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Archive for July, 2011

Posted by Martin July 21, 2011

How to avoid default notes when investing with Lending Club?

Investing with Lending Club is my another investment vehicle. With Lending club you can become a bank and lend your money to another borrower and you can gain quite a nice interest by doing so. Even though Lending Club screens every applicant (and they deny circa 90% of all submitted applications) time to time you will be facing notes which are late or default. How to avoid defaulting notes?


When I started investing with Lending Club and my portfolio was small I almost had no late notes. When the portfolio grew to a larger amount I was seeing a lot of notes in grace period, late 16-30 days and late 31-120 days. Fortunately none of my notes got into default. I was thinking that my screening filter would eliminate all risky notes, nevertheless I could experience notes graded as A or B getting late. It was quite surprising for me as well as frustrating. I remember, once I was so frustrated that I was even thinking to drop Lending Club investment at all. I didn’t want to deal with irresponsible people, who claimed how great borrowers they were and then they defaulted after the second payment.

Apparently even the best filter ever won’t protect you from such borrowers, so I had to develop a method how to lower the risk even more. I know it won’t protect you 100%, but this system can eliminate those notes, which are showing a sign of troubles and may default in the future.

I took a notebook and started recording all my notes which were in grace period or late. Every week on Friday I open my account, go to “notes” and browse through them. Those which are in Grace period I record the note ID in my notebook. Next week I do the same and check the status of recorded notes and add new notes (if any). If a note slips into “late” status I sell such note on the secondary market (FolioFn). I wait if the note gets into “current” status and then sell it. This ensures I can get as much money back as possible then when selling the note while it is still in “late” status. Mostly by doing so I can get back all what I invested in this note and sometimes a few cents more – better then waiting whether the note defaults or not.

If the note slips into “31-120 late” status during my “waiting period”, I sell it at all cost and I am willing to take the loss (usually 4 – 5 dollars discount, but in overall portfolio it is a very little loss). When selling the note in late status I usually have to discount the price.

Next condition which sends a note to my “black list” is a sudden drop of borrowers credit score. That is a sign of borrowers default with another lender and that may spread to Lending Club quickly. If I see that a borrower’s original score was in 700+ level and it suddenly dropped to 660- level I sell such note even though it is in current status.

Having troubled notes recorded somewhere else besides your portfolio, where you can quickly review what is the status of the note at the end of each week (sometimes when defaulting note gets current, you can easily lose track of such note) and check if it consistently pays late helps me eliminating notes which may potentially, one day slip into default. So far this method works for me and my portfolio is clean and has only current notes. My net return is still around 12.37% and I am no longer nervous seeing some of the notes slipping behind in payments.

How are you eliminating potential troubled notes when investing with Lending Club?

Posted by Martin July 21, 2011

Trade 07/21/2011

Trade 07/21/2011

Well, I must admit that I was probably wrong in judging the market direction. I didn’t expect today’s move I rather saw the market bouncing around the same level or slipping down. However Greece issue (not sure how efficient the bailout will be) along with good earnings helped to move the market back up.



That means that the market is in bullish territory. However, it is not still decided where to go. These days it will either create a new higher high and then we will see a new bull trend, or tomorrow or next week it will fail, creates a new lower high and we will most likely head down.

Nevertheless I closed some of my losing positions today (sold some puts on SPY and XLF – apparently the financial sector is going to do well and looks like it will go bullish).

Those loses I suffered from these trades are quite significant to me, considering how small account I do have. Thus my next plan is to slow down a bit, recover the losses and buy back my dividend positions.

Recently the DOE managing the US Strategic Petroleum Reserve (SPR) claimed that they will not tap to strategic reserves again as they did a few weeks ago. When they put 60 billion barrels on the market oil price dropped very significantly. However after they announced that they wouldn’t do it anymore one would expect that the price would jump up. Instead, the price action was mediocre and I would expect USO bouncing of the resistance and going down to re-test its support level.

USO
Will USO bounce from resistance and continue down or will it break up? Based on today’s action it looks like USO will bounce down.

However, I am not sure about it at this time and therefore I am placing a conditional order: if USO (oil ETF) drops below 38.34 I will buy 1 USO Sept’11 39 put. I will buy this put only and if the price goes down, so I’ll have confirmation that my expectation becomes reality.

Happy trading.

Posted by Martin July 20, 2011

Trade 07/20/2011

Today, based on the market’s movement, I am even more convinced that this market is poised for decline. It may not happen, however, but at this point I think it will. It still may be bouncing a bit at the resistance level, or even go up a bit, but that will provide better position to open bearish positions at better price.

Change The Way You Trade Forever

Therefore I decided to open more bearish positions on SPY and QQQ by buying some puts:

1 SPY Sep’11 134 Put and 1 QQQ Sept’11 62 put.

However I needed to sell some of my open positions and I decided to sell my losing long term dividend positions on CTL and HGIC. If the overall market will fail, these stocks will most likely go even lower than they are right now. I do not want to have losing positions, but I am planning on buying them back at lower price later.

All the trades should occur tomorrow morning or during the day. On buying the puts I have limit price so they may not execute right away. I’ll see later during the day or the week. If it won’t fill by Friday I will re-evaluate.

