Saturday, December 31, 2011

Taking A Peek At 2012.

Everyone worth his/her salt is making projection about the 2012. There is almost unanimity in the blogosphere that Euro is going to crash and we will see a repeat of 2008/9. So everyone is bearish biased in varying degree. Doomsday drummers like ZH, Mish, Prechter  et all are having a field day predicting the coming demise of Eurozone and return of the civilization to the stone age. We are encouraged to buy guns, bullets and canned foods. In the mean time, readership surges, ad-revenue and subscriptions come pouring in. They or their sister companies sell bonds by the bucket and deposit the much maligned fiat currency in the same TBTF banks on which they heap scorn every day. Not a bad business model, eh?

Yes, the OECD nations have piled up Trillions upon Trillions of dollars of debt and they will find it more and more difficult to service those debts and sustain them. But it is not going to be one straight line down from here. Trading in the stock market is different from fundamental macro economic analysis. Just look at Japan. It has over 200% of debt to GDP ratio and yet the yen is stronger than ever. How do you explain that? If Greek drachma was in existence, I am sure it would have been severely weaker today as a result of the debt problem of Greece.  Then how come JPY is stronger despite Japan having the highest debt in the advanced world? Just shows that there is no straight answer and things are much more complicated than ZH can explain.

How do you explain then that the commercials are net long EURO is a massive way since Sept 2011? These are the big guns that move the market. They are building up the position slowly and will possibly continue to build up long positions. People like ZH, Mish and Prechter just help them, either willingly or unwillingly, to divert attention from the slow and steady built up of their long position, so that the retail continue to sell.

The following is a weekly chart of EURO.
If you compare these two charts, you will note that while EURO was going up from Jan 2011 till end of April 2011, the commercials were building up short positions.The commercials went long from September and Euro has reached its lowest of 2011. Basically the same point where it started the year. So what has changed if I may ask? Why are these people screaming end of EURO?

Also note that there is no immediate relation between price movement of EURO and long or short position of the commercials. But ultimately, price follows the action of the commercials and that is a long term play.
I am not implying that EURO will start going up from tomorrow as a trend change. All I am saying is that the end of the world does not appear to be in the calendar of 2012.

Look at what the commercials are doing with the SPX index futures. This is different from ES.
Compare this with the weekly chart of SPX.

Commercials were net short of SPX from January 2011 till 1st week of August 2011 while SPX went up. They were net long between Mid-August 2011 till Mid-October 2011 when the markets went down. So the commercials are way ahead of the curve. Now they are short again from end of October. So we can be sure that a down turn is coming. May not be tomorrow. But when that down turn comes, just know that it has been planned months and months in advance. That the coming downturn has got nothing to do with whatever nonsense ZH, Mish or Prechter is saying.

This is what I call being unbiased. Trading  is serious business and modern economics is far more complex. So let us separate BS from trading. Hope this last post of 2011 will help explain my methods and approach to the market. Thank you for following me in Twitter (@BBFinanceblog). Please retweet to your family and friends and visit to profit from the world of finance.

Once again, wish you a very happy New Year.

Friday, December 30, 2011

Final Friday of 2011.

We ended the year almost exactly where we started it. 2010 year end SPX was at 1257 and 2011 year end SPX is also at 1257. And the whole year I was possibly the only one shouting that we are not going to see a repeat of 2008/9.

In between we had Euro crisis, tsunami in Japan, nuclear leak and radiation risk, uprising in Middle East, debt drama in Washington and countless stories of end of the world and collapse of the monetary system by doomsday prophets. I personally think that it not the debt of the world but the bomb of the mullahs which will tank DOW. But I also think that it will not happen in 2012. Don’t get me wrong. I think we will see DOW 5000 but I differ as to how and when we will reach there. In the mean time, there is money to be made on the long side as well.

Yesterday I wrote that the last trading day is going to be bit iffy. The market churned around in a small range and the selling occurred in the last 30 minutes.  Sort of cleaning the book. I would have been happy to get a green end but nonetheless, the uptrend is well intact. This rally started from 20th December and I am long from 19th. I am not happy with my position of TBT but otherwise I am OK. I think there are few more days in the coming week for this rally to complete its course.  On December 26, I wrote ( ) that a typical Santa rally consist of last five trading days of December and first two trading days of January.  If you look at the close-up of the last year (December 2010 – Mid-January 2011), most of the gains of 2011 came in the first fortnight of January.

I do not see any reason why it would be any different this year.

The short term cycle top is next week. So I will be playing it very fine. I will Tweet immediately to the readers whatever market action I take. On the other hand AUD is showing good promise with a target of 1.0325 next week.

So I am not very keen to go short immediately either. 

Not much should be read in today’s market action. It is just too much of a coincidence that the SPX closed exactly where it was at the end of 2010. Whoever believes in efficient market theory must also believe in tooth fairy.

For those who are fairly certain of the breakup of Euro, I have some news. The commercials are net long Euro in a massive way. We are likely to see a short squeeze sometimes in January which will hurt lots of bears.

So far as the recession in USA, I would present two news reports;
·         Baltic dry index is showing growth.

So let us trade what we see, not what we believe.  We cannot afford to be permanently long or short based on our bias. At least not I.

I take this opportunity to thank you for reading my blog and following me in Twitter (@BBFinanceblog). I hope you will continue reading and recommend it to your family and friends as well.  I wish you and your loved ones a very happy New Year. 

Last Trading Day Of The Year.

We are almost there. Another six hours and we will be done with 2011 stock trading. I expect the market to churn around, making lots of noise but not doing much. Few points up or down. Most likely we will end the year in positive. So nothing is to be taken seriously unless some earth shaking headline comes out of somewhere. At the point of writing this post, European markets are up nicely. So let us see what happens in USA.
In the mean time, you may want to read, enjoy and forget the following from Lee Adler. Just to demonstrate that liquidity is important. The views expressed are not my own and I do not necessarily subscribe to hyperbole. But it is nice to read and know what others are thinking.

