More inflation Talk

Good article in Seeking Alpha today  if you're interested in adjusting your portfolio for inflation (and it seems like traders have done exactly this all month long):

With inflation worries starting to surface and the US Dollar resuming its fall, many investment advisors have advocated the iShares Barclays TIPS Bond Fund (TIP). This ETF invests in Treasury Inflation Protected Securities, treasury bonds which promise to completely protect against inflation by calculating the coupon payment on inflation-adjusted principal.

The TIP is a smartly designed fund with an attractive expense ratio and plenty of liquidity. But it has one fatal flaw: TIPs haven't been tested in truly inflationary times, and are thus a much riskier investment than most people think.

The protective value of TIPs rests on an accurate calculation of inflation. Critics have long accused the CPI of underestimating the true value of inflation. Much like the unemployment figures, the CPI numbers have beenopenly massaged over time to look more benign. They aren't falsified per se, the index's parameters are simply changed in a way that produces overly conservative figures.

TIPs were first issued in 1997, smack in the middle of the "great moderation". They weren't tested in the 1970's. We don't know if the US government will pay them back honestly and in full. It may simply be easier and cheaper to lower the CPI numbers, leaving TIPs holders exposed. This excellent Bloomberg story describes how poorly TIPs performed in early 2008, right when pre-crisis inflation hit its peak.

The pressure on the US government to fiddle the inflation numbers will be overwhelming the next time inflation rears its head. The Fed wants to keep rates low to support growth. The Treasury wants to keep rates low to avoid raising its borrowing costs, both through higher interest payments and higher TIPs payouts. Every government in the world fudges their inflation numbers, and history has shown that the worst fudging comes in times of the worst inflation. With the US fiscal situation looking more and more dire, investors cannot rely on the flawed CPI to protect them.

Better, safer alternatives exist. The SPDR DB International Government Inflation-Protected Bond Fund (WIP) invests in inflation protected securities from a variety of non-US issuers. WIPs holdings are better credit risks, and their geographic diversity minimizes the chance that any one particular government will hurt your returns.

The ProShares Ultra Short 20+ Year Treasury (TBT) shorts the long end of the US treasury curve . Unlike the CPI rate, long term treasury rates are set by the market. (Although the federal reserve has recently tried to artificially support prices with quantitative easing, its policy has clearly failed.) As inflationary expectations rise investors will demand more yield for long term treasuries, causing prices to fall and TBT to rise.

Investors with more risk tolerance may want to invest directly in commodities, which are usually big winners in inflationary environments. Top picks would include the SPDR Gold Shares Trust (GLD), the Powershares DB Commodity Index (DBC), and the Powershares DB Agriculture (DBA). If you absolutely must invest in TIP, make it a small part of an inflation proof portfolio that includes exposure to international government bonds and commodities.

Disclosure: Author owns TBT.

Good opportunities

We always tell new traders that trading is harder than it looks, but what you always need, whether you are new at the game or a grizzled veteran, are opportunities.   And providing trading opportunities is what  HCPG is all about:

Here are some of the triggers just from the last two days:

SOHU buy 60 worked great:

As did SNDA 56 alert:

Our two previous buy points in RGLD:

In PCU yesterday on the break of the triangle:

Two buy points this month in NEM

Trend line break yesterday in MEE at 22

Our GDX buy point earlier this month on the break of the base:

BIDU 255 yesterday buy point:

AEM two buy points this month:

And we put this freebie in the newsletter last night pointing out the bottoming action -- great follow through today:

TBT holders don't be piggish

A month ago we wrote a post called "Commodity Rip" and discussed how commodity stocks were showing clear leadership. We highlighted XME at 34 (now 37 ), OIH at 94 (now 104 ), USO under 30 (now 35 ), and made a note on the weakness of treasuries with TLT at 97 (now 91 ). It's been one hell of a move.

The trend in the commodity stocks is still intact, but TBT holders might want to take some off the table as treasuries look like they've put in at least a short-term bottom.

Dealing with a psycho market

Accept the fact that we're range-bound and until SPY breaks 88 on the down-side or breaks through the 200 SMA and resistance (93-94) on the up-side there will be a lot of backing and filling.    

So what to do:

If you're a swing trader then buy the dips, sell the resistance in order to avoid being whip-sawed around and forget about break-out trading until the range is broken down/up.

And if you're a day-trader like us then it's business as usual (we got some decent day-trade

 moves on AAPL, VMW, CLF today from last night's newsletter).       

So stop whining, man-up, and be patient until we move out of this channel. 

Dip Buyers Win Again

Just when things could have gotten exciting on a break of SPY 88 -- dip buyers stepped in and thus far have won the day.     

 

  We wrote in our newsletter this weekend: 

"Strategy for strong market: If we break minor resistance 90 convincingly we'll try some longs.  Strategy for weak market:  through 88 and we could be in for a trip to the 50 sma and we'll be looking short."    

SPY Talk

Clear range is setting up in the market with support at around 88 (875 on the S&P) -- if that goes then watch for a move to the 50SMA-- and major resistance on the SPY at 93-94 (and 200 SMA). Within that range we have now a c lear minor resistance at 90; a high-volume close above 90 could rally us back to resistance zone in a hurry.

No predictions as to which direction this small range (88-90) will break but we'd prefer a move down to the 50SMA to give this potential March bottom a broader base and more backing and filling.



