Friday no good

I was again off on my prediction for Friday. I thought good news from Microsoft and Juniper could at least lift the market till Monday. But after I looked at the opening and the next 30 minutes I know I was wrong.

So I acted fast, I sold my HGU at $32.60 in the morning, pocketed a 21% return since I bought it Monday. I liquidated the remaining shares of my dividend paying closed-end fund in the morning as well. So I'm down from about 75% long at a time to 30% long and 70% cash now. I could not find better chance to liquidate more later in Friday.

The weak performance of Microsoft stock and many others is telling you that we are now in a phase of sell the good news. The Fed is having their meeting the coming week plus Google is reporting earnings, so next week could be quite volatile.

The Canadian market just got 4 more categories of 2 betas, they are gold, natural gas, crude oil and global mining. In the meantime the volume are very low, but that's normal. I'll keep my eyes open on the gold one. That's gold bullion and it's not gold companies, which is different than HGU (or HGD). And I'm still waiting for their agriculture beta product.

Going back to the US market. Looking at the graph somehow I have a feeling that we can have a leg up soon. Well I don't mean the downtrend is done, but I just think some sectors may due to a bigger rebound before they go back down. For example, I would like to find a good entry point to buy some URE (ultra long real estate). But as a hedge, by that time I will also want to get into an ultra short of something. I have to think about it further first.

Reduced long position

I didn't wait till HFU to hit around 50-day EMA, because it maintained a black candle for the whole morning. I'm worried that it may top out for now, so I sold at $15.90. Not bad because I think that is more or less the highest price after I entered my limit order. However I'm keeping my HGU even though I'm already sitting at a 18% profit.

As well I sold my FMCN at $50.09 for now. I don't want to take that risk to bet Microsoft will report good earnings and market will continue to move significantly up. Since tomorrow is Friday I think market will start up high, slow down and closes in green. If the closing price is significantly higher than opening price, this upward move may still have some energy to go next week, otherwise, market may start to get weak again mid next week.

I also sold some of my closed-end fund holdings. That is a fund mainly hold dividend paying stocks and financials is a big sector. I reduced half of the position, free up some cash for later opportunities. If market continues to go up and lift this closed-end fund up too I will sell the other half. I think I want to keep more cash for ETF investings.

Couldn't find a good price to unload another mutual fund which mainly invests in Canadian financials. I incorrectly thought Canadian financials were stablizing, only to see the position now sitting at almost a 10% loss in no more than 2 months. Forunately I never want to start with a big position so absolutely I'm not burned badly. Another global equity growth fund disappointed me today as well. With the market rebounded and the fund surprisingly showed me a negative return. This fund is now losing more than 12% since I bought about 1.5 months ago.

So I'm still roughly about 50% long and 50% cash. I still think under such an economic environment 50% long is too much. I think in the meantime the desire long % should be no more than 20%, and should not be in individual stock. I'm now left with only one individual stock, which is Nintendo, and I'm going to hold it.

If chance allows I'll try to close more position, given Microsoft provided a good earnings and sounds like market is going up tomorrow, I believe I may have chance to unload again.

Panic sell? Rational sell?

Yesterday marked as one of the most dramatic trading day in recent history. The US Fed cut 75 basis points before the market opened. Everything almost opened at the lowest point of that day. Well, that makes me think why. The cut came in before the market open, and all stock prices just shot right back up after they opened at the lowest point. Has the basics of the stocks really changed from the open to 30 minutes later?

Of course not. You see the power of margin calls and overnight positions. Unfortunately investors who got hit by the over-leverage needs to sell to raise cash. I don't have any solid numbers here but I believe that is how it works. Some investors at that very moment were forced to sell. And since they were forced to sell, they were price-takers, and they could only be price-takers, because they didn't have a choice. There are sharks out there to eat them and took this chance to buy at the lowest price of the day.


Usually under this situation we call this panic selling. Well, just sit back and think about it, amateurs only represent a small portion of the investing population moneywise. So even amateurs were not using leverage and just plain panic sell will not cost the market to go down so much, so fast. I can almost guarantee to you that the market went down so fast was largely due to margin calls. When margin calls come in, it's not panic selling. It's rational selling. At least in the eyes of your broker. So next time, don't be fool by the media that market goes down due to panic selling.

