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Quote Critique

"If all the economists in the world were laid end to end, they still wouldn't reach a conclusion."
- George Bernard Shaw (Irish dramatist, 1856-1950)

Sadly, this playwright tells more truth about economic divination than most textbooks I've read. This quote is too good for commentary, so I'm gonna call it quits and watch some porn.

One Chart to Rule Them All

The market remains incredibly weak, and rather than post a bazillion charts, here is one that tells much of the story.

The direction of the NASI remains down, and this keeps me from allocating money to the long side overnight.

Now that I'm back in NYC, I'm busy as hell meeting people and doing stuff that I would otherwise skip in Seattle. Thus, the time spent on this blog over the next 2 weeks will be more sporadic than I'm comfortable with. Yet, I'm sure it is for the better, for one must find inspiration in life to create new things. Quote critique will be up daily, but there will be significantly less ratio analysis.

Quote Critique

"With globalization, the big [countries] don't eat the small, the fast eat the slow."
- Thomas L. Friedman (NY Times foreign affairs columnist, referring to the Arab nations)

A cryptic quote without context, I can only assume Mr. Friedman was hungry when he wrote this commentary. Using words like fast, slow, big and small, confuses me because I have no idea what sort of metrics he reviewed to formulate this opinion. IMHO, countries that produce and utilize cheap, efficient weaponry, outlast the competition in the game of global survivor.

Bong Break

A tip of the hat to Adam Warner at the Daily Options Report for re-posting this awesome clip. I'm glad the fellows at Clusterstock keep tabs on the important stuff.

CNBC: The Whole Country Needs A Bong Break from AlleyInsider on Vimeo.

Clearly Smoking Securities is ahead of the curve.

Ratios to Reason $SPX

A weekly look at 5 indicators that depict the current market environment.

$BPSPX:$VIX = 97.31

$BXM:$SPX = 70.22

$CPMKTE:$CPMKTB = 39.67

$SPXA50R:$VIX = 87.58

$SPXHILO:$VIX = 15

The only glimmer of bullish hope my indicators offer is a 50% increase in the $SPXHILO:$VIX since my last analysis here. Otherwise, the bear market remains intact, and until the VIX can make a sustained move down, I suspect we will see increased market weakness. I'm eager to see how Barclays new volatility ETN's will trade, especially in light of the markets lack of confidence in their risk management, reflected by the $3 stock price. New products offer new strategies, and though their entry seems late to the party, the potential for increased diversification is wonderful.

Portfolio Theory $DBC $EEM $IWN $IYR $PLW

A look at the 5 least correlated liquid ETFs.

Commodities have stabilized over the last two months, but DBC technically remains in a downtrend. Long positions are remain speculative, but my gut tells me that there is more risk being short than long.

The bounce I was looking for in emerging markets never materialized, and EEM remains in a downtrend. The potential for a massive head and shoulders pattern remains, but caution is warranted for those looking to invest abroad.

Small cap value stocks remain in a downtrend, but there isn't much volume to confirm the recent price action. IWN continues to flirt with the lower Bollinger, so there is little reason to look for upside, even though a new X has been printed.

Real estate remains the weakest sector, and volume appears to increase during sell offs, confirming my bearish outlook. IYR is not showing signs of recovery, and that does not bode well for the rest of the market.

Despite market weakness, Treasuries weakened this past week. This is a bullish sign, and I love the prospects of TBT. Nevertheless, a strong bounce off the trend line is likely, so another run to risk free yield may be in the works this week.

Day trading remains the name of the game, but in the next few weeks, I hope to reveal a longer term strategy that takes advantage of the incredible volatility. TBT remains my favorite long, but I'm still unwilling to hold large positions overnight. The real estate and financial sectors remain the primary tells for the market, but also look for small cap out performance if a bullish trend emerges.

Quote Critique

"The big guys are the status quo, not the innovators."
- Kenneth L. Fisher (Forbes columnist)

Good quote, asshat speaker. I'm flying tomorrow, so rather than bore you with a personal attack upon Mr. Fisher, I will ask you to pray. Pray that I don't lose both engines to a flock of birds, that the fellow next to me is not a fat nut muttering crazy threats, and that his smelly wife can keep their colic baby under wraps. Ask your higher power to grant me an attractive stewardess who likes getting railed in the bathroom and slips all her fliers extra whiskey minis.

If all the above are made so, I will slaughter 1000 oxen to gain the favor of the gods, making the market rise. Should my conditions not be met, the market will crumble like the walls of Jericho, and I will dance amongst the corpses of idiot traders. Time to pack flammable liquid and ammunition into my luggage, ciao!

