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Market Talk

It was a wild week. Monday/Tuesday started slow but Wednesday we gapped up hard thanks to the "bad bank" news. We became bullish on Wednesday and rode some nice longs (A). Then on Thursday the market gave it all back and we fought the trend all day churning our wheels (B). After Wednesday's bullish price-action we thought, like idiots in retrospect, that the dip was to be bought. Wrong! However, on Friday we got our mojo back and stayed short all day (C) with the help of our leveraged ETF favorites and a few stocks. Looking at the SPY we can safely say that it would be very surprising if this market does not at least test the lows of 80.5 (resistance now clear at 88). Ideally we base over support and then break-down hard for a final wash-out. Too cute? Possibly. But we can hope.

A side note: the way this "bad bank" news has been dealt is absurd. Is CNBC the televised National Enquirer of finance?

More SPY talk

Today was the day the bears should have pushed the market down through support: they had the gap-down weight and momentum right at the open with the GE news. The following 4 day chart shows how pivotal/dramatic this week was: On Tuesday we close at the lows and through 82 support; all very depressing complete with "end of the market as we know it" calls. On Wednesday we gap-up, test that same support, but close at the highs, producing numerous "this is the bottom!" calls. On Thursday we again tested the 84 resistance. And today, the best day of all, we opened at support and rallied all the way back to 84 before closing off the highs. Please note that we also enjoyed poor economic/earnings news on Thursday and Friday. We'll hold off our enthusiasm until we close over 84 (and swing like mad to the bearish side on a break of 80.5-80) but so far, so good.



Added bonus of down-trend line break now coinciding with daily 84 resistance.


Note similar chart in XLF.


As you can see we're still very much in a danger zone and if this rally has any chance then financials have to pull-up and away from 8.7 area support.


FAS gives a more clear picture than XLF of how important our current level is: A conclusion is coming soon as we either break up through this down-trend or reverse down.

How to spend 1 million + redecorating your office

Hat Tip to The Daily Beast

Ex- Merrill Lynch’s CEO John Thain's re-decorating expenses

1) $2,700 for six wall sconces.
2) $5,000 for a mirror in his private dining room.
3) $11,000 for fabric for a "Roman Shade.”
4) $13,000 for a chandelier in the private dining room.
5) $15,000 for a sofa.
6) $16,000 for a "custom coffee table.”
7) $18,000 for a “George IV Desk.”
8) $25,000 for a "mahogany pedestal table.”
9) $28,000 for four pairs of curtains.
10) $35,000 for something called a "commode on legs.” (toilet)
11) $37,000 for six chairs in his private dining room.
12) $68,000 for a "19th Century Credenza" in his office.
13) $87,000 for a pair of guest chairs.
14) $87,000 for an area rug in Thain's conference room and another area rug for $44,000.
15) $230,000 to his driver for one year’s work.
16) $800,000 to hire celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.

Perverse and just utterly wrong on so many levels.

Link

We've been reading ClusterStock these past few weeks and like what we see in terms of news and editorials. We find ourselves to be in sync with a lot of their opinion pieces, like this one

Wall Street’s Sick Psychology of Entitlement

Edited by Henry Blodget (yes the same one that made the AMZN $400 call back in '98.... he's grown up since then :-)

Transcript of Buffett interview

Wouldn't it be great to have more men like Buffett and fewer men like Ken Lewis, Dick Fuld, John Thain (feel free to substitute investment banker exec name)...in the world?

Transcript of interview with Warren Buffett by NBR's Susie Garib:



SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?
WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20^th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had; have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.
SG: Mr. Buffett, I know that you’re close to President Obama, what are you advising him?
WB: Well I’m not advising him really, but if I were I wouldn’t be able to talk about it. I am available any time. But he’s got all kinds of talent right back there with him in Washington. Plus he’s a talent himself so if I never contributed anything for him, fine.
SG: But I know that during the election that you were one of his economic advisors, what were you telling him?

WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America’s best days are ahead and that we’ve got a great economic machine, its sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.
SG: How often do you talk to him?
WB: Not often, not often... no no and it will be less often now that he’s in the office. He’s got a lot of talent around him.
SG: What’s the most important thing you think he needs to fix?
WB: Well the most important thing to fix right now is the economy. We have a business slowdown particularly after October 1^st it was sort of on a glide path downward up til roughly October 1^st and then it went into a real nosedive. In fact in September I said we were in an economic Pearl Harbor and I’ve never used that phrase before. So he really has a tough economic situation and that’s his number one job. Now his number one job always is to keep America safe that goes without saying.
SG: But when you look at the economy, what do you think is the most important thing he needs to fix in the economy?

