Tuesday, June 26, 2007

When It Seems Easy, Feel Queasy...

I began this blog over two years ago, and I think that it has made me a better trader. Having to step up to the podium each day and offer up opinions (which are subject to scrutiny, disparagement, and future review) makes me think long and hard about the market. And the occasional public floggings I have received have imbued with me a healthy dose of humility that I think is essential to profitable trading.

Trading profitably has become far too easy recently for my liking. If bearish trades start becoming like shooting fish in a barrel, I know it's time to take profits. There have been times in the past.......and this is very common among traders.... when easy profits encourage more trading. And the tide starts to turn against you. So you pile on more. And the losses start to pile on. And, before you know it, all your fantastic profits from the last downturn are M.I.A. I really don't want to go through that again.

So as the trading day ended, I was kicking myself for having such a substantial position of puts on the Russell 2000 in place. There are some areas in my life where "irresponsibly large" is welcome, but options positions is not one of them. Let's just say I hope I don't wake up to a huge gap-up in the indexes. It could happen.


The basis for my nervousness.......besides my own angst........is the $VIX. Just take a look as this multi-year graph. For ease of viewing, I have circled peaks and troughs. We have certainly had $VIX levels higher than the present one, but let's face it, this is pretty peak-y. As I said: I'm nervous.


The Russell 2000 is below its supporting trendline, but this trendline isn't horribly significant. In other words, I don't put a heck of a lot of weight into the fact that it is broken. I'm glad it's broken, to be sure, but there's still a fair amount of support at these price levels.


One way to look at the market is that, for the past month or so, we've been caught in a trading range, and we are at the bottom of that range now. I've highlighted the range area on the S&P 500 daily graph here. I do not think we would break into new highs from here, but we might wind up with a triple top or at least partially retrace our way back up near the former highs.


One could look at the market another way........it is pretty easy to lay out a massive rounding top. Just look at the intraday chart of the S&P 500, where I've embellished it with probably one of the worst arcs drawn in human history. (I am not much of an artist).


Returning to the $VIX, however, the zoom upward has been swift. And if the market settles down and starts marching upward again, the premium values built into options are going to shrivel up faster than Strom Thurmond's johnson on a chilly southern evening.


OK, a few stocks. Stocks like CROX! I have, as I've mentioned before, lost some cash on buying CROX puts before. Fool that I am, I gave it another go today. My puts are slightly profitable. I was inspired by an article this week in Barron's. They say that easily 20% of this stock's value could be blown away just by right-sizing it to its industry. Plus, I think it's a fad.


One similar shoe fad which is already "post-bust" is Heelys (HLYS), those obnoxious shoes that kids wear with the wheel on the heel. As you can see, the stock is doing poorly.


I hate to mention JC Penney every day, but this continues to do beautifully. I've highlighted my price target. The puts I bought on this are up huge.


Vulcan Materials (VMC) has a plainly defined range which seems to be breaking down. I'm short this, and it's got a nice ways to fall to the trendline.

40 comments:

DirtyTed said...

"when it seems easy, feel queasy"
tim, it may be time to get out of those JCP puts, demoralization and panic is apparent in the stock. Look at that high volume on todays action.

Gary said...

Tim,
Congratulations on one of your most thoughtful posts. The markets are short term extremely oversold. The SPY and DIA both triggered a VTO trade today. If the COT is still long this week then the smart money just got about as good of a buying opportunity as it gets. If it flips to short then the probable bounce will be a good shorting opportunity. Now is not the time to press the down side. IMO

TOMTHETRADER said...

Tim.
It was important for the bears to hit the market today and hit it hard ..they did their best but they could not muster a break and I am looking for a gap down open to go 100% long. The pessimism is finally back enough to get a rally and now ...with just a little help ..the Bear suit comes off !!!

Best Of trading

TTT

Tom

SimpleTrade said...

Lot of traders (bulls and bears) are expecting a rally, and market continued to move lower, sell into strength.
This market tells me something is going on, it may crash, since almost everyone expect a rally.

Momo Fader said...

I won't even try to claim I know which way the markets go tomorrow, but I will say that if they don't gap up at the open and head up after that, watch for trouble. I think we're at a major inflection point here. SEC hearings were not favorable to mkt avgs. Will FOMC be? If June lows get taken out tomorrow, that forebodes ill.

Jake, I was actually referring to the Dow futures (YM SEP ECBOT). Markets closed with YM priced around 13448. Within 10 minutes they were as low as 13398. Dow closed at 1337, and futures have had a premium compared to indexes for as long as I can remember. Currently at 13405.

My best guess is that the news of SEC investigations into CDOs was disseminated after the bell.

