The Market Perspective

The Final Run Up Lies Ahead

Weekend Sept 29 2012

Thursday Sept 27 2012 An alert reader suggests this article about the slowing economy is of interest, he's right. Boeing Deere and CAT are alll predicting lower earnings.

The Israel PM raises the stakes with Iran.

Student Loan Defaults Mount Again, page A2 Weekend WSJ, eventually this will assume the same sort of prominence of men who fled to Canada to avoid conscription during the Viet Nam War. They became symbols of exodus. The same sort of mood will be projected on those with degrees and a mountatin of debt but no job.  It will be argued that these indivduals are facing an exodus not of their own choosing but of events out of control. The plight of their entire families from Grandparents to children struggling under the debt burden will be highlighted.  There will be a call to bring them in from the cold of their jobless isolation. You heard it here first.

Simply dissolving the city and selling all assets to pay creditors isn't an option, since we have to continue providing services to residents. The Council has cut police officers by 25%, fire by 30%, and other by 43%.

Stockton City manager Bob Deis, A Message from the City That Went Bankrupt, WSJ Page A 15 Friday 9/28/12

After Meredith Whitney's prediction of massive defaults by cities, we opined that she would likely be correct if her definition of default was expanded to all the stakeholders, her prediction was that the creditors would not get paid. Our prediction was that the three way pool of creditors, city employees, and city resident would all likely share in the default. The necessary moves described are deflationary. 

Next year expect that municipal woes and student debt defaults will become center stage issues. 

Mark Hulbert  describes the system of another college professor who concludes, as we have, that over the long term this is not the time to be an aggressive investor. Again the risk reward here is not what it was in March 2009, we are at the other end of the spectrum. 

On page A 17 Former Deputy Asst Treasury Secy David Malpass points out Economic Signals Point to a 2013 Recession.  See that article in relation to our conclusion below at end that a top of some significance lies directly ahead. Interesting quote there about buying  $1700 gold rather than investing in jobs. 

Overall

The markets worked off their temporary excess after our exit Tuesday Sept 18. Since then options expiration on 9/21 and the quarter end of 9/28 have passed. Risk off assets re bounded and risk on pulled back.   Let's take a look at that first. 

TLT bonds

The Dollar

 

GDXJ

Run your eye down the three charts and you will see the first two high correlate while GDXJ inversely correlates. Each has been in a channel. There seems to be a bout a two week cycle going on here from top to bottom in each investment.

Investors have been running right back into bonds at every whiff of danger, I had originally thought hte rout out what with QE III would be stronger. As others are speculating, perhaps Ben is not getting the bang for his bond buck, to the tune of $40 B a month, that he thought he would. 

Internal Indicators

I exited positions as it seemed to me that the risk reward of being long six figures ( a fistful of stocks?) was increasing. Of course the very end of a move is often the most spectacular, and also the most difficult to time. Now where are we?

Bullish Percent 150 day MA

This is a pretty good picture os just where the overall market lies. This indicator finally pushed through all the MAs, pulled back in a test and now looks set for a final run up. It does not make we want to own lots and lots of stock again but as out title suggests, the Final Run Up Lies Ahead. 

A return to the previous high at 90 would be a 28% move so there is plenty of room left for some fireworks to drag investors out of bonds, TLT and into the stock market now that it has doubled since March 2009. 

NASD Advance Decline and A/D volume

IN the final throes of a move up, investors tend to focus on recent winners. This was the Nifty Fifty in the 1970s. These days it is Apple and Google. Apparently Apple is a bit pressed to pull the entire NASD up especially with the SOX index performing poorly. I left the ribbon of MAs on but one can see the channel evident here as well. This chart looks to be struggling to me, don't you think?  Volume in the lower panel looks weak and weaker.

 It may be that the NASD fails to make new highs along with the big stocks. The big boys offer a considerably different picture over the same time frame. 

NYSE A/D and Volume

Here is the same time frame and the same indicators but for the NYSE rather than the NASD. Investors are buying the big stocks. At bottom volume is lower than the April high but in the main panel price has exceeded the April high, a warning of non confirmation. 

The Overall Weekly Track Record for Risk Assets

Gold is the gold line, silver is the gray line, crude oil WTIC is the black line, and the semi conductor index SOX is the green line. Is this helpful, I think so, this weekly version is easier to read than the daily. Again there seems to be a four to five month cycle going on here measured from top to bottom. This suggests a potential return to the 1875 are for gold. Give that four months has elapsed since June in our 4-5 month cycle, it suggests that if history repeats you don't want to be out of the trading room when this tops, it may not last long, remember the original Cassisus Clay bouts?  Notice how the players here swap positions. Oil was a leader in February, not now though. 

Has Anyone Noticed the Decline of Fantasy Farming?

The appeal of Farmville missed me completley but then I am not a computer gamer either, rearders realize I prever the real thing. But like the dot.coms post Year 2000, enthusiasm wanes. Could the poor ecomnomy have people spending less on fantasy and more on he the real world?  Unlike the luxury end of hte market Farmville seemd to have lower end appeal. 

The Bottom Line

In terms of opportunity we believe that a top of multi-year significance is approaching. The probability of profiting from by placing bets on the downside exceeds those of betting on the long side now. We have some calls on GDXJ and puts on TLT. That gives us plenty of upside but limits our downside. 

 

Socionomics

Displays of extravagant wealth are signs of the top of a market. We noted the announcement of the financing for the Kingdom tower, a one kilometer strucutre in Saudi to top the Burj in Dubai. 

Yesterday i addressed the State Convention of the Structural Engineers Association of Texas. Members from nearby Austin were describing the plans for the Austin Grand Prix to be held there next month. Just last year the very existence of the track was in question. Now, check out the pre Grand Prix Images.

Austin, TX is the Texas  equivalent of California's Silicon Valley. It is a manufacturing center for Samsung, Motorola, Applied Materials, as well as numerous other start ups. The University of Texas is ground zero for attracting PhD candidates from overseas. Down the road here in San Antonio, the UT Health Science Center, Medical School, acts as the anchor tenant for our bio medical high tech industry. 

In the 1990s Los Gatos Ferrari was the number one Ferrari dealer in the US. When companies went public the Silicon Valley CEO would treat himself to a new Ferrari. Well history repeats. Austin now has its own

Ferrari Dealer.    And just in case you thought that was for show, what's a dealership with without 

the Hill Country Ferrari Club?

I am told the Grand Prix will feature

-50,000 expected to fly in from all over the world, crowding an airport designed for 5,000 at a time

-the downtown Main Street will be blocked off so the cars can be on display for all to see, blipping throttles and slowing for photo opportunities

-what's a race without a fashion show?