Looking at today and yesterday market's performance. I think a short term bottom is formed. It is again due to margin call selling. Different leveraged-investors entered their positions at different price levels. A huge solid white candle with hugh volume probably means at these price levels margin call sellings are done. Unless the market moves down more, that is, moves below the bottom of the white candle, in the meantime it probably will not trigger another round of margin call selling.

But of course there are still trimming along the way up as investors are getting nervous and pessimistic. Those are mostly not margin call selling, so the selling will be less powerful.

I'm glad that I got into HGU and HFU at the bottom since Tuesday close. Since I already have a closed-end fund invests in Canadian financials, I'm looking to sell all my HFU if it touches the 50-day EMA. If the Canadian financials can go up more, I'll see if I can sell my closed-end fund for now, as I think in the meantime I have too much long position.

Looking at SKF, SRS, SDS, DXD, TWM and QID, they all displayed consecutive two big black candles. In the short term it is not looking good. But other than QID and DXD, all the other ETFs is having its 20-day EMA > 50-day > 100-day > 200-day. So unless there are signals that they are reversing at significant volume, they could be good bet when near 200-day EMA.

Canadian market

US is closed today, but the shock wave continued to hit the global market. I bought into HFU (again) at $13.785 and got some HGU at $26.59. Now I averaged down my HFU cost to about $15.50.

I bought into HFU because HFD, its reverse version shown a black candle (that is, closing price lower than opening price). As well, the highest price of HFD all day is the opening price. After a parabolic uptrend since beginning of 2008, I think it's time for Canadian financials to rebound a bit. Well, I just expect about a 5% rebound in financials from here, which a probable 10% upside for my HFU. If that happens, I will break even. As I said, nothing can drop in a straight line.

HGU went all the way up from $24 at beginning of 2008 to as high as over $36 in 2 weeks, crashed back down to as low as above $26 today. The uptrend definitely was due to the anticipated higher price of gold bullion with weaker US dollar. I'm not greedy here, something close to 10% is perfect to me.

Markets reversed trends faster than I was expected last week. I was not surprised that markets will resume down trend even after US government announced any plan to help the economy. Just that the rebound was so short live that surprise me. All my long positions like mutual funds/closed end funds were down almost 10% more. I'm still waiting for a better time and chance to unload some of those.

I know many people said markets are oversold, a rebound is due. Well but the size of the rebound and the length of time of the rebound can vary. To me, oversold or overbought is not that important. Rather, the distance between the 20-day EMA and 200-day EMA is more meaningful to me.

I'm currently spending some time to do some study there and I hope I can come up with some solid conclusions. I will post them here when I find something.

Sold FXP again

I keep writing new record of myself. I sold FXP at $81.76 today and made a 15% gain in two business days. I have to acknowledge that I sold prematurely, only to watch FXP went as high as $86.46.... I did not expect that kind of movement so fast because when Merrill Lynch issued a warning on larger write down on upcoming earnings report (due this Friday) the stock actually went up. But it didn't happen to Citigroup today.

Intel's report definitely does not help the market tomorrow. I guess tomorrow should be the climax of selling. Thursday and Friday may slow down a bit as some other financials including JP Morgan, Merrill Lynch, Wells Fargo, Washington Mutual, Bank of New York and etc are reporting. But since they are financials, probably their numbers are in Wall Street's pocket. Significant surprise on the downside is not quite expected.

I also need to acknowledge that my previous prediction of 2008, specially on the Chinese stocks that I have been talking about, are being violated. I would put all those stocks on hold, or be more aggressive, sell them at a good time to cut back long position. I may want to get out from FMCN for now to try to minimize the loss. As well, I'm still looking for chance to unload my HFU in Canada, as I was wrong on financials having a rebound last week. But glad that I didn't initiate a big position.

You may still hear people saying we are not going into recession. Again I want to emphasize, it doesn't matter. If there are a large number of investors do not believe the market is going up, they will sell, and their transactions will show on the graph. In a downtrending market it's easy to pick a stock to go down than to go up. This is what we call "Don't fight the trend".

