now that gold has been making headlines in the mainstream media, and now has even been featured in a comedy show, does this mean we're close to the top?
Of course not. As I have mentioned before, when we're close to the top, everyone around you will be investing in gold, hoping to strike it rich. People who have no business speculating in gold mining stocks will be admonishing others for not having put some money on the table yet, or worse, for selling their gold. The top will be characterized by mania, both metaphorically and psychologically.
However, what we have now is consistent with signs of a stage two bull market, where gold begins to be featured in a skeptical media and is still generally ignored by the average Joe, though institutional investors begin to show some enthusiasm. After all, The Colbert Report segment wasn't really positive on gold; in fact, it was negative, trying to tie gold with a bunch of crackpots. But at least we're no longer in stage one -- if we were, there wouldn't even have been a segment in the first place.
As of late 2009, the news media are still negative on gold. Slowly but surely, though, people will warm up to it, laying the groundwork for stage three. Just be patient. Everything is still running on schedule.
Of course not. As I have mentioned before, when we're close to the top, everyone around you will be investing in gold, hoping to strike it rich. People who have no business speculating in gold mining stocks will be admonishing others for not having put some money on the table yet, or worse, for selling their gold. The top will be characterized by mania, both metaphorically and psychologically.
However, what we have now is consistent with signs of a stage two bull market, where gold begins to be featured in a skeptical media and is still generally ignored by the average Joe, though institutional investors begin to show some enthusiasm. After all, The Colbert Report segment wasn't really positive on gold; in fact, it was negative, trying to tie gold with a bunch of crackpots. But at least we're no longer in stage one -- if we were, there wouldn't even have been a segment in the first place.
As of late 2009, the news media are still negative on gold. Slowly but surely, though, people will warm up to it, laying the groundwork for stage three. Just be patient. Everything is still running on schedule.
Wednesday, December 2, 2009
Blow-off Top at Hand?
I have to admit that I am very surprised at how strongly gold has been acting these past several weeks. Gold is up over $16 as I'm writing this at 3 am. It's been making new record highs for a month now, and is currently well over $1200.
This reminds me of my experiences with silver way back in 2004. (Yes, I've been doing this for over five years now.) Silver usually acts just like gold, but much more viciously. Just before the crash, it went all the way to $8.25 an ounce (it's over $19 nowadays, by the way) from around $6 for a gain of almost 40%. Then it crashed, giving back the majority of its gains in just a week or two.
I'm hoping gold won't crash the same way silver does, but all good things come to an end, and a correction of 10% is healthy for a bull market. Sooner or later, the price of gold will suddenly drop $50, taking everyone by surprise, including me. In a bull market, the bull wants to shake you off, but as long as you hold on, everything will be okay.
This reminds me of my experiences with silver way back in 2004. (Yes, I've been doing this for over five years now.) Silver usually acts just like gold, but much more viciously. Just before the crash, it went all the way to $8.25 an ounce (it's over $19 nowadays, by the way) from around $6 for a gain of almost 40%. Then it crashed, giving back the majority of its gains in just a week or two.
I'm hoping gold won't crash the same way silver does, but all good things come to an end, and a correction of 10% is healthy for a bull market. Sooner or later, the price of gold will suddenly drop $50, taking everyone by surprise, including me. In a bull market, the bull wants to shake you off, but as long as you hold on, everything will be okay.
Wednesday, November 25, 2009
"We Sell Gold" and Other Signs
These past few weeks gold has been setting all-time high after all-time high. It reached $1150 an ounce last week and this week reached over $1190 an ounce. While in the short term gold could correct (and probably will, given how overbought it is), in the long run, we're still nowhere near the end of this bull market.
I'm sure you've seen everywhere the signs that say in big bold letters "WE BUY GOLD" in strip malls and on TV. Is this the top? Not at all. People are still skeptical of gold. After all, how many do you know who own gold? Aside from me and your crazy uncle, probably nobody else. We've left stage one of the bull market but we're still in stage two. This concept of different stages applies to all bull markets. In terms of gold, whereas in stage one only gold miners and crackpots were bullish, in stage two institutional investors, the so-called "smart money," have begun showing their interest. But among the general public, and even among the vast majority of Wall Street, there's still widespread skepticism about gold. It's a "barbarous relic" (which has been used as money for the past six thousand years), "it pays no dividends" (nor do tech stocks), "it takes up a lot of space" (you can fit a million dollars worth of gold in a cereal box, I'm not kidding), and so on.
When will we see the top? When we reach phase three of a bull market, the mania phase. How will we know it's the top? It'll be when your next-door neighbor can't stop talking about the latest killing he made on a junior exploration company in Mongolia. It'll be when cocktail party conversation revolves around grams per ton of mineralization. It'll be when investing in gold will be a "sure thing," just like how buying real estate was such a "sure thing" three years ago. It'll be when, instead of "We Buy Gold" signs everywhere, we'll see "We Sell Gold" signs everywhere. That's when it'll be time to get out before the lemmings fall off the cliff yet again, as they always have. And while everyone despairs at the collapse of the gold market, the sickening realization that that "sure thing" wasn't so sure after all, we'll be on the other side of the trade, shorting the hell out of gold and making money off the folly of others. But that's maybe six or seven years from now. Until then, I'll take my chances on the barbarous relic that's gained every year since 2001 over the "stocks for the long run" that have returned a total of 0% during the past decade.
I hate to make it sound like I'll be a wolf preying on sheep, but that's the truth of it. And though I might make it sound easy, I promise you it won't be easy. At every step along the way, you'll face obstacles. People will think you're crazy. No not just crazy, actually crazy. Your friends will ridicule you as mine have, and even your family will doubt you as mine have. But you must never let go. You cannot let the ephemeral emotions of those around you overrule the sound, logical reasons of why you're doing what you're doing. You must resist the crowd. And in the end, at the top of the bull market, people will praise you, they'll say you were a genius for seeing the light so early.
I've been doing this for many years now, and it's still not easy for me. But one day it'll all be worth it.
But only for one day, because as soon as people start praising my "intelligence" or "foresight," I'll know it's time to start shorting gold. It'll be time to take the unpopular road, to do the opposite of what others are doing, and to be called crazy once again.
The path to riches is lonely.
I'm sure you've seen everywhere the signs that say in big bold letters "WE BUY GOLD" in strip malls and on TV. Is this the top? Not at all. People are still skeptical of gold. After all, how many do you know who own gold? Aside from me and your crazy uncle, probably nobody else. We've left stage one of the bull market but we're still in stage two. This concept of different stages applies to all bull markets. In terms of gold, whereas in stage one only gold miners and crackpots were bullish, in stage two institutional investors, the so-called "smart money," have begun showing their interest. But among the general public, and even among the vast majority of Wall Street, there's still widespread skepticism about gold. It's a "barbarous relic" (which has been used as money for the past six thousand years), "it pays no dividends" (nor do tech stocks), "it takes up a lot of space" (you can fit a million dollars worth of gold in a cereal box, I'm not kidding), and so on.
When will we see the top? When we reach phase three of a bull market, the mania phase. How will we know it's the top? It'll be when your next-door neighbor can't stop talking about the latest killing he made on a junior exploration company in Mongolia. It'll be when cocktail party conversation revolves around grams per ton of mineralization. It'll be when investing in gold will be a "sure thing," just like how buying real estate was such a "sure thing" three years ago. It'll be when, instead of "We Buy Gold" signs everywhere, we'll see "We Sell Gold" signs everywhere. That's when it'll be time to get out before the lemmings fall off the cliff yet again, as they always have. And while everyone despairs at the collapse of the gold market, the sickening realization that that "sure thing" wasn't so sure after all, we'll be on the other side of the trade, shorting the hell out of gold and making money off the folly of others. But that's maybe six or seven years from now. Until then, I'll take my chances on the barbarous relic that's gained every year since 2001 over the "stocks for the long run" that have returned a total of 0% during the past decade.
I hate to make it sound like I'll be a wolf preying on sheep, but that's the truth of it. And though I might make it sound easy, I promise you it won't be easy. At every step along the way, you'll face obstacles. People will think you're crazy. No not just crazy, actually crazy. Your friends will ridicule you as mine have, and even your family will doubt you as mine have. But you must never let go. You cannot let the ephemeral emotions of those around you overrule the sound, logical reasons of why you're doing what you're doing. You must resist the crowd. And in the end, at the top of the bull market, people will praise you, they'll say you were a genius for seeing the light so early.
I've been doing this for many years now, and it's still not easy for me. But one day it'll all be worth it.
But only for one day, because as soon as people start praising my "intelligence" or "foresight," I'll know it's time to start shorting gold. It'll be time to take the unpopular road, to do the opposite of what others are doing, and to be called crazy once again.
