Friday, May 21, 2010

Market Meditation

Time to see how much money Independent has made for its readers so far. Call it a market meditation, since the Baha'i writings teach that prayer and meditation are partly an evaluation process -- including self-evaluation. Let us look at how the Independent did on the gold, FAZ and SDS positions discussed and look at pending ideas like gold and silver mining stocks and shorting 30-year U.S. Treasury bonds using TBT.

On March 28, our first post on this blog, we urged to "buy gold/silver and take physical possession...ASAP", and elaborated on this concept repeatedly, such as here, here and here.
March 28, Spot Gold per oz: 1105.50
May 21, Spot Gold per oz: $1176.90
6 percent gain
The May 21 price above is after a some $70 sell-off from a recent all-time nominal high for gold. Should gold go lower, and we might even hope, much lower, say $200 to $400 lower, we will be blessed with a great opportunity to buy more at even deeper discount. By the way, if your inventory of anything is a bit larger than you like, be sure to use price highs to sell some and raise cash to buy future dips or use otherwise.

Why would gold or silver go much lower even if one is right that the longer-term trend is up in price for years to come. For one thing, there are too many highly leveraged players out there. When the market goes against any major positions they have, they have to raise cash quickly, and for that purpose, gold and silver holdings are the universal, perhaps most liquid currency that they might have. So when these players are compromised and selling the universal currency are times one hopes for to buy at even greater discount.

In a May 3 post, Independent noted that it may be a good time to bet against big banks using FAZ, which is a 3x inverse or shorting instrument which goes up about 3 percent for every 1 percent drop in the indexed big bank stocks. At that time, one could easily acquire FAZ for $12 per share or less.
May 3-4, FAZ: $12.00
May 21, FAZ: 15.1725
26 percent gain
Not bad for about 3 weeks, but if you read the FAZ article, this gain is chicken feed compared to its potential. All one has to do is to recall that the "too-big-to-fail" banks have a huge negative net worth, so if their share prices approach zero, this move would only be part of the way to true value.

With an instrument as volatile as FAZ, which peaked today at 17.91, much higher than its 15.17 close above, if you have excess inventory, use the peaks to sell some. On the other hand, do not be a smarty-pants day-trader, because you want to let your core FAZ position ride, since patience pays and the big money is made by staying with the big moves. One does not want to tinker too much, by selling part of one's desired core position at a price peak, only to find there are no more dips in a desired range since the market runs away to new highs. In that case, premature selling of core position can lead to big losses (via future gains not realized). So sell peaks only when you have excess inventory of a particular instrument; keep the core position.

Note that when big bank stocks get down to a few bucks per share, people tend to buy them as sort of non-expiring call options. Hence, the price only goes to true value of zero where particular banks completely fold and close up shop -- stock-holders get nothing in that case.

FAZ became volatile just after my prediction that "something significant may be imminent", which gets us to SDS.

On May 6, "Rolling in cash", linked above, noted the nine percent sell-off in the DJIA and S&P500 indexes, more than half of which was packed into less than one half hour in mid-afternoon.

Since then, pundits have wondered why this happened and whether it was fair and such. What happened is clear: buyers pulled their bids or more succinctly, shit happens. Why it happened is also clear: who is going to bid for an asset when price is plunging and other bidders have disappeared. Was it fair? Of course, it was. Owners of over-priced assets would be unfair to expect others to make the same mistake they did, by offering unreasonably high bids for those inflated assets.

Further, things are not right, if one can see through all the distorted government economic statistics which are essentially all lies to promote the illusion that the world has been saved from all previous sins, such as little details like historic levels of unpayable debt. Come on. Lenders don't expect to be repaid ... do they?

