The data was OK; but the outlook is getting worse
Steve Cook on Disciplined Investing

Have You Seen This?


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Have You Seen This?

The Market

    The Averages (DJIA 11153, S&P 1160) rebounded yesterday though it was another roller coaster day; this kept them within their respective intermediate term trading ranges (10725-12919, 1101-1372).

    Volume rose; breadth improved, the flow of funds especially so.  The VIX remains at an elevated level within its current trading range--that suggests that fear is the dominant emotion right now; so caution is still the word.
    This piece of Citi’s technical staff is a bit concerning (short):

    GLD bounced off the lower boundary of its intermediate term up trend on low volume.  I am nervous about this holding but our Portfolios are holding on and could Buy on any sign of real strength.
    Bottom line: volatility laced with fear (VIX) continues to dominate this Market.  That said, with stocks having mounted four unsuccessful attempts to bust the lower boundary of the current trading range, our Portfolios are cautious buyers of stocks on our Buy Lists but to also uncompromising sellers of those stocks that have violated our trading stops.

    The AAII sentiment indicator (chart):


    Surprise, surprise.  US economic data actually had an impact on yesterday’s pin action.  Jobless claims were down more than expected, GDP numbers were passable as were pending home sales.  Those stats got the Market off to a decent start.  More important, they provide support for those of us that still don’t think the global economy is about to fall off a cliff.

    More on jobless claims and GDP (medium):

    This analysis suggests that the US economy is still moving toward recession (short):

    This is more pessimistic: ECRI weekly leading index creator says US tipping into recession (short & must read):

    And the outlook for inflation isn’t so rosy either (short):
    Of course, Europe wasn’t completely out of the picture.  As I noted in yesterday’s Morning Call, overnight the German parliament had approved the expansion of the EFSF (bail out fund) which was a huge relief to most observers.  However, initially the European bourses were down--I am assuming on a ‘sell the news’ response.  Later they rallied and appeared to add to the initial upside momentum on this side of the pond.

    But what’s a day without a 3-4% intraday swing, right?  So the sellers took over driving the Averages into loss territory, before a last hour rally saved the day.  Is there any informative value to this kind pin action?  According to some of my trader buddies, there was some month (quarter) end window dressing.  In truth, however, other than a reflection of the heightened level of fear and confusion I talk about constantly, I think not. 

    The IMF is now considering joining the bailout crowd (short):

    Meanwhile back in the banana republic, the Troika can’t inspect Greek books because of sit ins (short):
    Bottom line: the eurocrats continue to inch toward some resolution of their financial crisis; but judging by the array of experts whose opinions have been included in these pages, they are a day late and a dollar short.  As you know, I think any lack of success the biggest risk to our forecast.

    Satyajit Das on how to survive the global restructuring (medium):

    More on the EU problem (medium):

    Following on my comments in yesterday’s Morning Call on the significance of the recent decline in copper prices, here is a history of the S&P after copper prices decline by 20% (bear market):

    More on investment strategy from Pimco (medium):

    This is only for the real pessimists amongst you (medium):

    And if you really want to get depressed (long):

     Thoughts on Investing—from Steve Cohen

“Leverage, concentration and illiquidity are the three things that can kill you”

These are words to live by in the investing world.

Leverage gets more traders in trouble than probably any other single factor.   Uncontrolled (unhedged) leverage can be a sure way to the poor house.  Using leverage is the equivalent of stepping off of a pony and jumping onto the back of a wild bull.  Most people can’t control it and the few who do still tend to get hurt at some point in their career.  Gambling with money you don’t have is a great way to lose your shirt.  Only the uber experienced should attempt it.  If you’re utilizing leverage you need an edge and if you don’t have an edge you need a hedge.

Concentration (meaning a portfolio with few positions) can be a double edged sword.  It will help generate your biggest winners (think Warren Buffett with Geico, AmEx, etc) and it will cause your biggest losers (think Amaranth or LTCM).  The key is knowing your market.  Don’t go all-in on a position if you don’t have an exit strategy and don’t have an edge.  Most people don’t have either and therefore have no business investing with a concentrated portfolio.

Illiquidity is a traders worst nightmare.  There is nothing worse than wanting out of a position with no buyers.  If you can’t find a buyer or seller you’re not in a market and if you’re not in a market you might as well have never gotten into the position in the first place.  Invest in liquid positions.  You can’t have an exit strategy if you’re trapped in a position.

   This Week’s Data

    August personal income fell 0.1% versus expectations of a rise of 0.1%; personal spending increased 0.2%, in line with estimates; core PCE deflator was up 0.1% versus forecasts of up 0.2%.


    Weekly rail traffic (short):



    George Will on Barney Frank and the Fed (medium):

Posted 09-30-2011 7:52 AM by Steve Cook
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