Tuesday, August 14, 2007

The Dow, Oil Service Holders and Hedge Fund Valets

The chart above is the tracking stock for the Dow known as the Diamonds(DIA). I have sketched out a possible head and shoulders formation that would bring 122 into play as a target(neckline to tip of head distance) The $120 level from back in March looks like solid support which is obvious which makes me think that it might not hold as it is too obvious. The 200 and the lower trend line offer some support. I am short the Dow via the Ultra short Proshares (DXD). You may say hey, wait a second the Dow has been a bulldog(some bears call it the PIG though) and I remember he said we are supposed to put our rocks in the wettest bags as they break most easily. Well you are, no question. But, I am attracted to the Dow for another reason. The hedgie herd effect.

We all know how the 'smart money' hedgie crowd follow each other like small children playing a pee wee soccer game(think swarm of bees). I have documented on that at length. They need to be in equities for fear of missing the boat. Just like they all tripped over one another borrowing yen and buying toxic CDO/mortgage crap they are now buying 'the safe blue chips'. This is the reason I believe the Dow has held up much better than the other indices and the reason it will fall precipitously, they will all be tripping over one another to get out of the same thing to meet their margin calls. Lets face facts which most conveniently prefer not to do, and the facts are is we now have conservative money market funds who cannot meet redemption's because they cannot value their holdings to determine a NAV(net asset value). What do you think is happening with the aggressive, pedal to the medal I only know bull markets hedge fund valets (see below)get their redemption's. Maybe I will be wrong but the weight of the evidence and more importantly 'THE TAPE' says otherwise. Besides, whenever everyone goes to one side of the boat, the boat tips. Simple physics for the non-physics major.

Also tomorrow is hedge fund redemption notice day, which in the larger scheme of things is small potatoes but given the many hedge fund managers(oops I meant to say money valets as most of these guys perform functions no different than the parking valet handling your automobile, the same skill set just different uniforms) out there on the 'precipice of insolvency' out there it could lead to some fireworks. The true money managers out there know what I am talking about and won't take any offence to my comments as they are brought down by this lowest common denominator dilemma

As nervous as I am being long of anything in this market there are some areas I am watching extremely close. The Energy sector is at the top of that list. The oil service holders (OIH) above shows the support area that I am watching but we must also respect the fact that $177 is a level that, if broken on volume, could lead to a decent move. This series of higher lows from Aug 8th are encouraging but has occurred on contracting volume which makes its suspect. Also, we must keep in mind that there are lots of profits in this sector and many funds out there will be selling what they can not necessarily what they want. Stay flexible and keep losses small(via tight stops and small exploratory positions) in the event they whipsaw OIH if you play the move thru $177. Good trading to you all.

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