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Friday, October 03, 2008


trading is off the table until the end of october

i had, through most of the carnage of the last couple months, paired an oil long with financial and NDX shorts to limit damage -- and i came out damaged but fine. on thursday last, however, i took off the SKF and QID to buy into a QLD long position alongside DIG. the technicals looked appealing.

washington mutual went under (as long expected) later that day, and i was unperturbed at first. but reading deeper into the fallout that slammed the credit market following the announcement, i frankly put prudence ahead of technicality and liquidated everything -- going all cash for the first time in a long time.

monday was a disaster, and i was both disconcerted and thankful not to be puking into the office trashcan.

the point is that, as dr. steenbarger said not too long ago, that when markets don't act as you think they should... that's information too.

the equity market at the end of yesterday put in what i would suggest is a possible successful retest of the monday low. there have now been two 90% upside days in the s&p which sparked from the 1120-1130 level -- today may be a third. marginal improvements in the new lows and volatility envelopes on the retest. could be a tradeable rally here.

but prudence has to rule the day for now. there are going to be lots of future tradeable rallies that spark from a place that isn't coincident with the deathbed of credit. the trick is to try to survive to see them.

and it isn't as though there's no counterargument. jeff cooper -- and pardon my added graphic, which is an attempt to illustrate the fractal (blue current s&p weekly, pink 1929 dow daily, green 1987 s&p daily):

While on the surface there may be differences between the '29, '87 experiences and the current crash if one looks at the daily charts. The notion occurs to me that looking at the monthly or weekly chart of the S&P or DJIA that it may be a fractal of the daily charts from the prior two instances. The monthly chart shows the persistent run up and just as persistent a tumble off the top. The message of that notion is two fold: we need to carefully watch the period of 49 to 55 weeks from the October 2007 high. Of course 49 weeks from the October 2007 high was mid September when this snowball from hell accelerated. The 55th week will be the end of October early November. An interesting time to focus on indeed as it obviously coincides with the daily 49 to 55 day panic zone on the daily counting from the September 2nd pivot.

... I suspect that after the House approves a bailout bill that there may be a coordinated effort by central banks to inject rocket fuel (as one trading bro calls it) into the market. It's the last exit to Brooklyn---can they afford to let the market sag on the passage? I may be wrong of course but the point is if it happens I warn against buying into any carrot that they try to stick into this snowball and pass off a a friendly Frosty the Snowman. It is not. The daisy chain of systemic issues are vast. ... The global counter-party and systemic complexities that exist today dwarf those of the prior two experiences.

cross-reference this end-of-october window with yves smith's reporting on credit default swap settlements over the next couple of weeks. this will be a test of the CDS market, and it may pass. but it also may not, and settlement fails could turn the extant pressure on the shadow banking system into a credit system explosion.

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Why not SRS or DXD or SDS or QID? If a crash or even just steady decline is coming in equities, why not short them?

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good q, anon.

1) i don't know that a crash is coming. it's a very low probability event even under these circumstances.

2) equities are very oversold. if a crash does not come, a massive rally might.

3) daily volatility is massive -- 500 points on the dow is becoming a daily job. i think that's indicative of just how weak we might get, but i'm also not willing to take large positions in this environment. too much ripping.

4) the previous three are all things that can be got around -- use stops, size correctly, right? but in a true crash there are structural risks as well. proshares should work in a crash. will they work in a crash? i would not be surprised if they (and plenty of other things) didn't.

i think if you assume a crash position here, the safest way might be by options, but you're already paying massive premiums in this environment. not to say you wouldn't make money in the event, just saying that fear is already here. the time to get short for a crash was a while back already.

fwiw, i do have an account holding SDS -- but only as a (hopefully effective) hedge against existing legacy positions in a "client" account.

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Thanks for your response. I agree with your response and frankly admit I am so addled by the volatility that I'm hesitant to do anything big. I certainly subscribe to the Ka-Poom thesis and think deflation of assets will be followed by rapid inflation, as all the scared cash gets back in. But as always the question is timing. These wild swings certainly indicate a wild search for direction.

I think we'll know after this coming week, though. If we start to slide, even without massive volatility, then watch out. The boomers nearing retirement will start to pull out of mutual funds to preserve what they have.

I've been in and out of the Proshares ETFs and am out at the moment. I do feel positive about SRS because the commercial and opt-arm crisis still lies ahead of us, and housing still has a ways to deflate even if equities start to reflate.

I'm thinking, though, 9250 is the floor on the DOW, based on the decline from peak to trough in 2002. Something tells me this is far worse, however, and so expect bigger declines.

Anyhow -- great blog. Keep it up.

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