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Posted by Martin August 05, 2011
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Investors in panic dumping bath water with a baby


Amazing days in the stock market. A relief rally diminished this morning. Are we at the bottom yet? People predicting a doomsday or recession are now stronger. Some even are saying that the US has never left recession. Are we really at the same situation or even worse that we were in 2008? I do not think so. SPY fell below $118 level and bounced back, will this be the beginning of a bounce and the end of this rock-fall? Maybe. Let’s see where the market ends at the end of the trading session.

Even though I also think this market is poisoned to go lower, but not this fast. Most likely on Monday or next week we will see some relief. But do not take it as buying opportunity. Personally I will try to profit on this rally in short term, but then I will be reversing back to bearish positions.




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Posted by Martin August 04, 2011
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Market in free fall – are we back in recession?


If you are thinking to be bullish these days (start buying stocks) I would postpone it a bit. We may see more on the downturn in this market. Tomorrow we will see some labor data published and they may stop this fall, but do not expect it much. I would say that data will be worse and we will drop further down.

A few days ago I was expecting the market to drop to 126 level (looking at SPY ETF, which tracks S&P 500. S&P 500 will be at 1260 level then). Well, we broke down fast and furious. Yesterday I was expecting a bounce for today’s trading back up to 130-ish level and then continuing down to 123-ish level. Not even close. We erased the hammer candle signal without even blinking an eye. The new support at 123 didn’t hold for long. As far as now (11:48 ET) we can see another very long bearish candle and sloping down.

News and media are now talking about recession. Panic is rising. When taking look at VIX you can once again see a long spike up created by a long bullish candle (currently at 28.13), which is similar to the spike which happened in March 16, 2011. Does that mean that we are doomed? No, not at all. This actually mean that we may be bottoming.

So how does that work with my previous posture stating that we are heading even lower (by breaking $123 level I am expecting to go to $118 level)?

Well, if you take a look at the market, we dropped huge within 7 trading days. The largest drop since October 2008 which erased all year-to-day gains of the market ($1.1 trillion of value in just 7 days!!!). Taking the speed and depth of the drop, this market has to correct and bounce back. When everyone is panicking and speaking about recession, we are close to the bottom of this 7-day slide. I cannot say when that happens. Taking into account tomorrows labor data (I am expecting them to be bad), we may bounce on Monday. If so, it will go up to $126 level or near it. However, we broke down on high volume and I in my opinion we are officially in bear market. So overall, we will go down, but we will see bounces (the same way as in uptrending market we see dips). So the expectation is that we will go back up to 126 level, where we bounce down and continue to 118 level and so forth.

So how to trade in this market?

It is tough question. For swing trading and short term trading this doesn’t matter. Swing or day traders can trade the market both ways. But what about 401k or IRA accounts? I do not know yet, but I am thinking to move some of my allocated money into cash equivalents and stay aside. This ride donw the hill may be long.




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Posted by Martin August 04, 2011
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SPY sell-off


When I said “Everything can happen” yesterday, so today it happened. I expected a bounce, which haven’t arrived. Instead the market opened with a gap. It was a bit obvious last night when watching futures where we will be heading at open.

So what am I doing? As I said yesterday, I have my stop loss which wasn’t executed, so I am still riding my puts and making money on this downtrend. I will wait where the market closes today and adjust my stop loss accordingly.

The market is heading to the $123 support level and right now it looks like we are almost there and actually a bit higher than that. We didn’t break through the yesterday’s low, so I guess that this low is our new support. Will we bounce off of there?




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Posted by Martin August 03, 2011
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S&P 500 reversal or further downtrend?


Yesterday S&P 500 (represented in my posts by SPY) broke through $126 support level on a high volume. It did exactly what I was expecting a few weeks ago when I was thinking it would go all the way down to this support level. I was wrong on a little bounce circa a week ago, but I am also learning trading with the trend.

Yesterday’s trading was spectacular on one thing. You may have been impressed by media, that all the downtrend was due to the US debt ceiling problems, but when the deal was reached, the market opened with a gap up, but closed deep below 126 level. That proves that it was the economy and not the debt ceiling issues which were more important. And data coming out weren’t really any positive at all.

However, we are once again in oversold territory. Take a look at the market and you will see a huge short term uptrend and immediate short term deep decline. We are due for a bounce, a rally relief.

If we are awaiting a rally relief, what actually does that mean?

Well, the market must correct itself. Nothing goes up or down indefinitely. After a long or strong uptrend, there are typically dips, after a strong downtrend, there are bounces. This time we will see a bounce. Today’s trading, when you take a look at candlestick chart, shows a hammer candle after long downtrend. A candle with a long wick (shadow). It shows, buyers were willing to step in and actually overrode sellers at the end of the day. This should be a typical exhaustion day.

But how long will this rally take?

I think we will go back to 130 level (or 50 day SMA). It may of course continue higher, but it may bounce from that resistance and continue down.

Why down?

Well, everything may happen, but take a look at the overall market. We are still in sideways pattern (since January 2011), but it is evident that we are slowly turning into bearish trend. We are completing head-and-shoulders pattern and creating new lower highs and lower lows. The $130 resistance level will be important. If we bounce down from it, it will be a confirmation that we are reversing in bear market. If we break up and continue to 135 – 136 level, we still may have chance to consider head-and-shoulder pattern as continuation pattern (if we break through 136-ish level) and we may see a new bull trend. But economic data are not that strong so far to have enough power to move the market that high. But everything can happen.

So what can we expect?

As I said, everything is possible, but my expectations are that we are now exhausted (long hammer candle on volume spike) and we will go probably up to 130 level. There we will probably stop and go down again. In the light of this expectation I am going to reverse my positions, sell put options and buy call options to ride this trend up. How long it will take I do not know as well as if it even reaches that level. Time will show. However, I may be wrong and therefore I am adding a stop loss order on my current put positions and I will be waiting for reversal confirmation before I buy calls.

Happy trading




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Posted by Martin July 21, 2011
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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?




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Posted by Martin July 21, 2011
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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.




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Posted by Martin July 20, 2011
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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.




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Posted by Martin July 19, 2011
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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.




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Posted by Martin July 19, 2011
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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.




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Posted by Martin July 13, 2011
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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.




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