A true socionomic moment, bright colors, short skirt, a sort of faux  Dallas Cowboy Cheerleader look. It may have the flavor or Monaco F1 season but hey this is Willie Nelson's hometown, note the Cowgirl boots on the model.

-one engineer told me his group was working on routing traffic to the Far East location of the track, it lacks enough roads to support the expected 100,000 plus attendance expected

 

-and yes readers, I did ask, okay after all this is over, how does one make money with the track? I was told that then it really makes money. The track will offer up scale service to those that want the thrill of driving a race car on an F 1 track. Speed Limited cars will be available to those that pay $10,000+ for the privilege. We pick you up at the Airport, 4 star hotel accomodations, a professional driver at the track offers suggestions for improving your performance, etc. 

-and of course the track will be rented to Car Clubs looking for a legal way to let their Porsches and Vettes run to over 150 mph. 

-for $55 on November 1, one can meet Ron Howard and see out takes from his racing movie, Rush. I expect that event is sold out....

What could go wrong?  Well the subject of my talk friday was break even analysis. We need to know the monthly fixed cost of the track, the alaries and debt service and maintenance. The projected cost is $300 million.. A business plan that extrapolates an infinite regression line of  well to do individuals flying from around the world to pilot a race car for five figures over a couple of days is indeed audacious. I willl run some numbers to get an idea of what break even would require. This will be an interesting project to track, ouch what a pun,  over the coming years.

The Retama Horse Racing Track, built in 1995,  here in San Antonio has lost $250 million to date.  But quarter horses are not cars but we are in Texas, note cowgirl booots above, what can we say about fickle social mood?

How times change. I can recall sitting watching an Alfa 'Graduate' Spider easily outrun a Datsun 2000 around the Austin Auditorium about 1968. I don't think I paid anything to watch but and there was a disappointing lack of leggy women, just a few gals in tank tops and cut offs. I recall the date as there was a new AMX two seater, British Racing Green with tan interior I think, at the event. 

Texas World Speedway appeals to the RV set.   Parking by the track in an RV is a far cry form jetting in from around the world.  I may be all wrong about the future of F1 in Austin, but there is no question that such unbounded optimism accompanies market tops. 

Recall that in 1971, then icon Steve McQueen produced Lemans  Frankly most racing movies are boring  but feature interesting clips of racing along with the expected slow motion crash. The period leading to the Market Low of 1974 would also be a top for McQueen's career. The Getaway, Papillon co starring with Dustin Hoffman no less, and finally the Towering Inferno, his only appearance with Paul Newman, followed in succession. After 1974 he would not appear in another major film until Tom Horn in 1980. That too was bittersweet, his became his  second movie since Sand Pebbles where his character is killed. America had yet to emerge from its recession, neither had Steve. 

Towering was another sign of the times, the Disaster Movie which paralleled the ecomnomic disaster of the day. It began with a movie about a cruise ship which turned upside down and movies  went on through a series of fires, earthquakes, and other events displaying individuals acted upon by sudden events. 

In 1971  the markets were headed back up to celebrate their 1966 high of Dow 1,000. Now the markets are celebrating their March 2000 and Fall  2007 highs as everyone flocks to the tracks again.  We are repeating the same pattern of social mood.  The need for speed is rather like the need to build the tallest building in the world. Positive social mood is expansive, taller, faster, more expensive and ostentatious.   Recall that we noted the latest Vogue magazine contained  whopping 900+ pages. It's all here on displayn our job as a socionomist is to point this out. 

Finally Friday's WSJ points out a series of religious themed movies are in production. Moses, Noah, Cain and Abel and even Mary get their turns. The advantage is that no royalties are due the Bible Authors, now long gone. Redemption and salvations become centerstage in a recession depression.By the time these films hit the screen the timing should be just right, in tune with a population looking for a divine intervention.

 

Thanks for reading The Market Perspective

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The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

 

Pullback Ends with the Quarter

Thursday Sept 27 2012

For the record we sold positions on the open of  9/18.  Between option expiration last Friday, the end of the quarter tomorrow, and amid a generally overbought market, stocks metals and oil retreated.

I suspected I was getting out early and said so. But that saved on the strain of watching the portfolio drop by 5-8% in a week.  It is mentally  hard to buy back that entire position now. I bought some calls on GDXJ and puts on TLT, and I bought way too early. Now would be the time to buy them. I have promised to be honest with readers and that is what I am doing here. Most writers gloss over their errors. 

 

I have consistently mentioned that we must look at shorter time frames as the indicators on the daily chart have maxed out. Here the two hour interval shows a remarkable similarity to what happened form mid to late August.GDXJ touched the 87 bar MA and bounced both times. The MACD indicator is now in buy territory, the opposite of where it was Sept 18, ahem. That is why this is an art not a science....

Central Fund

Readers will recall my original preference was for Central Fund. I moved out of some shares of CEF and added GDXJ as it outperformed on the upside. That of course works both ways!  CEF as an unleveraged holding of pure silver and gold did not experience near the pullback that GDXJ did. And it too is now in buy territory. 

So, additional gains in all our original recommendations now lay ahead. TLT has rgained its ovebought status. 

TLT

Note that once again TLT is the exact inverser of GDXJ. This is the same sort of position where we bought puts in early Sept and they exploded in value. The trick was exiting at the right time. We will focus on doing that over the next few weeks. 

Or as Holmes might say to Watson

The Game's A Foot!

Thanks for reading The Market Perspective.

 

Evidence of Market Tops Continues to Mount

Wednesday Sept 26 2012 7:00 AM Central Time

Evidence continues to mount that the rally from June 1 in stocks, oil, and metals is ending. 

The indicators on  daily price charts for stocks, oil, and metals  all exhibit topping patterns. Conversely those same indicators for the Dollar and Bonds indicate double bottoms increasing strength. 

Internal indicators  such as Bullish Percent on the shortest time frame have turned down. Finally this past weekend  we noted the patter of higher lows for the VIX. We suggested this is how bottoms are made when no one is looking. On our recommended exit last Tuesday on the market open we commented that it was a lot easier to exit a quiet market while prices were still up. That was in sharp contrast to yesterday's action. 

We offered readers a copy of Ed Carlson's report. Using completely different methods he called for a top between last week and yesterday. He even mentioned yesterday Tuesday Sept 25  as a potential low. He allowed for a weak rally from that level. This argument has gained considerable strength over the last few days. We are not in the habit of basing our opinion on someone  else's work.But in this instance it is notable that things are falling into place. 

Now let's take a look. 

TLT Bonds and the Dollar

In the top frame the Dollar has put in a slightly higher low than in April and May. 

