Nationalist Market
Commentary
Written Feb 1 for Feb 2, 2000
The CitiGroup option trader.
- Action: Stand aside until Feb 3, then short above $59 as soon as ovb
turns down on the 30 min chart.
- Reason: C has formed a triange on the chart over the past 10 trading
days. It is unclear whether C will break to the upside or the downside.
Ultimately, the downside is more likely, as the beginning of month inflows
slow on or about Feb. 3. Also, it is hard to imagine a financial conglomerate
such as C making serious upside progress while the Fed is raising interest
rates.
- Citigroup 30 min chart
- Why CitiGroup? CitiGroup (Citibank, Travelers, Solomon Smith Barney)
has volatility considerably greater than the S&P 500 and reasonably priced
puts and calls. It responds well to RSI and Stochastic signals. In short,
it may not be glamorous, but you can make money by taking swing positions
based on its fairly predictable trading patterns and reasonably priced
options. At-the-money options typically sell for less than $200.
Profiting from the NASDAQ mania.
- Action: Close out of any NDX inverse funds that trade only on
the close. Go long the QQQ or BBH but close out intra-day on the
first sign of weakness.
- Reason: The advice in the above paragraph is unchanged since I last
updated this page on the evening of 01/19. We have had collossal volatility
with a huge move down last week and a huge move up in the first two days
of this week. January has been one of those months in which following
the 3dma method would have involved you in some serious money losing
whipsaws. However, the heavy inflows associated with the first of the
month will slow by 02/03. Assuming the market rallies through Easy Al's
25 basis point fed funds rate increase on 02/02, then 02/03 should provide
an excellent shorting opportunity.
General Market Observations.
- Here is a link to a proportionate comparison of our Nasdaq now with
Japan in 1989. Nasdaq vs Japan
in percent
- The chart of the NDX for this year is tracking very closely the timing
of ups and downs in the NDX last year. I expect that pattern to continue, with two downward
waves in February, just as in Feb. of 1999.
- For Tues. Jan 18 - the Decisionpoint STVO indicator turned down on
Friday. This is usually a very reliable indicator and it is risky to
go against it in trading. The STO indicator has been heading south for
two days now. The Rydex Ratio is at an all time low (most money in
bull funds relative to bear funds ever) and a danger signal. If you
subtract AAII bears from bulls, the number hit an all time high last
week. Also, max pain (that point at which option dealers maximize profits)
is a bit lower on the S&P 500 and 100, and this is expiration week.
Finally, and perhaps most important, the Fed Open Market Desk has been
draining reserves recently even on days when Fed funds are trading
slightly above the 5.5% target. We have not seen this in years.
You do not get sustained rallies under these circumstances. Because
of heavy mutual fund inflows this month, I expect a trading
range for the rest of January, with continued heavy selling in the
internet sector and the recent hot high-tech IPOs. The damage
being done in these sectors will have a significant effect on investor
psychology for the rest of the year. See AKAM as just one example. Once
the inflows slow down at the end of the month, we go down hard.
- (01/11) I am particularly proud of my recommendation to cover any Intel (INTC)
short on the open Monday. If you click on the CitiGroup 30 minute
chart above you will notice that one of the indicators I selected is
called "OBV," short for the "on balance volume" indicator developed
by Joe Granville. It is surprisingly accurate when used in intra-day
charts and tipped us off on Friday that INTC would probably head
higher over the next few trading days. It reports earnings Thurs.
at which time all bets are off, as the pros tend to sell the news,
good or bad.
- (01/11) Less proud of the hold short call on AOL. Chart continued to look bad
along with a healthy dose of Luck!
- (01/11) Wall Street experts reassure us that the money being taken from
Tech and Internet stocks is being reallocated to cyclicals and other
industry groups. Trouble is, as I look at the various industry
sectors and their associated index, not much seems to be working
right at the moment except perhaps the semiconductors. Looks like much
of the list might be getting ready to follow Techs and Internets south.
- (01/09) Here is a very interesting article on market cycles that you
should read:
Sandspring.com
- (01/09) The question of the hour is whether the wild 13% decline in the NDX (intra-day) will continue following the partial recovery on Friday, or whether this was a dip that should be bought. After examining some of the charts, I think that last week has inflicted lasting damage on the psychology of the tech mania, and that the decline will continue in a day or two. (Friday was the prime day for rolling over call contracts to the next expiration month in advance of next Friday's January expriation, and so upward pressure Friday was understandable.
- (01/09) However, when you look at a short list of the favorite high flyers,
you can see that some terrific damage has been inflicted:
- CMGI: from 325 to 243, with damage largely unrepaired at 275.
Under some accumulation Wed thru Fri.
- ICGE: from 200 to 155, with damage largely unrepaired at 174.
Distribution on Fri.
