The New York Stock Exchange was down -9.05%, the Russell 2000 (Small Cap) was -11.85% and the S&P Financial Index was -16.67%. That was just today!
I was short the Dow (via DXD, +14.77%) and Energy (DUG, +19.05%).
Clients also had various shorts in Utilities (SDP, +12.72%), Materials (SMN, +19.79%), Financials (SKF, +29.32% (CHA-CHING)) and Emerging Markets (EEV, +17.84%).
I only had about 30% net short going into today. I didn’t buy it all at the top at Friday’s close. But I made some good money and took a bunch of shorts out in the last hour of trading today. Moreover, I completely avoided a day when the average stock was down -10%.
Not a bad day. See why I do so much homework?
Shorting in this environment is very hard. I have to fight Central Banks from all over the World. My goal to just scratch out small gains on each leg down and preserve capital for what is the inevitable next Bull Market. If I can end 2008 +5% or +10% and the markets are down -40% or -50%, then I will be in very good shape to position money effectively when things eventually do turn up. As long as I am doing my homework, I will be able to see the turn forming.
Fatigue
I think people are getting tired. Those who have held stocks the entire way down are selling. I hear the stories. I can feel the pain. I see the selling volume in mutual funds. Even the perma-bulls and Mutual Fund commercials on television are starting to talk about protecting assets, instead of growing assets. When they start telling you how to short assets, the bottom will be here.
Potential New Breakdowns
I see several key areas on the brink of starting new legs down. Most are in commodities.
Energy (XLE)
These charts scare the heck out of me. Take a look at the Energy Index. It sure looks like a consolidation pattern failing at the 50-day (Black Line). This is about as Bearish as it gets. I may just allow the remaining half of my DUG to ride here and see how much I can make if the breakdown occurs.
Natural Gas (UNG)
See how price is now stuck between key support (Green Line) and the declining 50-day (Black Line)? Natural Gas has a big decision to make in the near term. It isn’t just going to sit here. If Big Money sells, then the stocks will fall with the commodity (CHK, APA et al). If you hold these stocks and you don’t have stops in place then you are at a severe disadvantage to the professional investor who knows how to protect capital.
Agriculture (DBA)
Agriculture looks a lot like Energy.
A big move in commodities is coming in the near term. Because these charts are all in down trends and the charts appear to merely be consolidations of trends after large selloffs, I think the odds are really high that the next big move is down. So be prepared if you own any of this stuff.
Half of investing is not losing your shirt to obviously failing setups. If you lack the discipline to execute obvious trades, then pay somebody to do it for you. There no ego in investing. The markets are right and you have to follow them. If commodities go vertical on huge volume then I may look to buy pullbacks. I’m here to make money, not be right 100% of the time.
Metals
I don’t really follow Gold any more, much as I am starting to not even look at the Dow anymore. Both just move so differently from any of other comparable Index or Commodity. They just don’t give me a reasonable understanding of what is going on in the market (more on this below). So for metal, I use Silver as the proxy.
Silver (SLV)
Look at how Silver nestled right up into the 50-day (Black Line) for a few days. It was unable to break above and then had a brutal day today, down -10.26%.
Utilities
These have been a safe haven for mutual funds that have to stay invested and need to find someplace to hide while the markets are imploding. Utilities are on the brink of joining the rest of the markets in the tank – same story, failure at the 50-day (Black Line) after spending two months consolidating the September 2008 Crash. They may offer a great risk/reward short set up in the near term.
Remember what I have taught you – The markets make 80% of their returns over very short periods of time and then spend a long time sitting around in a narrow range (consolidating), before having their next big move. After a big move in price, the ensuing consolidation often carries price up into the key 50-day Moving Average (Black Line). After consolidating, the next big move is normally in the direction of the move preceding the consolidation.
Currencies
The Euro looks like commodities. The Euro appears to be consolidating after a sharp move lower and is setting up for the next big move.
So for the Euro, a sharp move down has been followed by several weeks of trading between 124 and 132. The 50-day has now declined to 132.5 and is falling. A break of 124 would be very bad for you if you own the Euro.