The ECB is borrowing U.S. Dollars from the Fed to bailout European banks. And that is in addition to the Long Term Refinancing Operation (LTRO)
However, the "borrowing" is not called "borrowing."  It's called a "temporary U.S. dollar liquidity swap arrangement."  Yet it is really borrowing because it's going massively in one direction for the purpose of giving the ECB Dollars to lend to European banks, so the ECB can avoid lending more Euros. The ECB doesn't want to tarnish its "inflation fighting" reputation and further devalue the Euro. Instead, the Fed is taking billions of Euros as collateral for the Dollar swap.  
As Gerald P. O'Driscoll Jr., former vice president and economic advisor at the Federal Reserve Bank of Dallas, and senior fellow at the Cato Institute, wrote in the WSJ (The Federal Reserve's Covert Bailout of Europe): 
"The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities."
U.S. Banks and financial institutions do not want to lend European Banks more Dollars, and it would look bad for the Fed to do this unpopular lending directly, so the Fed has found an indirect route.  
"The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan."
In exchange for Euros as collateral, the ECB gets non-technically loaned Dollars which it then lends to European banks. The additional Dollars flowing to the EU banks enable the ECB not to release more Euros to the EU banks and into circulation. According to O'Driscoll, this "Byzantine financial arrangement" was designed perfectly to confuse people. 
"The Fed's support is in addition to the ECB's €489 billion ($638 billion) low-interest loans to 523 euro-zone banks last week. And if 2008 is any guide, the dollar swaps will again balloon to supplement the ECB's euro lending...
"The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed's reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed's Swap Operations report, and the ECB website.)
"No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments. It is difficult to count the number of things wrong with this arrangement." (The Federal Reserve's Covert Bailout of Europe)
Mr. O'Driscoll argued that the Fed has no authority to bailout Europe. (Although lack of authority has not stopped the Fed from acting in the past.) Ben Bernanke met with Republican senators on Dec. 14 to discuss the crisis in Europe. According to Sen. Lindsey Graham, Bernanke told reporters that the Fed did not have "the intention or the authority" to bailout Europe. Nevertheless, the week Bernanke claimed he was not going to conduct an EU bailout "the size of the swap lines to the ECB ballooned by around $52 billion." 
O'Driscoll also argued that swap arrangements "foster the moral hazards and distortions" resulting from government intervention in the credit markets. "Allowing the ECB to do the initial credit allocation—to favored banks and then, some hope, through further lending to spendthrift EU governments—does not make the problem better." Moreover, this is another example of the Fed's lack of transparency. Non-transparency is a consistent theme of the Fed, in spite of Bernanke's promises to provide more openness. Bernanke's statement just two weeks ago that the Fed had no intention of bailing out Europe is consistent with a long history of secrecy and deceptive behavior. 
Distinguishing between the swaps (camouflaged loans from the Fed to the ECB) and the LTRO (loans from the ECB to EU banks), Lee Adler explained, 

"The USD swaps totaled almost 84 billion so far, while the ECB lent a net of $289 billion in the LTRO last week after rollovers.
"All central banks create money. That is their function. How they do it, whether by direct lending to government through direct purchase of government debt, or through lending to private institutions or purchasing private debt is a matter of a nuanced difference regarding the conduits through which the money flows into the financial system, the markets, and the economy. It’s a question of targeting.
"The biggest difference between the Fed and the ECB is that the ECB has always lent to all the European banks. Until 2007, the Fed only conducted operations with Primary Dealers. From 2007 to 2010 the Fed had direct operations with a variety of financial institutions. Since QE2, the Fed has gone back to dealing only with the PDs."
Apparently not anymore. The Fed is now using currency swaps to lend to the ECB which is taking the Dollars and lending them to European banks in exchange for a new, and more broadly defined types of collateral. As discussed in this week's Stock World Weekly, Money for Nothing and Your Debt for Free, the ECB's latest LTRO "is making it possible for eurozone member states to sell assets such as government buildings to banks, whereupon the banks turn the properties into asset-backed securities which are then pledged as collateral for borrowing from the ECB... WSE's Russ Winter observed, the ECB just was handed a gigantic can of worms. The ECB balance sheet is now up to $3.5 trillion USD...
“Illustrating the nature of this circular transaction, Bloomberg reports that Unicredit and Intesa, two insolvent Italian banks are using “state guaranteed bonds” as $52 billion collateral to throw at the ECB. So rather than even using actual Italian sovereigns, the ECB accepts something more nebulous down the food chain...”
Here's a chart Lee sent me from the ECB's website showing the expansion of assets on the ECB's balance sheet. The numbers on the y-axis are in millions, so the assets are rapidly approaching 2.75 trillion Euros (around 3.5 trillion Dollars).

Lee concluded, "The Fed has opened an unlimited credit line with the ECB and other central banks for which it has so far lent billions of Dollars, with Euros as collateral. The Fed is bailing out European banks; that's not in dispute. The ECB is the guarantor and the conduit, but the banks are the recipients of the bailout, and the Fed's balance sheet is expanding as a result of the loans to the ECB."
Stay tuned. Lee is going to describe how the US Government bond market collapses, and thus, the world ends, shortly.

Thursday, December 29, 2011

Back On Track

I laid out the case for continued uptrend in my last night’s report. And here we are, back on track to the cycle high sometime next week. ( )

Tomorrow is going to be bit iffy. On one hand, retail investors will sell their underperforming stocks to book capital loss; on the other hand many fund managers will attempt to buy stocks that have done well in order to make their balance sheet look pretty. I think there is a nice term for that kind of things; “window-dressing”.  For many of these managers, hanging on to their jobs is more important than the best interest of the unit holders. No wonder then that $135 billion have supposedly gone out of US Equity Mutual Funds. It seems 34 of the last 35 weeks have shown an outflow.

I personally think that the mutual funds have outlived their utility. They underperform the market and charge more to the unit holders. With the introduction of various ETFs, why would anyone put their money in mutual fund? May be ten year down the line, there will be no mutual funds. Good riddance!