- AKAM: from 320 to 237, with damage largely unrepaired at 248.
Ugly 15 min chart, still under distribution.
- LNUX: disaster from 198 to 167 low at the close on Friday. Under
distribution
- FDRY: disaster from 330 to 260, closing at low Friday. Under
distribution.
- JWEB: disaster from 77 to 33.25, closing at low Friday.
- CMRC: disaster from 320 to 192, closing at low Friday.
- SILK: disaster from 172 to 110, closing near low Friday.
- BLSW: disaster from 144 to 75, closing at low Friday. Heavy continuing
distribution.
- WCAP: disaster from 55 to 34, closing near low Friday.
- HHGP: disaster from 19 to 11.12 closing near low Friday.
- (01/09) You can see the damage inflcited on these high flyers by typing in the ticker symbols on one of the free internet charting services bookmarked below. In many cases the losses have ranged from 30% to 40% from the 27th of Dec. or from last Monday. The first two, CMGI and ICGE are particularly important since they are publicly traded holding companies of various internet startups and stocks. Thus, they are a very accurate guage of enthusiasm for internet stocks and the future of the internet IPO market.
- (01/09) Of course there are a few COUNTER EXAMPLES:
- Here is a 01/19 update on the stocks I listed as chart weaklings 01/03 with the price
action since their highs on 01/04. The moral is to short the weaklings:
- AMZN - Chart looks like hell, except that we have three completed
waves down. Time to cover short and wait for a bounce into the end of Jan. Short
again on any bounce beyond $85.
- AOL - Hold short.
- CNET - Looks weak, hold short.
- EBAY - Under accumulation, cover short.
- LCOS - Headed down after completed 3 wave upward correction.
Hold and add to short.
- RNWK 127 TO 145.87 - Headed down after completed 3 wave upward
correction. Daily OBV looks bad. Reenter shorts.
- WCOM Death warmed over. Hold short.
- MSFT Death warmed over. Enter new short on bounce to 110.
- INTC Death warmed over. Hold short
- (01/05) The scam of empire! We are on welfare from the rest of the world to the tune of $350 billions per year. This welfare for the imperial
mother ship is measured by our annual trade deficit. The provinces
ship us goods made with cheap labor, and we send them pieces of
paper - stocks and bonds. The elites of the provinces understand
the scam perfectly well, but temporarily there is no one else to
buy their goods. The action today in the bond, the dollar and the
gold stocks tells us that the private institutions that must recycle the surplus dollars by buying our bonds are beginning to rebel. Fasten your
seat belts, for if this trend accellerates, the crack up will be truly spectacular.
- (01/04) 1929 started with a slow roll in the first few days and weeks. In
contrast, we had -3.83% in the S&P and -6.45% in the NDX just in the first day! This is it folks! The start of the big one! Catch the rhythm of the
thing and plan for the snap-back rallies. During corrections, the NDX tends
to go down hard for 3 days or 5 days in a row. After these short, sharp moves down, it is often prudent to step aside, anticipating a snap back rally.
- (01/03) In reflective moments, I put myself back in time when JDSU, to take just one example, was a split adjusted $12 per share. Its appreciation
to $187 is stupendous; but would I have held on for anything like
that increase even if I had the talent to select the stock?
It is clear that I lack imagination. However, $187 per share is money
I can see! I don't need imagination! All I have to do is wait until the
funds and insiders begin to sell more than Joe Bagholder is willing to buy. It is a certainty. the only question is timing. Once the bear market begins,
this will seem obvious and prudent in retrospect, and those long
from $12 will appear wildly speculative. Its called waiting for
the sure thing! A bear can only make one mistake - being early.
The money is already on the table and growing as you read this!
- (01/02/00)Be sure to see my new post on short sale opportunities for the new year, for those of you who may not be comfortable staying long the QQQ, or may wish to hedge your long position, in this very dangerous mania. See Weakest of the Weak - Short Sale Ideas for the New Millenium.
- (12/31/99)The three month growth rate of adjusted monetary base is 36.2% - two month rate is at 48.1%. The friends of Easy Al who knew in advance that this was coming have made a fortune over the past two months. There has never been anything like it in our monetary history.
- (12/31/99) The expansion of reserves and credit began the first week of Sept. The market began its rocket blast about Oct. 10-18. It takes about a month or so for Wall Street to gain enough confidence in a monetary trend to
begin leveraging its bets on the NDX carry trade.
- (12/31/99) The emerging market funds are all parabolic now. The correction/bear market looms. At the end of a manic move, you always find the emerging markets funds going parabolic. Eighty percent of the money that flows into these markets comes from New York.
- (12/29)Yesterday I mentioned that the Fed was flooding the banking system with liquidity. I have included a new permanent link in the link section below so that you can easily check on the flood and observe the whole sorry episode day by day as it unfolds. Forward repos, System repos, Coupon Passes, the works! We have the most irresponsible Fed Chairman in history. Stay tuned.