US Dollar
The anti-Euro is the US Dollar, so it makes sense that a break in the Euro will lead to further rally in the US Dollar. I will be looking to buy the Dollar on more weakness in the Euro.
I will cover the US Dollar/Euro connection later this week when I discuss Quantitative Easing and a potential Dollar Carry Trade.
Stocks
I want to review two key companies in Energy to show you how much of an impact being a component of the Dow can have on the performance of your stock over a short period of time.
The two companies are Chevron (CVX) and Total Fina (TOT). Both are enormous Energy Conglomerates, with Market Caps of over $100 billion, Revenue of over $175 billion and Earnings of over $16 billion. I consider them to be similar enough that their stocks should be performing in a very similar manner.
But look at the differences in the charts of Chevron and Total –
Chevron broke support in September and then snapped right back up into it over the last two months (Pink Line). But Total broke in August and had a very weak rally the last two months.
The reason this has occurred is pretty clear to me. Chevron is in the Dow and Total is not. I’m not going to go on some conspiracy rant. That is not my intention with this. I could have replaced Chevron with Exxon, the other large energy company in the Dow. And I could have used BP, Royal Dutch or ConocoPhillips instead of Total.
I think what happens is that mutual fund managers are forced to stay fully invested at all times and sometimes they all plow into a handful of companies with way too much money. This leaves shareholders vulnerable for the time when everybody wants out of the company all at once
My concern is that if Energy and Commodities crack in near term, then the crowds in Exxon and Chevron may all run for the exits at exactly the same time. So if you hold these things, be very, very cautious.
The Bottom Line
Until proven otherwise, the mantra for the markets remains – Buy Weakness and Sell Strength. But the pressure seems to be building for a break of key support in a number of significant areas.
Big Money showed up today and sold the markets hard. I covered some shorts and am looking to reload in a number of obvious setups. If the markets rally, then they may only do so for an hour or two, or they may retest Friday’s high. Who knows. But I will know how to play it and will be looking at the intra-day charts for topping patterns to short.
Let me know if you have any questions or comments.
I was short the Dow (via DXD, +14.77%) and Energy (DUG, +19.05%).
Clients also had various shorts in Utilities (SDP, +12.72%), Materials (SMN, +19.79%), Financials (SKF, +29.32% (CHA-CHING)) and Emerging Markets (EEV, +17.84%).
I only had about 30% net short going into today. I didn’t buy it all at the top at Friday’s close. But I made some good money and took a bunch of shorts out in the last hour of trading today. Moreover, I completely avoided a day when the average stock was down -10%.
Not a bad day. See why I do so much homework?
Shorting in this environment is very hard. I have to fight Central Banks from all over the World. My goal to just scratch out small gains on each leg down and preserve capital for what is the inevitable next Bull Market. If I can end 2008 +5% or +10% and the markets are down -40% or -50%, then I will be in very good shape to position money effectively when things eventually do turn up. As long as I am doing my homework, I will be able to see the turn forming.
Fatigue
I think people are getting tired. Those who have held stocks the entire way down are selling. I hear the stories. I can feel the pain. I see the selling volume in mutual funds. Even the perma-bulls and Mutual Fund commercials on television are starting to talk about protecting assets, instead of growing assets. When they start telling you how to short assets, the bottom will be here.
Potential New Breakdowns
I see several key areas on the brink of starting new legs down. Most are in commodities.
Energy (XLE)
These charts scare the heck out of me. Take a look at the Energy Index. It sure looks like a consolidation pattern failing at the 50-day (Black Line). This is about as Bearish as it gets. I may just allow the remaining half of my DUG to ride here and see how much I can make if the breakdown occurs.
Natural Gas (UNG)
See how price is now stuck between key support (Green Line) and the declining 50-day (Black Line)? Natural Gas has a big decision to make in the near term. It isn’t just going to sit here. If Big Money sells, then the stocks will fall with the commodity (CHK, APA et al). If you hold these stocks and you don’t have stops in place then you are at a severe disadvantage to the professional investor who knows how to protect capital.