The path to riches is lonely.
Friday, November 20, 2009
The Deceptively Quiet USD
Looking at the very short term, SPY looks like it will go down. RSI and MACD both touched trend lines, and they declined today. Looking at the price action, the rally from the beginning of November has been pretty unimpressive. In fact, it looks like SPY has been carving out a rounded top. If I'm right about this, we should see about a week and a half of declines. From there, we'll have to reevaluate.
While the March bull could still put in some more gains between now and the end of the year (frankly, I think that's the most likely scenario), the nonconfirmation in small-caps (Dow stronger than S&P stronger than Russell) or financials (and the potential triple top in the Dow Transports) almost certainly means this rally is on its last legs. But I've been saying that for a while, so I'll believe it when I see it.
The much more fun chart to look at is gold, which has been posting new all-time highs virtually every day for two weeks now. Amazingly, the price action has begun to look slightly parabolic. While it's certainly possible the rally could continue higher, unfortunately, for the short term I think gold is getting a little overextended. One source I follow thinks that the absolute highest short-term target for gold is $1174; if it gets there, it's virtually assured to take a breather. In addition, gold market sentiment data are bearish from a contrarian perspective.
Silver and HUI/GDX (the gold stocks index/ETF) were previously not confirming, which is a bad sign, but lately silver has caught up very nicely, including a 5% gain in one day this week (much better than a 1.75% 12-month CD or especially the 0.25% 12-month CD Chase is offering!). RSI for silver broke out of a declining trend line and right now is 65, suggesting there's still room for gains, but conversely, price is touching the September trend line.
For the medium term, we've now entered the seasonally strong period for gold lasting till February, and we're only about halfway through, so I expect gold will eventually go much higher than $1174 before this rally is done, but a correction back to $1080 is certainly not out of the question. This fits well with a recent update from another letter I follow, where the author points out a beautiful parabolic uptrend in existence since April and is bullish as long as gold stays above it (somewhere around $1060 currently).
As for the dollar, the 75 level has proven to be pretty good support. I still think there's much more upside risk than downside risk, especially when looking at a one-year chart. If it can decisively break below 75, then the next target is 74, then 72. After that, it's a long way down to the bottom of the channel -- 69 or below! If it breaks up out of the bullish falling wedge, though, it could approach its 200-day moving average at 81. Either way, the dollar is setting up for a huge move.
While the March bull could still put in some more gains between now and the end of the year (frankly, I think that's the most likely scenario), the nonconfirmation in small-caps (Dow stronger than S&P stronger than Russell) or financials (and the potential triple top in the Dow Transports) almost certainly means this rally is on its last legs. But I've been saying that for a while, so I'll believe it when I see it.
The much more fun chart to look at is gold, which has been posting new all-time highs virtually every day for two weeks now. Amazingly, the price action has begun to look slightly parabolic. While it's certainly possible the rally could continue higher, unfortunately, for the short term I think gold is getting a little overextended. One source I follow thinks that the absolute highest short-term target for gold is $1174; if it gets there, it's virtually assured to take a breather. In addition, gold market sentiment data are bearish from a contrarian perspective.
Silver and HUI/GDX (the gold stocks index/ETF) were previously not confirming, which is a bad sign, but lately silver has caught up very nicely, including a 5% gain in one day this week (much better than a 1.75% 12-month CD or especially the 0.25% 12-month CD Chase is offering!). RSI for silver broke out of a declining trend line and right now is 65, suggesting there's still room for gains, but conversely, price is touching the September trend line.
For the medium term, we've now entered the seasonally strong period for gold lasting till February, and we're only about halfway through, so I expect gold will eventually go much higher than $1174 before this rally is done, but a correction back to $1080 is certainly not out of the question. This fits well with a recent update from another letter I follow, where the author points out a beautiful parabolic uptrend in existence since April and is bullish as long as gold stays above it (somewhere around $1060 currently).
As for the dollar, the 75 level has proven to be pretty good support. I still think there's much more upside risk than downside risk, especially when looking at a one-year chart. If it can decisively break below 75, then the next target is 74, then 72. After that, it's a long way down to the bottom of the channel -- 69 or below! If it breaks up out of the bullish falling wedge, though, it could approach its 200-day moving average at 81. Either way, the dollar is setting up for a huge move.
Wednesday, November 4, 2009
"The Road Not Taken"
Robert Frost's poem "The Road Not Taken" is a well-known poem that many of us read back in middle school or high school. Everyone thinks it's an inspirational poem, a piece that encourages us to think for ourselves and not follow the crowd. Most critics, however, see the poem as an ironic piece, a poem that tries to rationalize a choice that was identical to the other. Consider the last stanza:
"I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I --
I took the one less traveled by,
And that has made all the difference."
Most people read this literally: The sigh is one of contentment, and the speaker is glad because he's better off for having taken the road less travelled by. But this is wrong. (And why is he better off? You could equally validly interpret this negatively: The sigh is one of regret, and the speaker is remorseful because he's worse off for having taken the road less travelled by. In this case, we should all be conformists and stick rigidly with the group!)
If you look at the second and third stanzas, you'll see that the speaker himself notes that neither path is actually more travelled than the other. After all, he says that "the passing there / Had worn them really about the same." And if you pay attention to those two lines, then the last stanza (the one copied above) makes sense: The speaker's claiming that his choice "has made all the difference" is ironic because he's trying to justify a decision that was essentially arbitrary -- the two paths were identical. The speaker's sigh adds to that irony. What was at the time merely a choice between two equal unknowns has been mythologized into a story that seeks to elevate his decision into something that changed the course of his life. Those to whom he tells his story in the future will be led away with a false sense of grandeur, but we on the other hand know the naked truth.
So why did I bring up this poem? I read an investment article today, and the article's author, explaining his contrarian position, committed the common sin of believing "The Road Not Taken" was an ode to individualism. (At least he didn't commit the other common sin of believing the title to be "The Road Less Travelled.") It's very tangential, I admit, but there you have it.
"I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I --
I took the one less traveled by,
And that has made all the difference."
Most people read this literally: The sigh is one of contentment, and the speaker is glad because he's better off for having taken the road less travelled by. But this is wrong. (And why is he better off? You could equally validly interpret this negatively: The sigh is one of regret, and the speaker is remorseful because he's worse off for having taken the road less travelled by. In this case, we should all be conformists and stick rigidly with the group!)
If you look at the second and third stanzas, you'll see that the speaker himself notes that neither path is actually more travelled than the other. After all, he says that "the passing there / Had worn them really about the same." And if you pay attention to those two lines, then the last stanza (the one copied above) makes sense: The speaker's claiming that his choice "has made all the difference" is ironic because he's trying to justify a decision that was essentially arbitrary -- the two paths were identical. The speaker's sigh adds to that irony. What was at the time merely a choice between two equal unknowns has been mythologized into a story that seeks to elevate his decision into something that changed the course of his life. Those to whom he tells his story in the future will be led away with a false sense of grandeur, but we on the other hand know the naked truth.
So why did I bring up this poem? I read an investment article today, and the article's author, explaining his contrarian position, committed the common sin of believing "The Road Not Taken" was an ode to individualism. (At least he didn't commit the other common sin of believing the title to be "The Road Less Travelled.") It's very tangential, I admit, but there you have it.
Saturday, October 31, 2009
Indecisive Mr. Market
The bearish case I laid out on Wednesday was apparently invalidated yesterday with an especially strong rally in the stock market that seemed to be a bounce off support. But then today the market completely reversed itself. In fact, both SPX and XLF broke supports even worse than they did on Wednesday. The Dow Transports look extremely precarious. While it is possible that Mr. Market is merely trying to fool everybody -- bulls and bears included -- based on what's happened, the most likely case now is a decline in the stock market. How low? I don't know, but if SPX touches its 200-day moving average at 920, that's an 11% drop from here (16% drop from its peak at 1100). And if it continues to fall, it looks like there's some good support at 875, or a 16% drop from here and a 20% drop from the peak. This would put us right back at the July lows. Beyond that, it's too fuzzy to say on a short-to-intermediate term basis. (The bear in me would like to point out that eventually -- possibly but probably not sometime between now and the end of the year -- the stock market will test and break its low of 666 in March.) However, we must keep in mind that the stock market could be lying and will launch yet another bull run, in which case my target of 1130 would apply. This comes out to a decent 9% gain. I hate to be wishy-washy, but in this game you've got to keep an open mind. The next few days will give us some clarity.