- (12/29) The NDX carry trade! Forget borrowing in Japanese yen at 1% to buy dollar denominated notes yielding 5%. Why go through the trouble when you can borrow U.S. dollars and invest in the NDX? Indeed Maria Bartiromo is a financial genius. She said, "Who cares about interest rates when you can make 25% a year owning stocks?" And indeed, that is what the leveraged players, hedge funds, insurance companies and banks are doing. They do not care a fig about the cost of credit. But they do care about the momentum of the NDX and its components. It is obvious from the tape action over the last few days that this carry trade has frayed around the edges. The internets and the IPO moon shots have started to crumple. So is it a short correction or beginning of a new trend? That depends on how selling by the leveraged players is interpreted by the ultimate bag holders - buying opportunity or cause for fear. We shall know in the fullness of time.
- (12/28/99) In the next year, profit growth will be strongest in tech (where it is already over priced), oil service, and basic materials (papers, metals, chemicals). The latter two groups should be owned unless and until AG stops all of the system repos and coupon passes, and M-3 and Monetary base growth start to slow. If he starts actually tightening credit - as
opposed to just raising its price - get into an inverse fund!
The Three Day Moving Average Concept
1. Several months ago I set about to find a way that bears could be positioned to benefit from a bear market and increase their capital while they wait. The system involves buying the QQQ (a stock that tracks the NASDAQ 100 or "NDX") and shorting the QQQ (or switching between NDX and inverse NDX mutual funds, such as Rydex or Profunds). You buy the QQQ whenever the 3dma turns up and the 3dma is below the 50 dma. Sell and reverse short the QQQ when the 3dma turns down and the 3dma is more than 120 points above the 50dma. I backtested this system on data from NDX 913 on June 19, 1997 through 11/12/99 and the original $5000 investment grew to $11,180.55 for a 124% gain. The system used a 5% stop and no leverage. The performance would have improved dramatically by changing the stops into "stop and reverse" (something my old software cannot handle), thereby capturing virtually all of the Oct 98 through Feb. 1999 melt up. The Window on Wall Street code (which will also work in Metastock) is:
Enter long; ref(mov(c,3,s),-1)<mov(c,3,s) and mov(c,3,s)<mov(c,50,s)
Exit long; ref(mov(c,3,s),-1)>mov(c,3,s) and mov(c,3,s)>(mov(c,50,s)+120)
Enter short; ref(mov(c,3,s),-1)>mov(c,3,s) and mov(c,3,s)>(mov(c,50,s)+120)
Exit short; ref(mov(c,3,s),-1)<mov(c,3,s) and mov(c,3,s)<mov(c,50,s).
2. You would have done better to buy the NDX on June 19, 1997 and hold it through 11/12/99 (up 216%). However, by holding, you would have been risking a bear market. The above system allows you to be bearish and yet make money even if you are wrong. You would have MORE capital to compound when the disaster strikes rather than less. The system above guaranteed you would be
positioned to benefit from a bear market. Hence, on a risk adjusted basis (and I think the risk is huge) the above system compares very favorably to a buy and hold strategy in my view.
3. Once the 50dma starts to move down, you would need to adjust the system to entering long at a 3dma upturn 120 points or more below the 50dma and entering short on a 3dma downturn above the 50dma. Take a look at a chart of the 3 and 50 dma's from the period of July 1998 through October 1998 and you will see what I mean by this.
4. The value of the above system depends upon the notion that prices, at least at the very early stages of a bear market, are "continuous," or that the NDX will not fall 400 points the first day. If you examine the charts of the 1987 and the 1929 crashes in the historical charts section of Decisionpoint, you will see that each downturn starts slowly and then accellerates after several weeks to a point where prices became discontinuous. This is one reason why a 3dma turn is important as an entry point rather than a longer term moving average crossover, which is likely result in your getting short near the bottom of the downmove.
5. As of 12/23/99, the 3dma is now a staggering 675 points above the 50dma. Thus, any downturn in the 3dma should be a signal to sell your long QQQ position and short the QQQ (or reverse into the inverse funds). For those of you with intra-day data and charting, the 20 period ma of the hourly chart is the equivalent of the 3dma, but better in the sense that you will ordinarily have the signal before the fund switch deadline of the same day and not have to wait for the next day's closing price. However, make sure that the 20 period ma of the hourly chart is falling sharply to the downside before switching.
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Disclaimer
The Ole Ygg is not a registered investment advisor. You are responsible for your own investment decisions. Do your own research, and if relying upon advice of others, seek counsel of a registered broker or investment advisor first. The above comments are intended as conceptual discussion of market direction and technical indicators only and are not a recommendation to purchase or sell any particular security.
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