WB: Well we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed and they have to and that isn’t necessarily going to produce anything dramatic in the short term at all. Over time the American economy is going to work fine.
SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?
WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.
SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?

WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.
SG: But are we creating new problems?

WB: Always
SG: How worried are you about these multi-trillion dollar deficits?
WB: You can’t just do one thing in economics. Anytime somebody says they’re going to do this and then what? And there is no free lunch so if you pour money at this problem you do have after effects. You create certain problems. I mean you are giving a medicine dosage to the patient on a scale that we haven’t seen in this country. And there will be after effects and they can’t be predicted exactly. But certainly the potential is there for inflationary consequences that would be significant
SG: We all know that in the long run everything is going to work out, but as you analyze President Obama’s economic plan, what do you think are the trade-offs? What are the consequences?

WB: Well the trade-off… the trade-off basically is that you risk setting in motion forces that will be very hard to stop in terms of inflation down the road and you are creating an imbalance between revenues and expenses in the government that is a lot easier to create than it will be to correct later on, but those are problems worth taking on, but you don’t get a free lunch.

SG: What about the regulatory system, is it a matter of making new rules or simply doing a better job at enforcing the rules we already have?

WB: Well there are probably some new rules needed, but the regulatory system I don’t think could have stopped this. Once you get the bubble going... once the American public, the U.S. Congress, all the commentators, the media, everybody else started thinking house prices could go nothing up, you were creating a bubble that would have huge consequences because the asset class was so big. I mean you had 22 trillion dollars probably worth of homes. It was the biggest asset of most American families and you let them borrow 100% in many cases of the price of those and you let them refi up to where they kept taking out more and more and treating it as an ATM machine.. the bubble was going to happen.
SG: But everybody is saying we need more rules, we have to enforce them, we need to go after every institution, every financial market. Do you think that new rules will do the trick or do we have enough rules that we just need to enforce them?

WB: Well you can have a rule for example to prevent another real estate bubble; you just require that anybody bought a house to put 20% down and make sure that the payments were not more than a third of their income. Now we would not have a big bust ever in real estate again, but we would also have people screaming that you’re denying home ownership to all these people that you got a home yourself and now you’re saying a guy with a 5% down payment shouldn’t get one. So I think it’s very tough to put rules out... I mean I can design rules that will prevent it but it will have other consequences. It’s like I say in economics you can’t just do one thing and where the balance is struck on that will be a political question. My guess is that it won’t be struck particularly well, but that’s just the nature of politics.
SG: You’ve said that we’re in an economic Pearl Harbor, so how bad are things really?

WB: They’re bad, they’re bad. The credit situation is getting a little better now. Things have loosened up from a month ago in the corporate debt market. But the rate of business descent is at a pretty alarming pace, I mean there is no question things have really slowed down.
Peoples’ buying habits have changed. Fear has taken over and fear is a tough thing to fight because you can’t go on television and say don’t be afraid, that doesn’t work. People will get over it, they got greedy and they got over being greedy. But it took a while to get over being greedy and now the pendulum has swung way over to the fear side. They’ll get over that and we just hope that they don’t go too far back to the greed side.
SG: What’s your view on the recession? How much longer is it going to last?
WB: I don’t know. I don’t know. I don’t know the answer to these things. The only thing is I know that I don’t know. Maybe other people think they know, but I have no idea.
SG: The last time we talked, you said back in the Spring, you said the recession is not going to be a short-haul thing. What is your feel for it right now?

WB: It isn’t going to be short, but I just don’t know Susie. There’s no way of knowing.
SG: Berkshire Hathaway is in a lot of businesses that are economically sensitive, like furniture, paint, bricks. Do you see any signs of a pick up?

WB: No. No. The businesses that are either construction or housing related, or that are just plain consumer businesses, they’re doing very, very poorly. The American consumer has stepped back big time and it’s contagious and there’s a feedback mechanism because once you hear about this then you get fearful and then don’t do things at all. And that will end at a point, but it hasn’t ended at this point. Now fortunately our two biggest businesses are not really tied that way- in insurance and in our utility business we don’t feel that, but everything that’s consumer related feels it big time.
SG: Do you think that the psyche of the American consumer has changed, becoming more savers than spenders?