TLT overshot its 200 day MA, typical, and closed strong over its 125 day MA yesterday. It also bounced off its former resistance at 118 ash shown by the horizontal support line. Money is moving back into bonds. 

In the lower panel MACD exhibits a double bottom pattern and is turning up as is the histogram. 

NYSE A/D Volume

Last week I felt it was just too much to expect a higher move in NYUD. And sure enough it sharply reversed. The only bull argument left here is that it may find support at an uptrend line from the June low. But even then matching the high of last week may be the best we can expect. 

SPX Daily

Stocks are still in an uptrend but the daily MACD as we have observed ceases to be of any informational value  once it tops out. This is why we looked at the hourly and two hour charts. Gold and silver exhibit these same patterns. The VIX advanced sharply yesterday adding to its pattern of higher lows. 

 

Gold, SIlver

Again we see the same patterns as in stocks. 

Speculation - Commodities and risk on assets may be putting in lower highs compared to February. This would be appropriate for a lead into a gigantic deflationary collapse around the world. The deterioration of the Shanghai Index which made another new weekly low last week is broadcasting just that. With nothing really new in Europe, the rush for Dollars to pay debt may be on. 

A Short Term Low In Stocks SPX Hourly

THe SPX has shed over 30 points in the last two weeks. It may well bounce off the 125 bar MA. MACD in the lower panel argues for a low. We know maximum mood occurs at the end of a move. That typifies yesterday when stocks reversed and sold off hard in to the close, note the last two hours.  Now SPX is right at the former high of 1440 recorded earlier in the month. Interestingly Elliott Waver Ramki had suggested 1475 for a top some months back. 

Crude Oil Non Confirmation

Without question the Transports and Crude Oil are falling fast. The Transports are a negative for the stock indexes and crude oil is a huge negative for the rest of the commodity market. Crude was down yesterday and as I write at 7:00 AM CST it is down over a dollar again today. The MACD in the lower panel is clearly turning down as is the histogram. 

Bottom Line

This blog is intended for investors seeking to maximize their returns in the current 18 year cycle of stagnation. This requires moving in and out of markets over month and weekly time frames. We cannot call the market ona day to day basis. Our recommendation was to move out of stocks and metals last Tuesday. We hope you did. We put on some bets for higher prices of commodity producers using calls  and puts in bonds. That greatly decreased  overall risk exposure.

With so many potential unknowns on the horizon, the election, a falling oil price, Mid East chaos, and the worst month of th year for stocks, October just a week off....as we have repeatedly said, the negative news is there, all we need is for the social mood switch to go negative. Then all these things become worrisome which turns the whole shebang into a bear market. We cannot know exactly when that happens but this past week suggests mounting evidence of a serious downturn in positive mood. That results in a rush to the exits, exactly where an investor does not want to be. 

Socionomics

And, recall our reference to the Harmonic Convergence of 1987?  We noted that the market pattern is just a few days off the pattern thn. The idea was that the Harmonic Convergence marked the best of all worlds in August 1987. After that there was nowhere to go but down. Now the markets are doing the saem if in fact we converged  with an optimism peak this past week. As Mark Twain remarked History may not repeat but it sure rhymers. 

Last week the richest man in Saudi Arabia announced that the financing for The Kingdom Tower, a proposed one kilometer tall building, had been completed. That would be a fitting wildly optimstic  comment at what may turn out to be the very top of the market since March 9 2009. Headline

Social Mood Peaks at One Kilo Elevation!

What an ESP moment, I just opened this morning's WSJ after writing the above paragraph. In a great socionomic echo, the Kingdom Holding Group has an entire one page ad boasting that it is diversified around the world. The ad cites investments in aviation, real estate, health care on multiple continents. And that crowning, pun intended, achievement, is a depiction of the 1,000 M Kingdom tower. 

In fact Kingdom Holdings is not diversified at all. All these holding will collapse as a group versus the scramble for dollars to pay down world debt. Our Hourglass Theory holds that social mood moves from one Chamber to the other. Since March 2009 the financial sands have embraced risk. The Hourglass is now empty on the defensive end. Such bravado and confidence amid a return to the previous twelve year high in the markets (stocks, gold, real estate, you name it)  is precisely what one expects at market tops. 

 

If you are new to the blog we suggest reading the last two week updates to get a feel for our overall view. 

Again we hope you are pleasantly in Cash. 

Thanks for reading The Market Perspective.

 

1973-74 - Crash What Crash?

Tuesday Sept 25 2012

I now have daily weekly and monthly data on the DJIA going all the way back to its creation. We featured charts of various periods this past weekend to show the 18 year cycles. 

I hope to improve on these graphics but...here is a look at the Slow Melt Down from  1973-74. The Dow begins at 1,000+ and then slowly loses 50% declining to 577 by December 1974. 

Dow Jones Industrial 1973-74 Weekly

A crash is generally acknowledged to be a sudden drop of 20%. You will not find such an occurrence in the 1973-74 experience. We cannot know the exact nature of the future. But after the wild drop os 2008, this slow melt down would be a perfect way to lull investors into overstaying their welcome. 

This past weekend we pointed out that markets exist in fractals. There are giant 18 year fractals, portions of the previous bull market that start and end at the same points. But within those 18 year periods of stagnation are opportunities to profit from huge swings in the market. Now, after examining this decline from 1973-74, let's step back and look at the bigger picture. 

DJIA Monthly 1973-1976

A short position from 1973 to December 1974 paid off very well. The tough part was then realizing the bottom and going long. Note the bump in January 1973, that was a fake out and clearly NOT the bottom. But within a couple of years the Dow had regained its former luster but left many behind who sold out on the way down searing never to go near the stock market again. Trust me on this, I was there. 

A bear market exists to eliminate the excesses of the previous bull market. 

It also eliminated the buy and hold investors who believed this was  easy. 

Not to mention that lengthy list of brokerages I posted this weekend who also thought this is easy. 

RIP Lehman, Bear Stearns, IMF Global, Peregrine, and Zombie Banks like CITI.

While we are waiting for the markets to get going again  thought readers might enjoy this short history lesson. We should be focusing on entries anticipating the next top and how to profit amid what is certain to be the ruin of the next two years for most that are unaware of history. 

Tuesday Market Finds firmer Footing

Tuesday Sept 25 2012

Mark Hulbert finds the Transports are a contrary indicator.  This suggests we were wrong in identifying Transport weakness as market weaness recently. 

Paul Farrell  tends to be a perma bear but in this instance I agree about his long term view. And he has an interesting list of  17 wrong predictions all made in the same sort of time period we are in now, after a long extended market climb.