I think tomorrow will still be a green day to end the year on a positive note.  Apart from my cycle analysis and other predictive tools, which indicate continuation of the uptrend, it has also to do with that “window dressing” effect.  You may be aware of something funny called the “Weekend Effect”.  The "weekend effect" is the name given to the phenomenon that U.S. stock prices are lower at market opening on Monday than they were at close of business on Friday. This is also known as the "Monday effect".  Kenneth R. French, currently the Carl E. and Catherine M. Heidt professor of finance at the Tuck School of Business at Dartmouth College, was one of the first economists to identify this phenomenon, in 1980. His research, published in the Journal of Financial Economics, showed that average returns for Mondays were lower than those for the rest of the week, and were often negative. Much has changed between that research and now and it should be taken with a pinch of salt in the normal course. But we are talking of Santa rally which is a different thing altogether. All these form a part of behavioural finance and have been subject of many research papers over the years. Successful trading is a serious business.

I am waiting for TBT to make a good progress and may be that wishful thinking will be rewarded in January. The other major story for the day was the hammering in the price of gold. Zerohedge has been paddling gold vigorously for many months now and I wonder what kind of investment strategy they are following. I do not think we are done with selling in precious metal by any long shot.
That is the bottom line for today. Stay safe and stay focused. Thank you for your continued support and following. Please join me in Twitter (@BBFinanceblog) and invite your friends and family to join as well, if you think it will benefit them. Visit regularly to profit from the world of finance. 

Wednesday, December 28, 2011

Nightly Report. December 28, 2011

I am kicking myself at the back for violating my own trading principals. I have been writing for the last three days that a correction is expected and necessary for further up move. And yet I did not take profit and re-enter at a lower level like I did during the last pullback. Most likely I was complacent or I did not properly estimate the size of the correction. Just proves that every now and then the market shows you who the boss is. We all do our song and dance to win the heart of a fickle sweetheart but there is no guarantee. One momentary lapse of concentration, one deviation from the trading principles and we end up flat on the back. Luckily for me, there was no actual loss, but I feel that I have missed out on an opportunity.

Two things I was and am fairly confident of. I believe SPX will be near 1300 or exceed it during this cycle and a correction was needed / on the way before we reach that target. So now that we have the correction, next four days should be in line with the projection. I work with many parameters. Cycle analysis, TA, sentiment analysis, liquidity flow, market noise analysis, and different time frames and so on, so forth. So far, notwithstanding the 1.2% correction in SPX I think we are on course for a high next week.  The correction of today should not derail that conclusion. Let me present few TA which everyone can apprehend.

First the daily chart of SPX.

It seems the correction stopped on the sloping tend line.

Next is the NYMO.

We have drawn another trend line through the sloping tops of the NYMO and here also the correction has stopped well above the line.

NASI is showing that the trend is intact.

Also let us look at the seasonality factor again.

I will be drawing your attention to this chart few more times next week as well. As you can see, the market behavior is consistent with the seasonality factor. There were no external factors disturbing the market today. This correction was totally expected and now we can move forward. I will continue with my analysis and I will come back with further post at night if I think I have found anything serious which will make me change my mind about the market tomorrow.

Also remember, today was a Major Distribution Day and in the normal course the day after is green. Add to that the seasonality factor.

Last thing for the day is gold. If you recall my last post on gold ( ) I mentioned that if GLD breaks the long term trend line, there may be additional problem for gold.

As you can see, GLD broke that line today, although still half in. And it is much oversold. So again, we may see some near term bounce but when the stock market tops next week and starts major correction, we may see more downward pressure in gold.

Once again, thank you for following me in Twitter.(@BBFinanceblog) I know lots of you have  great following, so please retweet to your friends and followers. Let more people benefit. Visit regularly and profit from the World of Finance.

Fly Away, Little One. Be Free!

It's been a good couple of days:
  • Yesterday, we just got a very good sized check from the IRS (we'd let some things slide when the Unknown Son was sick, and finally got things straightened out a few months ago.
  • about a half-hour ago, I submitted a paper to a journal (not a top-tier one, but a decent one). It's been about 4 years since we started it. So now, it's off my desk.
  • I just got an email that my new 43-inch flat-panel TV is available for pickup from Best Buy.
All in all, a nice way to close out the year. Now I just have to get the TV set up in time to watch the Lesnar/Overeem MMA fight on Friday.

Tuesday, December 27, 2011

Nightly Report. December 27, 2011

Tonight’s report will be short as nothing much has changed from last week and not much action in the market either.

I wrote on December 23 that I am expecting a minor correction by December 27, 2011.                                ( )  Although we had a slight dip in DIJA, the SPX and Nasdaq ended the day in Green. Tomorrow morning would be the only last chance of a dip before we go flying higher. I added a tiny little bit to my existing long position as I was waiting for a bigger pull back which did not arrive. Let us see how tomorrow unfurls. However one more buy signal was initiated today, as follows:

As you can see, this has been a very reliable indicator in the past and should run at least for few more days. This is a lagging indicator and is just a confirmation of the existing trend.

AUD is continuing with its continuation pattern and is possibly setting up a base for the spring forward. I expect AUD to move up-to 1.0265 in the next two days and finally test 1.0370 before getting rejected. That will also signal the time to close the entire long positions. The funny thing is, I do not even trade forex.

During my intraday tweet I mentioned that I am disappointed with TBT. I know for sure that US Bonds are on a downward cycle but it is not being reflected in the price of TBT. I hope it also races through the gate in the next few trading days.

Once again, I urge readers not to be biased. The concept of bull vs. bear exists only in the mind of retail investors and traders. For the big boyz, no such silly difference exists. They can be both at different time, sometime switching sides multiple times in a day. Very soon, may be within seven trading days, we will also change our costume and wear the bearskin.

We have sowed the seeds for this trading cycle; the fruits are hanging and getting ready for harvesting. Till the time is ripe, let us be patient. You cannot force the grain to ripen before its time, nor can you open the door of the microwave oven before that slice of pizza has been heated up properly. Try it yourself and you will know what I am talking about.