Gold got away from today's action unscathed, and silver declined, but not as bad as it did on Wednesday. Interestingly, the dollar did not get as high as on Wednesday. This might be significant, though I'm worried I might end up missing the forest for the trees trying to predict things by looking at day-to-day action. But let's give it a try. The dollar posted strong gains today, but gold barely fell. Considering that the two are strongly negatively correlated, this is rather unusual. It could be due to physical demand, in particular demand from India for the festival and wedding seasons. However, I think that investment demand is going to play a big factor in price-setting. Open interest numbers for both gold and silver futures have been very high lately, and the big declines earlier in the week did nothing to dampen interest. This is worrying because it's the perfect setup for a nasty correction in the metals. Though the physical market may soften the declines, it's the paper market that tends to move the price. However, note that it is possible for the dollar to rally and gold to stay relatively stable, as long as the physical market continues buying, and as long as the gold shorts (the bullion banks that control the majority of the gold market on the COMEX) don't try orchestrating a bear raid. Alternatively, perhaps a dollar rally will be the catalyst (as it usually is) for a gold correction that rapidly drains out open interest, but with only a relatively minor price decline as the physical market enthusiastically moves in to buy at lower prices. I admit things aren't very clear -- after all, gold has been positively correlated with the stock market lately, and things aren't clear there either -- but we'll find out what happens soon. And with a bullish candlestick piercing line pattern showing in the USD chart today, the next few days will be very insightful.
Gold got away from today's action unscathed, and silver declined, but not as bad as it did on Wednesday. Interestingly, the dollar did not get as high as on Wednesday. This might be significant, though I'm worried I might end up missing the forest for the trees trying to predict things by looking at day-to-day action. But let's give it a try. The dollar posted strong gains today, but gold barely fell. Considering that the two are strongly negatively correlated, this is rather unusual. It could be due to physical demand, in particular demand from India for the festival and wedding seasons. However, I think that investment demand is going to play a big factor in price-setting. Open interest numbers for both gold and silver futures have been very high lately, and the big declines earlier in the week did nothing to dampen interest. This is worrying because it's the perfect setup for a nasty correction in the metals. Though the physical market may soften the declines, it's the paper market that tends to move the price. However, note that it is possible for the dollar to rally and gold to stay relatively stable, as long as the physical market continues buying, and as long as the gold shorts (the bullion banks that control the majority of the gold market on the COMEX) don't try orchestrating a bear raid. Alternatively, perhaps a dollar rally will be the catalyst (as it usually is) for a gold correction that rapidly drains out open interest, but with only a relatively minor price decline as the physical market enthusiastically moves in to buy at lower prices. I admit things aren't very clear -- after all, gold has been positively correlated with the stock market lately, and things aren't clear there either -- but we'll find out what happens soon. And with a bullish candlestick piercing line pattern showing in the USD chart today, the next few days will be very insightful.
Wednesday, October 28, 2009
A Dying Bull?
Writing an investing-related email to a friend has put me in the mood to finally write an investing-related post, so here goes:
Looking at trend lines and RSI, the dollar is right at the edge of resistance. If it can break past 77, we could see a pretty big rally in the dollar. If, on the other hand, it bounces down from resistance and falls below support at 75, the articles and newsletters I follow say there's nothing to stop it from falling further until it reaches 72.
Silver has taken a big beating the past few days and is now approaching support at $16. It broke through the 50 day moving average today. I'm not sure how low it'll go if it falls below $16, but when $16 was resistance, $14 was support. Gold has fallen as well, but not as much. The technical picture is similar though. There was support at the $1030-$1035 range. Gold is slightly below that now (at $1028), so that might be enough to say it's broken. The next support level is around $1000.
Now we get to the interesting part. Since August, there's been a very nice channel in SPX (the S&P 500). It touched the upper trend line four times and fell back, and it touched the bottom line three times and bounced up. It is now at the bottom line again, but this time, it's slightly broken through it. (The trend line goes through 1050 and SPX ended the day at 1043.) This is bad news for the bull market, of course, but because it hasn't decisively broken through it yet, it would be premature to declare a new trend is at hand. However, we have other news to suggest that the bull market is on shaky ground. The Dow Jones Transports formed a double top and has broken through support. XLF (the financial sector ETF) is also right at support. Goldman Sachs, the bellwether of this bull market, has turned somewhat bearish, breaking through its low on October 2, and it's decisively broken through its 50-day moving average. It's also broken through support at 50 RSI, which for the past several months has been the point where the stock bounced back. In sum, we're at a potential turning point in the stock market. Unlike previous times, this time GS is showing bearish signals. If SPX bounces back from its current levels, then the bull market should be intact, possibly till the end of the year. (The next target would be 1130 or higher.) If it decisively breaks through support, it'd be wise to get out until the market can find a new level of support.
The thing to watch will be the USD. There's been a very big inverse correlation between the dollar and stocks lately. This might be due to a dollar carry trade similar to what was going on in the yen a few years back. In this case, traders are borrowing dollars at ultra-low rates and investing them in assets have posted a higher return, like stocks (and gold too). Investors have become much less risk-averse lately -- a little too daring, in my opinion. Although there have been a few hints that the dollar is about to reverse course and start heading higher, especially if it can breach 77, it's not yet entirely clear what the dollar will do. In any case, it'll be the dollar that leads, not the other way around.
Looking at trend lines and RSI, the dollar is right at the edge of resistance. If it can break past 77, we could see a pretty big rally in the dollar. If, on the other hand, it bounces down from resistance and falls below support at 75, the articles and newsletters I follow say there's nothing to stop it from falling further until it reaches 72.
Silver has taken a big beating the past few days and is now approaching support at $16. It broke through the 50 day moving average today. I'm not sure how low it'll go if it falls below $16, but when $16 was resistance, $14 was support. Gold has fallen as well, but not as much. The technical picture is similar though. There was support at the $1030-$1035 range. Gold is slightly below that now (at $1028), so that might be enough to say it's broken. The next support level is around $1000.
Now we get to the interesting part. Since August, there's been a very nice channel in SPX (the S&P 500). It touched the upper trend line four times and fell back, and it touched the bottom line three times and bounced up. It is now at the bottom line again, but this time, it's slightly broken through it. (The trend line goes through 1050 and SPX ended the day at 1043.) This is bad news for the bull market, of course, but because it hasn't decisively broken through it yet, it would be premature to declare a new trend is at hand. However, we have other news to suggest that the bull market is on shaky ground. The Dow Jones Transports formed a double top and has broken through support. XLF (the financial sector ETF) is also right at support. Goldman Sachs, the bellwether of this bull market, has turned somewhat bearish, breaking through its low on October 2, and it's decisively broken through its 50-day moving average. It's also broken through support at 50 RSI, which for the past several months has been the point where the stock bounced back. In sum, we're at a potential turning point in the stock market. Unlike previous times, this time GS is showing bearish signals. If SPX bounces back from its current levels, then the bull market should be intact, possibly till the end of the year. (The next target would be 1130 or higher.) If it decisively breaks through support, it'd be wise to get out until the market can find a new level of support.
The thing to watch will be the USD. There's been a very big inverse correlation between the dollar and stocks lately. This might be due to a dollar carry trade similar to what was going on in the yen a few years back. In this case, traders are borrowing dollars at ultra-low rates and investing them in assets have posted a higher return, like stocks (and gold too). Investors have become much less risk-averse lately -- a little too daring, in my opinion. Although there have been a few hints that the dollar is about to reverse course and start heading higher, especially if it can breach 77, it's not yet entirely clear what the dollar will do. In any case, it'll be the dollar that leads, not the other way around.
Sunday, September 6, 2009
False Alarm
It's 3:49 am right now. As I was about to turn off my computer, I had the vague, uneasy feeling that I was forgetting to do something important. Suddenly, I remembered: I need to check what the markets are up to.
Sorry, that's totally not it. Not only is it not Monday morning, but even if it were, this Monday is Labor Day, and the (US) markets would be closed anyway. Maybe there wasn't anything important to begin with, or if there were, I still can't remember it anyway.
This false alarm does bring up something I've been thinking about, though: Is investing a job or a hobby?
I don't consider myself a professional trader or investor because I don't have the pretensions of one. I don't work for a bank or hedge fund, and I don't spend all day looking at a screen, or shell out hundreds or even thousands of dollars on investment newsletters, or move around large chunks of cash. But in some ways, I am one; I know a lot about investing, far more than the average person, and probably more than average person who calls himself an "investor." It all depends on how you define "professional" versus "amateur."
If we're looking at strict definitions, aren't I a professional if it's my profession? It's what I do for a few hours nearly every day. Since I don't have a job, it's pretty much the only way I make money (although I'm not investing my money so I can spend it). On the other hand, as I said, I don't have the professional's pretensions. I'm not investing so I can put food on the table.