WB: Well it certainly has at this point and my guess is that continues for quite a while. What it will be five years from now, I have no idea. I mean the American consumer when they’re confident they spend and they’re not confident now and they’ve cut it back but who knows whether.. I doubt that that’s a permanent reset of behavior, but I think it’s more than a one day or one week or one month wonder in that case.
SG: Is that a bad thing?
WB: Well it just depends who the consumer is. I mean consumer debt within reason makes sense. It makes sense to take out a mortgage on a home particularly if you aren’t buying during a bubble. You are normally going to see house price appreciation if you don’t buy during a time when people are all excited about it. So I don’t have any moral feelings about debt as to how people should.. I think people should only take on what they can handle though and that gets to their income level…

SG: Let me ask it this way, with Americans saving more may be good for consumers, but is that bad for business?

WB: Well it’s certainly bad for business in the short term. Now whether it’s better for business over a 10 or 20 year period... if the American public gets itself in better shape financially that presumably is good for business down the road, but while they’re getting themselves in better shape, its not much fun for the merchant on Main street.

SG: One thing that Americans aren’t buying these days is stocks. Should they be buying?
WB: Well just as many people buy a stock everyday as sell one so there are people buying stocks everyday and we’re buying stocks as we go along. If they’re buying into a business that they understand at a sensible price they should be buying them. That’s true at any time. There are a lot more things selling at sensible prices now than they were two years ago. So clearly it’s a better time to buying stocks than a couple of years ago. Is it better than tomorrow? I have no idea.

SG: This financial crisis has been extraordinary in so many ways, how has it changed your approach to investing?

WB: Doesn’t change my approach at all. My approach to investing I learned in 1949 or ‘50 from a book by Ben Graham and it’s never changed.

SG: So many people I have talked to this past year say this was unprecedented… the unthinkable happened. And that hasn’t at all impacted your philosophy on this?
WB: No and if I were buying a farm, I wouldn’t change my ideas about how to buy a farm or an apartment house or a business and that’s all a stock is. It’s part of a business so if I were going to buy stock in a private business here in Omaha, I’d look at it just like I would have looked at it two years ago and I’ll look at it the same way two years from now. I look at how much I am getting for my money, how good the management is, how the competitive position of that business compares to others, how durable it is and just fundamental questions. The stock market is... you can forget about that. Any stock I buy I will be happy owning it if they close the stock market for five years tomorrow. In other words I am buying a business. I’m not buying a stock. I’m buying a little piece of a business, just like I buy a farm. And that doesn’t change. And all the newspapers headlines of the world don’t change that. It doesn’t mean you can’t buy it cheaper tomorrow. It may turn out that way. But the real question is did I get my money’s worth when I bought it?
SG: One of your famous investing principals is, “be fearful when others are greedy and greedy when others are fearful.” So is this the time to be greedy, right?

WB: Yeah. My greed quotient has risen as stocks have gone down. There’s no question about that. The cheaper something gets that you’re going to buy, the happier you feel, right? You’re going to buy groceries the rest of your life; you want grocery prices to go up or down? You want them to go down. And if they go down you don’t think gee I got all those groceries sitting in my cabinet at home and I’ve lost money on those. You think I am buying my groceries cheaper, I am going to keep buying groceries. Now if you’re a seller, obviously prices are higher. But most people listening to this program, certainly I, myself, and Berkshire Hathaway, we’re going to be buying businesses over time. We like the idea of businesses getting cheaper.
SG: So where do you see the opportunities in the stock market right now?
WB: That one I wouldn’t tell you about.
SG: Let me throw out some sectors and you just tell me quickly how you feel about these sectors.
WB: Susie, I am not going to recommend anything…
SG: Even in general, for example a lot of people now are looking at infrastructure companies, is that a sector that you find attractive?
WB: I wouldn’t have any comment. What they ought to do is look at businesses they understand. They‘d be happy owning for years if there was never a quote on the stock. Just like they buy in privately into a business in their hometown... They ought to forget all about what somebody says is going to be hot next year or the year after, whatever… because what’s going to be hot you may be paying twice as much for as something that’s not going to be hot. You don’t want to think in terms of what’s going to be good next year, you want to think of what’s a good business to be in and then buy it at an attractive price. And then you can’t lose.
SG: Do you see more opportunities in the U.S. compared to overseas?
WB: Well I am more familiar with the U.S. We have such a big market. I see lots of opportunities here and I see lots of opportunities around the world.

SG: Investor confidence was so shattered last year, what do you think its going to take to restore confidence?