GDXJ The Final Parabolic Move Begins

I sincerely hope I have been clear to readers. After an exit last Tuesday I clearly stated that I thought I was early but that the difficulty of calling a top as our holdings began  a final parabolic rise made this all the more difficult. So I eixted several hundred thousand dollars of holdings and substitued some modest single digit calls on gdxj and puts on TLT. My thinking was that I still have upside potential but have capped my potential loss. 

Above notice how the blue 50 day MA is experienceing an increasing rate of change. That signals the final move up. At bottom the RSI has pulled back.  Note that GDXJ was down 4.32% just yesterday; that is in keeping wiht the Monday pullbacks we have consistently experienced. This two hour chart has been a reliable indicator of the stair step action of the market on the way up. Another reason for the two hour chart is that the daily chart indicators are now of limited to no value, take a look. 

GDXJ Daily

The commodity channel index, and just about another indicator is maxes out. It is like driving 100 mph with an 80 mph speedometer, it ceases to be of value beyond its maximum reading. This in itself is an indication of a coming top but hardly any help in knowing when to exit. 

NYSE Summation Index

 Here too the CCI has maxed out. We can see the MAs are headedd higher but of course they are lagging indicators, the top will be well past once they turn down. ABout all one can assume is that NYSI will re-visit its former top over 1200. While that seems reasonable notice it did not tarry long there in November or February, it's the Neighborhood of the Quick and the Dead over 1200 so to speak. 

We plan to keep you posted, plan on visiting often. Thanks for reading The Market Perspective. 

Oil Still Falling, The Canary in the Coal Mine?

Monday Sept 24 2012 7:45 AM CST

Monday has consistently been a down day the last couple of months. Still after options expiration Friday one would have expected a more matched day if we have upside left. 

One can scan these headlines to see what I mean that there is no lack of negative news. Once social mood switches in synch with this news, markets will head down with a vengeance.

Our decision to exit all major positions last Tuesday on the opening  including gold and silver appears correct so far. Even if we begin a rally this week, as we have said this past week risk increases now as the market moves to an eventual top. If you have not, please read all our articles from 9/15 forward to get an idea of  our thinking. 

I made a short post on oil yesterday, do NOT put a lot of faith in my Elliott Wave Count! Indeed I consider the weak performance of oil here as a very negative indicator for the overall upside. It did not join or hold up with gold silver copper last week. The negative weekly close for the Shanghai SSEC index surely indicates waning demand for industrial commodities. 

Even if oil rallies over the next two weeks it is looking like it will  put in at best a lower high or just equal the prior high at  110 but now that is a distant 18-19 dollars away. We may need an escalation in potential conflict to justify such a rally, no I don't want that, just an observation. 

Amazing How Things Come Together Department

Ths morning I was answering an e mail from a Canadian reader concerinng the real estate market. 

-I noted that REITs were among the worst performers in the 1973-74 meltdown.

-then I noticed a pop up ad on my g mail site from, sure enough, an REIT!

- I am putting together a post on real estate especially looking back to 1973-74.

-I mentioned how much better the Canadian Economy had been managed than the US to another Canadian reader. Well  check out Kimberly Strassel's article on page A 21 in today's WSJ, 

How Canada Saved Its Bacon. 

We noted a similar op ed by George Schulz in the past two weeks. The upshot is that Canada got its Political House in order in the early to mid 1990s. The US still could but the longer we wait the worse it gets. The FED now buys 77% of our debt at near zero rates. Revenue is 18% of GDP while expenditures are 23%. We will not grow or tax our way out of that.

Ms. Strassel noted the 'party atmosphere'Bernanke has created. Readers will recall we paired Ben with that ultimate Party Animal 

Spuds McKenzie just a week ago. 

Has Kimberly been reading TMP?  Here is our lead form the weekend update 9/15/12.

 

 A weak start to a middling market performance last week. I have promised more updates during this shall we say interesting period. 

Crude Oil Complex Heads South

Weekend Sept 223 2012

Crude Oil is pretty slippery stuff

Alan Abelson in Barrons

Here is a gues for Sunday afternoon on the Crude oil market

IF this count is correct, it shows proper alternation between a sideways second wave and a sharply down fourth wave. Wave Three breaks into a five wave pattern. This suggest a fith wave up lies ahead. 

Prior to the start of Wave one up the market fell in an A B C pattern. The dramatic change in the RSI after the labeled Wave C bottom further suggest this may be a reasonably correct count or guess. 

As I say we do not claim to be EW experts, there are other sites which specialize in that. But a decent guess. 

In 2008 crude oil topped last at145 in July. I am wondering if it underperforms this tme, just coming back to say 110. 

Of course if Israel bombs Iran this and all other charts are out the proverbial window. 

Expansion and Contraction

Weekend Sunday Sept 23 2012

One reader asks TMP to explain what is meant by the periods of expansion and contraction. 

This is rough outline of the idea of Eras of Expansionand Contraction. 

Our Strategy will start with this  explanation in the forth coming iBook. 

Buy Low Sell High, A Strategy for Doing Just That

For whatever reason, the US Economy  and therefore the world, at least since Charles Dow created his Indexes, alternates by generation. This 'generation' breaks down into fairly clear eras of boom and bust. Now before you ask why, I don't know. Perhaps it is the market's way of fooling the next generation who is depending on the advice of their Fathers and Mothers, and they are fooled. The 18 year cycle may well go back much futher but we lack a handy index for tracking it. Other writers have worked on this topic. 

We will examine social mood more in detail in other sections of our strategy. For now, never mind why, just focus on what history tells us. The news media makes a living trying to link news to events, we try to link investing success to buying low and selling before the markets top out.

The creation of Market Indexes allows a handy way to track investments and positive social mood. Our friends at Elliott Wave have used other measures such as the Cleveland Trust Index which existed prior to Dow's Indexes to attempt to track the economy back further. But for our purposes, if we define modern times since about 1890-1903, this approach works. After all that time saw the introduction of the telephone, the autormobile,  Westinghouse Air Brake which finally made train travel reasonably safe, and then the ariplane, and indeed Stock Indexes. The introduction of the latter if you think about  it suggests that Americans had finally accumulated some real savings above and beyond daily needs such that an investment index had popular broad appeal. Of course just eleven short  years after Dow created it in 1896, Americans had already gone overboard and brought down the House with the Panic of 1907, that's Social Mood piling in at the last minute. But I digress, here is the beak down. 

