PSA: Serious signs of stock market trouble

[The Big D]

I know there's nothing more annoying than a guy with a bunch of shorts spewing doom and gloom about the stock market, but I thought I would throw this out there: I trade a number of stocks based on a simple technical trend following system that typically generates trades on a multi-month time horizon. I'm equally happy with being long or short, and I do whatever the system says I should do because historically it's been right a lot more than it's been wrong. I won't reveal the details of the system, which may cause some people to disregard this post, and that's OK with me. Anyways, over the last 5-10 trading days every single stock I follow that I was previously long in has generated a signal to go short. This lockstep move is atypical in normal markets - for example for the entire summer, I had a mixed bag of long and short positions (more long than short) depending on individual stock performance. The last time it did this was late 2008 (short), and then march 2009 (long) and we know how those turned out.

So in my experience, when this happens, it means we're in for a rather substantial broader market move (this time, in the down direction). People with large long positions (via individual stocks, mutual funds, ETFs, holdings in 401Ks etc) might want to evaluate their positions.

[Marth]

Just today there was news of a 4.5$ billion fund to I think Citi bank? Maybe that will add to the market hurt too. This is a pretty good prediction mate, I am new to the market but what stocks are you following?

[The Big D]

Originally Posted by Marth

Just today there was news of a 4.5$ billion fund to I think Citi bank? Maybe that will add to the market hurt too. This is a pretty good prediction mate, I am new to the market but what stocks are you following?

I tend to follow stocks that are on the edge of profitability since they seem to momentum trade the best. I follow the casino stocks, airlines, the disk drive and computer storage industry, the financials, a few loners like Xerox and Ford. I also pay attention to the broader stock market and the metals.

Which ones I actually choose to trade I'd rather not say.

[The Big D]

Originally Posted by Marth

Just today there was news of a 4.5$ billion fund to I think Citi bank?

It's CIT, and it it's a colossal pseudo-bankruptcy mess. I'm not 100% clear what's going on there except that Icahn's involved, which typically isn't a good sign.

[Marth]

yeah good point hey do you have msn? add me or anyone on here talk stock market ssbmmarth@live.com.

If stock market hits another disaster like this spring, I don't think our economy can take it mate :|

[ar81]

Do not worry. If you think stocks are a problem, wait for the bubble of the options. Sooner or later. This is several times bigger than US economy.

[The Big D]

Originally Posted by ar81

Do not worry. If you think stocks are a problem, wait for the bubble of the options. Sooner or later. This is several times bigger than US economy.

What options are you talking about? Stock options? Commodity options? Some other sort of more exotic derivative?

I'm VERY suspicious of your post simply because I don't believe the open interest in any options market (or any other derivative market, for that matter) even begins to match the size of the US economy. I'm also suspicious because options don't tend to have bubbles beyond whatever occurs in the underlying. The combination of fast expiration and historical volatility data points tends to keep them priced more or less in line.

For the record, I don't think "stocks are a problem" either. I think being long stocks might be a bit of a problem in the medium term, which is why I am currently short.

[The Big D]

Originally Posted by Marth

If stock market hits another disaster like this spring, I don't think our economy can take it mate :|

I don't think it will be anything like last year. Earnings are too high for that to happen. I do think current "interesting times" will continue for the foreseeable future.

[The Big D]

I should mention in the interest of full disclosure that today's movement changed the indicators to long for some of the stocks. Things no longer look so doom and gloom, although they're still the worst they've been in many months other than yesterday.

I lost a little bit of money on this one (not too bad, actually). One of the interesting features of good trend following systems is that they often change their mind immediately after putting on a position. It makes you look a little daft when you say "going down, no, wait, going up!" but that fast change of opinion tends to be profitable.

[pjhaggerty]

very interesting. I trade currencies, not stocks, so I don't wan to comment on the move in the market. However, it's good to see someone having a trading system and following their system no matter what. You seem to have a very good attitude as a trader. I am curious about your system though. I don't want details, but I just want to know, did you develop it yourself or buy it from someone?

[The Big D]

Originally Posted by pjhaggerty

very interesting. I trade currencies, not stocks, so I don't wan to comment on the move in the market. However, it's good to see someone having a trading system and following their system no matter what. You seem to have a very good attitude as a trader. I am curious about your system though. I don't want details, but I just want to know, did you develop it yourself or buy it from someone?

I developed it myself using pieces from previously published systems. It's in essence EMA trend following with a few bells and whistles plus of course a mechanism for choosing what markets to play.

The interesting thing is that wile I by no means traded the last few days perfectly (trend following always loses $$$ getting in and out of positions), those shorts from Weds. paid off when everything tanked on Fri.