Maybe I should consider myself an amateur, then, in the older sense of the word. The word "amateur" sometimes has the pejorative connotation of somebody inexperienced in what they're doing, but some amateurs have made pretty impressive contributions; I'm thinking especially of "gentleman scientists." In this case, there's no difference between a professional and an amateur other than one does it for money (his profession), and one does it for love (amor, the ultimate source of the word "amateur").
On the other hand, I'd be thrilled if I could turn my hobby into a money-making activity -- that is, enough of a money-making activity that I could live off of my investments. So, right now I'm still an amateur. But let's kick it up a notch. I recently made a thousand bucks in a day's work. If I can make $3000 in a day, or achieve a return of 150% in a year, I'll consider myself a professional. Until then, I'm doing this for the love of it.
Sorry, that's totally not it. Not only is it not Monday morning, but even if it were, this Monday is Labor Day, and the (US) markets would be closed anyway. Maybe there wasn't anything important to begin with, or if there were, I still can't remember it anyway.
This false alarm does bring up something I've been thinking about, though: Is investing a job or a hobby?
I don't consider myself a professional trader or investor because I don't have the pretensions of one. I don't work for a bank or hedge fund, and I don't spend all day looking at a screen, or shell out hundreds or even thousands of dollars on investment newsletters, or move around large chunks of cash. But in some ways, I am one; I know a lot about investing, far more than the average person, and probably more than average person who calls himself an "investor." It all depends on how you define "professional" versus "amateur."
If we're looking at strict definitions, aren't I a professional if it's my profession? It's what I do for a few hours nearly every day. Since I don't have a job, it's pretty much the only way I make money (although I'm not investing my money so I can spend it). On the other hand, as I said, I don't have the professional's pretensions. I'm not investing so I can put food on the table.
Maybe I should consider myself an amateur, then, in the older sense of the word. The word "amateur" sometimes has the pejorative connotation of somebody inexperienced in what they're doing, but some amateurs have made pretty impressive contributions; I'm thinking especially of "gentleman scientists." In this case, there's no difference between a professional and an amateur other than one does it for money (his profession), and one does it for love (amor, the ultimate source of the word "amateur").
On the other hand, I'd be thrilled if I could turn my hobby into a money-making activity -- that is, enough of a money-making activity that I could live off of my investments. So, right now I'm still an amateur. But let's kick it up a notch. I recently made a thousand bucks in a day's work. If I can make $3000 in a day, or achieve a return of 150% in a year, I'll consider myself a professional. Until then, I'm doing this for the love of it.
Wednesday, September 2, 2009
September Is the Cruellest Month
For some unknown reason, September is traditionally the worst month for the stock market. People have proposed various theories, but none seems to be particularly satisfactory. In any case, now the September is upon us, let's have a look at what's been going on lately in the markets.
Gold has been in a trading range all summer. It's formed a symmetrical triangle formation, which suggests that gold should break out soon. Since symmetrical triangles are consolidation patterns, most likely gold will go up, though we can't rule out a sharp break to the downside either. September, interestingly, is the best month for gold, so we should expect something big from it soon. If it's like most past Septembers, it'll be a big move up.
Silver has been more active than gold, but it too has been more or less bounded since it last made a high at $16 back in June. We can expect it to follow it gold, though lately it has been matching movements in the stock market a lot. If gold is going to go higher soon, this should mean silver will go higher too.
Like gold and silver, oil hasn't moved that much all summer. It had a big run-up in the spring, but then refused to go higher than $75. Lately, oil has been attempting to breach $75 again, but I'm a little bearish on oil, at least in the short and medium term. Oil will go higher eventually, but right now, unless it can decisively take out $75, more likely we'll be looking at a correction.
The stock market has been on an endless climb upwards since March. I've been saying for a long while now that this can't continue forever, not with the horrible economic situation, but as John Maynard Keynes said, "The market can stay irrational longer than you can stay solvent." The worst offenders are the financial stocks. Most banks are not worth anywhere near what the market thinks they're worth; in fact, most of them are worth nothing more than $0. But when "investors" ignore reason, anything can happen. Stocks will keep on going up... until they stop going up. Then they'll crash as everyone realizes they've been had. September may prove to live up to its red legacy.
So that's what I see going on. Gold and silver will go up, oil will probably go down, and the stock market should go down but may continue to defy logic again. I don't purport to have a crystal ball, but all I can say is that reason and probability are on my side.
Gold has been in a trading range all summer. It's formed a symmetrical triangle formation, which suggests that gold should break out soon. Since symmetrical triangles are consolidation patterns, most likely gold will go up, though we can't rule out a sharp break to the downside either. September, interestingly, is the best month for gold, so we should expect something big from it soon. If it's like most past Septembers, it'll be a big move up.
Silver has been more active than gold, but it too has been more or less bounded since it last made a high at $16 back in June. We can expect it to follow it gold, though lately it has been matching movements in the stock market a lot. If gold is going to go higher soon, this should mean silver will go higher too.
Like gold and silver, oil hasn't moved that much all summer. It had a big run-up in the spring, but then refused to go higher than $75. Lately, oil has been attempting to breach $75 again, but I'm a little bearish on oil, at least in the short and medium term. Oil will go higher eventually, but right now, unless it can decisively take out $75, more likely we'll be looking at a correction.
The stock market has been on an endless climb upwards since March. I've been saying for a long while now that this can't continue forever, not with the horrible economic situation, but as John Maynard Keynes said, "The market can stay irrational longer than you can stay solvent." The worst offenders are the financial stocks. Most banks are not worth anywhere near what the market thinks they're worth; in fact, most of them are worth nothing more than $0. But when "investors" ignore reason, anything can happen. Stocks will keep on going up... until they stop going up. Then they'll crash as everyone realizes they've been had. September may prove to live up to its red legacy.
So that's what I see going on. Gold and silver will go up, oil will probably go down, and the stock market should go down but may continue to defy logic again. I don't purport to have a crystal ball, but all I can say is that reason and probability are on my side.
Saturday, August 15, 2009
Investing Update #4
I sold all of my silver and silver options the other day for some very nice gains, and today I bought some silver put options. I was afraid that silver would keep on going up, but it had a pretty bad day today. I think there will be a small recovery on Monday, though. If that does happen, I will probably increase my silver put option position.
I am extremely annoyed by the fact that financials have been stronger than the overall market no matter what happens. When the broad market goes up 1%, financials will go up 2%. When the broad market goes down 1%, financials will go down 0.5%... or sometimes even go up 1% anyway. The banking sector is still rotten to the core -- nothing has changed -- but I've been waiting for three months now, and the options-like decay of leveraged funds has probably wreaked havoc on my positions.
I also need to work on my risk management. Almost all of my trades so far have been winning trades, except for two: FAZ and SDS. Although I'm annoyed by the size of my loss in SDS, I'm not that worried about it because it's such a small position. But when I bought FAZ, it formed somewhere around a third of my portfolio. I made two big mistakes buying FAZ. First, I bought too much of it. Except for gold and silver, which I know very well, I've decided that I should not be putting any more than 20% into any single investment. Second, I didn't sell it sooner. What I should have done was sell it when the loss got beyond a certain point, say 20%. I could then easily get back in if I saw that it had reversed itself and starting posting gains. Related to this point, the majority of my trades have been very short, typically no more than a month or a month and a half long. A 20% loss would have been bad, but it would have stopped me from getting even bigger losses (I'm down nearly 70% on FAZ), but equally important, I would have had the extra capital to invest in something else and hopefully make 20% on some other investment to make up for my 20% loss.
I've also learned that buying leveraged ETFs is like playing with fire: It's all fun and games until somebody gets hurt. I've been burned enough times now that the next time I want to bet against the financial sector, I'll buy put options on XLF (the single-leveraged financial ETF) instead of risking my money on SKF or FAZ. Options are certainly more volatile, but at least they're a little more predictable.
I'm still up overall, but my bad bets on SDS and FAZ have been dragging my performance down a lot. I'm effectively subsidizing my losses with the gains I've made on my other investments. I would sell them, but I'm still hoping for that long-awaited stock market crash, and it's been so long now that I might as well hold them until the end. I'm not asking for much; the best I'm hoping for is to break even. As they say, hope springs eternal.
Closed Trades
7. LONG iShares Silver Trust (SLV)
Bought 150 shares at $13.53; sold 150 shares at $14.74; gain of 8.9%; held for 51 days.
8. LONG iShares Silver Trust October 14 Call Options (SLVJN)
Bought 15 contracts at $0.90; sold 15 contracts at $1.34; gain of 48.9%; held for ~34 days.
9. LONG iShares Silver Trust October 15 Call Options (SLVJO)
Bought 5 contracts at $0.87; sold 5 contracts at $0.83; loss of 4.6%; held for 47 days.