WASHINGTON, June 26 (Reuters) - The U.S. Securities and Exchange Commission has opened 12 enforcement investigations into matters surrounding collateralized debt obligations (CDO), the agency's leader told a Congressional panel on Tuesday.

It is not at all common for futures to crap down like that after the bell, without a nasty earnings report from a component member. Didn't see any nasty ERs or nasty reactions to good ERs today. This is worth noting.

johndeere said...

REady for the gap tomorrow. This market is cooked and ready for a big drop. I went double short at the close.

Arkady said...

tim,

what is your plan tomorrow is we gap down?

-arkady

Momo Fader said...

Tim, I think if you look at a 10yr monthly chart of the VIX you might form a different opinion. We are seeing a clearcut case of mean reversion here, or if you prefer -- a breakout.

VIX 10yr monthly

Tim Knight said...

"what is your plan tomorrow is we gap down? "

(a) smile
(b) keep those stops nice and tight

JakeGint said...

This market tells me something is going on, it may crash, since almost everyone expect a rally.

Everyone except the fur covered denizens of this board?

Tim Knight said...

"Tim, I think if you look at a 10yr monthly chart of the VIX you might form a different opinion. "

First, thanks for forming a hyperlink people can click.....it's appreciated.

I've got access to the same long-term information on the VIX. Don't get me wrong - - I think we may have seen the top, and we might be headed into much higher VIX territory.

But for the next short while - - - maybe a few hours tomorrow - - maybe a few days - - who knows, maybe even a week - - I'd say we've got the groundwork laid for a bounce higher (but not to a new lifetime high).

At that point, I'll be falling all over myself to get short again.

If we just keep falling tomorrow, I'm going to start to get really puzzled.

Tim Knight said...

By the way, since I was talking so much about Ratatouille yesterday, I wanted to mention that you can go to iTunes and download for free a 10 minute preview of the film. Well? What are you waiting for? Go get it!

Tim Knight said...

In case any of you think I'm an iPhone basher, make no mistake, I will be getting my JesusPhone at 6 p.m. Friday.......

The reviews are just coming in. They sound really positive.

Momo Fader said...

First, thanks for forming a hyperlink people can click.....it's appreciated.

The chart is better when I'm logged in to stockcharts site. Too bad. Much cleaner signal on the monthly candlesticks. Sure looks like a rising three methods too. I wouldn't be surprised by a move to 25 on the VIX.

Think you meant bottom instead of "top" but perhaps not.

I'd say we've got the groundwork laid for a bounce higher.

You think they're going back to the same bag of tricks at the Fed statement? Bears been beaten down so many times by rallies off support, and many ambiguous FoMC statements and data have led to glorious euphoria? What happens if this time they monkey with the "containment" language? To my lying eyes the subprime problems hardly appear contained. Perhaps this puppy hasn't learned my lesson yet, and I need to be beaten again. But I'm cautiously optimistic that the groundwork is laid for a sharp sell-off and more talk of the t word.

tommy t said...

Gary...how is the market very oversold? on a 5 day RSI? geez, look back to bigger down moves and what happens when one buys cause the 5 day RSI is below 30. Very oversold is when the 14 day RSI is less than 20!

Gary said...

I just meant that short term the market is very oversold. The VTO trade that I mentioned is now in play on the DIA and SPY. I have a description of the rules on the smart money tracker if you want to take a look. Sure the market can contiune down from here. However the COT is much more bullish than it's been in many years. Long signals have a very very good track record. That's not to say that they can't just totally blow it this time around. It definitely a possibility. However another possibility is that the smart money knows something we don't, like maybe the Fed is going to lose the hawkish tone or they are going to flood the market with liquidity, etc. etc. The Fed has been fighting the bull for 5 years now. They know what has happened in the past and so far their efforts have been successful. I don't think they will give up now. If the COT was wavering in the middle ground I could give it the benefit of the doubt but as of last week they were buying like its 1999 again.

johndeere said...

"If the COT was wavering in the middle ground I could give it the benefit of the doubt but as of last week they were buying like its 1999 again. "

Very disturbing sound if that's the casee.

william bills said...

Tim,

While I am still very much a bull, I think you could be in position for a very handsome score here. A nice correction here is exactly what the Dr. ordered. Don't wimp out on a winner! 1450 on the S&P "should" be a gimme. I think the market is spooked, and with the lack of liquidity around the holiday, it could get real nasty.

However, I think your right to be nervous. I don't like the VIX this high - relatively speaking.

I have to admit that I am clueless about the Hans Blix reference with the VIX.

Tim Knight said...

"I have to admit that I am clueless about the Hans Blix reference with the VIX."