Right now, the market is bouncing and if it will have enough strength to create a new higher high, it will be a sign that the market is ready for a new bullish trend, but I am not convinced that this is the case and I believe it will actually create lower high and turns back down. That would push us on downtrend path and we may see 126-ish levels on SPY and 53-ish level on QQQ.

Happy trading.

Posted by Martin July 19, 2011

Trade 07/19/2011

I expected the earnings season and mainly this week (this week is very important to determine if the market gets a new impulse to reverse and continue upwards or further deteriorate) will bounce the market up. It happened and the market (SPY) rallied today and closed at 132.73 (which is at the intermediate resistance level). Tomorrow we may expect a gap due to Apple and its great earnings report. However, that may be all we can see as good news for the market. So the following weeks we may see further drop.


Overall, I think the market will go down to 126-ish level to complete a head&shoulder pattern, partially due to European crisis, which is not over and will return back as well as the US debt crisis which is waiting round the corner. I will wait until Wednesday to see, if I will buy SPY calls to protect my portfolio and ride this short bounce up.

Today I also bought XLF September 17, 15 strike put, because the financial sector overall is underperforming and as banks will be reporting their results (which I think will not shine to boost the industry) this market will further drop down.

Posted by Martin July 19, 2011

Trade 07/15/2011

Today I have bought 1 August 17 SPY put 131 strike contract expecting the market to decline further down since it broke through 50 day SMA on high volume. I am expecting the market to go further down to the second resistance at 130 points. The market is in sideways overall, but potentially creating a head and shoulders pattern, thus the market should go all the way down to 126-ish point to complete the pattern. There we will see if this head and shoulder pattern will be a trend reversal (further decline, bearish market) or a continuation pattern. Time will show.

Posted by Martin July 13, 2011

Indecisive market and today’s disaster

Indecisive market and today's disaster

Will you believe me if I claim that today’s market trend was a disaster? Well, if not take a look at the daily chart. In the morning we gapped up and everything looked bright, but we ended down. Extensively down, compared to the morning’s start.

Change The Way You Trade Forever

Two days ago I tried to explain, why I was shorting the market (SPY) and pointed out three potential scenarios which would happen. I expected the market actually break down through the 50 day SMA. Well it didn’t happen. Let’s see what was moving the market.

I was thinking that European debt would be the weighting factor pushing the market down. At least as long as earnings report season progresses (Thursday, Friday when JP Morgan or Citigroup reports earning). I believed that the earnings can be the only catalyst which can turn the market up.

Well, I was wrong. Comments from FED were enough to push the market higher last two days and prevent it from breaking thru the first resistance (50 day SMA). So what happened yesterday? Ben Bernanke announced a stance of FED adopting a wait-and-see policy and the market jumped up. See the chart.

 

SPY
Click to enlarge

 

When I saw the chart for the first moment I panicked (obviously, I was shorting SPY) and I tried to find the reason, why the market jumped up. When I found, that it was FED’s comment, similar to those we have been hearing for last three years, I calmed down. As you can see, later on the market slumped down and ended lower.

Today’s action wasn’t any better. Huge gap up, strong move up and at around noon the market deteriorated. closed the gap and ended in intraday loss. That’s why I consider today’s trend a failure.

 

SPY
Click to enlarge

 

However, such action of increased volatility and responsiveness to worthless news (such as Chines growth, c’mon, guys, do you really believe in China? Just look at so many fraudulent Chinese companies these days being suspended from trading recently – YUII, RINO etc.), indecisiveness in direction and inability to move lower as I expected, I decided to take my profits of the table and wait what would happen next. I closed my short positions in SPY with nice 63% profit and I will wait for the next move. I still am bearish on this market and think, that it will go down. If that happens and the market shows this weakness to me I will re-enter my short positions. Another reason I decided to close positions was that I was holding naked puts (I typically trade spreads) and these are more dangerous.

There are a few reasons why I think the market will go down. European debt and US economical issues are one of the most important factors which will turn this market down. The only event which can do otherwise is shining earnings. I am still bullish on VIX, because volatility will be increasing these days.

You can see all my holdings here.

Posted by Martin July 11, 2011

Market update – Bear correction or new bull?

Market update - Bear correction or new bull?

Today, the market reacted as I expected. After a strong run up in a very short period of time it was imminent that the market will correct. Being bullish near the first resistance or shortly above 50 day SMA was very dangerous. I myself was originally expecting the market bounce back down off of the 50 day SMA and continue down. Instead it broke through and continued up in even stronger bullish trend. Well, there was one “little” problem: volume. The volume was declining as the price was rising up. At the top, the volume was weakest! A great exhaustion sign.

Then the market gapped up. For me it was the point to re-enter my bearish positions (I re-opened those bearish positions which I was stopped out, because I entered too early). So I bought put options on SPY. The very next day (Friday 8th) the market gapped down. A great, nice island reversal signal (during the day SPY closed the gap, but at the end closed well below keeping the gap actually open). And today another gap down!

Is the market a bearish correction or a beginning of a new bullish trend?