10. LONG iShares Silver Trust January 14 Call Options (SLVAN)
Bought 5 contracts at $1.27; sold 5 contracts at $1.78; gain of 40.2%; held for 20 days.
Open Trades
1. LONG ProShares Ultra Short S&P 500 (SDS) (effectively SHORT)
Bought 5 shares at $67.14; currently at $45.35; loss of 32.5%; held for 112 days.
2. LONG Direxion Daily Financial Bear 3x Shares (FAZ) (effectively SHORT)
Bought 32 shares at $78.86; currently at $25.73; loss of 67.4%; held for ~109 days.
3. LONG SPDR Gold Trust January 100 Call Options (GLDAV)
Bought 2 contracts at $4.13; currently at $3.50; loss of 15.3%; held for 22 days.
4. SHORT Intel Corp (INTC)
Sold short 15 shares at $19.17; currently at $18.77; gain of 2.1%; held for 22 days.
5. LONG iShares Silver Trust January 13 Put Options (SLVMM)
Bought 10 contracts at $0.76; currently at $0.74; loss of 2.6%; held for 0 days.
I am extremely annoyed by the fact that financials have been stronger than the overall market no matter what happens. When the broad market goes up 1%, financials will go up 2%. When the broad market goes down 1%, financials will go down 0.5%... or sometimes even go up 1% anyway. The banking sector is still rotten to the core -- nothing has changed -- but I've been waiting for three months now, and the options-like decay of leveraged funds has probably wreaked havoc on my positions.
I also need to work on my risk management. Almost all of my trades so far have been winning trades, except for two: FAZ and SDS. Although I'm annoyed by the size of my loss in SDS, I'm not that worried about it because it's such a small position. But when I bought FAZ, it formed somewhere around a third of my portfolio. I made two big mistakes buying FAZ. First, I bought too much of it. Except for gold and silver, which I know very well, I've decided that I should not be putting any more than 20% into any single investment. Second, I didn't sell it sooner. What I should have done was sell it when the loss got beyond a certain point, say 20%. I could then easily get back in if I saw that it had reversed itself and starting posting gains. Related to this point, the majority of my trades have been very short, typically no more than a month or a month and a half long. A 20% loss would have been bad, but it would have stopped me from getting even bigger losses (I'm down nearly 70% on FAZ), but equally important, I would have had the extra capital to invest in something else and hopefully make 20% on some other investment to make up for my 20% loss.
I've also learned that buying leveraged ETFs is like playing with fire: It's all fun and games until somebody gets hurt. I've been burned enough times now that the next time I want to bet against the financial sector, I'll buy put options on XLF (the single-leveraged financial ETF) instead of risking my money on SKF or FAZ. Options are certainly more volatile, but at least they're a little more predictable.
I'm still up overall, but my bad bets on SDS and FAZ have been dragging my performance down a lot. I'm effectively subsidizing my losses with the gains I've made on my other investments. I would sell them, but I'm still hoping for that long-awaited stock market crash, and it's been so long now that I might as well hold them until the end. I'm not asking for much; the best I'm hoping for is to break even. As they say, hope springs eternal.
Closed Trades
7. LONG iShares Silver Trust (SLV)
Bought 150 shares at $13.53; sold 150 shares at $14.74; gain of 8.9%; held for 51 days.
8. LONG iShares Silver Trust October 14 Call Options (SLVJN)
Bought 15 contracts at $0.90; sold 15 contracts at $1.34; gain of 48.9%; held for ~34 days.
9. LONG iShares Silver Trust October 15 Call Options (SLVJO)
Bought 5 contracts at $0.87; sold 5 contracts at $0.83; loss of 4.6%; held for 47 days.
10. LONG iShares Silver Trust January 14 Call Options (SLVAN)
Bought 5 contracts at $1.27; sold 5 contracts at $1.78; gain of 40.2%; held for 20 days.
Open Trades
1. LONG ProShares Ultra Short S&P 500 (SDS) (effectively SHORT)
Bought 5 shares at $67.14; currently at $45.35; loss of 32.5%; held for 112 days.
2. LONG Direxion Daily Financial Bear 3x Shares (FAZ) (effectively SHORT)
Bought 32 shares at $78.86; currently at $25.73; loss of 67.4%; held for ~109 days.
3. LONG SPDR Gold Trust January 100 Call Options (GLDAV)
Bought 2 contracts at $4.13; currently at $3.50; loss of 15.3%; held for 22 days.
4. SHORT Intel Corp (INTC)
Sold short 15 shares at $19.17; currently at $18.77; gain of 2.1%; held for 22 days.
5. LONG iShares Silver Trust January 13 Put Options (SLVMM)
Bought 10 contracts at $0.76; currently at $0.74; loss of 2.6%; held for 0 days.
Wednesday, August 5, 2009
Investing Update #3
It's been a while since my last trade update. Since then I've sold my short oil and long Treasury positions, opened up a new short in Intel stock, and bought a few more options. I'm a little disappointed with my oil and Treasury trades because I sold them after they had hit their highs. At one point, I could have made about 30% on both trades, but I waited a little too long and settled for a lot less. Since then, Treasuries have been trending sideways, but oil has been on a pretty big tear, rallying about 30% in DXO.
I've added several options positions, and they seem to be doing all right. I'm a little worried about the October calls, since we're only about two and a half months away from expiration, but we'll see what happens.
Closed Trades
5. SHORT PowerShares DB Crude Oil Double Long (DXO)
Sold short 325 shares at $4.59; bought back 325 shares at $3.77; gain of 18.0%; held for ~32 days.
6. LONG Direxion Daily 30 Year Treasury Bull (TMF)
Bought 29 shares at $35.25; sold 29 shares at $36.68; gain of 4.1%; held for ~37 days.
Open Trades
1. LONG ProShares Ultra Short S&P 500 (SDS) (effectively SHORT)
Bought 5 shares at $67.14; currently at $45.50; loss of 32.2%; held for 102 days.
2. LONG Direxion Daily Financial Bear 3x Shares (FAZ) (effectively SHORT)
Bought 32 shares at $78.86; currently at $29.74; loss of 62.3%; held for ~99 days.
(Note: FAZ did a 10-for-1 reverse split and sold off fractional shares, hence the change in numbers.)
3. LONG iShares Silver Trust (SLV)
Bought 150 shares at $13.53; currently at $14.35; gain of 6.1%; held for 43 days.
4. LONG iShares Silver Trust October 14 Call Options (SLVJN)
Bought 15 contracts at $0.90; currently at $1.10; gain of 22.2%; held for ~26 days.
5. LONG iShares Silver Trust October 15 Call Options (SLVJO)
Bought 5 contracts at $0.87; currently at $0.65; loss of 25.3%; held for 39 days.
6. LONG iShares Silver Trust January 14 Call Options (SLVAN)
Bought 5 contracts at $1.27; currently at $1.65; gain of 29.9%; held for 12 days.
7. LONG SPDR Gold Trust January 100 Call Options (GLDAV)
Bought 2 contracts at $4.13; currently at $4.60; gain of 11.4%; held for 12 days.
8. SHORT Intel Corp (INTC)
Sold short 15 shares at $19.17; currently at $19.32; loss of 0.8%; held for 12 days.
I've added several options positions, and they seem to be doing all right. I'm a little worried about the October calls, since we're only about two and a half months away from expiration, but we'll see what happens.
Closed Trades
5. SHORT PowerShares DB Crude Oil Double Long (DXO)
Sold short 325 shares at $4.59; bought back 325 shares at $3.77; gain of 18.0%; held for ~32 days.
6. LONG Direxion Daily 30 Year Treasury Bull (TMF)
Bought 29 shares at $35.25; sold 29 shares at $36.68; gain of 4.1%; held for ~37 days.
Open Trades
1. LONG ProShares Ultra Short S&P 500 (SDS) (effectively SHORT)
Bought 5 shares at $67.14; currently at $45.50; loss of 32.2%; held for 102 days.
2. LONG Direxion Daily Financial Bear 3x Shares (FAZ) (effectively SHORT)
Bought 32 shares at $78.86; currently at $29.74; loss of 62.3%; held for ~99 days.
(Note: FAZ did a 10-for-1 reverse split and sold off fractional shares, hence the change in numbers.)
3. LONG iShares Silver Trust (SLV)
Bought 150 shares at $13.53; currently at $14.35; gain of 6.1%; held for 43 days.
4. LONG iShares Silver Trust October 14 Call Options (SLVJN)
Bought 15 contracts at $0.90; currently at $1.10; gain of 22.2%; held for ~26 days.
5. LONG iShares Silver Trust October 15 Call Options (SLVJO)
Bought 5 contracts at $0.87; currently at $0.65; loss of 25.3%; held for 39 days.