WB: If people were dependent on the stock market going up to be confident they’re in the wrong business. They ought to be confident because they look at a business and think I got my money’s worth. They ought to be confident if they buy a farm, not on whether they get a quote the next day on the farm, but they ought to look at what the farm produces, how many bushels an acre do they get out of their corn or soybeans and what prices do they bring. So they ought to look to-the business as to whether to be confident compared to the price that they paid and they ought to forget about what anybody is saying, including me on television, or what they’re reading in the paper. That’s got nothing to do with whether they made a good decision or not. What’s got to do with whether they made a good decision, what kind of business they bought and what they paid for it.
SG: People are reeling from this whole Bernie Madoff scandal. What would you say to people who have lost trust in the financial system?
WB: They shouldn’t have lost... you don’t need to lose trust in the American system. If you decide to buy a farm and you pay the right price for it, you don’t need to lose faith in American agriculture you know because the prices of farms go down…
SG: But you know what I’m saying. People lost money last year in companies that they thought were rock solid. As I said the unthinkable happened and then on top of it, this whole Bernie Madoff scandal. It has undermined people’s sense of well being about our system. So what do you say to people who have lost trust?
WB: Well they may be better off not being in equities. If they’re really depending on somebody else and they don’t know anything about the somebody else, they’ve got a problem. They shouldn’t do that. I mean there are going to be crooks out there and this guy was a crook on a scale that we’ve never seen before. But you ought to know who you’re dealing with. But if you’re going to buy a stock in some business that’s been around for a 100 years and will be around for 100 more years and it’s not a leveraged company and it sells some important product and it’s got a strong competitive position and you buy it at a reasonable multiple of earnings, you don’t have to worry about crooks, you’re going to do fine.
SG: Is there any take away lessons from the Bernie Madoff story?
WB: Well he was a special case. I mean here is a guy who had a good reputation for 30 years or something, and the trust of a lot of people around him. So it’s very easy to draw assurances from the fact that if fifty other people that are prominent and intelligent trust the guy, that maybe you should trust him too. But I wouldn’t put my trust in a single individual like that. I would put my trust in a very good business. I would want a business that was so good that if a social guy was running it, it would still certainly do well and there are plenty of businesses that are like that.
SG: So are you saying that investing has gotten so complicated that investors should stick to what they know? Is that the take-away lesson?
WB: You should always stick to what you know. I say the “know-nothing investor” and there’s nothing wrong with being a “know-nothing investor”. I spend 60 hours a week, thinking about investments and most people have got jobs and other things to do. They can buy index funds. And they’re not going to do better then an index fund if they go around and trust some guy who’s promising them very high returns. If you buy a cross section of American business and you don’t buy it during a period when everybody is all enthused about stock, you’re going to do fine over 10 or 20 years. If you buy something with the idea that you’re going to do fine over 10 months, you may or may not. I do not know what stock is going be up 10 months from now, and I never will.
SG: What about Berkshire Hathaway stock? Were you surprised that it took such a hit last year, given that Berkshire shareholders are such buy and hold investors?

WB: Well most of them are. But in the end our price is figured relative to everything else so the whole stock market goes down 50 percent we ought to go down a lot because you can buy other things cheaper. I‘ve had three times in my lifetime since I took over Berkshire when Berkshire stock’s gone down 50 percent. In 1974 it went from $90 to $40. Did I feel badly? No I loved it! I bought more stock. So I don’t judge how Berkshire is doing by its market price, I judge it by how our businesses are doing.
SG: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?
WB: I wouldn’t name a number. If I ever name a number I’ll name it publicly. I mean if we ever get to the point where we’re contemplating doing it, I would make a public announcement.
SG: But would you ever be interested in buying back shares?
WB: I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock…
SG: What are your feelings with Berkshire. The stock is down a lot. It was up to $147 thousand last year. Would you ever be opposed to buying back stock?