P.S. Market still looks terrible, but with the volatility higher than Keith Richards, anything is possible. TBT remains my favorite candidate for upside potential.

Quote Critique

"Writing a book is an adventure. To begin with it is a toy, an amusement; then it is a mistress, and then a master, and then a tyrant." - Winston Churchill (British statesman, 1874-1965)

This quote appears to bear little relevance to trading, but if blogs are like books, then I'm still in the nascent stages of amusement. In my naivete, I do not see how a labor of love turns into a tyrannical endeavor, but that is a secret time may reveal.

Manic Markets

The market continues to churn in a wide range, but there are some signs of change.

Hedged trading has begun under performing the underlying index, signaling short term bullishness. Volatility is falling, but remains high, so stay cautious.

Tuesdays selling may be a capitulation point considering the ratio of down/up volume.

Up/down volume on Wednesday is in an uptrend, so look for markup and accumulation.

The NAMO has stopped falling, and though it remains below 0, it could turn bullish fast.

TBT has showed impressive strength in the last few days, even during the sell off. This is my favorite long candidate, target ~50.

The weakness in the VIX is encouraging, but one day does not make a trend. I'm still very cautions, and more liable to sell rips than buy dips. Nevertheless, if Treasuries continue to fall, I will begin to get long.

Quote Critique

"People become attached to their burdens sometimes more than the burdens are attached to them." - George Bernard Shaw (Irish dramatist, 1856-1950)

Revealing wisdom by reversing the order of words is a tried and true method, and the technique borders cliche due to its prevalence. Nevertheless, Shaw hits on an excellent point that relates to trading in a tangible way.

You get what you want out of the market. This is true for gains and loses. The propensity for individuals to ride a cratering security to zero belies an unconscious desire for emotional stimulation. Complaining about loses is a symptom of cognitive dissonance, and it echos Shaw's sentiment; many are unwilling to surrender that which ails them.

Today's Twitterd Tickers $FAZ $C $BAC $AAPL $STT

Here are the tickers making noise on StockTwits.

Apple looks ready to plunge into the abyss. If you're a regular reader of Smoking Securities, you know I think AAPL is a dog. $27 cash is great, but using using a low estimate of 4.66 EPS next year, a 10 PE makes this a $74 stock. Don't be an emotional investor attached to a brand.

Five days ago I posted about the dangers of BAC here. The message of the market is clear, this is not a place for long term investment. Any purchase of BAC stock is a speculative short term bet that takes advantage of volatility, not improving fundamentals.

Although I expected Citigroup to print a 3 handle, I didn't think it would be in the 2.80 range so quickly. This beast remains a destroyer of long term equity, and should be treated like BAC. Investors relying on TARP banks to pay dividends are playing a dangerous game.

My last mention of FAZ was here, and so far the trade is moving in the predicted direction. The uptrend in FAZ is relatively new, so further deterioration in the financial sector seems likely considering how much room this has to run. Nevertheless, keep your position size up to date because the increasing daily movement will easily shake out emotional bets.

State Street is another toxic financial that should be treated with caution. A sharp rally into resistance will occur, but there is no sign of reversal as the trend remains lower.

Keep your Benjamins close. The market continues to exhibit risk aversion and volatility. This environment requires keen position size adjustment as the daily swings continue to grow. Small bets can reap huge rewards because the tape is relatively noisy. Moreover, poor capital allocation leads to emotional trading habits that increase the risk of ruin when luck goes bad.

IMHO, the collapse of BAC, BCS and UBS threatens the viability of ETFs and ETNs like SKF and OIL. Swap agreements and debt have credit risks that may appear overnight, though some argue that is possible for the USD. Beware potential liquidity issues for leveraged products that adversely alter the tracking of the underlying index if counter party uncertainties arise.

Historical Indeed

A new guy moves to the White House every eight years. I think the real news is here; today was the biggest Dow drop on inauguration in history.

Volatility is screaming upwards, and clearly fewer stocks are in bullish formations. The tape still warrants selling the rips, and I suspect we're in for bigger dips.

Buy write strategies continue to outperform the underlying index, indicating bearish sentiment as the market seeks to hedge long positions.

The momentary bounce in the NAMO was snuffed out by torrential selling. Unless you can move quickly, defense wins this game, so don't jump on the equity train.

The scariest chart I follow is the NASI. A run to the LEH collapse lows would be a doozy. Like all of the charts in this post, I have no confidence in any bounce until I see an X.

Amid the increasing volatility, fewer stocks are trading above the 50dma, so investors will probably continue to sell their increasingly worthless stocks.

The collapse of RBS and BCS should be making headlines every 2 minutes, but all eyes and ears are tuned to the $170 million party in D.C. A massive liquidation could be in the works as Britain finds itself trapped between a collapsing Pound and hemorrhaging banks. Cash remains king for all but the most nimble traders and disciplined short sellers. Breath deep.

