Apr

24

Stock Speculation – Trading Strategies – Preservation of Capital in A World Gone Mad

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This market rally, be it a Bear Market rally or otherwise is definitely getting long in the tooth. It feels like a big game of musical chairs and the music keeps playing on…for now. The conventional wisdom from most mainstream media seems to be luring unsuspecting novices into shark filled water. "The market always leads the recovery" they say. I’m not buying it. I am being extremely cautious right now because I think that we are facing the most dangerous point in the cycle since last fall.

S&P 875 looks like a brick wall and under normal circumstances I would be inclined to say that the rally stops there but these are not rational times and a push through that level, combined with the "don’t miss the boat" mentality could take it up to 950-1000. What I will be watching keenly for is a quick, sharp run up, culminating in a long-range white candle with an opening gap the following morning and a red candle reversal. That would be the sign to move to the sidelines and see how the first major "correction" of this recent move off the low plays out. In the meantime I suggest mostly day trading and swing trading with a close eye on the exit and stops under everything. We might see some trading ranges in the medium term but any move below the 20-day moving average and I am on the sidelines immediately, not trying to be a hero trading long. It has come to my attention that we might just be in a Wave 4 rather than a B Wave and you can see from the graph in the prior post what the implication of a 5th wave down will be.

While the market is always risky there is still great money to be made speculating. One thing I have noticed recently is that the market does indeed reek of manipulation to some extent. While normally I would dismiss the claims of manipulation, I am witnessing it myself on almost a daily basis. For instance I watch a lot of stocks trade tick by tick with time and sales and Level 2. I see trades going off at the ask over and over and then all of a sudden they drop the bid and ask for no reason. I though the idea was that is that there were buyers taking all the asks, then the price was supposed to tick up. Also one of the weirdest things that I see almost everyday is a big block trade or two a couple minutes after the close at a price not remotely resembling what the stocks was actually trading for near the close. I’m talking 5% away or more in some cases. So how does one apply rational analysis in this environment? That’s why I call it speculating.

People that think you can "invest" in a traditional sense in this environment are taking this tape way too seriously.

The current day to day stock market seems to have morphed into more of a a video game and the market feels more and more like a casino rather than a serious institution. I can pretend that I have some good investments and perhaps if I go away for a period of time I will return and they will have appreciated in value, but the point is that the market is anything but efficient at point in time. Serious new money would be best to wait on the sidelines in CASH and be very patient. During the FDR days, companies and individuals cut spending and investment back to the bone and hunkered down hoarding all excess capital with the intent of waiting out the "unfriendly business environment" for an entire administration. "Sell in May and Go Away" is a popular saying, but I wonder if "Sell Today and see you after the next election" might not be passing thoughts for the long-term, old-money type investors.

The volatility in individual stocks is amazing and risky. The S%P they will tell you averages about a ten percent return over the long term but the stocks I watch everyday can move ten percent in an hour and that is a game changer. In addition, these days it’s a crapshoot which direction the market gaps open, on any given day up or down and the magnitude . The overall market is unstable and irrational at this time and logic is pretty much out the window. If you are going to trade stocks it’s best to approach it for what it really is, pure speculation. Someday perhaps it will return to the nobler days of past but the way that the stock market has morphed into an "entertainment showcase" should raise a cautionary flag to serious money. Maybe I’m off base because conceptually serious money can not consist of debt based fiat paper currency that is guaranteed to lose value over long periods of time. The conclusion is that real money only consists of gold and silver (as stated clearly in the Constitution).

I currently have no faith in most of the people running the government. I am looking forward to 2012- only a few years away. I have little faith that the people running the Federal Reserve, FDIC or the banks can keep the system from imploding at some point. It seems like we are reaching the end of our "less then 100 year old fiat currency experiment. I am nervous because I have no faith that the "leaders" possess the skills to deal with any number of Black Swans that may be on the horizon. The potential problems are bigger than the ability our leaders possess as demonstrated by recent political and news events. In short, these people can’t run a country and a financial system during good times so what happens down the road when a major challenge hits? I only hope they somehow forestall the Economic Armageddon for a few more years so we have more time to prepare.

I feel as if the current two party system has failed this country and I am absolving myself of any political affiliation. I hope to someday be an optimist again but it must be the curse of growing old that makes me so cynical. Maybe it is the new "system" or maybe I’m too well informed these days because I read too much.

In the past, technology has always come along to save the day. Let’s hope a new technology revolution is right around the corner, say in 2012 and we can one again preserve the system and live happily ever after. Around 1990 we had a very similar situation to today, insolvent banks, auto bailouts and a terrible economy and it looked like the system was done for then, but along came the Internet and changed everything and alas, that seemed to conjure up another 20 years life support for our debt-based, fractional reserve bubble economy. I’m praying new technology will come along and save the day again.