WB: I’m not opposed to buying back stock.
SG: Everyone wants to know your plans. What you’re going to do with all of Berkshire Hathaway’s cash, some 30 billion dollars? Is this now the right time to do a big acquisition?
WB: Well we’ve spent a lot of money in the last 4 months. We spent $5 billion on Goldman Sachs, $3 billion on GE, $6.6 billion on Wrigley, we’ve got $3 billion committed on Dow. We’ve spent a lot of money. We’ve got money left, but I love spending money. Cash makes me very unhappy. I like to always have enough and never way more than enough, but I always want to have enough. So we would never go below $10 billion of cash at Berkshire. We’re in the insurance business - we got a lot of things. We’re never going to depend on the kindness of strangers. But anything excess in that, I love the idea of buying things and the cheaper they get the better I like it.
SG: You’ve been talking about doing a big acquisition for a while now, what are you waiting for?
WB: Well we’ve spent $20 billion dollars... that might not be.
SG: I mean in terms of a company…
WB: Well we’ll wait for the right deal. We had a deal to buy Constellation for roughly $5 billion and then events with the French coming in meant we didn’t do it. But I was delighted to commit to that $5 billion dollars for Constellation Energy. And it could happen tomorrow. That one happened on a Tuesday afternoon I mean it happened like that. Constellation was in big trouble and we flew back that day, talked to the people at MidAmerican that Tuesday and made them an offer that night.
SG: It seems that you’re pretty optimistic about the long term future of the American economy and stock market, but a little pessimistic about the short term... is that a fair assessment of where your head is right now?
WB: I am unquestionably optimistic about the long term. I’m more than a little pessimistic about the short term, but that doesn’t mean I am pessimistic about the stock market. We bought stocks today. If you tell me the economy is going to be terrible for 12 months, pick a number, and then if I find something that is attractive today, I am going to buy it today. I am not going to wait and hope that it sells cheaper 6 months from now. Because who knows when stocks will hit a low or a high? Nobody knows that. All you know is whether you’re getting enough for your money or not.

SG: As you know it’s the 30^th anniversary of Nightly Business Report. As you look back on the past three decades, what would you say is the most important lesson that you’ve learned about investing?
WB: Well I’ve learned my lessons before that. I read a book what is it, almost 60 years ago roughly, called The Intelligent Investor and I really learned all I needed to know about investing from that book, in particular chapters 8 and 20 so I haven’t changed anything since.
SG: Graham and Dodd?
WB: Well that was Ben Grahams’ book The Intelligent Investor. Graham and Dodd goes back even before that which was important, very important. But you know you don’t change your philosophy assuming you think have a sound one and I picked up I didn’t figure it out myself, I learned it from Ben Graham, but I got a framework for investing that I put in place back in 1950 roughly and that framework is the framework I use now. I see different ways to apply it from time to time but that is the framework.

SG: Can you describe what it is? I mean what is your most important investment lesson?
WB: The most important investment lesson is to look at a stock as a piece of business not just some thing that jiggles up and down or that people recommend or people talk about earnings being up next quarter, something like that, but to look at it as a business and evaluate it as a business. If you don’t know enough to evaluate it as a business you don’t know enough to buy it. And if you do know enough to evaluate it as a business and its selling cheap, you buy it and don’t worry about what its doing next week, next month or next year.
SG: So if we asked for your investment advice back in 1979 back when Nightly Business Report first got started, would it be any different than what you would say today?
WB: Not at all. If you’d ask the same questions, you’ve gotten the same answers.

SG: Thank you so much Mr. Buffett … Thank you so much, always a pleasure talking to you.
WB: Thank you, been a real pleasure.


Take a look at these tips on saving money from Reader's Digest.  

Financials broke through their November lows yesterday. Note the divergence with the S&P 500 which is still significantly above last year's lows.


A minor support at 80 is now being formed with major support in the 75 zone.


If the financials can pull up over previous support (now resistance) over the next few days then we could be setting up for a decent rally with a higher low in the S&P 500. If however financials start selling off again and move away from XLF 8.67 then it's very likely that we'll be in for a move down to SPY 75.

As has been the theme for the last year: it's all about the banks.

Market Talk and some broader thoughts

In previous posts we wrote about different support levels, 89,85 and 82. The first two minor levels gave out easily while 82 major support thus far has held.

We don't particularly feel confident on the long side these days as we watch banks blindly march through fields of landmines on a daily basis. However, there is one bullish divergence that has emerged.

Note the following two charts:




What sticks out is the divergence between the market and the financials. To put it simply, the financials are sprinting towards last year's "panic" lows while the S&P 500 is attempting to hold support. What does this mean? It signifies that the broader market is trying to hold support and not cave into the lows; but it's doing so against the constant weight of the financials dragging it down while they flirt with the dance of death.

As an aside note: in our decade + of trading/investing and to put it more broadly, in all our adult lives, we have never felt the disgust and frustration that we currently feel in regards to the incompetencies of the financial system that got us here, and the foolish way the "solution" a.k.a. bailouts have been handled. The ongoing mockery of taxpayers (an example being banks paying bonuses to executives with bail-out money) brings out visceral rage. Personal visions that would have startled us only a year ago with their atavistic violence are now commonplace in our minds. However, we understand that we live in a modern, civilized democracy and the days of public humiliation/punishment in the town square are over. The only mode of revenge, albeit a hyper-sanitized one, is FAZ, a 3x short financial ETF that every trader we know actively trades. Our ability to short the financial system is our only protection against a corrupt, incestuous system that long ago ceased to work in the best interest of the nation.

