Wednesday, April 2, 2008

Thoughts on Calls for a Market Bottom & UGA

I know this bear market rally, which is what it is no matter how many prognosticators claim to the contrary(like a break of 1400 on the SPX), has many of the bearish traders demoralized. If you have been trading on the short side, which is rational given we are in a bear market, the last few days has been not only monetarily painful but psychologically damaging as well. The mental capital has taken a severe hit. So what is the hard trade to do, right now. Give it some thought.

What this bear market rally has done is shake out a lot of late shorts to the party, which by all accounts was quite crowded and taken a very oversold market back to some state of neutrality. The perma-bulls can crow all they want about how the crisis is over, the journalists can be enlisted to further this story, but the facts remain the same. Housing prices, via lax(to say the least) credit were in a bubble of epic proportions. This will not be corrected in a manner of months that much I can assure you. Home prices must become affordable again in relation to peoples incomes and until that happens all other discussion is basically moot.

If you want to get a gauge as to what is going on, look at what happened in each and every rally after the tech bubble burst. The media is correct in that this credit bubble is different than the tech bubble, different in that the credit bubble dwarfs the tech bubble by a long shot ! In each and every rally, post tech top, every analyst strategist, hedge fund valet and fund manager came out of the woodwork to call a bottom. In the vain hope of attempting to pull a Henry Blodgett. For those that don't remember good ol' Henry came out and called for Amazon to hit $400 when it was trading about $100 which it proceeded to do in literally weeks and which he rode to fame and then flames when it was revealed he was internally disparaging the same stocks he was publicly touting. Nice. but hey its the shorts remember.

Anyway they were all calling a bottom at each and every turn, in the narcissistic hope of making that call of a lifetime. Thereby securing them a spot on pom pom TV's Morning Call or better yet their own Crameresque market show! The claims of selling overdone, attractive on a valuation basis, new economy, etc. continued, but alas each and every call of a bottom was wrong and the lows were broken and more selling ensued. (short sellers of course!). So not only was money lost as the bubble burst but even more was thrown away as people not involved fished for a bottom hoping to catch that falling knife.

Cisco, a real tech company with real products, real customers, real sales and real earnings unlike the rest of the junk. So tell the guy who listening to the bottom callers, bought CSCO in Jan of 2001 about 9 months following the peak at $40/share. This was down over 50% from the high water mark of $90, bottom right..., Mary Meeker, Jack Grubman, Frank Quattrone, Abbey Cohen, or my pal Henry? No the bottom was actually just north of $8 in the fall of 2003. Just a tidbit to remember when you feel like you are missing the party and feel compelled to jump in.

To think the financials at this juncture are any different given the enormity, extent and far reaching implications of this credit, derivative bubble is shall I say erroneous.

I wanted to talk about the U.S. Gasoline Fund ETF ticker (UGA), for all those Dawg fans out there. There is not a lot of data on this one yet so I have posted a 60min chart(above). It looks to me like an inverted head and shoulders formation. The neckline break would occur just shy of $51. A break of $51 would compel me to get long 2 units

Good speculating to you all.

Open Positions:
Long 6 units Currencyshares Japanese Yen ticker FXY @ $88.55 stop at $91.40
Long 2 units Ultrashort Financials ticker SKF @ $102.20 stop at $98.70
Short 2 untis Daimler AG ticker DAI @ $86.20 stop at $88.05

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