Agriculture (DBA)
Agriculture looks a lot like Energy.
A big move in commodities is coming in the near term. Because these charts are all in down trends and the charts appear to merely be consolidations of trends after large selloffs, I think the odds are really high that the next big move is down. So be prepared if you own any of this stuff.
Half of investing is not losing your shirt to obviously failing setups. If you lack the discipline to execute obvious trades, then pay somebody to do it for you. There no ego in investing. The markets are right and you have to follow them. If commodities go vertical on huge volume then I may look to buy pullbacks. I’m here to make money, not be right 100% of the time.
Metals
I don’t really follow Gold any more, much as I am starting to not even look at the Dow anymore. Both just move so differently from any of other comparable Index or Commodity. They just don’t give me a reasonable understanding of what is going on in the market (more on this below). So for metal, I use Silver as the proxy.
Silver (SLV)
Look at how Silver nestled right up into the 50-day (Black Line) for a few days. It was unable to break above and then had a brutal day today, down -10.26%.
Utilities
These have been a safe haven for mutual funds that have to stay invested and need to find someplace to hide while the markets are imploding. Utilities are on the brink of joining the rest of the markets in the tank – same story, failure at the 50-day (Black Line) after spending two months consolidating the September 2008 Crash. They may offer a great risk/reward short set up in the near term.
Remember what I have taught you – The markets make 80% of their returns over very short periods of time and then spend a long time sitting around in a narrow range (consolidating), before having their next big move. After a big move in price, the ensuing consolidation often carries price up into the key 50-day Moving Average (Black Line). After consolidating, the next big move is normally in the direction of the move preceding the consolidation.
Currencies
The Euro looks like commodities. The Euro appears to be consolidating after a sharp move lower and is setting up for the next big move.
So for the Euro, a sharp move down has been followed by several weeks of trading between 124 and 132. The 50-day has now declined to 132.5 and is falling. A break of 124 would be very bad for you if you own the Euro.
US Dollar
The anti-Euro is the US Dollar, so it makes sense that a break in the Euro will lead to further rally in the US Dollar. I will be looking to buy the Dollar on more weakness in the Euro.
I will cover the US Dollar/Euro connection later this week when I discuss Quantitative Easing and a potential Dollar Carry Trade.
Stocks
I want to review two key companies in Energy to show you how much of an impact being a component of the Dow can have on the performance of your stock over a short period of time.
The two companies are Chevron (CVX) and Total Fina (TOT). Both are enormous Energy Conglomerates, with Market Caps of over $100 billion, Revenue of over $175 billion and Earnings of over $16 billion. I consider them to be similar enough that their stocks should be performing in a very similar manner.
But look at the differences in the charts of Chevron and Total –
Chevron broke support in September and then snapped right back up into it over the last two months (Pink Line). But Total broke in August and had a very weak rally the last two months.
The reason this has occurred is pretty clear to me. Chevron is in the Dow and Total is not. I’m not going to go on some conspiracy rant. That is not my intention with this. I could have replaced Chevron with Exxon, the other large energy company in the Dow. And I could have used BP, Royal Dutch or ConocoPhillips instead of Total.
I think what happens is that mutual fund managers are forced to stay fully invested at all times and sometimes they all plow into a handful of companies with way too much money. This leaves shareholders vulnerable for the time when everybody wants out of the company all at once
My concern is that if Energy and Commodities crack in near term, then the crowds in Exxon and Chevron may all run for the exits at exactly the same time. So if you hold these things, be very, very cautious.
The Bottom Line
Until proven otherwise, the mantra for the markets remains – Buy Weakness and Sell Strength. But the pressure seems to be building for a break of key support in a number of significant areas.
Big Money showed up today and sold the markets hard. I covered some shorts and am looking to reload in a number of obvious setups. If the markets rally, then they may only do so for an hour or two, or they may retest Friday’s high. Who knows. But I will know how to play it and will be looking at the intra-day charts for topping patterns to short.
Let me know if you have any questions or comments.
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