Without a doubt to a large extent it will be wishful thinking, but our hope at least is that we go forward from this financial disaster with a bit more wisdom, more foresight, and less greed.

Market Talk

Unless there is some fantastic news that temporarily diverts the attention of traders from the world's ills, be it catching Osama (remember him?) or magical earnings from some important names, then it will be just a matter of time before we break SPY 85.5. Once that occurs then the bulls have to either make a stance at this important support zone or be prepared for a retest of December lows (82) and subsequent November lows (74).

SPY talk

Market is at a critical juncture and bulls have to step up to the plate tomorrow morning to hold SPY support at 89 which is daily support, up-trend line and convergence of 20/50dma. If this level does not hold next stop will be 85. A strong bounce will be needed to get away from this support zone as soon as possible. If we do not pull away from SPY 89, and instead remain at this level, forming a horizontal base, then the market will likely just be delaying the inevitable and breaking down through this level later this week.



We're day-traders who trade around support/resistance but we always have an eye on the longer-term picture. We find the following chart terrifying. Unfortunately it is the chart of the S&P 500. How would we interpret this chart? We bounced on multi-year support, now we're basing above, and sometime this year will go back and break-down below last year's lows. However this time it will not be an electrifying vertical drop down like it was in 2008 but an exhausting day to day grind down on diminishing volume. And after months of months of slow losses, of investor hopelessness, of dwindling income and attrition from our ranks, including finally some of the best and brightest, then we will be close to finding the next multi-year bottom, possibly in late 2009 or 2010. And that is our optimistic view. Of course, we have our share of wrong calls and we hope this is one of them. However, note that our market prediction for 2008 made in Jan 2008 was a 20% hair-cut for the market, again, too optimistic.

Newsletter Excerpt

Two equally compelling set-ups, one in a leveraged ETF, one in a stock, we will always choose the leveraged ETF (our favorites being DIG/DUG, UYM/SMN, FAS/FAZ, URE/SRS) over stocks as we feel they are much more "true" -- that is fewer headfakes, more telegraphed, sustained moves.

However, big caveat: without set-ups around support/resistance these leveraged ETF's can destroy your capital more quickly than you can say Bernie Madoff. Don't touch these vehicles unless you're trading around clear multi-day/month support/resistance zones (which we will always provide in the newsletter).

Hyper-Speed

The market went from SPY 155 to SPY 80 in two years (2000-2002). Then it took five years (2002-2007) for it to simply recoup the losses and go back to the highs. However, it took only one year for the market to go from the highs to the previous lows. If someone showed us this chart with the title of some unknown stock and asked us our opinion, we would say, "What a mess! Stay away!"


Looking at the following chart it's hard to imagine that we're not in for a difficult time in 2009, either in the ways of new lows or months and months of consolidation or grinding action. It's going to be tough slogging for the bulls in 2009 as the long-term trend is clearly still with the bears until proven otherwise.

Last week the market tested the lower range of support, bounced hard, went straight through short-term resistance we had shown the week before, and never looked back. All bullish. Real test will be what happens when volume pours in the market again come Monday.



The recent move has been strong and the sentiment bullish but keep an eye on the bigger picture: an up-hill battle in a completely broken market. Our guess is that this holiday-induced light-volume rally will be tested sometime this coming week.


If you, like us, haven't traded much in the last 2 weeks then take it easy on Monday as reflexes tend to be slow down somewhat after being away from the market. Make sure to "warm up" first with smaller positions on Monday morning. For you addicts that traded straight through the last 2 weeks, then of course, it's business as usual.

Range-bound

Yet another day in which the range was inside the last higher-volume/broader-range day, which was Monday, December 22. We would be happy if we could stay within this range until next Monday (not likely but would be nice). Watch to see how stocks react if SPY breaks 85.5; next time around at this zone support will most likely not hold and shorts will gain momentum. If the bulls want to end the year on a more positive note then they have to rally the troops and pull away from support towards the top of this range near 89.5.

Dinosaur Trader's Best of 2008

Check out the post for Dinosaur Trader's best of 2008. Good stuff.

Update

Believe it or not, even after all the recent volatility, we've been in the same trading range for the last two weeks. Over 90 and it we could easily go to 100 resistance. Major support at 82 meaning we break that zone and we will most likely revisit the lows. Right now the bulls have the momentum and they need to make their move. Our fantasy scenario? A few days consolidation under SPY 90 and then a significant break-out into the holidays. So far the banks have led (good) and the oils have been dragging behind (bad). Bulls need the oil stocks to firm up for this rally to survive.

