Resisting the Temptation on CREE 8/29/11

When you are out of the market and sitting on cash, money market and some bond funds, and the market puts in nice strong days back to back, you feel left behind. There is a temptation to jump in. But I have to resist that kind of temptation.

I was looking at CREE and in my TC2007 software; the indicators are looking primed for an up move. Double bottom. Nice pull back. But my basic system on Metastock still says down. The market overall is still saying down. Is it wise to jump in? Sure if I want to gamble with some lower odds. But I don’t want to do that. I will be patient and wait for at least CREE to signal up, and then wait patiently for the pullback to stick my toes in the water. Why not have the odds in my favor? After all that is what smart trading is all about. Stacking the odds in your favor, looking at which way the tide is flowing and swimming with the tide. There are tides and then there are waves. Best to catch the wave in the direction of the tide.

Taking Profits 8/23/11

After the success of the Libyan rebels in entering Tripoli over the weekend, I felt the market had the right excuse to climb and get out of the oversold levels it was in. I felt uncomfortable sitting on my down put option positions that were all showing profit. I was traveling on business and besides, I don’t look at the numbers during the day as I am a strictly end-of-day trader on my portfolio. The markets and futures were suggesting a gap up for 8/23 and rather than risk missing the sell trade on a limit order, I took the approach of market orders on my puts. I placed market open close orders on 8/22 night for the next morning. I am glad I did as the market went up from there.

Since I just returned home, I thought I would fire off a blog post tonight mentioning closing my down positions.  I am now only in cash, bond and money market funds. Admittedly the technicals all signal down positions on equities but short term stochastics has bottomed out along with the slower stochastics. That is not a high odds winning place for down positions.

I will sit out for a while and look to take down positions again on a further bounce.

Taking the Downside

After switching out of equities in my 401K a couple of weeks back and closing my hedges, my thoughts were that I should expect a bounce as the market was way oversold. Still, I did not wait to time the bounce to exit my equity positions. I operate my 401K on a 1/month analysis basis and when it told me to move into cash, Fidelity Government Income fund and PIMCO Global Bond fund, I did it right away. But the thought was that when the market bounced I would take on downside positions with put options on the stocks I follow, thereby limiting my exposure.

So how did all this play out last week? SPY went from 118.12 to 112.64 during the week. That is a little less than a 5% drop. Fortunately the downside positions I took during the week gave me a positive week on my portfolio.

I started by looking at SPY using my Cheetah system that gives me major and minor signals. It triggered the expected minor down signal on 8/12/11 and since this system can give me signals a little early, I waited a day or two. I added put position on SPY. Notice the Fibonacci lines on SPY that I drew from the previous high to the low and how SPY went almost exactly to the 38.2% Fib line and turned around. Interesting… I was thinking it had a chance to go to a higher Fib level than it did. My mind tells me that it is a sign of further weakness, which gave me a little more drive to take the down position. My minor down signals occur on weakness and is not trend following. In fact it is trend leading, and sometimes can catch me on the wrong side. Usually I wait for the primary and the minor signals to be in the same direction before I take the position as I did this time.

Next I saw a down signal pop up on CAT on 8/15. Again I took the down position on that. Added a few more down positions on some other stocks I track that had similar down signals pop up. Still, I felt the possibility of the market climbing to the higher Fib level and I did not want to be caught jumping in early with a strong down position. That was of course what cost me opportunity loss as I would have made a heftier profit last week if I had gone in down full throttle.

Where will it go next? I did not see a capitulation Friday. There is more downward action likely. There is the possibility that we could see a nice double bottom and the market rips to the upside. Now that would be a little tough on all my downside positions, so I have to be willing to jump ship on the down positions any day next week. In my mind I suspect that will happen towards the later part of the week if it does. But if I rack up a decent gain in the first part of the week, I will take a profit and bank it.

I am about flat for the year, which is not too bad considering the market is down over 5%. Moreover the recent 15% drop in the last few weeks has been quite harmless to our portfolio mainly because of the hedges I had following my technicals.

Beginnings and Endings

This weekend I was deeply grieved to hear the passing away of a classmate of mine from India. He was a gentle soul and was well remembered by all of our classmates for who he was and his talent with playing the flute. He had been battling with prostate cancer for a long time and finally succumbed to it. He leaves behind very warm memories of the friendships from our school and college days that seem just like yesterday in our minds. I know this will be a very difficult time for his family; his wife and his daughter, whom he leaves behind.

With those kinds of thoughts swirling in my head, I was hard pressed to think about what I feel like writing about this week. And I thought maybe I should touch on new beginnings. I was talking with a good friend’s son this weekend on the subject of managing 401Ks. He has been working for about 4-5 years now. I felt there are at least two paths to follow to becoming self-reliant in investing, and maybe a dash of a third.