Back to the market, I think they want to crush all the shorts at the same time they suck in all the dumb money so everyone goes broke. Then again maybe they can change the rules and "inflate" the market all the way back up. By the way, when and if inflation actually starts to manifest itself they might just drive a lot of the excess capital back into the market. That’s one of the actual scenarios I go over in my mind that could just send the market back to the sky. In an inflationary environment there is no where to hide except in stocks because money sitting idle is losing purchasing power quickly. Unfortunately the nominal increase in dollars never keeps up with the actual inflation so the profits are an illusion. Some of the best performing markets in nominal terms are a result of inflation in the local currency and of course, purchasing power is lost. Actually it’s an evil plot to keep people with excess capital from stuffing it under the mattress.

My investment theme for the future is "tangible items", resources, precious metals, and means of production. Things that money would buy if paper currency actually had value.

Speaking of stuffing money under a mattress I had an interesting thought. In theory isn’t keeping money in a bank account more risky that taking some cash out and locking it in a safety deposit box at the bank? Fractional reserve banking is obviously a Ponzi scheme and we all know for a fact that they really don’t have the cash. The FDIC is a joke compared to demand deposits and the whole system makes me nervous to say the least. I personally heard the leaders of the world say "We avoided a global systemic financial collapse" or something to that effect, but when Presidents utter the words "financial collapse" I tend to get a little edgy, What the hell is that supposed to mean and what are the implications? Have they now miraculously solved all the problems that lead us to the brink of collapse or have they simply papered over the problems and temporarily kept the train on the tracks? Time will tell, but the whole derivatives thing is still there and the scope and magnitude of derivatives is like an active volcano that could erupt at any time and not one of our "leaders" can do anything about it. The numbers are just too big and eclipse global GDP. The scary thing is the butterfly effect and when complex systems fail the implications are unknown and just like a massive earthquake, the effects are beyond the scope of man or politician to prevent the destruction. While I can’t spend all my time worrying about impending cataclysmic upheavals by Mother Nature or Washington, that Black Swan is still on the horizon.

I read something that struck me as funny on a message board this week:

"Let’s all raise a middle finger salute to the Federal Reserve, JP Morgan, all the corrupt govt and bank officials who have destroyed America and world economies, as well as the disastrous liberty destroyers and deficit spenders dems and repubs. Just trade your worthless fiat FRN pieces of paper for the REAL MONEY – PRECIOUS METALS, Silver and Gold."

Haha, my thoughts exactly. Silver and gold are the one salvation from all the madness and will indeed preserve purchasing power that transcends time and geography. It is the only real money and does not represent a debt. As I have been saying over and over for many years and I still believe it now, in order to have real wealth you must accumulate over time a substantial quantity of physical gold and silver. It should be the base of your investment pyramid. I have always advocated slowly buying small amounts over time and incrementally converting excess capital into a base of precious metal. Al this trading of stocks is a grand scheme to acquire increasing amounts of FRN’s so that we can pay the bills, buy shiny trinkets from China but ultimately exchange them for gold and silver and stockpiles of food, ammunition and booze.

Here are a couple really good articles that I just read before posting this:

http://www.financialsense.com/fsu/editorials/andros/2009/0424.html

http://www.financialsense.com/fsu/editorials/glenn/2009/0424.html

They say stuff in those articles that would make me nervous to actually write because I don’t want to be singled out as too "radical".

On a positive note, we’re making money trading stocks. It’s hard not to when even the dogs are barking. Some of the little low-priced stocks are great for trading because you can buy a thousand shares and sell em in an hour when the price pops up a quarter and make $250 like taking candy from a baby. I have also been noticing a lot of stocks with nice predictable patterns that make for great trades, as long as there’s a good place to set the stop initially. So when the market is acting well you have to play, that’s what makes it so fun. You have to trade to make money but don’t be afraid to sell,sell,sell, and go to cash if a trade starts going against you.

I have 500 free shares of a great company. All I did was trade the thing a few times, as it bounced around from roughly 4 to 7. A few 1000 share trades and a few 500 share trades and I found myself with a double. So I did the only rational thing, I sold half. So now holding overnight isn’t really an issue and I can’t lose money even if the stock goes to zero. This is really a twist on a trading strategy that I have been using for years. "Take profits in shares rather than dollars". Say I buy 600 shares of a stock and get a nice pop, I might sell 500 and keep 100 "low cost" shares. If I can buy 1000 shares and get a 10% move, I can sell 900 and have 100 free shares. There’s all kinds of twists but I think you get the idea. Doing this with dividend paying stocks is even better though the strategy tends to work best with lower priced stocks where you can buy a substantial amount and sell most of them off, keeping a token 100 or 200 shares. One could actually build a decent portfolio like this focusing on particular stocks that might have longer term potential. The key is that free shares are ok to hold and you can still use a stop on the low cost shares. I have had stops in place where the worst case scenario was that I would be stopped out with only a 20% profit. Next week I am thinking of trying this strategy on a couple little mining stocks that I think might move enough to get me a couple hundred free shares.