I am extremely thankful for your show of support and for following me in Twitter (@BBFinanceblog). Till I set up a Facebook page for the blog, the Twitter is going to be my major way of communicating with my readers. Please forward this to your friends and family, who might benefit from unbiased trading. Visit regularly to profit from the world of finance.

AUD In The Morning.

I expect a quite start , may be a bit lower opening for the day. Understandable after a long holiday. And nothing goes up in one straight line. But European markets are in positive after Asia closed in marginal red. AUD has been in a consolidated pattern for much of yesterday. To get an idea of what is expected of AUD, I enclosed the following two charts.
I wrote last week that I expect some weakness on December 27 or December 28, but any weakness should be minor. I would like to add to my long position on weakness.

Monday, December 26, 2011

So, What Is A Santa Rally?

We have been talking about a Santa Rally and many readers may be wondering what that really means. Simply put, it is a seasonally proven rally when the stock market forges ahead in the last five (5) trading days of the year and the first two (2) trading days of the New Year. This seven days rally propels the market in a higher orbit and is a general indication of the health of the stock market. May be you can read the following;

I have been shouting the whole year that irrespective of what Robert Prechter and Zerohedge is saying, we are going to see a doomsday scenario anytime soon in 2011. There may be volatility but that is just a trading opportunity.  90% of the trading is done by the 50 largest investment bankers of the world. These bankers, also called Too Big To Fail (TBTF) bankers, have no other source of making profit, apart from the speculative profit. Their traditional source of income is almost gone. They are saddled with huge bad assets in their books. The only way they can survive is by making money through other revenue. So they generate these huge up and down waves. They buy at the bottom, create a rally, sell high and then start the cycle all over again. I have a feeling, Zerohedge is just an instrument in the hands of the TBTF bankers to create that fear and panic where the retail always sell short and are unable to take advantage of the rally. I may be wrong. May be those good folks are being manipulated to act like a bonehead. But either way, they are not very smart traders, contrary to what they would like us to believe.

Take this current rally for e.g. I have seen people selling, getting short from 1255 level in SPX. Just because SPX rallied from 1202, does not mean that we have sell now. The following is an actual conversation from one board. I have deleted the names for confidentiality;

“I am trading rydex only funds. I went 30% short on friday close. expecting a pullback as per your earlier report. Now you are expecting 1310/1290 so I am thinking of going long 70 % / short 30% next tuesday. If there is any pullback I close short and go long 100% as we are expecting higher high.

Question - 1. Below which price you think we should close out longs.

I would like to see how you are thinking/planning your trades as per your technical edge.  I do understand this are all probbality and nothing is gauranteed. Its more to see inside masters brain. I dont day trade so have to plan ahead of time.

thanks “

Pity this guy because he did not use his own brain and went short when he should not have.

 Every indicator tells us that more upside ahead. Seasonality is solidly backing us. No bond issue in Europe till the 2nd week of January. Volumes are light. Why would you short now? We would rather short the market at the end of the 1st week of January, when seasonality tells us that the market will correct itself.  But folks have been brainwashed to believe in the end of the world story. The irony is, bear market comes at the height of euphoria.  It never comes with announcements.

In various boards I see newbie traders, eager to make a quick buck, all excited about the coming fall of the stock market. The statistics tell us that 4 out of 5 retail traders will underperform the market. One of the major reasons of underperformance is to come to the trading arena with a bias or pre-defined mindset and expect the market to confirm to that bias. It never happens.  Market does opposite of what you would expect.
We still have this last trading week and the next to wrap up this rally and we will take it up from there. Just remember, the days of buy and hold investment type is gone forever.  As a retail investor, trader, we can still make decent money playing the game even if it is rigged. Occasionally we will lose, but if the winning percentages are higher than losing, then we should be feeling good.

I have started this blog as a part of my doing good karma. I do not ask for donations, I do not want you to click on ad to generate adsense revenue. In fact, I use Adblock and suggest everyone to use it.  I only want more and more people to be successful trader and donate a percentage of their profit to any charity of their choice. I will continue with this blog, only if I see continuing and growing interest from readers. If you think you are benefiting from my analysis and calls, I urge you to forward this blog ( ) to all your friends and family, tell them why you like it and bring in more and more readers.  Without growing and sufficient interest, it is just a waste of my time. So dear readers, please do your good karma and encourage others to join my Twitter (@BBFinanceblog). That will keep me motivated.
See you tomorrow.

Friday, December 23, 2011

Trading Fundamentals.

First of all; wish all of you Merry Christmas and Happy, Prosperous New year.

Isn’t it wonderful to put your trading on auto pilot? When you have taken a position and you know that it is going to be achieved. No more anxiety attack and looking for intraday signals. At least I find it much better this way. 

Yes, the rally is not a normal, fundamental driven rally. It is a Santa rally. Fairy tale rally. But who cares? At the end of the day, if we are on the right side of the market and have been able to take our profit, we would be happy, even if the profit comes from a non-fundamental, economically bad rally. That is the reason I keep telling my readers, please do not mix economics and trading. And possibly, stop reading blogs which espouse conspiracy theories and have so far convinced you that everything is fake and should be sold.
The reason I say this because everywhere I see normally sane, intelligent people are selling the rally. They are either liquidating their long positions or entering into new short position. They are giving up the sweet easy money that is all there for the taking. And by going short at this point of time, they will have to bear agonies of seeing their position under water for a considerable amount of money and time. When the time will come to short and make money on the other side, these people will be just glad to cover their losses. Sad indeed! And guess who wins?

Every day morning, before trading starts, I tweet my readers my take on the market and how I expect it to perform for the day. Normally that’s how the trading goes, irrespective of the news flow of the day. That just proves that news is noise.  The markets action tells you the future. Looking beyond the obvious helps.

Anyway, here is a daily chart of SPX with lots of straight lines. As you know the quickest and shortest way is always a straight line. And sometimes, simple things are true.