For some reason, the phrase "Hans Blix digs chicks and VIX" was stuck in my head. Just silly/stupid.

AssetStrategists said...

As of now, I may be crazy, but here are my

Current Short Positions:
AL
AMLN
BAC
BEAS
FPL
HNT
LEH
LEN
MTH
RAIL
UIC
USG

I am off for two weeks vacation beginning this weekend and may not have net access so I plan to go flat by Friday. I may miss two of the more exciting weeks of the year but I know that the market will still be there when I get back with more excitement and opportunity to come! Happy Early Independence Day wishes and here's to more profits before Friday's close!

JakeGint said...

"How you like dem appres, Hans Brix??"

Now you've got THAT movie in my head...

JakeGint said...

CROX finally getting the smackage.

Brett said...

Here's my crack analysis, after an hour and a half of trading today:

1) VIX is at resistance and despite a down market day, is down nicely.

2) QQQQ, SPY and DIA all UP today.

3) QQQQ bouncing off nice trendline

4) DIA and SPY at support

5) market oversold, at least short-term.

So looks like Dow up 150 today.

And everyone on TV will be talking about new highs. Is it warranted? Probably not. But it's going to happen.

Tim Knight said...

"Now you've got THAT movie in my head..."

I've just been waiting for the Dow to fall 800 points one day, just so I could name my post, "Surprise, Cockbags!" Only Team America fans would get it.

ttthedgefund said...

TIME TO CUT LOSSES TIM, RUSSELL GGOING TO NEW HIGHS THIS WEEK. DO NOT TAKE A CHANCE AND LOSE YOUR GAINS ALLTOGETHER.

JakeGint said...

T -- I think that headline might cost you your considerable female fan base.

But I'd love it.

_______________

What'd you do, ban Tuna Can Tommy?

Brett said...

Hard to call that an 'insightful comment', isn't it?

Tim Knight said...

"What'd you do, ban Tuna Can Tommy?"

No. I wish I could. I can't lock out individuals. I can either moderate EVERYONE (I don't have the time) or let the clowns in with the intelligentsia.

As for alienating the female fan base - - Leisa would forgive me. And CyberCyl is too much of a babe to hold a grudge.

Tim Knight said...

Here are some early reviews of the JesusPhone. Looks like the network completely sucks, but the product is awesome.

Gary said...

JohnDeere,
Not so disturbing when you consider that the Nazdaq was up 80% in 99. From what I can see the market is up 26% from the summer bottom of last year. So far all it has managed is a meager 3% pullback. To me it looks like this market is so strong it can't even manage a normal correction. The commercials have been increasing longs as the market has been rising. That doesn't happen very often. Normally they hedge as the market rises. When this happens it is normally about as bullish a siganl as one could ask for. Vice versa on the short side when they increase shorts as the market falls very bearish. Thats what they did from 2000-2003.

johndeere said...

How does it feel to give back them gains Tim? I knew the market would turn in favor of us bullish players. Long the NQ and ER2. Hope you did not hold them shorts.

Tim Knight said...

"How does it feel to give back them gains Tim?"

How does it feel to hold on to your undersized member while you neglect to read my post? I specifically said I anticipated a big move upward today.

Idiot.

Tim Knight said...

johndeere wrote yesterday afternoon:

"Ready for the gap tomorrow. This market is cooked and ready for a big drop. I went double short at the close."

Your posts are valueless. Please stop wasting your time, and ours. One moment you declare the market is going to collapse, and the next you taunt me for supposedly losing gains in the face of a rising market.

Go away.

JakeGint said...

Maybe he's related to Tuna Can Tommy and they were just having a bear suit party last night.

________________________

That VTO trade is working out nicely, btw.

johndeere said...

Sorry for your huge losses.

JakeGint said...

Tractor Boy sez:

Sorry for your huge losses.


____________________

I guess that's what happens when you go "double short on the close."

JakeGint said...

Tim, I actually found this on another financial blogger's site (thanks Trading Goddess), but I think it's a perfect one for your video pantheon. Oh how glad I am there were no digital video cameras around when I was growing up:

Flash! King of the Universe!

johndeere said...

I may be out 5k today but my strength and faith are still with me inside. Much better than being a bear and hoping for misery for the world. Go to hell bears.

Gary said...

Too much talk of a double top and I totally missed what was actually happening. A little post on the double top theory on the smart money tracker this evening. Of course this could all change tomorrow and the double top could prove correct.

Market Speculator said...

too bad the iphone didn't have jesus hair hanging out from it...

I suspect we'll have very light volume coming into tomorrow's action. Everyone will be waiting for the Policy Decision by the FOMC...fireworks!