The first is learning basic portfolio management, and the importance of keeping a diverse selection of investments to manage volatility and keep steady growth. Rebalance once a year and not too often. The best book on the subject is the recent publication called “The Ivy Portfolio” by Faber and Richardson. It goes through how the top two endowment funds have amassed a huge wealth by losing very little and getting solid steady gains year after year. Preventing a large loss coupled with steady gains is the path I follow. I would be thrilled if I could duplicate anything close to their performance! The book takes you though how you could set up a portfolio along their lines, balance once a year and then through tactical asset allocation, improve the rewards and reduce the drawdowns.

The second path is one of technical analysis. When investing in a stock, commodity or mutual fund, how can one use technicals from the data to figure out when to exit an investment during bad times and when to enter before it makes moves upwards? The best book I have found on that subject is “Technical Analysis from A-Z” by Steve Achelis. I know I have mentioned this book before in one of my earlier blogs. It was one of the first books that started me off on my journey to learn how to be self-reliant in investing. Once I learned some of the basic tools of technical analysis, I complimented my learning with Metastock software. I still use Metastock for trading systems and charts analysis on a regular basis.

The third is learning Position Sizing. How much of a portfolio should I have in a single investment? How much loss should I tolerate from a single trade? This third method is more applicable to those who wish to trade individual stocks and may spill over to portfolio management as well. In my mind it is how you can survive in the trading business long term, long enough to show profits. Improper position sizing on small trading accounts will cause fatal failures and account blow ups. It will leave a distaste for trading that can rarely be overcome later on.

Nothing is definite in life or investing. We all know that we have to go one day. What we would like to do is provide a small amount of security for our families, for ourselves and maybe share our good fortune with others if we wish to. Money is not an end in itself. But if we can enjoy the journey, then that itself is a positive way to live our lives.

Switch is made I

The market was very volatile today. VIX jumped 10 points. The Dow dropped over 600 points. My SPY puts certainly made some money! It feels good to follow the technicals and execute - over 600 points down and I hardly feel any negative effects. Now I did miss taking some of the down positions I should have.. they went right by me and are beyond my grasp. I will have to wait for a pop to get back in.  My GLD position has been quite positive and I think I will place a stop loss on it or just close it out soon.  This market is starting to look like it is now heading to a capitulation this week. Capitulation is when it goes to an extreme and then turns right around. One big reversal day and the traders will switch sides and go long, at least for a few days.. till the buying dies out and fresh selling feeds the downward frenzy again.

I cannot remember a drop coming this fast and this big from where it started..  The US market has caught a cold and global markets are all affected. GLD, Silver, cash and some bond funds are the only havens open. I am glad I am now mostly out and sitting with a small down bias plus GLD. But I don’t want to hang on to GLD for too long as we all know what happens when this ship turns. Most currencies are taking a hit– except the Swiss Franc (FXF exchange traded fund). Time to take a deep breath and be glad that I am not part of the circus.

Switch is made

The market has certainly taken a hard turn to the downside. After dropping 11% in 3 weeks, people are going to get a rude awakening when they get around to seeing their retirement funds and 401Ks if they were heavily in stock funds. The US AAA downgrade could not have come at a worse time. The way the GOP, TEA part folks went at it vs. the Democrats, it was clear that everything was measured carefully for political and ideological gains and the minority appeared to rule. Where is the voice of the majority? It was mostly trying to avoid a missed debt payment and in order to do the right thing accepted a poor plan for debt reduction. It seemed like with all the political bickering and wrangling, we deserved the slap that S&P gave us. The same S&P that gave high ratings to those worthless mortgage backed securities a few years back. Guess they are getting better now. And it sure looked like we were unable to come up with a decent plan except for the poor compromise agreed to in the last minute.

I am really glad that I was hedged fully on the long positions I had in my 401K, which was about 25% of my portfolio. After I saw how much the 401K stock funds had gone down, it was also a surprise to see how much my SPY put options had gone up. Still I won’t lie. The net position was a “tolerable”loss. I hate losses. I also feel like kicking myself for missing out on the down play on ANR. The signal came sometime last week and I was traveling on business, and that is my excuses. Excuses don’t make money. When those signals come, I have to act regardless of how tired I am when I look at the info.

My monthly analysis on my 401K done this weekend says to make the switch to bond funds, Fidelity Government Income fund and cash. It points to pulling out of all stock funds. Who knows what awaits us on Monday after the rating downgrade. The best we can hope for is a mild day. If the Asian markets and Australia takes it on the chin and the US starts with a huge gap down, it is quite possible that many traders will fade the day and the markets could slowly recover. I will place the exchanges over the weekend as I am traveling to one of our plants during the day.

If the market opens with a huge gap down, then I may very well sell my put options on SPY that are in-the-money and profitable and trade them for the same number at-the-money at market prices. I will have to place that trade before I go to work as I will not be watching any of this during the day. By placing this trade, I will be pulling out some profits on the hedges and taking some money off the table. At some point, the market is likely to bounce as shorts cover and I do not want to give up my profits. We are quite oversold right now and could get a sharp bounce. Or we could continue to stay oversold a little longer and go down sharply. No one knows for sure. But the picture for me is to switch back completely to cash and bonds till next month’s analysis on my 401K. That means I close out most all of my long stock funds that was about 20-25% of my portfolio. The other thing I cannot predict is how long this will all last.