6. LONG iShares Silver Trust January 14 Call Options (SLVAN)
Bought 5 contracts at $1.27; currently at $1.65; gain of 29.9%; held for 12 days.
7. LONG SPDR Gold Trust January 100 Call Options (GLDAV)
Bought 2 contracts at $4.13; currently at $4.60; gain of 11.4%; held for 12 days.
8. SHORT Intel Corp (INTC)
Sold short 15 shares at $19.17; currently at $19.32; loss of 0.8%; held for 12 days.
Monday, August 3, 2009
The Bull's Still Climbing Those Stairs
Is the stock market ever going to fall? I keep on thinking it could be like 1930, but no amount of wishing from me is going to make that happen. It could be like 1968, which would be especially fitting since the S&P crossed 1000 today.
I've done some more reading and thinking, and I could be wrong about the stock market over the medium and even long term, at least in nominal terms. I've been thinking we could see a major decline, but there's no reason why it couldn't meander for years like it did in the 70s. And in fact, that might be the likelier case, what with the government very interested in propping up the market. If the Dow stays around 10,000 for years, it'll seem like investors haven't "lost" money, though in fact inflation and currency depreciation will belie that. The market could even rise to new highs but still be in a bear market after taking into account real-/currency-adjusted values. So I'm still bearish on the market long term, but this would have different implications on how to trade it.
If shorting the market isn't going to work, we need to look at other asset classes. Besides gold and silver, which I think are the best ways to make money in the coming years, there are commodities, bonds, and the dollar. Considering that the inflation/deflation debate hasn't been resolved yet and probably won't be for at least another one to three years, I'm not as enthusiastic on commodities; you would also need to consider the demand and supply data for them, which aren't as relevant for a semi-currency like gold. Treasuries seem to be a sure bet -- interest rates can only go up from here -- but my worry is that the government will intervene to keep them down. If the government is successful, you'll make no money in nominal terms but lose money in PPP-adjusted terms due to the necessary depreciation of the dollar. If the government is not successful, you'll make money in nominal terms, but you could still lose out in real terms if the market loses confidence in the dollar as a result. Consequently, I think shorting the dollar would be a better bet, since your downside risk should be lower than if you were shorting Treasuries.
Any way you cut it, the future doesn't look very bright for the US, or for the world for that matter. If you can't save the world from disaster, you should still at least try to save yourself.
I've done some more reading and thinking, and I could be wrong about the stock market over the medium and even long term, at least in nominal terms. I've been thinking we could see a major decline, but there's no reason why it couldn't meander for years like it did in the 70s. And in fact, that might be the likelier case, what with the government very interested in propping up the market. If the Dow stays around 10,000 for years, it'll seem like investors haven't "lost" money, though in fact inflation and currency depreciation will belie that. The market could even rise to new highs but still be in a bear market after taking into account real-/currency-adjusted values. So I'm still bearish on the market long term, but this would have different implications on how to trade it.
If shorting the market isn't going to work, we need to look at other asset classes. Besides gold and silver, which I think are the best ways to make money in the coming years, there are commodities, bonds, and the dollar. Considering that the inflation/deflation debate hasn't been resolved yet and probably won't be for at least another one to three years, I'm not as enthusiastic on commodities; you would also need to consider the demand and supply data for them, which aren't as relevant for a semi-currency like gold. Treasuries seem to be a sure bet -- interest rates can only go up from here -- but my worry is that the government will intervene to keep them down. If the government is successful, you'll make no money in nominal terms but lose money in PPP-adjusted terms due to the necessary depreciation of the dollar. If the government is not successful, you'll make money in nominal terms, but you could still lose out in real terms if the market loses confidence in the dollar as a result. Consequently, I think shorting the dollar would be a better bet, since your downside risk should be lower than if you were shorting Treasuries.
Any way you cut it, the future doesn't look very bright for the US, or for the world for that matter. If you can't save the world from disaster, you should still at least try to save yourself.
Thursday, June 25, 2009
Another Investing Update
Since my last update about two weeks ago, I've added to a few positions and opened a few new ones. I increased my short oil exposure and my long Treasuries exposure. I was doing much better earlier in the week, but overall I'm pretty satisfied. I'm especially satisfied with the improvement shown in my SDS and FAZ positions; I was afraid those would never recover. Of course, I still have a ways ahead of me before I get back in the black for those.
I opened up two new silver positions. The first is the silver ETF, which I had sold just a few weeks ago. Silver has fallen a lot lately, and I think now's a good time to get back in. As of now, I think it has a downside risk of around 50 cents (silver at $13.25 and SLV at $13.00), but an upside risk of several dollars, up to around $18-19 for silver. Considering this, I also decided to buy some call options on SLV. It's my first time buying options, so let's see how it goes. Based on my calculations, I could get gains of up to 275%... or watch my investment go to $0. It will be a fun ride.
Open Trades
1. LONG ProShares Ultra Short S&P 500 (SDS) (effectively SHORT)
Bought 5 shares at $67.14; currently at $57.76; loss of 14.0%; held for 61 days.
2. LONG Direxion Daily Financial Bear 3x Shares (FAZ) (effectively SHORT)
Bought 325 shares at $7.77; currently at $5.09; loss of 34.5%; held for ~58 days.
3. SHORT PowerShares DB Crude Oil Double Long (DXO)
Sold short 325 shares at $4.59; currently at $4.28; gain of 6.8%; held for ~11 days.
4. LONG Direxion Daily 30 Year Treasury Bull (TMF)
Bought 29 shares at $35.25; currently at $38.85; gain of 10.2%; held for ~11 days.
5. LONG iShares Silver Trust (SLV)
Bought 150 shares at $13.53; currently at $13.68; gain of 1.1%; held for 2 days.
6. LONG iShares Silver Trust October 14 Call Options (SLVJN)
Bought 6 contracts at $1.11; currently at $1.10; loss of 0.9%; held for 1 day.
I opened up two new silver positions. The first is the silver ETF, which I had sold just a few weeks ago. Silver has fallen a lot lately, and I think now's a good time to get back in. As of now, I think it has a downside risk of around 50 cents (silver at $13.25 and SLV at $13.00), but an upside risk of several dollars, up to around $18-19 for silver. Considering this, I also decided to buy some call options on SLV. It's my first time buying options, so let's see how it goes. Based on my calculations, I could get gains of up to 275%... or watch my investment go to $0. It will be a fun ride.
Open Trades
1. LONG ProShares Ultra Short S&P 500 (SDS) (effectively SHORT)
Bought 5 shares at $67.14; currently at $57.76; loss of 14.0%; held for 61 days.
2. LONG Direxion Daily Financial Bear 3x Shares (FAZ) (effectively SHORT)
Bought 325 shares at $7.77; currently at $5.09; loss of 34.5%; held for ~58 days.
3. SHORT PowerShares DB Crude Oil Double Long (DXO)
Sold short 325 shares at $4.59; currently at $4.28; gain of 6.8%; held for ~11 days.
4. LONG Direxion Daily 30 Year Treasury Bull (TMF)
Bought 29 shares at $35.25; currently at $38.85; gain of 10.2%; held for ~11 days.
5. LONG iShares Silver Trust (SLV)
Bought 150 shares at $13.53; currently at $13.68; gain of 1.1%; held for 2 days.
6. LONG iShares Silver Trust October 14 Call Options (SLVJN)
Bought 6 contracts at $1.11; currently at $1.10; loss of 0.9%; held for 1 day.
Saturday, June 13, 2009
Investing Update
Some of you might know that one of the things I like to do is investing. It's a lot of fun, and if I had enough money and enough guts, I would turn it into a living. It's also quite dangerous, of course, if you don't know what you're doing. I like to think that I do know what I'm doing, although whether I have true wisdom or merely youthful arrogance remains to be seen. One friend warned me to be careful recently. I feel very touched by his concern!
I've been doing it for quite a while though. I first started back in junior year of high school, not with stocks like most people, but with silver. Yes, the shiny metal. Bars of it. I converted most of my savings in high school into silver bullion, and I still have a fair amount of it (safely stored away; if you want money, go rob a bank). College made going out and buying bars of metal rather difficult, so I spent most of college merely watching the investing world on the sidelines. More recently, I decided it was time to get back in the game; I had been watching long enough, so I opened an online brokerage account.
You can think of investing as putting into action what I believe about what's going on in the economy and world. There's no reason why I shouldn't take the opportunity to make some money off of it. I've always had a pretty pessimistic view of things (that's just my personality I guess), but to me, my pessimism is the result of my realism. I have the grim satisfaction of first learning way back in 2004 that the huge rise in housing prices was unsustainable. By 2006, it was plainly obvious that the housing market would crash; it was only a matter of predicting when.