I do not know it and we will have to wait for the answer. Right now the market is correcting the previous trend. But what actually is the overall market status? It depends on the perspective you are looking at the market and its trend. If you are a longer term trader (position trading for example) than we are in a sideways move. From that perspective I would stay aside. I cannot say, where the market will go.

SPY
Click to enlarge

As you can see on the chart above, the market changed its move after a nice, long, recovery trend into a sideways move. From a long term perspective, if you want to take a bullish position, you have to wait whether the market breaks up above 137 points level on a high volume or take a bearish position if it breaks down below 126 level on high volume.

However, I like to play this market from a shorter point of view – swing trading. I do not know, where the market will go, but I can analyze what I can see on the chart at this point to get the clue, where we are going. Of course being long or short in a defined trend is a lot easier and less risky than the approach I am taking right now. I know it, but I want to do it and I have defined entry and exit strategy for this particular trade. So I can be playing this sideway trend and use sub-trends for swing trading (highly risky for most of the traders or investors).

So what I can see and what I can expect?

Given the bullish trend we had, island reversal signal I am expecting the market going down. And it actually happened. But how far down it can go? I can see a few targets here:

  1. The market will hit 50 day SMA (see tag #1 on the chart below) and will be bouncing here for some time – if so I will liquidate my short position and take the profit here. However I am not expecting this much as I will try to describe later below.
  2. It will break through 50 day SMA and will go down to first support line to test it (see tag #2) at 130 points level. This is the target I am aiming for.
  3. The market will break through 130 level and will go all the way down to 126 level (see tag #3). If this happens I will open a new short position at break through level.

SPY
Click to enlarge

Well right now I do not know which scenario will happen. Time will show. As I mentioned above, I am expecting the market to test the 130 level support, where I want to sell my put options. Why this level?

  1. This market fall is happening on increasing volume, unlike previous uptrend, which was happening on decreasing volume. That means more selling pressure.
  2. Bollinger bands are widening (see several red crosses on the chart highlighting upper and lower bands – blue thin lines). Well the Bollinger bands won’t tell you where the market will go, but it will tell you what momentum the market has. In other words, how much fear or greed we have. Compare this to another “fear/greed” index VIX. It basically shows similar output. If VIX is low, the market is calm, as it starts rising, the market is more boiling, see the chart below.
  3. We slightly crossed 50 SMA on higher then average volume with gap down. If the market doesn’t close this gap tomorrow or few days later, this downtrend has more selling pressure and will go down.
  4. Stochastic indicator is still in strong overbought range indicating bearish trend reversal.
  5. As I mentioned in my other posts, the European debt is not over and it will come back – it is actually coming back as Italy, Spain and Portugal have problems which were shadowed by Greek’s issues and which weren’t solved yet.
  6. Earnings season – this actually is the only point which can turn the market back on uptrend track. If we get good news in upcoming weeks, all (short) bets may be off.

SPY
Click to enlarge

Pay attention to the market correlation with VIX. If we can state that the market is cyclical, it will repeat this pattern over and over. Of course, there is no guarantee, that it will go exactly as depicted, but all indicators I am looking at are signaling that it will.

And as I said above, there are many things which may change the trend, such as earnings. That is the thing I cannot predict (as well as the whole market of course) and that can change everything. All I can do right now is to react and be prepared to what the market will be doing, take some profits off of the table, buy more puts, or reverse all my trades to bullish. Right now I am still bearish in short term period, shorting SPY, but bullish in VIX (since it acts the right opposite than the market).

Happy trading

Posted by Martin July 07, 2011

Stock market overextended

Stock market overextended

Get Access For 14 Days Only .95 Today the market was yet another surprise. S&P 500 gapped up and basically broke through the major resistance level. All happened because of job claims data. When I reviewed them I didn’t consider them that amazing. Apparently good enough to bring another wave of enthusiasm to the market.

But the volume was once again quite low. During summer days it is typical that the volume is lower then during the rest of the year, but we should not see that low volume with such run. In my own view, this market is overdue for a correction.

 

SPY

 

As I mentioned in my previous post, the last week run was too fast and too extended. When comparing the chart to the similar run in nearest history we can see, that we ran up to the same highs within a week. The market typically ran that high for a whole month! Then in March 2011 we had a large correction and then a recovery. At the beginning of April we had another downturn dip and then we continued back up. At the beginning of May 2011 we had a nasty correction and last week and a half we recovered almost all loses. If we believe that the market is cyclical, we are due for a small break.

I am expecting the market to correct back down to either a 50 day SMA or maybe even lower to April’s low.

However, there may be a catch here. This bullish behavior will attract new buyers and we may actually skip the correction! I am still bearish, but cautious. If new positive earnings news enter the market, I will have to change the side of the market.

Happy trading

Posted by Martin July 06, 2011

Where is the market heading now? Down?

Where is the market heading now? Down?

That’s a million dollar question investors are probably asking now. I am asking as well. The truth is that last week move upward was impressive. They say, it was the best 5 day move since 1928 (I think). But was this move a bullish reversal or is this a bearish correction? I think, now is the time when this question will be answered.
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