I probably have not mentioned my thoughts on solar energy stocks, but I really want to say, I know many solar energy stocks are going to come down with the market, because the market in a whole is going down and as well, these stocks have had crazy runs that their 20-day EMA significantly outpace the 200-day EMA. Same story to dryship stocks earlier in 2007. Too bad I do not want to short individual stocks.

FXP the fourth time

Got into FXP at $70.73 again today. I missed out the good opportunities in all TWM, SKF and SRS in the beginning of this year. I expect the rebound will not hold for very long, so I started to initiate a small position on it.

As said, markets these days are very fluctuate. Things move so fast during a day (look at CFC). I don't want to gamble too much. So I'll play with ETFs instead of individual stocks.

Markets didn't wait for me

Only a few days ago when we headed in 2008, I still saw articles here and there predicting a strong equity market this year. Just a few days I wonder if those people change their view.

I already became bearish since November, became more bearish by end of 2007. As you see I'm not perfect. I did not correctly predicted a sub-prime blew up in August, but at least I tried my best conservatively to recoup some of my losses by trading TWM and FXP.

When a recession comes or big fall of market, you will start to see articles about what sectors and what stocks are defensive. Let me tell you (again), due to the current invention of short ETFs, you should not bet on yourself you can find a stock that can go up well in a down market. You should simply hold some cash and make use of the short ETFs.

I am a bit scared by the market these days, swing too much and too fast. Otherwise, I should have got myself some short ETFs and making money to offset some of my loss on the mutual funds and closed-end funds I have. I already have some ideas what to buy and when to buy, just that the market moves so fast that it didn't wait for me......

Anyway, I was wrong on the direction about Canadian financials as well. Nothing falls in a straight line, so at least I believe I stand a chance to recoup some of the loss before I cut loss. I'll see.

The shortfall of ultra long and short

I like to apply idea to realistic situation other than on paper only. After all, you want to make real money profit, not paper profit.


I emphasized the use of ultra long and short ETFs. I want to make sure they are effective and how would they affect actual trading and profit in real world. Therefore, I did some very simple test using make up numbers.

Note that ultra long and short ETFs search for 200% exposure to a particular index on a day-to-day basis. Some articles emphasized the tricky part of day-to-day basis. However, this is not the important point in here, they went the wrong way.

The most important issue for the ultras are the leverage minus cost. What I mean is, when the index goes up, an ultra long ETF should produce roughly less than 2x, and when the index goes down, the ultra long ETF should lose roughly more than 2x. That is due to the cost and management fee.

I tried to produce a graph of a series of make-up returns. I initially assume the index loses 2% in 1 day, then gains 1% the next day. It flips between -2% and +1% for about 32 days. Then the pattern changes. It flips between +2% and -1% for about 70 days. The index produces approximately 19.4% in total. If we assume the ultra long produces exactly 2x exposure, the ultra produces approximately 39% at the end of 102 days.

Using the ultra actually compounded the effect. Therefore, if the index has been negative for a while, it takes more effort for the ultra long to catch up in performance. As you would see, while the index is slightly positive, the ultra long is still negative. But if the index continues to rise, eventually the ultra long picks up the speed and surpass the index. Conclusion, to hold an ultra ETF for long time, you have to make sure that you are making the correction directional bet. If the index takes longer than you expect to go to your direction, you have to expect to hold the ultra ETF longer to realize the compounding profit.

Now however if I change the exposure to 1.9x your direction and 2.1x the opposite direction, the picture totally changed.

If I use exactly the same index return pattern as above, assuming the ultra long only goes up by 1.9x when the index goes up, but the ultra long goes down by 2.1x when the index goes down to reflect the costs. Not very surprising, the ultra long actually underperformed the index by 0.02%.

Now if you believe this kind of exposure makes more sense than simply 2x. What you need to do is 2 things:

1. market timing matters. Just that you think the index should go up over a year, it doesn't mean you can earn more by using ultra long. Due to the imperfect 2x exposure, you better time the market carefully.