Quote Critique

"A market is the combined behavior of thousands of people responding to information, misinformation and whim." - Kenneth Chang (NY Times journalist)

Misinformation and whim probably account for more market trading than I'd like to imagine.

Portfolio Theory $DBC $EEM $IWN $IYR $PLW

Here is the weekly rundown of the 5 least correlated liquid ETFs.

DBC is showing some signs of life on minuscule volume. Intuitively, I'm bullish commodities, but since they remain in a technical downtrend, I remain cautious.

Emerging markets are bouncing within a newly formed downtrend. EEM looks capable of rallying from this point, and may be forming the right shoulder of a HS pattern.

The small cap value sector is showing a light volume bounce, but remains in a downtrend. Short term optimism for IWN isn't unwarranted, but stay cautious.

IYR still looks like an unmitigated disaster, but it is putting in some upside work. Real estate remains incredibly volatile, so a run up to the upper Bollinger may be in the works.

Treasuries have started to show some convincing weakness, a new low would be a boon for equities. Though PLW is in an uptrend, I'm preparing to buy TBT.

Equity markets are incredibly weak, but the potential for a rally abounds. Although few stocks are in bullish formations and volatility remains high, a bounce through inauguration is not out of the question. This remains a day trading environment as weakness in the financial sector can turn a 3% rally into a 4% dip.

Quote Critique

"The public may boo me, but when I go home and think of my money, I clap."
- Horace (Roman poet-critic, Epistles, c. 20 BC)

The boos of the public don't concern me, but I plan on dying penniless, surrounded by the people I love. Money has incredible value, but only if you can give it to others. Perhaps I'll feel differently in 10 years, but clapping alone doesn't seem like much of a life.

Rally Shmally

Call me a complacent bear, but I think the market has an ass kicking in store for the bulls.

Yes, that's a new low for the banking index. Yes, there may be a major pop due to government shenanigans. Yes, it will probably be a fantastic shorting opportunity.

Stocks on the NYSE are increasingly volatile and less bullish, so until I see some X's here, I'm selling the rips.

If banks can plumb new depths, why not housing? This too looks ripe for bear raping rally, but in the end, this too will fall.

Here is the real bearish smoking gun. The NASI has made a new O, and the floor is a long way down from here. Grab your parachutes!

Bonds failed to rally with the rest of the market, and I trust debt traders more than the equity schmoes. A Treasury sell off will be a huge tell for a sustained market rally.

Despite my bearish leanings, I'm actually long a smidgen of URE. I successfully shorted it towards the end of the day, but over covered my position, and didn't realize this till after the close.

Tomorrow will be a big day, and with the VIX floating around 50, I imagine the swings will be crazy. According to my indicators, the environment still favors cash and short term trading, so there is no need to rush into new long term investments.

Bullshit is $BAC

Bank of America (a.k.a. Countrywide Lynch) "surprised" the Street, and cratered to a new low.

This chart has been screaming sell for months, and unless you have a short investment time frame, stay away from this monstrosity.

The market is putting in a helluva rally at the time of this post. Volatility remains high, so my instinct tells me that this will be an opportunity to get short. Nevertheless, I'm not fighting the bulls until their demand is satiated (I already lost 10 cents shorting URE). I'm in cash, trading tiny positions because I've lost my mojo in this schizophrenic market.

Quote Critique

"Excellent firms don't believe in excellence - only in constant improvement and constant change."
- Tom Peters (In Search of Excellence)

Constant improvement and change is an unfortunate but necessary condition of existence within the rat race. It requires a degree of self loathing to catalyze the desired transformation, for if one is at peace, no metamorphosis is necessary. Alas, adaptation is critical to the survival of any system, and unless contentment is being in a loin cloth under the banyan tree, 'tis prudent to improve and change.

Cash Is King

Market conditions continue to deteriorate as panic spreads around the globe.

My SPX indicator made a new O, signaling increased volatility and fewer stocks in bullish formations. Buyers should step to the sidelines and wait till the current rush to safety subsides.

The buy write index continues to outperform the underlying SPX, reinforcing my bearish sentiments. A break of the upper Bollinger looks to be in the works, so stay defensive.

Equities have entered a new downtrend relative to bonds, so despite talk of a Treasury bubble, there is no appetite for risk.

The Dow Jones World Index is now below the 10sma, and since the global equity markets move in harmony, buyers should beware the primary global trend.

Fewer stocks are trading above their 50dma amidst rising volatility. Any trading on the long side is best left to billion dollar funds that can provide the liquidity being sought.