Market Talk

Trading range now is 90 resistance and 75 support on the SPY. Previous support was 82, which again, was hit today. Market above 82 and bulls have a chance. Below 82 and bears become more confident. Through 75 and it's going to be a very depressing Christmas for investors.

This might be the trading range for the next little while so saddle up and stay smart.

Blog Status Update

We're thinking of firing up our blog once again but this time we'd like to make it a more community effort; we're opening up the blog to guest contributors. Possible ideas are: trades that you took on a certain day with chart and commentary; trade styles; op-ed pieces, data feed reviews, etc. The posts will of course be put under your name and it will be up to you whether to have the comment section on or off.

Base and Break: DRYS

Grasp the following, and you will comprehend the base and break, which is the primary system in which we make our living.

1) A great daily that has been in our newsletters repeatedly over the last week.

2) Today the stock gaps up with volume: probably the best combination of all is a gap-up, base and break to target.

3) base and break - failed

4) base and break to target - successful

As soon as the stock gapped up (3%) it became our focus for the day (we're only watching around 10 stocks, so it stuck out easily). It was the only stock with volume on our list. The stock set-up at 86 for a base and break. First entry was to buy the break, and as usual, stop at any reversal.

Step 1: Buy this base and break at 86.

Step 2: Get out immediately as the stock has reversed back into the base.

If you can't move fast, then our type of trading is not for you. This is not the type of system in which you put on multiple positions and go get a coffee. This system requires attention and the ability to move quickly. If you freeze the 20 cent loss could turn into a 1.4 point loss.

As long as the stock does not fill the gap, and DRYS did not, do not lose sight. The stock set-up very well again at 86 in less than 20 minutes. Note how the stock was bought up from that deep spike down. This is a very good sign and shows how much buyers want this stock.

One more time, buy the break of this base at 86 with stop on any reversal. The primary target is, as always, the daily number.

Very smooth move straight from 86 as buyers tripped over themselves buying the stock.

As usual, the stock goes to target, spikes over, and reverses. Sell partial at target, and hold the rest for possible continuation with stop at the new intraday base. The new intraday base at this point was 87.6. Therefore, buy 86, sell partial at 88, then move stop to just under 87.6 in case the stock continues upward.

This is a perfect example of buying the base, and selling the vertical line. The stock set-up 2 points under the 88 daily spot. Active day-traders who bought at 88, which was actual resistance, made the mistake of buying on top of a vertical move a stock that is far away from the base. Swing-Traders have much wider stops than we do (for example 2 points compared to 20 cents) and can be more flexible with entry points.

Good interview

Grab a beer, sit back, and listen to the interview with Upside Trader.


And one more time: subscriber, female, with initials A.P. who used the university e-mail address in Califorinia, please contact us as none of our e-mails are reaching you...

Excerpt from (what will be) today's newsletter

The market was weak today but we had two good runs: VLO from the watch-list, and DRYS from the trading-list. FSLR, unfortunately, gapped above our number.

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The DRYS trade encompasses several lessons that are constant in our system, so let's go through it in detail.

1) Volume and relative strength were excellent. Volume was around 40% of daily in the first hour and stock was near highs as market was near lows.

2) Notice how DRYS gapped up and held the gap, even though the market kept going lower into the red zone.

3) Base and break 1 point under the daily resistance at 77. This was entry: buy on break of 77 with stop on any reversal.

4) Don't forget how often our stocks set-up exactly 1 point under the spot in a base and break pattern.

5) Always buy from the break of the base (low slope) and sell into vertical rise/spike (high slope). At 77 the stock is just breaking the flat base; at 80 the stock is vertical.

When we saw DRYS gap-up with volume we started feeling confident that the stock would go today. When the market started going into deep red zone and DRYS stayed green, we grew more confident. We bought an initial position just over 77, added two times between 77.3-77.5 when it became clear to us that the stock was going to make a run for resistance. In the first spike towards 78.5 we started peeling off the position, sold more into 79, and exited on the reversal below 79.5. We contemplated buying back the position around support at 12:40 P.M. but didn't.

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Trader's Segment:

One of our readers sent in the chart of the trade today. Let's take a look:

R.S. writes: "Since the sector was strong I decided to gradually scale into DRYS. I waited until I had a nice profit on the 1st buy; then made the 2nd. As it traded through 78, I loaded up and then sold on the first red candle. I've been tempted to get back in BUT I've learned to be happy with my profit and WALK away."