Bear Periods

1894-1912

1930-1948

1966-1982

2000 - 2018 (Probable end date, we are 12 years into this stagnant era)

Bull Periods

1912-1930

1948-1966

1982-2000

It is vitally important to grasp this most basic macro concept, A series of charts demonstrate why. Let's go back to Great Granddad's investing era of 1912-1930. I began and ended this graph both before and after the period to show the dramatic spike at the end. 

Dow Industrials 1912-1930

While legend has it that is was the Roaring Twenties, the truth in looking at the graph is that the Era really only roared from 1925-1929 when the greatest percentage gain occurred. Recall a basic tenet of socionomics is that mood is strongest at the end of any era. Clearly that was true then and in later periods. 

Now here is why this is so important. Once one grasps the era one is in, the better strategy is clear. In the 1920s, you could have bought most anywhere along the line, better on pullbacks like 1915 during WW I of course, but in the end you would have made plenty of money. Actually one's overall returns are dramatically improved by taking advantage of severe pullbacks during periods of negative mood that do occur in expansionary eras. But we are staying big picture in this post. 

The bottom line is that in a period of expansion, buy and hold works. In a period of contraction, buy and hold does not work. So in an expansionary period stock selection takes precedence over timing. Now what next, well once one got comfortable with buy and hold from 1912-1929, things changed. 

Dow Industrials 1930-1948

Now, and again it is imperative that one grasp this about the era one is in. The Dow dropped a smashing 90% from the 390 high in October 1929 to a mere 42.84 on month end 6/30/32.  Wiping out 90% of the value of all stocks, note that were still trading!, in a mere 2.5 years is a depression indeed. No doubt the collapse of one third of all banks contributed heavily to this. But today we are examing the numbers of history not the whys and wherefores. One has to go all the way back to 1896 to see the 42.84 number, so the entire market was re-set to where it began withe Charles Dow. 

Note, does anyone today think we the market could go back in the next 2.5 years  to where it was 34-36 years ago, about two 18 year eras. That would be Year  1976 and the Dow was under 1,000. This is unthinkable now but it happened in 1932. The 1972-74 experience as just duplicated from 20007-2009. How quickly the public forgets. 

Clearly Buy and Hold did NOT work in this era. Indeed there was a huge rally from the 1932 bottom and again from the 1938 low and again during WWII from early 1943 as the outcome of the War shifted in the Allies favor. 

But again, the strategy if one is to be successful has to change. in an era such as this, one will have to be both long and then short the market at various times.

The only way to make money in the market is to be in tune with the market, period.

As Geroge Strait says, you might want to put that on the 'frigerator door.

Now let's move to the Baby Boomer era when I came of age.

Dow Industrials 1948-1966

Elmer Keltonn the famous Western authorn comments on his first purchase of a home 1948. He told his Dad the house was priced at $8,000. Dad's advice was, better wait son, the price will probably come down.

Dad was doing his best. Dad had been influenced by 18 years of hard core deflation. No one he knew had made money in real estate or stocks. And so as the new era took off, peple left their money in safe bank accounts not caring to lose their money as their parents had in 1932. Indeed there are still stories of people stuffing money in the mattress and all over their house rather than trusting a bank that could go bust.

Now look at the graph what do you see? It is a more gradual climb than in the 1920s but again the market really moved the last four hears from 1962-1966. By 1962 many people had seen others making money, the memory of 1932 was gone for most of the participants in the market (a very important point) and so social mood expanded towards the end of the move, taking the Dow from 600 in 1962 to its first ever four digit level, 1,000 by 1966, the Year I graduated from High School.

Let's mention that again. Generally it takes a lack of participants in the last era for the present era to be possible. There are fewer adn fewer people alive that lived through 1930-1932. That makes the posbbilibity it could happen again that much more realistic, think 2000-2003 and  2007-2009, when both Greenspan and Bernanke were at the helm. Note the FED has never prevented the crisises such as 1907 it was created to prevent. The FED is there for the banks, not you and I. 

And so all the Baby Boomers like myself has a wonderful life long experience of the economy always bouncing back. That memory would serve us poorly for what happened next. In 1966 America was watching The Sound of Music which won the Academy Award for Best Picture. By 1969 Midnight Cowboy had displaced Christopher Plummer and Julie Andrews, what a change. 

DJIA 1966-1982

This was not any fun, at all. It is no longer possible to ask LBJ, Richard Nixon, or Gerald Ford about their experiences. I wonder if Jimmy Carter realizes he came into the Presidency at one of the worst times possible while Clinton had the best, viva la difference  as the French say. 

At any rate, while I had no idea of eras at the time, this explains how the entire brokerage industry melted from 1972-1974 and began re-inventing itself as a discount house at the time, though again we had no way of knowing that. I began at duPont Glore Forgan in October 1972. Ross Perot maverick Billionaire was in control of the firm. Nixon trounced McGovern. Nixon and Kissinger would end the War in Viet Nam. The Dow had returned to 1,000. 

What could go wrong?

Just about everything as it turned out. The Dow melted from 1,000+ in early 1973  to a fateful 577 by December, 1974. Gasoline lines formed  from the Embargo and a possible Presidential Impeachment loomed. Flip Wilson went off the air. Bill Cosby had not been seen on tv since 1969. The Exorcist was the 'favorite movie' billed as the most horrifying show ever. Texas Chainsaw Massacre debuted near the bottom in 1974. I have a lecture on all that if you are interested.

But again the point is that in an era of stagnation, buy and hold would not work. 

Now, appreciate that markets move in fractals.

1966-1969 Down

1969-1972 UP

1973-74 Down

1974-1977 Up

The rest of the era was  down and then finally a huge move up once everyone was convinced no one would ever make money in the market again. That's social mood for you. But our point is this. If one had been able to take advantage of these moves by going long at bottoms and short at tops, there were huge returns to be made. 

DJIA 1982-2000

Wow!  I got in at the top with duPont Glore Forgan in October 1972, I threw in the towel by Sept 1974 just four months before the bottom. But appreciate I was a broker not an investor. And trying to make money was near impossible on a commission basis when no one wanted to invest. 

One of my friends from broker school got me re-qualified in 1983.By that time I had become a CPA and thought I might open a few IRAs for clients in mutual funds and such. I recall that at Dow 1200 three of us heard the CEO of our brokerage firm predict Dow 2000.. We all laughed and went to the bar, what on earth was he thinking?

Note I subsequently began an interest in technical trading which led to trading millions of dollar so fixed income securiteis and becoming one of the Top Brokers at First Affiliated Securities. Like Cliff Robertson in Charley or later Tom Hanks in Bonfire of the Vanities, it was a brief shot at being a Master of the Universe. Again that is another story. 

