Quote Critique

Hypnotized by abject boredom, I picked up the 2009 Stock Traders Almanac in order to feel the joy of material acquisition. Needless to say, I'm not surprised to find it useless for trading, but the daily quotes are good bathroom reading. Thus, I will be plagiarizing each nugget of wisdom, and analyze its merit for my amusement.

"Major bottoms are usually made when analysts cut their earnings estimates and companies report earnings which are below expectations." -Edward Babbitt Jr. (Avatar Associates)

Wall Street is full of this contrarian rhetoric, so take it with a grain of salt. Clearly bottoms are made during times of overwhelming fear, but this sort of generalization can give the wrong impression to naive investors. Getting involved with a company that is slashing its earnings and being marked down by the Street is psychologically challenging, and often requires years of patience to prove fruitful.

Signs of the Times $SPX

I'm a huge fan of percentage/volatility charts, but due to their underwhelming popularity, they're confusing. Hopefully someone understands their value besides myself.

Although my NASDAQ indicator has gone bearish here, the SPX is holding on for dear life. There are fewer bullish stocks and volatility is rising, buyers beware.

The BXM/SPX spread has broken resistance and is running to the upper Bollinger, something to interpret as increasingly bearish.

The percentage of SPX stocks trading above their 50dma is falling and volatility is increasing. The environment is growing more difficult for investors.

SPX stocks making new highs are dwindling amidst the rising volatility, another reason to be careful if you're buying stocks.

The one glimmer of hope seems to be the rising number of NASDAQ stocks making new highs, but since this is based on a 10dma, I suspect it will turn down soon.

Investors should get defensive as traders look to short this weakening market. Real estate and financial companies could see another round of selling, and I'm keeping a close eye on the price of preferred shares via PFF or other ETF proxies. The energy sector looks weak as well, so trade what you see and not what the pundits spew.

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

This week's look at the 5 least correlated liquid ETFs.

After a hefty rally, commodities have resumed their fall, and DBC remains in a massive downtrend. Heed the words of famed economist and failed trader John Keynes, "the market can stay irrational longer than you can stay solvent."
Momentum in emerging market's waning, and the bounce in EEM is beginning to look like a dead cat. Perhaps the fiasco at Satyam is just a glimpse of the Madoffness abroad.
The small cap value sector suffered a failed breakout and has pulled into support. Although the IWN technically remains in an uptrend, nearly 40% of this ETF is allocated to financial service, so it's fragile and may be a short.

As mentioned here last week, real estate remains in danger as the IYR is ready to touch the lower Bollinger and retest the recent bottom. The selling this week came with increased volume, so buyers beware.

Bonds remain in a massive uptrend, and though I made some nice coin in TBT, now is not the time to be short the US Government. Though Treasuries are Ponzi up the Yangtze, nobody seems to care so long as the trend is up.

A century ago, a fellow asked the banker Pierpont, "what will the market do?" and the elder Morgan replied, "it will fluctuate." This timeless quote, along with "it will open at 9:30 and close at 4:00," underscores the absurdity of predicting the future, and the importance of adapting to the market environment.

The markets propensity to fluctuate, neatly described by the VIX, is beginning to rise and that poses a significant danger to nervous investors. Moreover, the selling on Friday was strong ~9:30 and ~4, suggestive of a broad desire to GTFO. If you're looking for a tip, take your money, put it in a MMA, go play with the kids, and come back next week.

That said, how about a gap up on Monday to make some bears shit, and then a fade to lows below Friday to demoralize the rest? Volatility is rising and the market will spoon feed excrement to those who fail to adapt. We are entering the fifth wave, assume the position.