2. trade in and out. If there is no tax, sell into strength and buying back during pullback always help the performance of an ultra ETF. Given the compounding effect against you, I guess even after you consider the tax effect you will still find trading in and out helpful.

sold FXP

Sold at $82.70. Made a profit of approx. 11% from $73.50 about 2 weeks ago. I made myself two records. Trade the same securities 3 times within 2 months, and made profit all 3 times. I guess if I can keep up of that kind of good work I can retire very soon.

Unfortunately I'm not that smart, therefore, all my other holdings dropped today. But almost all of my holdings I'm going to hold them for a while purposely, so the drop today doesn't bother me too much, unless it really drops very badly.

In the meantime I would not go to any individual stock, unless you want to go short. Given the expansion in ETFs these days I guess individual investors should learn how to make use of them in any market environment. These months mark a sequence of down days of market, under this kind of market, it's easier to pick a stock that will go down than a stock that will go up.

Today may mark the end of some strong (tech) stocks uptrend, we'll see how it plays out later. But all strong stocks like AAPL, GOOG, BIDU, AMZN, VMW, ISRG and FSLR dropped by quite an amount. That may mean the downward pressure starts bringing the strong stocks down too. But instead of trying to bet on the supposed-to-be-strong stocks, as I said in last paragraph, a better trade is to bet on stock that will go down. But if you don't want to short individual stock, ultra short ETFs are a good way to go.

As I said yesterday, XLF either rebounded or made new low today due to the job report. It made new low. If we would take this as an example. Wait for a rebound and when XLF hits the 50-day EMA, buy some in SKF. If you would like to play the rebound as well then you have to make a guess of when XLF will bottom in the short term and buy some UYG.

Anything, current strategy should be, bias to the downside. Good luck.

HFU

The title is not short hand of some coarse languages, don't worry. It's the Canadian Financials ultra long ETF I bought today at $17.03.

I know the overall market did not start with good upward moving in 2008, but with strong oil and gold, Canadian market did go up 2 days in a row, how surprising.

But, the financials did not follow the index. HFU is now sitting at a price very close to the lowest set in November 2007. I did not commit all my money, just a first dip to test the water. I think given that Canadian banks have less problem related to credit crunch (but still there is ABCP problem) as their US peers, Canadian financials should have some short term upside potentials.

We'll see how it plays out.

My FXP battled to go up passed $80. I guess I'll liquidate it if it hits somewhere like $82. I guess I'll take a look at the market before it opens tomorrow (as US is reporting job data tomorrow before market opens) and see should I put in a limit order.

Quite surprise me too is FMCN, which went up 2 days in a row in a down market. I guess people really like its acquisition of CGEN, which is a direct competitor. I guess if resource allows, I can consider VISN as well. VISN's revenue number doesn't look bad.

Nintendo held up very well as well. I guess nothing I can complain about.

Given the market action today, doesn't look very good to QQQQ or QLD. The Nasdaq was holding up for most of the day, only to see it turned red in the late afternoon. XLF is at the November's low already, if there will be a rebound we should see it tomorrow comes with the excuse of the job report, or expect XLF to make a lower low.

Crude Oil $100

Crude oil futures finally broke through $100 per barrel, although did not close above it.

Many people think this is really something. Well when oil was around $70 only years ago, $100 is something. But when oil was $99 in November 2007, $100 in January 2008 does not add to my blood pressure.

The first trading day of 2008 doesn't look very bullish. All SPY, DIA, QQQQ, IWM and XLF are all approaching their November lows again. So if they cannot hold that lows, expect another leg down. FXI is coming down as I wish (because I'm still holding FXP). FXI's first support is $160, which is last time's lowest in December, then the next support will be around $150 - the 200-day EMA. If FXI approaches the prices between the two supports I should cover my FXP.

I was so stupid. I didn't know there are ultra long and short ETFs in Canada trade on the exchange. Now I can trade with the ultra long and short of S&P TSX 60, Financials and more indices in Canadian dollar term. I know there will be 10 more coming up on the market. The ETFs I like are the TSX 60 (which is large cap), financials and agricultural. Now I can set up core financial mutual fund portfolio and at the same time, trade with the financial long and short.

My current view is still the same, little bearish for the short term future. Since in a long run China is still a place to invest, I'll wait for chance to go into China mutual funds and CAF.