Another wave of fear is sweeping the markets, and there is no telling when it will stop. The possibility of another massive bank failure looms; Citigroup can't catch a bid despite a headline deal with Morgan Stanley. SRS and FAZ are the best vehicles for making money intraday, but the incredible volatility requires strict discipline and mental stamina.

No Jobs at $AAPL

Word on the Street is Steve can no longer run the show at Apple. Here's the Bloomberg scoop.

Though this chart doesn't reflect the new low of $76.51, it does reinforce my belief that surprises tend to move stocks in the direction of the primary trend.

Participants long Apple stock are prone to frustration and panic due to the overwhelming downtrend. Tomorrow probably won't mark a long term bottom, but it could be an opportunity to play an upside bounce once everyone stops freaking out.

Apple remains an emotional stock due to beliefs of its fundamental value coupled with its overwhelming technical weakness. This sort of divergence creates irrational participants who become addicted to the biochemical responses that accompany fear and greed. Check out the posts on StockTwits to get a feel for the psychology of interested participants here.

My feelings about Apple have kept me away from this train wreck, but the lesson here is incredibly valuable. Don't let intuitions about fundamental worth supersede the objective judgment of price action.

Quote Critique

"History is a collection of agreed upon lies." - Voltaire (French philosopher, 1694-1778)

Cynicism from an imprisoned drunk drug abuser is generally unpleasant, but it is easy to like the words of this famed Freemason. The conspiratorial nutcase in me screams "Dead On!" but rationally, this quote is snarky wisdom that builds nothing. I believe it, but now what?

Over Trading

Tuesday was a lesson on the virtues of patience and discipline as I unsuccessfully tried to short the market. Things still look grim for the bulls, but there is too much churning for me to make money as I get frustrated switching positions and paying commissions for pennies.

Over trading is more than taxing on my account, it strains my mental stamina. The nervous energy from jumping in and out without the benefit of profits is wholly unsatisfying, and leaves me vulnerable to more mistakes as my P/L goes red.

Thankfully, I have a ukulele by my side at all times, and an assortment of kooky books to thumb through. Sometimes, the best thing I can do to trade is to not trade at all.

Quote Critique

"There have been three great inventions since the beginning of time: The fire, the wheel and central banking." -Will Rogers (American humorist and showman, 1879-1935)

Being a man of the times, I'm more partial to Bic lighters, bicycles and the Internet. Nevertheless, I can't deny that central banking is good to those who run the show; three cheers for fractional reserve lending! Corruption and politics aside, I love the Fed because their Reserve Notes smell good, look pretty under UV, and are accepted in any Banana Republic or war zone.

Ratios to Reason $SPX

In an effort to create more structure for this blog, I'm re-posting 5 charts that depict various trends within the $SPX. In the future this selection will be posted during the weekend.

$BPSPX:$VIX = 139.61

$BXM:$SPX = 68.88

$CPMKTE:$CPMKTB = 41.34

$SPXA50R:$VIX = 122.16

$SPXHILO:$VIX = 10.9

Why am I regurgitating this mass of pretty but confusing information? The charts represent aspects of the market that are not revealed by the price of the SPX. 3 of the 5 graphs relate percentage:volatility, and currently they are bearish, trading in downtrends towards 0. If you're buying stocks, it's prudent to wait for a growing number of bullish stocks trading above the 50dma making new highs.

The other two illustrations are a bit more conventional. One measures the spread between a buy write strategy and the underlying index, creating an inversely correlated derivative of the SPX. Lastly, $CPMKTE:$CPMKTB is the relation between US Equities and US Bonds, useful for discerning the appetites of investors. Both of these indicators are signaling more downside to come.

In time, I hope to find a better method of aggregating the information presented in these graphics. Any suggestions towards such an end would be greatly appreciated.

Today's Twittered Tickers $AA $C $FAZ $SRS $USO

Here are the tickers making noise on StockTwits

Alcoa is pulling back into support, and technically remains in an uptrend. This may be a good long candidate once the market stabilizes, but stay away until another X gets printed.

Time for a wholly spurious prediction. Citi will go to three and announce there is no problem because their financial position is sound. The next day they will be bought by (insert remaining bank here) for the price of a Snicker.

FAZ looks like a strong candidate FTW as we enter another wave of financial obliteration.

I've been shorting IYR rather than buying SRS because I'm a huge pussy. That will stop now that the bears are back. This looks like a smoking long.

USO is getting slammed into its final level of support. I'll get long once I see an X printed, but if we break 27, look out below.

If you're searching for a bounce, try looking at SPY from November 20th to January 6th. Boing! My indicators say we're heading lower, so I'm selling the rips as I suspect we're due for a retest of the November lows.