Dec 12, 2008: an unconvincing rally

Several pundits have declared Nov 19 to be "the" low in this bear market. I doubt it. I would echo one blogger who said the lows may have been made, for 2008.

Since Lehman Brothers was allowed to fail a whole new set of dominoes has been set in motion. The rules now are different and a lot of deleveraging is yet to happen. The most recent (last week) news: Citadel LP freezing redemptions, the Bernie Madoff blow-up, a country (Ecuador) is now in default are all telling me that more falling shoes are to be expected with a likely negative effect on the markets which has been ignoring a lot of bad news of late.

I've come to believe that at times like these it is best to focus on the technicals which are still pointing strongly down, and be skeptical of newsbytes that sound too good to be true like the recent misleading decline in foreclosures news.

I've sold all equities during the "Obama rally" and I remain bearish now with a small allocation betting on the markets to resume their decline after the recent mini euphoria dissipates.

I have to add one warning though: doubly leveraged bearish ETF have been very weak of late. There's no more oomph is trying to short the markets using the inverse leveraged ETFs. This is becoming too easy and too obvious so the futures are discounting them. Premiums on puts are very high accordingly. Anyone who is bearish, should be careful here. I personally prefer to short the long ETFs rather than buying the inverse ones. Also: I use the leveraged ETFs only for short term trades, less than a week, and only when they seem overbought.


Why am I so skeptical of the recent rally? The markets should turn north about 2 quarters before the economy turns the corner. Given the current state of the economy I believe we have more than 2 quarters before any positive turn would start to emerge.

In particular:

On the positive side, I see some strength in the fixed-income ETFs, and as mentioned above a significant weakness in leveraged inverse ETFs.


Since the stock market is ultimately the best leading indicator, I've been looking for technical clues for a bottom and I don't yet see them. In particular:

In other news

I'm giving up on marketocracy. My limit sell orders there are being ignored even when prices are well above my limits and volumes are much larger than my orders. Delisted ETFs do not seem to get redeemed. Many newer ETFs are missing from their database so I cannot implement my plans. The site is unresponsive and painfully slow. Recently it has been completely down during some critical days in the market. I'm looking for a better alternative. Unfortunately, I had a record of better than 89% of users rank there which I will have to build from scratch in the new place. It is a shame, but I really have no choice.

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I've released my heatmap software as Free Software, using the GNU General Public Licence (GPL). You can find it here, enjoy.

Short term trading strategies
My most important project of developing a short-term trading strategy is progressing well, and initial results show great promise. I'm already using it to trade a small percentage of my real portfolios. Unfortunately, many of the details are too valuable to widely share here so I'm keeping them confidential for now.

As always, this isn't intended as investment advice. It merely reflects my own thinking and actions at the time of writing. In the immortal words of John Maynard Keynes "When the facts change, I change my mind. What do you do, sir?"

Every investor should make up their own decisions based on their risk tolerance and understanding.

Any feedback is welcome.

-- ariel