Today we broke the six month downward sloping line. That is good news for the rally. We also broke past the 1st price target, which was the closing price of December 7. The next price target is the closing price of October 27. If we can close above 1284 area of SPX in the next few trading days, then we are looking at a blow out top.  That would convert lots of doubters who are still sitting outside and not participating in the rally. By that time, most of the easy money would have been made and what better way to convince the sheeples about the new dawn, than breaking the closing price of July 21st.   

Remember folks, it is a game played at different levels and with the collective mind of the investors as well.  I urge my readers to take a print out of the above picture, keep it posted in front of the trading desk and ask yourselves every day, where are you in terms of the market sentiment. If you are feeling comfortable with your sentiment and they are in line with the general market expectation, possible you are next in line for sheering. 

Have a wonderful Christmas weekend with your loved ones. Thank you for following me in Twitter.(@BBFinanceblog) I know lots of you have  great following, so please retweet to your friends and followers. You could be giving them the best Christmas present, for all you know.  Visit regularly and profit from the World of Finance.

Auto Pilot On Friday Before Christmas.

Wanted to show you the update of the Analog of Eric Swarts which he posted last night after close;

SPX needs to close well above the down sloping trend line;

I am expecting correction either today or on December 27, but given the seasonality factor, any correction will be minor.

The Semester Goes Out Not With a Bang, But With a Whimper

I was just commenting to the Unknown Wife how this semester was ending going so well compared to previous ones - my student managed investment fund presentation was done a day earlier than usual, my principles class was ahead of schedule, and my exams were at the beginning of exam period rather than near the end.

I should have known - never say things like that. Even in jest.

It angers Academia - the patron goddess of all professors (also known as "she who makes professors' work go pear-shaped at the worst possible time")

So, what happens? I was cutting and pasting items from the grades spreadsheet for my principles class (it has four components, all on separate tabs of the worksheet). Somehow, I not only deleted the grades for all three exams, I copied the sheet to a file name that overwrote the backup (I always save the spreadsheet to a new file name after each update). After searching for over an hour, I finally found an email backup copy I'd made that had everything but the final exam grades.

The morals of the story:
  1. Make multiple backups of your grading spreadsheet (and anything else of critical importance) every time you change it.
  2. Never, ever say "things are going well this semester". It angers Academia (and she is a vindictive "rhymes with witch").
On a more pleasant note, a couple of bright spots this week:
  1. looks like I'll have a paper submitted within a couple of days. It won't get looked at by the journal editor for a couple of weeks due to the holiday, but it'll be off my desk. Since (as my coauthor says) "if we don't submit this one soon, we'd better start saving for its college education", that's a good feeling.
  2. A coauthor informed me that she had a revise and resubmit that requires her to do some tests that she could do herself, but would rather outsource. Since I can easily do it with a week's work or so, she asked me to be a coauthor. So, for a bit of work, it looks like I will likely have another hit.
  3. We've been making do at the Unknown Household with a seven-year old TV (an old cathode-ray model). We just got our new TV stand (a very nice corner model) and will shortly be getting a new 46 inch flat panel model. Ah, the Kingdom of Thingdom has a new subject.
In any event, here's wishing a Merry Christmas (or whatever else you choose to celebrate this time of year) to all my readers (all three of them).

It's finally feeling like Christmas in the Unknown Household - we've got Christmas songs playing on the radio, Winnie the Pooh (the Unknown Son's (a.k.a. Knucklehead's) recent fascination) on TV, and I'm in the middle of making up a quadruple batch of pumpkin soup on the stove A double batch will be for our neighborhood party tonight and another is for the big family get-together at our place on Christmas Day. So the place sounds and smells like Christmas.

mythe Goddess made me save my grade spreadsheet to the wrong name

Thursday, December 22, 2011

What Next For Gold?

The stock markets are on auto pilot. They are grinding higher despite all the doubts and walls of worry. But that is the plan for the next nine days. There may be a small correction in between just to shake out the weak hands and correct the overbought conditions but the ship is on course. So lets talk today about something else. ”Gold”.

There was a time when we could say for sure that USD is on one side and everything else on the other. That means when USD would be up, all commodities, which includes oil, precious metal  and equities, would go down and vice versa. Which also mean that if Equities would go up, it would be somewhat reasonable to expect that gold would also go up. Of course the degree of up or down would vary. But of late that correlation is breaking down.

Spot gold prices had a freefall on December 12. But it is still within the long term rising trend line as you can see from the GLD chart.

However, it is now showing some signs of weakness. The following chart shows the futures for various months in CME. This is when the SPX is on fire and dollar is not doing much.

There is red everywhere as far as eyes can see.

Let us look at the daily chart of the gold futures for the month of February 2012.

After the massive correction it reached an oversold condition and had a dead cat bounce for few days. And now that momentum has gone out. We can see that loss of momentum in the GLD chart as well where the stochastic RSI is turning down.

Before the correction, I had discussed about the negative gold rate and I did short “gold”. Made some money shorting it and then closed the short position. You can see it here; .  When the Santa rally started, I went long precious metal again. Instead of gold I purchased call option on its more emotional and temperamentally unstable cousin, silver, SLV.  Then I repositioned on December 20th and December 21st. During the repositioning I went out of precious metal altogether. And my reasoning, logic and indicators are proving to be correct so far.

While physical demand was encouraging in some markets, India, one of the biggest markets for spot gold is not showing much enthusiasm. For one, Indian currency is depreciating quickly vis-à-vis US dollar, making gold more expensive for average consumers in India.  Next to India, people are trying to guess the demand out of China. But with home prices down and stock market not doing well, affluent consumers in China may not be feeling very flush either.

I think it is time to be cautious on precious metal sector. If GLD breaks down below $153 in the coming week, I would be very worried. Or maybe I would short gold and silver again. The following paragraph is from Jon Nadler of Kitco. Please do not send me hate mails. The opinions are his, not mine. I just keep an open mind. So do not shoot the messenger.

