Patience is Paying Off

Last week the Dow fell 400 points and the NASDAQ fell 2%.
That’s 3 down weeks in a row. Out of the last 7 weeks, 5 weeks ended down.

I always go back to the trends because it’s too easy to lose sight of the forest for the trees. Individual weeks can be false signals. For example, I would argue that May 16th was an options expiration day and a short squeeze pushed up stocks that week. That’s just conjecture, of course, but it makes sense when you see that stocks had been moving up for 2 months prior. Also, note that that was the last time the Dow moved up.

Just as the last options expiration day may have pushed up stocks, it also may have been acting last week to push them down. This time, with stocks trending down, there was no short squeeze to drive traders to buy stocks to cover their positions.

Which is my way of saying things might be oversold in the short term. Don’t be surprised if the market rises up again next week in a mini dead cat bounce. But overall, the market will continue to move down.

Staying with the big picture story, go back to my previous chart showing global money racing away from the stock markets and into money markets. Now go back to the chart showing the Dow and the NASDAQ for the last 3 months. Hedge fund rules limit investors from cashing out in the last 45 days of the quarter. In this case, May 16th. Notice the sag in both markets that week.

The story I'm reading in the markets is that smart money hsa been leaving the markets for some time and in earnest in May when the Q2 exit deadline loomed. The market's downward drift was arrested by an options expiration week that squeezed shorts (traders had to buy up stocks to cover short positions). Also, I suspect that regular investors misinterpreted the pullback as an investment opportunity, further goosing up the market in the short term.

At this point, the NASDAQ and DOW diverged. I think this was caused by the financial heavy Dow.

If I had to guess, next week will be even worse as funds sell-off in order to lock in rapidly evaporating Q2 profits. Especially tech stocks.

I am focusing on the big picture. Foreclosures are accelerating, consumers are belt tightening, and companies are firing people. California unemployment shot up in May from 6.2% to 6.8%. Experts point to seasonal summertime workers like students, as if that explains the increase. First of all, schools don’t get out until late May. Secondly, there wasn’t the same problem last year in May. The jobs simply don’t exist.

I think the stock market will continue to get worse as mid-July comes. We get a look at corporate earnings and the GDP, and as we get forward guidance. And the Fed meets.

Against this background it only makes sense to hold short positions.
AGN is the only one crying out for an immediate decision – it expires in 4 weeks. It would be great to see a $50 price before then. But I noticed last week that AGN is finally tracking the Dow’s decline.
AN is also exciting. The fell below 412 – what I consider to be a resistance point, and on heavy volume. From Wednesday-Friday last week, 21M+ shares were traded compared with an average daily volume of 2.3M.

The Ultrafunds are also showing a lot of life

My preference is to unload the puts in the summer. I’ll stay in the ultrashorts a bit longer.

I want to buy Natural Gas and Coal stocks, and there was some pullback last week. I usually don’t want to buy this close to earnings, but I suspect some amazing earnings and guidance will be forthcoming. The only concern here is that some investors mistake a connection between oil and coal & NG.