Independent also said [emphasis added]:
For DJIA and S&P500 stocks, it is now sell the rallies, which can be done by buying one or more lots at a time of SDS, a 2x short or inverse S&P500 ETF instrument which goes up when those stocks go down.
Like clock-work, we got an unmistakable rally, with the DJIA up some 400 points in one day. From May 10 to May 13, in New York trading, one had four days to sell the rally by buying SDS (or some other way, like selling S&P500 futures). Over those "rally peak" days, there was a SDS price range of 30.06 to 31.62. For the record, let's say one worked into a core SDS position at the mid-point of this range: 30.84 as our average entry price. One now stands here:
May 10-13, SDS, 30.84
May 21, SDS, 34.68
12 percent gain
Not bad for about one week work. And notice how civilized the decline in the stock indexes was. Not a shocking mini-panic packed into ten or fifteen minutes, but rather a nice, sweet, steady decline, the kind of behavior one would want in a dinner guest. About an eight percent decline in seven trading days, something everybody can be happy about, without outcries that the market has gone mad or whatever.

If one does not yet have a full core position in SDS, one will look for more rallies to sell (by buying SDS lots). Maybe next week will see some stock buying or short covering. Seems like a good time for that (depending on news yet to be seen this weekend and beyond). Today's S&P500 close at 1087 is about 16 points below its 200 day simple moving average (at 1103) and people might also be saying, "Let's test 1100".

In any case, we have a nice Friday close below previous closes since the recent high forming a pattern of lower highs and lower lows -- that is, a down-trend signature. Not that we cannot see new yearly highs -- keep in mind that money printing is astronomical and the big banks get first dibs, and stocks is one likely destination for newly minted cash. With this dynamic, higher stock prices can mean much the same thing as higher gold prices, namely that the stock or the gold may not have changed in value, bur rather the dollar has dropped in value or purchasing power.

Anyway, by whatever zig-zag line, the next major stop for the S&P500 is in the 940-950 area which is the bottom of a large up-trend channel and the wave 1 peak of the whole bear market rally starting in March 2009. How dismal is this? Well, it does not look too encouraging that the S&P500 has already taken out the wave 3 peak, the wave 5 peak being the current top on the chart this year.

The question now is: do we get a big bounce at S&P500 940-950 or do we slice through it like it wasn't even there (as a chart price support level)? May we all be blessed with health and happiness until then, so we can see what does in fact happen.

"Rolling in Cash" also introduced the idea of shorting long-term U.S. Treasuries by buying the TBT ETF. Independent tracks another ETF, TLT, which follows U.S. Treasury bonds with maturities of greater than 20 years. My target to start to ease into a short position was to buy TBT lots when TLT touched or surpassed 100. In the "Rolling in Cash" chaotic day, we came close to the 100 target, and only very briefly.

Presently, when stocks fall, TLT rises (which corresponds to a drop in long-term interest rates). To develop a core position in TBT to benefit from a long bond price drop and eventual collapse, we are in fact looking for a time when stocks and long Treasury bonds are both falling in price. This is a tough call and can't really be predicted all that exactly. All one can do is to tip-toe into a TBT core position at price peaks in TLT. For my part, as implied above, I'm looking to buy TBT lots when TLT spikes above 100, adding incrementally in some hopefully reasonable manner, depending on chart price levels, channels, news at the time, etc. That would add to a minimal (25 percent of) core position in TBT the author initiated on the "Rolling in Cash" day.

Gold and Silver Mining Stocks
Just like gold and silver may be sold off when general stock markets fall significantly, which we expect to happen, the gold and silver mining stocks can do the same, but even more, since they exhibit greater leverage. I already have my favorite list and inventory of many of these stocks, and even bought more today. However, I'm not ready to strongly suggest to readers here to go in that direction yet, with the hope that even lower prices may be seen as the general markets trend lower. Some respected analysts say that none should be bought until much lower prices are seen, since we are nowhere near final lows in general stock markets.

My own compromise in this area is to hold less than desired core positions hoping to buy dips, as I did today, while also selling peaks in several of these gold/silver stocks today also, which had good news causing their prices to spike higher, even though today was a down day for gold stocks generally.

This article is informational, not investment advice.
© 2010 James J Keene

1 comment:

  1. Do not short U.S. Treasury Long Bonds (by buying TBT) yet. Look for an even higher trigger basis TLT above 100, more like 103-105. I'll explain why in my next market positions summary post.