Bob Prechter's book on Elliott Wave was published in the late 1970s. He predicted a wild move to 3686. As Bob remarked, no one bought the book in 1979.By 1985 it was selling thousands of copies. 

The 1982-2000 era was marked by the 'discovery' of market successes like Warren Buffet and Peter Lynch. Value investing was discoverd again. But the era ended in a fit of non value investing as the public bid up the NASD by 2000 points in the last six months going into March 2000. This time the Tulip de jour was dot.coms, companies that only made money by going public, never doing what they claimed to do. Go figure,  a parabolic social mood moment. 

And now

DJIA 2000 to Now

Stockcharts has data from about 1990 and some earlier which allow for a much better chart. 

I stayed with this format for comparative perspective to the past eras. 

 

I altered the vertical scale to a 6000 to emphasize the huge moves of this era. 

This also demonstrates that the market moves in fractals, smaller time segments of the overall pattern. 

2000-2003 Down

2003-23007 Up

2007-2009 Down

2009- Now Up

2012 ????????????????

At this point readers might refer to the last two posts this weekend   where we show that 'you are here.' But even this simple graphic should demonstrate that risk has returned to the forefront, big time. '

Investors are at the same level of potential risk at in 2000 and Fall 2007. I hope that explains my exit from the market and attempts to vastly reduce my risk exposure. 

 

The Most Recent Fractal, 2009-Now

 

There have been many studies of frac tals in nature.

Consider how your mood can change even within one day. That is an example of mood or change breaking down into identificable segments. 

Now all we have to do is find a way to identify coming changes in fractals, mood and therefore marekt activity, and the Brass Ring is ours. 

That was of course a tongue in cheek statement. Many try few succeed.  

 A brass ring is a small grabbable ring that a dispenser presents to a carousel rider during the course of a ride. Usually there are a large number of iron rings and one brass one, or just a few. It takes some dexterity to grab a ring from the dispenser as the carousel rotates. The iron rings can be tossed at a target as an amusement. Typically, getting the brass ring gets the rider some sort of prize when presented to the operator. The prize often is a free repeat ride. The phrase to grab the brass ring is derived from this device. 

Conclusion

Markets move in alternating 18 year eras of boom and bust. The boom eras generally exhibit an overall upward trend. This trend accelerates towards the end of the era, typically in the last four to five years. Even in eras of upward trend, fractals exist which allow for significant pullbacks to discourage the long term investor. 

Alternate eras of stagnation follow 18 year eras of boom. These eras are marked by highly visible booms and busts as social mood  waxes and wanes. Typically the 18year era may end right where it started, this was the case more or less for  1966-1982. But if one can identify time periods moving from one extreme to the other, boom to bust or vice versa within the era there is money to be made. 

Here at TMP we are focused on doing just that. We hope you will join us and continue to provide constructive feedback. This look at past years is a quick rendering of our overview, apprecIate that I dashed this off early on a Sunday morning.  This is not a Random House publication with multiple editors. We do not have staff other than Bentely the Great Dane Hound Dog mix  and while he has his specialty, graphic design frankly is not one of them. 

I attempted to answer a reader question about periods of expansion and contraction. To that end, this serves a good purpose of asking for feedback on what you would like to see as we commmit these thoughts to our more formal and hopefully better illustrated iBook

Buy Low Sell High, A Strategy for Doing Just That

Cheers, we welcome all constructive feedback. 

 All thoughts and ideas here are those of the author, please do not post without reference to source. 

Thanks for reading The Market Perspective

[email protected]

 

 

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

 

 

 

 

 

 

 

Approaching the Top

Weekend Sept 22 2012

Speaking Engagement

Dennis Elam will address the State Convention of the Structural Engineers Association of Texas Friday  September 28 2012 at the La Villita Center at 9:00 AM CST. 

Professor Elam Phd CPA  has addressed many professional groups in the Central Texas area as he did as a Securities Professional when living in the Permian Basin. He has commented on markets on both radio, television, and in his weekly newspaper column. Contact us if you need informtative and entertaining updates of continuing Professional Education  on the markets or accounting issues. 

[email protected]

Weekend Wall Street Journal

So far the measures have fallen well short of birding a nearly $1 Trillion funding gap in state pensions.

Page A1 Weekend WSJ

The number of hourly workers at Harley is half  the level of three years ago.

Page B1 Harley Gets Leaner

 Already at its lowest point in more than 3.5 years, China's stock market suffered its worst week in nearly a year....the week's 4.6% sell off.....

Page B5 Chinese Shares Take a Drubbing...

The Transports are the first major index to reflect an underlying change in the market. The market is saying, yes the economy does matter. You can't just close your eyes and buy everything anymore. 

Page B5 Late Sell off Pinches Stocks

As we have noted there are plenty of negative news stories out there. But the Social Mood switch has not been pulled from Bull to Bear yet. I expect it will happen before the Election. This explains our exit from fresh highs in the market this past Tuesday. Please read our preceding section on manging risk. 

Now let's take our usual weekend look at the markets. 

Bullish Percent 200 Day Moving Average

The pullback in this bullish percent   this past week is just what we expected. Notice a could of things. 

the indicator is finding support where it bounced in March and April, well assuming it tuns up this week

three MAs have converged as the index moves higher, that is usually the precursor to a move up

as this is the 200 day bullish percent indicator it is the last to top out. It lacks a mere seven to ten points from doing just that. We are in the last inning folks. And once it tops out at 80-85, the indicator loses any further predictive value. Then one is just guessing what will happen next. 

The Dow Theory

 

Charles Dow created his Industrial and Transport Indexes in 1896. At the time he had not created the Utility Index. The theory was that one sector that transported goods needed to confirm the sector that manufactured goods for the market to have a sustainable advance. It was a good theory then and now. The transports are the gold line. I went ahead anyway and threw in the Utilities in the green line. I left the blue 50 and red 200 day MAs to demonstrate that the industrial were going where no other Dow Index was going, up. An alert reader of TMP brought this to my attention which is  also why I included the quote on the Transports in today's opening. Again this is a massive non confirmation that is telling participants they should not be in the market. Can you hear Charles calling from the nineteenth century?

The Rate of Change

A rate of change ROC goes up as the market moves faster and faster  short term. This means the market is moving from an arithmetic rate, say 1.2x to a geometric rate say x squared. The ROC in the bottom panel is moving up. That reflects the increasing steepness of the move up in the main chart shown by the two green lines at far right.

Strong markets finish in parabolic moves up as the crowd rushes in at the last and least opportune time. So this is confirming along with all the other indicators on this page and this past week that we are approaching a top.