Knowing something like this doesn't require any special talent or superior intellect, though of course that would help. But the two main factors in predicting things like this and profiting off of them are the ability to make logical conclusions based on the evidence, and the ability to stay rational and withstand peer pressure even when everyone around you has drunk the Kool-Aid and tells you vehemently that you're wrong -- and that is one of the most difficult things in the world to do. It's a rare ability, and it's something that I'm still working on.
With that in mind, I've already written pretty extensively on what I think about the economy and the future of the dollar. Some people have said that I'm being overly pessimistic. I'm just telling it how it is.
What do I think about the markets in general? To put it in a nutshell: In the short run, things can change very quickly, but right now I'm bullish on Treasuries and the dollar; bearish on gold, silver, oil, and the stock market.
In the long run, though, I'm bullish on gold, silver, and oil; bearish on the dollar, stock market, and Treasury bonds. Follow that advice, and you'll be prepared for what's ahead.
-------------------------
I titled this entry "Investing Update" because I mean to give an update as to how my investment decisions have turned out.
I transferred my money to my brokerage account a few days before my birthday, and I made my first trade a few days after my birthday. Somewhat surprisingly to me, my first trade was shorting stock. Details below:
Closed Trades
1. SHORT Saks, Inc. (SKS)
Sold short 50 shares at $4.72; bought back 50 shares at $3.60; gain of 23.7%; held for 19 days.
2. LONG iShares Silver Trust (SLV)
Bought 242 shares at $12.29; sold 242 shares at $14.90; gain of 21.2%; held for ~43 days.
3. LONG ProShares Ultra Silver (AGQ)
Bought 25 shares at $42.76; sold 25 shares at $53.38; gain of 24.8%; held for 28 days.
4. LONG ProShares Ultra Silver (AGQ)
Bought 10 shares at $56.62; sold 10 shares at $48.22; loss of 14.8%; held for 4 days.
(For trades 3 and 4, I was stopped out early, so I wanted to get back in partially, which turned out to be a bad idea; the weighted exit price of the two trades is $50.02 for a weighted gain of 17.0%.)
Open Trades
1. LONG ProShares Ultra Short S&P 500 (SDS) (effectively SHORT)
Bought 5 shares at $67.14; currently at $52.63; loss of 21.6%; held for 49 days.
2. LONG Direxion Daily Financial Bear 3x Shares (FAZ) (effectively SHORT)
Bought 325 shares at $7.77; currently at $4.35; loss of 44.0%; held for ~46 days.
3. SHORT PowerShares DB Crude Oil Double Long (DXO)
Sold short 106 shares at $4.66; currently at $4.73; loss of 1.5%; held for 2 days.
4. LONG Direxion Daily 30 Year Treasury Bull (TMF)
Bought 15 shares at $33.33; currently at $35.49; gain of 6.5%; held for 2 days.
I've been doing it for quite a while though. I first started back in junior year of high school, not with stocks like most people, but with silver. Yes, the shiny metal. Bars of it. I converted most of my savings in high school into silver bullion, and I still have a fair amount of it (safely stored away; if you want money, go rob a bank). College made going out and buying bars of metal rather difficult, so I spent most of college merely watching the investing world on the sidelines. More recently, I decided it was time to get back in the game; I had been watching long enough, so I opened an online brokerage account.
You can think of investing as putting into action what I believe about what's going on in the economy and world. There's no reason why I shouldn't take the opportunity to make some money off of it. I've always had a pretty pessimistic view of things (that's just my personality I guess), but to me, my pessimism is the result of my realism. I have the grim satisfaction of first learning way back in 2004 that the huge rise in housing prices was unsustainable. By 2006, it was plainly obvious that the housing market would crash; it was only a matter of predicting when.
Knowing something like this doesn't require any special talent or superior intellect, though of course that would help. But the two main factors in predicting things like this and profiting off of them are the ability to make logical conclusions based on the evidence, and the ability to stay rational and withstand peer pressure even when everyone around you has drunk the Kool-Aid and tells you vehemently that you're wrong -- and that is one of the most difficult things in the world to do. It's a rare ability, and it's something that I'm still working on.
With that in mind, I've already written pretty extensively on what I think about the economy and the future of the dollar. Some people have said that I'm being overly pessimistic. I'm just telling it how it is.
What do I think about the markets in general? To put it in a nutshell: In the short run, things can change very quickly, but right now I'm bullish on Treasuries and the dollar; bearish on gold, silver, oil, and the stock market.
In the long run, though, I'm bullish on gold, silver, and oil; bearish on the dollar, stock market, and Treasury bonds. Follow that advice, and you'll be prepared for what's ahead.
-------------------------
I titled this entry "Investing Update" because I mean to give an update as to how my investment decisions have turned out.
I transferred my money to my brokerage account a few days before my birthday, and I made my first trade a few days after my birthday. Somewhat surprisingly to me, my first trade was shorting stock. Details below:
Closed Trades
1. SHORT Saks, Inc. (SKS)
Sold short 50 shares at $4.72; bought back 50 shares at $3.60; gain of 23.7%; held for 19 days.
2. LONG iShares Silver Trust (SLV)
Bought 242 shares at $12.29; sold 242 shares at $14.90; gain of 21.2%; held for ~43 days.
3. LONG ProShares Ultra Silver (AGQ)
Bought 25 shares at $42.76; sold 25 shares at $53.38; gain of 24.8%; held for 28 days.
4. LONG ProShares Ultra Silver (AGQ)
Bought 10 shares at $56.62; sold 10 shares at $48.22; loss of 14.8%; held for 4 days.
(For trades 3 and 4, I was stopped out early, so I wanted to get back in partially, which turned out to be a bad idea; the weighted exit price of the two trades is $50.02 for a weighted gain of 17.0%.)
Open Trades
1. LONG ProShares Ultra Short S&P 500 (SDS) (effectively SHORT)
Bought 5 shares at $67.14; currently at $52.63; loss of 21.6%; held for 49 days.
2. LONG Direxion Daily Financial Bear 3x Shares (FAZ) (effectively SHORT)
Bought 325 shares at $7.77; currently at $4.35; loss of 44.0%; held for ~46 days.
3. SHORT PowerShares DB Crude Oil Double Long (DXO)
Sold short 106 shares at $4.66; currently at $4.73; loss of 1.5%; held for 2 days.
4. LONG Direxion Daily 30 Year Treasury Bull (TMF)
Bought 15 shares at $33.33; currently at $35.49; gain of 6.5%; held for 2 days.
Sunday, March 22, 2009
The Way of Investing
One of my favorite hobbies is investing. It's a little like gambling, but with an air of respectability. Besides the legitimacy of investing versus gambling, the other major difference is the outcome of your decisions. In gambling, the odds are fixed and known beforehand by both parties, that is, the player and the house. When you put money on, say, 12 in roulette, you and the house know that the probability of the ball landing on 12 is 1 in 38. Nothing you can do will change the probabilities. Investing, on the other hand, has unknown probabilities and unknown outcomes. This doesn't mean, though, that it's impossible to make money. What makes investing unique is that essentially you can stack the odds in your favor.
Suppose you wanted to invest $100 in a stock. If you did no research and simply bought a few shares of a randomly chosen stock, what is the likelihood that the stock will increase five years from now? If you have no knowledge of the company behind the stock and no knowledge of the economy that the company is a part of, it's probably fair to say that it is as likely that the stock will increase as it will decrease. But suppose you know that generally speaking, stocks go up over the long run. What are the chances that your randomly chosen stock will be higher five years from now? Perhaps the odds are now in your favor, say 75% of it going up versus 25% of it going down. Note that nothing actually changed; the only thing that changed was that you had some extra information about the stock. The more you move from a state of no information to a state of perfect information, the more the probabilities will move to 100% (and correspondingly, 0%). I described above the state of no information, where you knew nothing about the stock (or stocks in general) and simply picked one at random. At the other extreme, if you know for a fact that ABC Corp.'s first quarter earnings will be higher than the consensus forecast, then, all else being equal, there is a 100% chance that the stock will be higher. Assuming nobody else knows this (if they did, this information would already be priced in), you could make money on this news. At this extreme end, we call it insider information, and trading based on that news is illegal, and for good reason. After all, we believe in a level playing field for everyone, and insider trading goes against that idea.