So the strategy is to take profits in shares rather than in cash and still set stops so you can’t lose money.

With some of the moves in these little stocks you can use your imagination and a calculator to figure the details but the strategy is effective and who knows, this may be a great time to pick up some cheap shares for the future.

Next time we will discuss the adage "sell in May and go away".

Enjoy the weather and get some fresh air!

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Apr

2

Trading Timeframes – V Bottoms – It’s ALL Speculation in the New World Paradigm

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Three Weeks ago tonight I felt inspired to comment on the market and noted that the S&P had bounced 12% from the "666" Low. As of today we are 26% higher than that Multi-year low of 666. Remember that number if you can to establish a reference point because it stands as somewhat of a line in the sand as we move forward into the New World environment, in which anything can happen. We have come to expect a series of clearly unexpected and dramatic events both in the market and in world events.

This is a speculators market to say the least. I speculate that many traders such as myself, sleep best at night when much or all of the "bankroll" in the trading account is in cash. Theoretically if one has a stop-loss on each trade, you might come back from lunch to find your trading account is all cash and the New World is now your oyster.

I’ve heard a few traders throw out the term V-Bottom so let’s see what one looks like. This is the trade we posted 3 weeks ago in our prior post.

"Market Higher 12% from the lows – Hope Springs Eternal When the Weather Gets Nice"

A look at the V-Bottom:

The original set-up:

Interestingly enough there are tons of charts that look very similar to this and the pattern shows a high correlation to the overall market. Any sensible trader would take the bulk of profits here, while most would have scaled out of the position long ago (except for maybe that last 1/4 as we discussed). Buying opportunity of a lifetime? That remains to be seen.

I find myself holding some stocks an hour, some till the close, some overnight, some for a few days and some for a few weeks. You can do that with good trailing stop loss orders, but I’m inclined to reign things in a bit here and be ultra-cautious for a bit. Some of the real action has been in the low priced stocks and some good old fashioned speculation can be a lot of fun. There are a lot of stocks trading like options and you can pick up a thousand shares in the morning and sell them after lunch for a good days pay.

Speaking of a good days pay, I recently read that throughout much of time and history, a working man would exchange an entire day of manual labor for 1 ounce of silver. Boy is that ratio out of whack now. It’s not hard to imagine that the trend over time might favor reversion to the mean. If you are a newcomer please note that we have liked silver as an investment for many years. I keep an ounce in the office, a Maple Leaf dated 1990 I think cost me four-something when silver was three something. I could have bought a value meal with it at the time but today it will buy 4 value meals so I guess it has done ok. I still have it which is more than I can say for the other four bucks I had in my wallet at the time. The reason you want some of these is to hedge against the implied arrogance our government has in thinking that it’s "less than 100 year old" experiment in fiat currency will not ultimately fail as have all those before, throughout history. It is inevitable that the current iteration of what we use for money, FRN’s, will be worth less or (worthless) in the future. Devaluing the currency and inflation is a fact of life since our currency is no longer tied to gold and silver. It will be interesting to see what they come up with as a substitute once the last 5% of purchasing power evaporates. It might not be a bad idea to hedge with a few of these:

For more insight I recommend this article by Jason Hommel.

They talk about "diversification", which is gibberish for fully invested in a bunch of stocks, funds and ETF"s, maybe a piece of property that’s down almost as much as the market. I say diversification in modern times should expand well beyond the scope of the markets. With the Black Swans on the Horizon one might consider stocking up on weapons, ammo, food, supplies, and other survival items as a small portion of a diversified existence. Gold and Silver and some of that New World Currency are a must as well. Shiny trinkets and durable items are still real cheap and something tells me the Trillions upon Trillions of digital FRN’s might make them more expensive in the future. Diversification means being prepared for inflation and deflation, whichever comes last. Diversification mean being prepared for anything and everything, in which case there is no substitute for a secure remote location.

I have great hopes that the economy can get back on track to the good old days but it seems like a slow-motion train wreck. It’s hard to see how the market can get back to normal while the global economy is in shambles. Normal isn’t a 52% pullback and a 26% bounce in the S&P. I’m by no means a perma-bear but it’s hard to imagine the market can continue to go straight up from here with all the unresolved problems out there. The market is getting ready to hit some major overhead resistance and the range I’m watching is from 775 to 875 on the S&P for the next month or so. That range is kind of the no man’s land and we will watch for a break or the upper or lower end to help read the longer-term trend. Bear Market rallies are fierce as we just witnessed and can easily go further than imaginable fueled by short-covering and rule changes.

Only time will tell if the market really bottomed at 666 or if all hell breaks loose and we penetrate that to the downside. In that case we can feel more secure with our diversification supplies. Someone told me that the economy might be ten times worse that they are telling us but I hope he’s wrong. Prepare for the worst and hope for the best makes sense when you happen to live in interesting times.

Here’s a picture of a real market bottom.