Chinese Shares Take a Drubbing

 We noted way back on NOvember 28, 2010 that the SSEC was probably putting in a top. It did. Now the move down is accelerating again. This is another massive non confirmation in addition to the Transports not confirming the Industrial. Like Wiley Coyote running off the cliff this means the downturn in the Industrial Stocks will be that much worse when the social mood switch is thrown to the negative position. 

Mr. Copper

Copper has long been the pulse of an economy. Copper is used for wire in homes and in electronic devices and we might say the USA is now one big electronic device. This is a  near textbook pattern of a developing Elliott Wave. Wave One comes from an oversold position, see RSI at bottom. Wave Two corrects sideways.  Wave three is the strongest, see RSI at bottom again. Wave Four demonstrates alternation to Wave Two with a more dramatic drop. 

All of which sets the stage for a Wave Five Move up over the next two to three weeks. Note that Wave Four Held above all the MAs. Copper should be a good proxy for the entire commodity group. 

The Dollar

The two hour chart of the Dollar shows enough recovery to begin heading down over the next couple of days. At top TLT the bond fund looks the same way. 

Luxottica Group - Ray Ban, Oakley

Luxury goods are enjoying a final burst to the top. Market tops are evidence by the desire to Show Off Trappings of Success. The number of Distinctive Property Ads in the WSJ, multi million dollar star home sales, the move up n luxury good stocks, the most expensive Ferrari ever just produced, and just this week...the richest man in Saudi Arabia announced the financing had been completed for  one kilometer high building Originally he wanted a mile high building. This would have been impossible four years ago but that's social mood for you. 

Socionomics

 

The Kingdom Tower

Financing for the Kingdom Tower was announced as complete this week.

This article quotes a price of $1.2B but that cannot be right. Gerald Hines bought a Dallas Office Property a few years back for $300 M. A one kilometer tall structure will surely cost many times that, other articles have mentioned $30 billion. But the announcement of the tallest structure ever that will take until 2018 to complete, my estimate for the end of this era of stagnation, is surely a fitting Announcement of a Forthcoming Market Top.  

The Skyscraper Theory posits that skyscraper projects are planned near the end of stock market and economic booms. Social mood is expansionary leading to a 'Anything Goes Burst of optimism' to build the biggest building yet. Remember the fable of Jack's Beanstalk.  Then after years of construction the project is either cut back, sidelined, or opens to a miserable real estate market. Here are a few examples.

The first phase of City Center the biggest privately funded project in US History opened in 2010 amid the bust. It opened in Las Vegas which up to 2008 was Boom Town USA. 

With the exception of the  Petronas which managed to open two years before the top, the others all debuted once the downturn was well underway. 

 Now Macau has become the biggest gambling center in the world. Considering the look of the SSEC Index chart shown earlier, I'd say that's a bad bet, pun intended. I suggest you use this guide to plan a trip there a year or two from now, I suspect rates will be a lot lower then...

The Bottom Line

Negative divergences abound from  the Transports not confirming the Industrial to the SSEC not confirming the boom in Macau. Bullish Percent indicators are within single digit ranges of former highs. As we showed in the previous post, the VIX is quietly making a series of higher lows. These indications suggest a top of multi year significance will form, possibly before the Election. 

The Dollar and TLT have rallied back this past week, the Dollar had a weak Day Friday. 

I have sold stock position and now hold a few option positions vastly reducing my overall market exposure ad turning  some profits into cash. We will look to add HDGE in the near future. 

Thanks for reading The Market Perspective

[email protected]

 

 

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

Managing Risk

Weekend Sept 22 2012

  “We have tried spending money.  We are spending more than we have ever spent before and it does not work.  I have just one interest, and if I am wrong... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started... And an enormous debt to boot!”

FDR's Treasury Secretary Henry Morgantheau on The New Deal

The Week in Review

We have arrived at pretty much the same place as we did in the 1930s and the 1970s. TMP has noted the amazing resemblance to the late 1970s, Democrat  Presidents were elected  eight years into the stagnant era, massive spending, and then utter chaos in the Middle East as long time rulers were over thrown, encouraged by lax US policies. This is not a geo political blog but the socionomic similarity is amazing. 

Before reading further we urge both new and veteran TMP readers to go back to our update last weekend, titled The FED Throws a $40 B Party. That update features some 13 graphs explaining our concerns.  I followed that with no less than 10-11 posts this week.  Again I suggest that everyone review all the posts of this past week to refresh on our views of where we are in this market.  

We sold positions Tuesday morning Sept 18 on the open. Our stated reason was simple, the closer we get to what will surely be a significant top the great the risk that the market dramatically reverses, erasing recent gains. The market could dramatically reverse  before a stop sell order is hit, or is executed lower in the event of market not held conditions or one fails to put in a sell order at all. (Bold print for emphasis added).

We noted later in the week that in fact the oil market had done just that dropping seven percent in one week. Was that just a pullback before a final move higher or a top in a significant and highly emotional market?  At this point we have no way of knowing, oil has at best had a dead cat bounce since. 

We reminded everyone of where this market is with this weekly graph on Sept 20 which we update today. 

Yes the 'widely anticipated' iBook on TMP strategy is still in the works. But the overall idea is to 

Buy Low Sell High, a Strategy for Doing Just That

Well it is time to be selling and perhaps scaling in orders for the next anticipated BIG move. We are one short trading week away from the weakest seasonal month on Wall Street - October, the month of Stock Market Crashes.

This pattern is evident in the Panic of 1907 as well as the crashes of 1929, 1987, and 2008. 

Crashes happen at the end of moves in a final disgusted, in the case of bear markets, give up. But an initial drop, such as the 7% drop in oil this past week, can seem like a crash. 

The strategic idea of TMP is to

realize the era one is in, expansionary or stagnant, we are in a stagnant era which began in 2000 similar to 1930-1948 to 1966-1982/4.  Such ears are characterize by wide swings of bull and bear rallies rather than one long bull rally such as 1982-2000. This clearly means that buy and hold will not work, one has to be in tune with the market.

TMP utilizes internal indicators such as  bullish percent, summation index, High Low, Advance Decline Volume and such to determine potential highs and lows.

While social mood is not an exact science, it is helpful in observing the overall mood.

We went so far as to review Dr. Harry Markowitz Risk Reward Frontier this past week. We urged readers to consider where the real risk frontier begins and ends.  The strategy is to buy more assets at out of favor values, June 1, 2012 was the recent example and begin taking profits as mood moves the other way, this past week being the recent example.Socionomics tells us that mood is extreme at the end of moves. This is why the bargains are on drops of the DOW of 400 points near the end of moves. Note our observation that the  NASD moved its final 40% in just six months into Year 1999/2000 after taking 18 years to get to move 60%!. 