This trader bought an initial position into the base and break and added as the stock went through resistance. We wrote in this weekend's newsletter how "In moves that we think are significant, for example, a sector break-out, we are often more patient in taking profits and actually add as the stock starts to run." and this is exactly what this trader did today. Instead of selling into 78 (which would often be quite logical as the stock is becoming vertical) R.S. actually bought more. Why? Because of the fantastic volume and relative strength coupled with strong sector strength. There was also no fear as there was an already comfortable margin of profit (since initial position was from 77) from the initial base and break buy.

This is the reason why we write that exit strategies are often nuanced. You need experience in the market and to know when to not push your luck, and when to have conviction that the stock will run hard. Note that this was a very aggressive trade, and one that cannot be done in less benign environments (where we would recommend to sell into the number instead of buying more). All in all, an excellent trade.

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VLOVLO knocked on our number (54) several times before breaking it and going up exactly 1 point. Recall this weekend we spoke about exit profits, and how we like to take off profits at 1 point intervals. We weren't crazy about VLO intraday as the number kept being hit, something that increases the risk of sudden reversal. Nevertheless it worked well for a nice and easy point.

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Both DRYS and VLO moved quite fast and were easy to miss if you were watching many stocks. This is the reason we always write that you should focus on the best daily spots, usually around 10-12 stocks per day. If one stock has early volume (look at volume % in QT) then stalk that stock specifically. One of the biggest mistakes of new traders is watching too many stocks. They don't do any research the night before, run scans, and watch hundreds of stocks hoping to catch the move. They end up jumping on the move too late and find the stocks reversing on them immediately.

Make every trade a good trade, be it for a loss or profit; this means that every trade you take should be from a valid set-up. If no valid set-ups appear during the trading day, then sit aside.

Absolute key to this system is to be in control of your emotions, have enough experience and knowledge to differentiate between good and bad set-ups, and then to develop the patience to wait for the valid set-up instead of trying to trade constantly.

Don't be the panicked, frazzled, anxious noob jumping from one trade to another. Be the calm, rational trader who crouches in wait, and then leaps to the occasion as the stock breaks the base. In our opinion, the system of waiting for daily spots plus defined intraday set-up of buying off the base on stocks with good volume and relative strength, is one of the most consistent methods out there for making a living in this business.

Is Tech Back?

Too soon to tell whether tech is back or not but definitely something to be on the watch for, especially after AAPL earnings this week.

We listed many charts in our newsletter today, and it was heartening to see some good old tech names along with the commodities, which have been hanging around our lists for months.

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For the new subscriber with initials A.P. and who has the e-mail address of an educational facility in California: our e-mails to you keep bouncing back. It's possible that this is not the e-mail address that you use, but it is the one PayPal supplied us with, so please get back to us with a possible alternative e-mail.

Good interview

The following interview is by a fellow trader who has a style very similar to our own:

Worth listening to:

Impatient Trader Interview

Bigger Picture

Some of the best rallies come in bear markets. They're short and they rip the throats out of the bears, especially the weak ones with little conviction. But then the bounces fade and the inevitable downturn continues. Last week was a decent little rally and we'll see how much more fuel she has...but don't forget about the big picture.

From the look of things, it's a matter of when, and not if, we touch Nasdaq 2000.

WallStrip

Say what you want about the man, but this is an entertaining interview, and he comes across as funny and honest. He seems to be missing that filter normal people have between what is thought and what is said (short WallStrip?) but that's also what makes him come across as refreshingly direct.

We find it somewhat amusing how much bad press this man receives and somehow, perversely, that motivates us, in turn, to give him some good press. Sure he's into self-promotion, but that's his gig. No reason to hate. Anyway, he won a place on our blog (and no, we don't trade nor have any interest in trading penny stocks).

The Ultimate Blow-out

One of our very own, a "plain vanilla" futures trader (except of the French variety) causes a 7 Billion loss, and very possibly was one of the determining factors in this week's world plunge. Of course this makes the Fed action somewhat hilarious (ultimately it stands to reason that the Fed cut an intrameeting 75 pts because of a 31 yr old trader's fraudulent antics) .... as they say, truth is stranger than fiction.

Our guess is that on Jan 30, the Fed will still cut 25-50 points, only if to save face.

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"Separately, the U.S. Federal Reserve remains comfortable with its decision to cut interest rates Tuesday in spite of news today that the preceding stock selloff may have been related to a rogue trader, a Fed official said. The official said the Fed didn't know of Société Générale's unwinding of positions when it cut rates. Nonetheless, the Fed remains as comfortable now with its decision as it was Monday night, when it was made, the official said."


Source: WSJ