Point A is the trend-line that we broke and keep visiting from the other side. Point B is support, and Point C is resistance.

Get your lawn chair out

We're stuck in this range in the SPY with the floor being 88 support, and the ceiling previous highs and 200 SMA around 93-94. Until that is resolved, be prepared for choppy, trend-less action.

Day Traders get their day

It's not 1 PM yet so too early to call it but thus far it looks like a reversal day. Consolidation near resistance is actually good for the bullish case -- as long as the pull-back doesn't gain momentum towards 88. Let's see how it looks at 4 PM.



These are ALL the stocks that triggered from last night's newsletter, losers and winners.


ACI 18 worked well if you were fast.


CLF 25.


CNX 40.5


GNK 21


JRCC 24


MEE 21.4


Best set-up of the day goes to base and break 1 point under daily spot on MON (91 base and break under 92 daily spot).


NEM 44.75


PCU 20


TBSI 10.5 didn't work. We don't like trading sub-$20 stocks and regret putting this one on the letter.


VMW 29 excellent set-up for a big size/close stop trade (as opposed to wider stop/fewer shares trades we recommend on commodities).

Suspense Continues

SPY testing the other side of the trend-line and looks like it wants up for a visit to the 200 SMA. We're neutral now, bullish on a close above (92), and bearish on a break of 88. Four point range.

Monday morning green shoots

The market gapped up today (complete reversal from futures being down almost 1% last night) on upgrade on BAC, an uptick in "homebuilder sentiment," good news from home improvement stock, LOW, and a 17% rally with love from India.

We would have much preferred a visit to the 50SMA but the bulls went with the news and didn't relinquish an inch to the bears all day long.

It's hazy out there and we're sticking to pure day-trading as we can't see a clear direction on the SPY. On one hand it looks like we're going to go visit the 200 SMA and resistance at 94, but on the other hand volume was light and this one-day bounce will need continuation before it can be believed. Much too blurry for our taste (and the few number of set-ups we have for tomorrow reflects this).

SPY talk

In retrospect, it would have been too cute for 88.5 to hold -- we broke it, hit the 20 SMA and bounced. Unless we get new "green shoots" data in the following weeks then the next logical place for SPY is the 50 SMA around 83 zone.

SPY 88.5

Three touches now on this level. How cool is that?


Update: We jinxed it -- SPY now under minor support intraday. Close today will be significant.

So far So good

As we wrote last night in our newsletter we were looking for a bounce on the commodities today. So far so good -- however, now the big test comes as whether the bounce finds continuation back to the highs or whether it simply sets up new shorts (today's lows).








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Day of Opportunity

These are all the stocks that triggered our numbers today from last night's newsletter:

Let's start with the two longs that went over our spots:

POT 103.


MOS 48.


JOYG 28 short.

BUCY 24 short.



BRCM 21 short.


ATI 36 short.



SPG 49 short.


Join us for a 1 month trial -- (no credit cards required) and test out our system.

Bucket of Cold Water on the XLF

We have great respect for Meredith Whitney. She saw the cracks in the house of cards before the crisis, then before the latest bank earnings came out she said she wouldn't be short the financials (because of the Government intervention) and now after the rally she says she wouldn't own them. As good as it gets for an analyst.

If you haven't already seen this then sit down for the next 10 minutes and soak it all in:

Intraday Updates

Thus far today the bulls have done a very good job of holding support. These are intraday updates of the daily charts -- look how well support held this morning. If the sell-off is to gain any traction then the bears have to push through the following support levels:

XLB 26 area held. If that goes later in the day, watch for a dive to 25.


The 20 SMA held on the QQQQ; the Nasdaq was the weakest index last week, and now is the first one to bounce.




KOL bounced near support (and 200 MA)in the 21.4 area.


Perfect example of one of our favorite commodity plays, BTU, bouncing on previous minor support of 31.

XME bounced on 35 support.



Watch those levels -- if they go and selling accelerates then it's likely this is not just a 1 day pull-back.

Market Talk

With the exception of the Nasdaq weakness (as we discussed on Friday) the bulls are still in control; however, this could change soon.

XLF long to the 200 SMA, after that we'll be looking for reversal shorts.


Commercial Real Estate looks like it has one more pop left but will offer an excellent shorting opportunity at the 200 SMA. Unless IYR shows very clear relative weakness, stay long until 40. Ideally we run for a day, and then gap-up to 40 -- that would be a very nice risk/reward spot short on 40 resistance.



If you're leaning bearish then hope for quick max pain; the longer we base under resistance the more chance that the break-out will be successful. This is the reason we're hoping for a very big run or gap-up to resistance as the urge to take profits will be very strong compared to a slow grind up and base at resistance (which would increase the success rate of any break-out). So if you're a bear, hope for a big 2 day rally!

We've been writing about this trend-line on the QQQQ for a while now in the newsletter. Note today that the QQQQ is in a peculiar spot: in a little box under the trend-line but bouncing for the second day in a row on the 200 SMA.

On the upside it still has room to 36 until next major resistance and on the down-side, selling might pick-up on any hard break of the 200 SMA or break of the 2 day low around 33.85. Our thoughts are that sentiment is still very bullish and any significant selling in tech (for example a move to 32) would be a good buying opportunity.