The Volatility Index

The VIX calculation is explained here. But think of this is just another Black Box indicator, it moves opposite the stock market, which is what you really need to know. At stock market tops therefore, the VIX should be making a bottom. Market bottoms are formed with a series of quietly formed higher lows. Now look at this daily graph and tell me what you see-just that, a series of quietly formed higher lows. 

Now with that thought in mind let's take a look at Risk, a concept rarely discussed in most Market Letters.

RISK

Risk is counter intuitive to crowd or herding psychology. In our Hunter Gatherer days longer lived cave men and women stayed that way by running away from stampeding herds of wild animals. Now however, stampeding herds of investors exiting otherwise valuable companies are a buy signal, the opposite of what our Hunter Gatherer brains are wired to believe. Conversely, the herd tends to buy stocks when everyone else is buying, which is to say too late to harvest a double percentage gain. And probably to late  to realize it is a better exit time than entrance, see Chart One today!

Options have been around since 1636 in the heady days of Tulipmania. The original and current idea of options  or derivatives is to use them to limit risk. A complete discussion of derivatives and options is beyond, way beyond, what we can present here. But, for example a put option grows in value as the underlying contract or stock or commodity drops in value. It is like home or auto insurance. In the event of a sudden and unexpected catastrophe,it becomes insurance. 

Modern computers allow calculation of the relative delta or probably strength of fluctuation in options. This allows fund managers to construct a system of what is termed delta neutral. For example. suppose we own 10,000 shares of Apple Computing, hey in the fund business who doesn't?  One could hedge the chance of Apple dramatically dropping by purchasing put options matched in time and volatile duration to the stock held. To make an analogy, if your house is estimated to be worth $200,000, one should probably hold that much in insurance on the house. 

But options and derivatives have gotten a bad name via outright large bets in one direction that are the exact opposite of a hedge. Lehman, Bear Stearns, and Merril Lynch all bet one way and in leveraged fashion on sub prime mortgages When they dropped in value the meager 3% capital all three  claimed was wiped out. In the bear market of the 1970s firms had to maintain ten percent capital, and there were no off exchange traded derivatives. Now capital requirements are one third that in far more volatile times.  Note, all these had become publicly traded companies, and so the owners were playing with other people's capital.If they had remained partnerships trading their own capital, it is some measure of sanity might have prevailed but I digress. 

Recently Jamie Dimon's Whale Trader at J P Morgan us 'lawyering up' as a result of his $5 B + loss in a one way trade. 

Now I told you all that to make this point. Let's suppose one is long 4,000 shares of GDXJ, and as a matter of fact I was long more than that.  

4,000 x $24/share is  $96,000, which is big money at my house I don't know about yours. 

Now suppose the  portfolio dropped about 4% this past week, which in this example would be 

96000 x 4% = $3840, or enough for a couple to take a a nice cruise, just to put that in perspective. 

Such volatility is to be expected when the trades are initiated but as internal indicators become overbought is well uncomfortable. As I observed earlier this week, it is easy to exit when markets are calm. 

I promised to examine alternate strategies to reduce risk but to still potentially profit. Since maximum mood happens at th end of moves, we grant that a high percentage return is possible at the very end of the move. This happened tome last Friday when my TLT puts dramatically expanded in value. Whoops by Monday Tuesday they dropped back just as fast. I readily admit and said that this cold shower prompted my exit from other stock positions which had not dropped and had nice profits. 

And so I purchased in one account ten TLT 121 puts and ten GDXJ 25 calls both for October expiration on Oct 19. I am guessing if something is going to happen it will conclude at least a couple of weeks prior to the election. so that leaves four weeks to go, not long but my total outlay was about $1400 for the calls and $2100 for the puts. The calls give me exposure to $25,000 worth of GDXJ and the puts to  $121,000 of TLT. So my total risk is $3500. 

What could go wrong?  At worst both securities fall below 25 and 121 by expiration I do nothing and lose the $3500. But they are at the money and should hold up for the next two weeks assuming the markets do not fall completely out of bed. And I am thinking we have some upside in GDXJ and downside in TLT. How much?

Let's say GDXJ moves dramatically to $30. that should translate to a profit of $4000-5000. If TLT falls five points to say 115, the same thing would happen. Again it would be a great idea to place sell orders  orders ahead of time anticipating such an event. Such instruments are famous for making a parabolic move in one direction and then collapsing. 

Yesterday was options expiration.   The September options expired and participants 'rolled over' positions to later months such as October 19. 

Here is Friday's activity and this is typical of an option expiration day. Which is to say that the winding and unwinding or positions result in no change by the end of the day. if managers efffectively matched off previous and future positions this makes sense. 

This also explains fairly even activity this past week going into expiration, everyone did not make their decisions on Friday. 

Which is to say if something is going to happen on the upside it will be this next week not last week. 

Now for newbies a few reminders

Do not for one second think this brief discussion makes you a seasoned options professional. My friend that flew helicoptors in VIet Nam made a similar remark about his brief three month training program on how to fly a ehlcoptore before being sent to the War Zone.

You cannot lose more than your purchase price but you darned sure can lose it all. 

This is not a long term investment, you do not own shares in IBM. This is the literal definition of the Quick and the Dead. 

Do not place outsized bets. See lawyering up article on The Whale linked above. 

The idea is to reduce not increase risk. 

Your author is a former NASD Registered Options Principal, this is not my first rodeo. All of this is a recommendation on reducing risk, do not become a 'Whale.'  

If you have no experience, I have laid the particulars out here so you can follow along, readers know I don't mince words and admit both successes and errors. We all learn a lot more from the latter, errors,  by the way. 

If you read this far I am proud of you!   I hope you found this a worthwhile exmanination of how to manage risk and will follow along the next month to see how this Serial Ends. 

CAUTION

Options Trading is only for experienced individuals. Please note the precautions posted above. Brokers require special forms and approval for such trading. You can lose all the money you put into options. And do it in a hurry as well.

This post has been considerably different from most of our updates. At 2000 words it is lengthy. So I am stopping here. I will exaine the past week as usual in the next update for fear this would be too long and most would lose interest in reading.  

And Finally  a Busrst of positive Social Mood 

A few weeks back, was it even that long, as we approach a market top, and now after the SPX has risen from 1260 to 1480,  we told you to expect advertisements and articles with titles like

How to Play the Market Now

Sure enough, note the smiling faces all across the photo. There were no photos like this in 2009. It has taken that long for the memories of the Crash of 2008 to fade. As we say, positive social mood pervades market tops. Note there is no headline suggesting you should simply exit which is what TMP recommends. No I didn't watch the video.