Investment Protection Solutions’ Dominick Paoloni, who had held 10% of his clients’ funds in gold, sold 90% of those positions off last week. Albeit in the bigger scheme of things the $8.5 million liquidation by IPS is but a drop in the proverbial gold market bucket, the possible developing trend ought to keep some up at night wondering what it is that such money managers see out there.

Perhaps they are becoming convinced that gold is less appealing amid developing deflationary conditions, perhaps they are tying its performance to the beleaguered euro, perhaps they have come to realize that gold’s inability to overcome $2K amid perfect ‘storm’ conditions this fall means that something has changed in the market’s psychology.

Indeed, consider the fact that the euro has come under an existential threat, and that certain governments are running up debt tabs faster than you can say “bailout!” Gold has not responded ‘properly’ to such alarming news or to the fact that there has been a trend by a few central banks to buy the metal despite record or near-record values. If the situation appears puzzling to some, then they ought to look no further than the US dollar and its supposedly impossible ‘revival’ lately. This is because if there is one asset that the European crisis has indeed bolstered (and then some) then that would be the supposedly moribund greenback. Given the divergent paths that gold and the dollar have been on since the Fed pushed rates to near zero, the current state of affairs should not surprise too many (yet, it does, and to a degree that is astounding).

Veteran market observer and publisher of the Value View Gold Report, Ned Schmidt notes in his latest missive to subscribers that “denial has been rampant in the markets for some time.” He points to silver as an example of a metal which “has been in a bear market since April, though some continue to deny that reality.” Mr. Schmidt diagnoses the current market paradigm as the “withdrawal of inflated expectations” (the double-entendre of ‘inflated’ should be noted here). He calls the previous forecasts for 2.5, 5, and 10K gold just as “irresponsible” as those that had promised is $100 per ounce silver to be a concrete reality by now.

According to one market forecasting tool that Mr. Schmidt includes in his latest analysis, there is additional pain to come in the precious metals’ space. However, noting that “markets do not go down forever” either, Mr. Schmidt goes along with the projection that gold might yet make a run to new highs, perhaps in late 2014/ early 2015. However, “that high may not be significantly above the highs already achieved” concludes Mr. Schmidt. As for the current or near-term bottom in gold, the author of the VVGR does not expect that to be put into place until about April of 2012 and the figure could be as low as $1,110 “if no events positive for the price occur.

I am not sure whether we will see gold go down that far but if it does, at $ 1100/ounce, it sure will be a super value buy. I think long term Gold will reach $ 2000 or even cross it. But I do not want to be invested in gold now and see the price go down 30% from here. That would be such a terrible waste of the opportunity value of money. Remember those poor souls who went long gold in 1980. They had to wait for over 20 years to see their money back.

Did I hear someone just said;” This time is different”? Ya, yes, of-course!

Do you find the article thought provoking? If so, please retweet to your friends who may benefit from such discussion. Once again, thank you for following me in Twitter.(@BBFinanceblog). Visit regularly and profit from the World of Finance.

Freedom To Think.

Friends, I am not a day trader. It takes too much time and effort and I am not made of that fiery stuff. Hats off to those who are able to day trade successfully. For me, it is like sitting on a rocking chair, which keeps me busy and occupied whole day, but does not take me anywhere.
The point of saying the above is, I have identified a trend and have taken a trade in that direction. Now during the course of that trade, prices may go up or down, but so long the general trend is being maintained, I could not be bothered much. Unless of course, something extra-ordinary happens, like December 20, when the trend got too stretched and I saw an opportunity. So while I will keep an eye on the market happening, I would not possibly jump in action with every news or price swing.

I would consider them as mere noise and would rather devote my time and energy on other things of life. Also it will be useful to remember that nothing goes up in straight line for ever. Prices have to come down in between; corrections have to happen from time to time for the trend to follow its path. My point of saying it here is that if you see SPX closing in red one day between now and end of this rally do not panic. It has been scheduled to scare those naughty boyz who do not believe in Santa. If and when that happens, please know that everything is according to plan. Any decent dip is a buy.

I am trying to figure out if gold correction is over, if gold has de-coupled from equity. How far bond prices will correct themselves and what lies ahead in 2012. Are we facing deflation or hyperinflation? Why we are not seeing  hyperinflation yet, given that all the Central Bankers are printing money like there is no tomorrow. How to marry macro with micro economics and get a good risk adjusted rate of return. Getting a reasonably good answer to all these questions will help in getting an above average return from the market and we would not have to listen to all the crap from the talking heads of CNBC or paranoid conspiracy theories of Zerohead or endless waves of fairy tales from Prechter.

That is what freedom to me is! Free to think independently.

The Higgs Boson -- and the value of money

What does the (tentatively discovered) Higgs Boson have to do with finance? Nothing. At least nothing obvious. Still, it's a fascinating topic with grand sweeping themes. I've written an essay on it for Bloomberg Views, which will appear later tonight or tomorrow. I'll add the link when it does.

The interesting thing to me about the Higgs Boson, and the associated Higgs field (the boson is an elementary excitation of this field), is the intellectual or conceptual history of the idea. It seems crazy to think that as the universe cooled (very shortly after the big bang) a new field, the Higgs field, suddenly appeared, filling all space, and giving particles mass in proportion to how strongly they interact with that field. It would be a crazy idea if it were just a proposal pulled out of thin air. But the history is that Higgs' work (and the work of many others at the same time, the early 1960s) had very strong stimulation from the BCS theory of superconductivity of ordinary metals, which appeared in 1957.

That theory explained how superconductivity originates through the emergence below a critical temperature of a condensate of paired electrons (hence, bosons) which acts as an extremely sensitive electromagnetic medium. Try to impose a magnetic field inside a superconductor (by bringing a magnet close, for example) and this condensate or field will respond by stirring up currents which act precisely to cancel the field inside the superconductor. This is the essence of superconductivity -- its appearance changes physics inside the superconductor in such a way that electromagnetic fields cannot propagate. In quantum terms (from quantum electrodynamics), this is equivalent to saying that the photon -- the carrier of the electromagnetic fields -- comes to have a mass. It does so because it interacts very strongly with the condensate.