But even when you use only publicly available information, it's still possible to make money beyond the market return. The key lies within the probabilities. Let's start with the micro level with individual stocks. Suppose the consensus is that there is a 50% chance that ABC Corp. will announce earnings of $1.00, a 25% chance that it will announce earnings below $1.00, and a 25% chance that it will announce earnings above $1.00. Accordingly, the market prices ABC stock at $10. You, on the other hand, believe that there is a 50-20-30 chance, respectively, meaning that you value the stock more than $10. Because you are a price taker (you're buying 100 shares when on average 10 million shares are traded a day, so your buying has virtually no effect on the price), you can enter the market without affecting the price. The next day, ABC Corp. announces earnings of $1.10. The market prices in this new information, and now ABC stock is worth $10.50. You've made money.
The issue, of course, is that you need to be consistently right, and for the individual investor, that's extremely difficult. After all, how did you know that the correct probabilities were 50-20-30, and not 50-25-25 like the market consensus? Was it pure luck? Fortune is fleeting. Was it a superior analysis? There are hundreds of stock analysts with Level 2 data, access to dozens of newsletters and commentaries, even fellow coworkers on the trading floor who spend hours every day following ABC Corp. The likelihood that you will be able to consistently outperform the market is extremely small. At the micro level, it's nearly impossible to make more than the market return without simultaneously increasing the amount of risk you're taking because markets are mostly efficient. (I'm not claiming the Efficient Market Hypothesis or EMH, however, which states that markets are totally efficient; there is a world of difference between "mostly efficient" and "totally efficient").
I should point out, however, that even if the EMH is true, that doesn't mean it's impossible to make money; it only says that it's highly improbable that you will make more than the market. If the market has a return of 30%, that's a pretty good return regardless.
As you start moving from the micro level to the macro level, though, you start gaining the upper hand. The Efficient Market Hypothesis does a good job of explaining why a stock might rise and fall, but it can't explain why there are bubbles in the stock market. At the macro level, there's more room for error, both in your judgment and in other people's judgment. Personally, I believe that even if on an individual level the Efficient Market Hypothesis applies, it doesn't necessarily follow that it should apply on an aggregate level. In other words, a stock might be priced so that it reflects all available information, but a stock market might be mispriced. I have to admit that this seems like a contradiction (a well-known example where the macro does not necessarily follow from the micro is Arrow's Impossibility Theorem; an example of its implications can be found here), and I haven't done any sort of research on it, but it is a compelling explanation, I think.
The other nice thing about working with markets is diversification. (I could write a whole post about how the word "diversification" is misused, but for now just think of it the way as we usually think of it: the more securities, the higher the risk-adjusted return.) Diversification allows us the ability to focus on the big picture rather than worrying about individual securities. If we take a hit on a particular stock, it won't affect our overall portfolio too much because it's such a small portion of it. But because overall the stocks will tend to move together, the movement of the overall market will outweigh the anomalous movements of individual stocks.
Working on the two ideas that markets as a whole can be mispriced and that diversification allows us to look at the overall picture, we can develop strategies that can take advantage of these mispricings. These strategies will require us to be able and willing to go long or short on a security. It's this ability and willingness to go short that separates the professional investor from the average investor. The typical investor is only long stocks. He buys an investment and hopes that it will go up. Because things go up and things go down, the amateur can make money only half the time. Not only is the professional investor is more knowledgeable than the average, amateur investor, but he also has more tools available. The professional investor buys an investment and knows that it will go up. But the professional investor also shorts an investment and knows that it will go down. He makes money regardless of the direction of the market because he knows the direction of the market. This applies no matter what particular strategy he's using, whether he's buying and selling individual stocks or buying and selling entire markets. I want to emphasize again that the difference between a professional investor and your neighbor who calls himself an "investor" is a mindset, a philosophy if you will.
I'll save further details on how to invest and what to invest in for a later post, and I'll end this post with my favorite investing quote:
"What's your advice for the average investor?"
"Don't be average."
Suppose you wanted to invest $100 in a stock. If you did no research and simply bought a few shares of a randomly chosen stock, what is the likelihood that the stock will increase five years from now? If you have no knowledge of the company behind the stock and no knowledge of the economy that the company is a part of, it's probably fair to say that it is as likely that the stock will increase as it will decrease. But suppose you know that generally speaking, stocks go up over the long run. What are the chances that your randomly chosen stock will be higher five years from now? Perhaps the odds are now in your favor, say 75% of it going up versus 25% of it going down. Note that nothing actually changed; the only thing that changed was that you had some extra information about the stock. The more you move from a state of no information to a state of perfect information, the more the probabilities will move to 100% (and correspondingly, 0%). I described above the state of no information, where you knew nothing about the stock (or stocks in general) and simply picked one at random. At the other extreme, if you know for a fact that ABC Corp.'s first quarter earnings will be higher than the consensus forecast, then, all else being equal, there is a 100% chance that the stock will be higher. Assuming nobody else knows this (if they did, this information would already be priced in), you could make money on this news. At this extreme end, we call it insider information, and trading based on that news is illegal, and for good reason. After all, we believe in a level playing field for everyone, and insider trading goes against that idea.
But even when you use only publicly available information, it's still possible to make money beyond the market return. The key lies within the probabilities. Let's start with the micro level with individual stocks. Suppose the consensus is that there is a 50% chance that ABC Corp. will announce earnings of $1.00, a 25% chance that it will announce earnings below $1.00, and a 25% chance that it will announce earnings above $1.00. Accordingly, the market prices ABC stock at $10. You, on the other hand, believe that there is a 50-20-30 chance, respectively, meaning that you value the stock more than $10. Because you are a price taker (you're buying 100 shares when on average 10 million shares are traded a day, so your buying has virtually no effect on the price), you can enter the market without affecting the price. The next day, ABC Corp. announces earnings of $1.10. The market prices in this new information, and now ABC stock is worth $10.50. You've made money.
The issue, of course, is that you need to be consistently right, and for the individual investor, that's extremely difficult. After all, how did you know that the correct probabilities were 50-20-30, and not 50-25-25 like the market consensus? Was it pure luck? Fortune is fleeting. Was it a superior analysis? There are hundreds of stock analysts with Level 2 data, access to dozens of newsletters and commentaries, even fellow coworkers on the trading floor who spend hours every day following ABC Corp. The likelihood that you will be able to consistently outperform the market is extremely small. At the micro level, it's nearly impossible to make more than the market return without simultaneously increasing the amount of risk you're taking because markets are mostly efficient. (I'm not claiming the Efficient Market Hypothesis or EMH, however, which states that markets are totally efficient; there is a world of difference between "mostly efficient" and "totally efficient").
I should point out, however, that even if the EMH is true, that doesn't mean it's impossible to make money; it only says that it's highly improbable that you will make more than the market. If the market has a return of 30%, that's a pretty good return regardless.
As you start moving from the micro level to the macro level, though, you start gaining the upper hand. The Efficient Market Hypothesis does a good job of explaining why a stock might rise and fall, but it can't explain why there are bubbles in the stock market. At the macro level, there's more room for error, both in your judgment and in other people's judgment. Personally, I believe that even if on an individual level the Efficient Market Hypothesis applies, it doesn't necessarily follow that it should apply on an aggregate level. In other words, a stock might be priced so that it reflects all available information, but a stock market might be mispriced. I have to admit that this seems like a contradiction (a well-known example where the macro does not necessarily follow from the micro is Arrow's Impossibility Theorem; an example of its implications can be found here), and I haven't done any sort of research on it, but it is a compelling explanation, I think.
The other nice thing about working with markets is diversification. (I could write a whole post about how the word "diversification" is misused, but for now just think of it the way as we usually think of it: the more securities, the higher the risk-adjusted return.) Diversification allows us the ability to focus on the big picture rather than worrying about individual securities. If we take a hit on a particular stock, it won't affect our overall portfolio too much because it's such a small portion of it. But because overall the stocks will tend to move together, the movement of the overall market will outweigh the anomalous movements of individual stocks.
Working on the two ideas that markets as a whole can be mispriced and that diversification allows us to look at the overall picture, we can develop strategies that can take advantage of these mispricings. These strategies will require us to be able and willing to go long or short on a security. It's this ability and willingness to go short that separates the professional investor from the average investor. The typical investor is only long stocks. He buys an investment and hopes that it will go up. Because things go up and things go down, the amateur can make money only half the time. Not only is the professional investor is more knowledgeable than the average, amateur investor, but he also has more tools available. The professional investor buys an investment and knows that it will go up. But the professional investor also shorts an investment and knows that it will go down. He makes money regardless of the direction of the market because he knows the direction of the market. This applies no matter what particular strategy he's using, whether he's buying and selling individual stocks or buying and selling entire markets. I want to emphasize again that the difference between a professional investor and your neighbor who calls himself an "investor" is a mindset, a philosophy if you will.
I'll save further details on how to invest and what to invest in for a later post, and I'll end this post with my favorite investing quote:
"What's your advice for the average investor?"
"Don't be average."
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