[Marc D]

Tax-loss selling will come into play soon I imagine. Interesting behavior the market is displaying after a good 3rd quarter gdp, I guess the tanking dollar doesn't help much. Has the dollar seen its bottom?

[The Big D]

Originally Posted by Marc D

Tax-loss selling will come into play soon I imagine. Interesting behavior the market is displaying after a good 3rd quarter gdp, I guess the tanking dollar doesn't help much. Has the dollar seen its bottom?

A tanking dollar should raise stock prices, not decrease them. At least if it's tanking due to inflation.

I think the GDP wasn't really news. Everyone knew GDP growth was going to be positive.

[Marc D]

Originally Posted by The Big D

A tanking dollar should raise stock prices, not decrease them. At least if it's tanking due to inflation.

I think the GDP wasn't really news. Everyone knew GDP growth was going to be positive.

True about the GDP, no surprise there with the government stimulus and all. Excuse my ignorance because i'm still a bit of a noob with markets and stuff and I'm learning as I go but CPI has been relatively under control so is fear of future inflation indeed why the dollar is tanking or is it some other factor(s)?

[The Big D]

Originally Posted by Marc D

True about the GDP, no surprise there with the government stimulus and all. Excuse my ignorance because i'm still a bit of a noob with markets and stuff and I'm learning as I go but CPI has been relatively under control so is fear of future inflation indeed why the dollar is tanking or is it some other factor(s)?

I'm not sure what exactly is going on. I agree the dollar is dropping, but not due to classic consumer inflation. As to why, it's a very complex picture.

The easy part to understand is that we have very unbalanced trade. That means dollars are going out the door in return for foreign manufactured goods coming in (net). What happens to those dollars next determines the exchange rate.

Possibility 1: those dollars are sold on the currency markets to get whatever currency is used in the country where the manufacturer is. This decreases the price of the dollar relative to that currency and in the process drives us towards balanced trade by raising the price of foreign imports and dropping the price of US goods in the rest of the world.

Possibility 2: The dollars are used as money outside the US (for example, to buy oil) by either countries (who also may keep reserves) or individuals. When this happens, the dollar becomes stronger.

Possibility 3: The dollars come back to the US in the form of foreign investment in bonds or stocks or real estate. In the bonds case, dollar devaluation is delayed until bond maturation but not prevented. In the stock and real estate cases, we've effectively exchanged equity in US corporations or physical land/buildings for foreign manufactured goods. That may be a bad thing, but the net effect on the dollar's valuation is zero.

So sort of by definition, we're seeing less 2) and more 1). But as to WHY, I don't know. We may also be seeing less "delay" effect from bond purchases because US bonds have unattractive yields right now and there have been a lot of defaults (with less than level handed government intervention) recently.

[The Big D]

As a follow up to this, today's market action was very interesting. The FOMC announced in effect a continuation of the free money fire sale (interest rates near zero, no bias towards raising them in the future) and the market, having been bid up before the announcement, eventually dropped. Now that's weird - the Fed said the most expansionistic thing they could possibly say, and the market went down as a result. It's a general principle that when the market goes down after the best possible news, what you've got is a bear market.

So I'm still bearinsh on equities, even though I'm seeing more alpha and less beta and the picture is a little less clear than it appeared last week.

As a side note, the FOMC isn't seeing much inflation. This indicates the USD/EURO move we've seen recently is a trade issue rather than a money supply issue.

[Marc D]

Thanks for the info above about currencies, I had to read it a few times before it sunk in. The dollar looks like it bounced off its low. Today's action was odd. I read that unemployment ticked up again. The fed may not be concerned about inflation now but once spending picks up again and the consumer floods an already flooded market with dollars they're gonna have to act quick.

[Gene]

Originally Posted by Marc D

Thanks for the info above about currencies, I had to read it a few times before it sunk in. The dollar looks like it bounced off its low. Today's action was odd. I read that unemployment ticked up again. The fed may not be concerned about inflation now but once spending picks up again and the consumer floods an already flooded market with dollars they're gonna have to act quick.

Yes, the Fed will aggressively fight inflation at some point in a recovery. I hope they are correct in their timing. Acting too early would cripple the recovery. Acting to late would result in runaway inflation and all the problems inherent in rampant inflation.

[yoopersmith]

My Port is all long, and it weathers all storms.

I don't buy/sell based on environmental conditionals alone...but on the overall strenght and health of the business.

Sure, my value goes down (and up) with the tide, but I stick to my unemotional guns and keep plugging along.

The way I look at it...as long as there is still a financial system and a United States of America...my money is just fine.

If we devolve into a "mad max" style world...money will be worthless any way