This idea from superconductivity is pretty much identical to the Higgs mechanism for giving the W and Z particles (the carriers of the weak force) mass. This is what I think is fascinating. The Higgs prediction arose not so much from complex mathematics, but from the use of analogy and metaphor -- I wonder if the universe is in some ways like a superconductor? If we're living in a superconductor (not for ordinary electrical charge, but for a different kind of charge of the electroweak field), then it's easy to understand why the W and Z particles have big masses (more than 100 times the mass of the proton). They're just like photons traveling inside an ordinary superconductor -- inside an ordinary metal, lead or tin or aluminum, cooled down to low temperatures.

I think it's fitting that physics theory so celebrated for bewildering mathematics and abstraction beyond ordinary imagination actually has its roots in the understanding of grubby things like magnets and metals. That's where the essential ideas were born and found their initial value.

Having said that none of this has anything to do with finance, however, I should mention a fascinating proposal from 2000 by Per Bak, Simon Nørrelykke and Martin Shubik, which draws a very close analogy between the process which determines the value of money and any Higgs-like mechanism. They made the observation that the absolute value of money is essentially undetermined:
The value of money represents a “continuous symmetry”. If, at some point, the value of money was globally redefined by a certain factor, this would have no consequences whatsoever. Thus, in order to arrive at a specific value of money, the continuous symmetry must be broken.
In other words, a loaf of bread could be worth $1, $10, or $100 -- it doesn't matter. But here and now in the real world it does have one specific value. The symmetry is broken.

This idea of continuous symmetry is something that arises frequently in physics. And it is indeed the breaking of a continuous symmetry that underlies the onset of superconductivity. The mathematics of field theory shows that, anytime a continuous symmetry is broken (so that some variables comes to take on one specific value), there appears in the theory a new dynamical mode -- a so-called Goldstone Mode -- corresponding to fluctuations along the direction of the continuous symmetry. This isn't quite the appearance of mass -- that takes another step in the mathematics, but this Goldstone business is a part of the Higgs mechanism.

I'll try to return to this paper again. It offers a seemingly plausible dynamical model for how a value of money can emerge in an economy, and also why it should be subject to strong inherent fluctuations (because of the Goldstone mode). None of this comes out of equilibrium theory, nor should one expect it to as money is an inherently dynamical thing -- we use it as a tool to manage activities through time, selling our services today to buy food next week, for example.

Update on AUD. December 22.

Last night before bed I posted the movement on AUD and commented that things look for for SPX in the morning.
Here we are with the latest on AUD;

Wednesday, December 21, 2011

Retail Short Position in AUD. Contrarian Indicator.

The following information is from my Forex dealer.
The Speculative Sentiment Index (SSI) which is a contrarian indicator, shows that the retail short in AUD is much more than the long. That indicates more gain in AUD.

The following chart is a trend of AUD for the next 24 hours.
There is a Head and Shoulder pattern in 60 minute chart of AUD. Although I do not have much faith in this pattern, a decisive break above will help the SPX tomorrow morning.

Thank God For Small Mercies!

Yesterday I sold and closed all my long position in the face of a massive upturn and I myself doubted my action. But in the end, we have to follow the methods and rules and not be ruled by emotions. Stock market is almost like playing a game of Texas Hold’em. We have to keep the nerves and win. It was a good call to sell yesterday and I got a better entry price today apart from locking in the profits. I immediately Twitted my readers; . By the way, did I tell you that today was a massive T bill sale by the Fed, the last one for the year?

Also, yesterday I wrote; “Do I think that the rally is over? Heck no! There is more to come. But as of now, the index is over stretched beyond imagination. Like the elastic band, it has been pulled too far too soon and it has to come back to equilibrium before it can start its journey again”. Exactly that is what happened. The markets came down, correct the overbought situation and allowed us a better entry. Thank God for such mercies!

From the SPX hourly chart you will note that it reversed from the 23.6 Fibo retracement area.

So which stage of the market sentiment are you now? I think most are somewhere near “See, what did I tell you?” stage.  People still don’t believe in Santa! And that disbelief is after years of parental guidance about the yearly gifts that Santa brings in! Really, such a lack of faith! I am shocked, shocked.

OK, you don’t believe in Santa, but do you believe in the greed and manipulative power of the TBTF banks and money managers? Don’t these poor fellows deserve some yearend bonus for beating the index? Come on guys. I would like to show you a follow up on the analog which I posted on Monday, December 19. This is courtesy Eric Swarts of Market Anthropology. May be now you will believe in Santa or the money managers or both!

Now I am back in my long position and I don’t have much to do for the next eight days. So I can get on with my life doing things that need to be done and enjoying the spirit of Christmas. I travel a lot and in the next few days I plan to write my take on various European countries. I would appreciate very much if you, my dear readers, also participate and send your comments and experiences. Writing about the European countries would be fitting end to this year, which has been consumed by all things European.

I also would like to write about the four horsemen of the apocalypse. Those, who are constantly beating the drums of impending doom. If GS and other TBTF bankers wanted to buy cheap and sell high, they could not get any better help. These doomsday drumbeaters have created such a fear psychosis that every rally is a sell and the end of the world is round the corner. Even a broken watch is right twice a day. These folks have been predicting doom since 2008/9 and every time there is a major correction in the stock market, they jump to it and proclaim victory.  I am sick of these people. Why don’t they accept that stock markets go up as well as down and when the stock markets go down, it is of no particular credit to these doomsday soothsayers.

Wish you all a happy Hanukkah. Hope you are enjoying the market commentaries.  Once again, thank you for following me in Twitter.(@BBFinanceblog) I know lots of you have  great following, so please retweet to your friends and followers. Let more people benefit. Visit regularly and profit from the World of Finance.

Congresscritters Aren't Like The Rest Of Us

This last few weeks, we've heard a lot about research conducted by Ziobrowski et. al. (see here and here) on the possibility of informed trading by Senators and Congressmen. Based on abnormal returns earned on their portfolios, it appears that they do use their "inside information" in ways that would be illegal for those not in government service. In case you haven't seen it, here's the 60 Minutes story that brought Ziobrowski's research into the public eye:

Now here's another fun fact - Congresscritters not only get to profit from material nonpublic information, they also get to reveal it to select parties too. It seems like a number of hedge funds regularly meet with members of congress to get fast track access to this information. Here's a video from the Wall Street Journal for your viewing pleasure.

And here I though our elected officials were pure of heart and above approach (sorry - I think I shouldn't have changed my meds without doctor's orders).

Trading Journal, December 20, 2011

Started adding long positions. Purchased the following;

Call QQQ $55 Jan 21 2012 @ $1.20
Call FCX $ 38 Jan 21 2012 @ $1.41
Call TBT $19 Jan 21 2012 @ $0.63
Call SSO $45 Jan 21 2012 @ $1.87
Call TNA $43 Jan 21 2012 @ $4.30

Will add on further weakness before close.

Tuesday, December 20, 2011

Protect Your Capital And Profit.

Yesterday I went long when the index was plunging because I trusted my cycle analysis and my calculations. And today Santa came thundering down to vindicate me. But then I sold my long position one hour before the close, just like yesterday, only the other way round. My logic is simple and you can read them in my trading philosophy here ;

So I took the money and ran. Do I think that the rally is over? Heck no! There is more to come. But as of now, the index is over stretched beyond imagination. Like the elastic band, it has been pulled too far too soon and it has to come back to equilibrium before it can start its journey again. Today was a Major Accumulation Day. Yesterday was a Major Distribution Day. According to my good friend Cobra, we will definitely see a down day tomorrow.

Look what happened when SPX was up for six consecutive hours last time. We saw a big drop next day. But last time cycle was down and this time cycle is up. So may be the selling tomorrow will be less intense than last time. But more likely than not, it will be a red day tomorrow. So why take the chance. Why not re-enter at a lower level again. Isn’t that unbiased trading is all about?

I sold the long positions and twitted to my readers;  . I do not want to chase the bus. We will see how tomorrow unfurls and will take a call.

Do not get distracted by the noise. Do not read too much of dooms day preachers. They are same as the talking heads of MSM. To me, there are really no differences between Cramer, Prechter or Zerohedge.   One is telling you buy, buy, buy and the others are telling you to sell, sell, and sell. None of them are objective in their analysis and are totally biased with their own agenda. They talk about economics but even the economists do not understand how economics works and much less they understand how it affects the stock price movement. I do not say that I understand how it works, but at least I keep an open mind and look for opportunities in all situations. And yes, I do not believe that the world is coming to an end, even if stock market valuation is cut in half.

Anyway, that’s enough of ranting. Now let’s wait to see how things work out tomorrow but I am fairly certain that we will get another opportunity to go long at a lower level. Once again, thank you for following me in Twitter.(@BBFinanceblog)  That way you can always get the real time info and stay on top of the game. Visit regularly and profit from the World of Finance.

Trading Journal. December 20, 2011

May be I jumped the gun but need to protect profit.
The markets are way overstretched. Stochastic RSI is stuck over 100 in the SPX hourly chart.
 Although I know more upside is to come, need some decent pull back. Today being a major accumulation day, we can expect some selling tomorrow.
I have closed my long position and will again enter long on weakness;
Sold the following:

  • XLF $13, Feb 2012 Call @ $0.48
  • QQQ $55, Feb 2012 Call @ $2.53
  • FCX $37, Feb 2012 Call @ $2.91
  • SLV $29,Feb 2012 Call @ $1.75
  • TBT $18,Feb 2012 Call @ $1.29
  • SSO $44, Feb 2012 Call @ $3.65
  • TNA $41, Feb 2012 Call @ 7.59
The trend is up and will definitely get back to the long side. Waiting for good opportunity.

Monday, December 19, 2011

Nightly Report. December 19, 2011

One of the pitfalls of my style of trading is that I am always early for a trade. I have been writing for a while that I expect weakness around December 19-20. This has to do mainly with the liquidity flow or lack of it. The Fed is sucking away some US$ 20 billion on coming Wednesday (selling more T Bills) and that kind of stuff normally affects the stock price. But this was expected and known and I twitted my readers in the morning not to chase the rally. I told them that I expect weakness and when it comes I will go long. In fact about a week back I wrote that I expect SPX test around 1200 level before bouncing back. So here we are today.

I would say that everything is going very much according to plan. I went long during the day and added long positions in a staggered manner. I could have waited for the last 30 minutes to go long, but I believe that it is not possible to perfectly time the trade. I am looking at a trend reversal and I have jumped in, albeit one hour early. Yes, I am under water at this moment but that is only to be expected.

Today’s report is going to be short because there is nothing new to add. Once again, like last time, this one is also going to be a very quick trade. The big trade is coming sometimes in January 2012. I will tell you more about that when we come close but for now we have to wrap-up this one in the next eight trading days.
We have only eight (8) trading days left in the year and for reasons explained many times here, I do not think we will end the year in negative territory. One very important reason is the 3rd year of the Presidential cycle and that cycle is very much alive.

For those of you who love Analog, Eric Swarts of Market Anthropology is a master of fractals and analogs. The following chart is from him.

It compares the hourly movement of SPX during the March, April and May of 2011 and that of now.  The blow of top may not be coming in December but we are definitely following the script.

So far so good. Thank you for following me on Twitter (@BBFinanceblog). Please retweet to your friends who may be interested and who might benefit. Visit regularly to profit from the world of finance.

Stuck In Grading

Ah, all classes are done, and my finals have been taken. Unfortunately, I had a rather large group in my principles class, and they had a long final - 73 students and a final with 25 multiple choice questions(concepts and definitions) and 21 problems. I'm currently on problem 11, so I still have about 730 "student-problems) to grade (about 5-6 hours of work).

Then the grumbling by the students starts. I've already had one email me to complain that "my tests didn't assess the students' learning properly" - within a day of the exam.

But even with all that, this still beats any other job I can imagine.