THE DAILY TRADING RISK: GET OUT!

Wednesday, March 23, 2011

GET OUT!

The volume is falling but price going up up and away? This is a headfake rally. If XLF falls below 15.95 and IWM breaks 81.60 then its all over till earnings season starts on April 11. The scheisters are setting the market up for their benefit and your stupidity. The MACD is now rolling over and the Stochastics are in the kill zone. If they do QE3 in June or hint of it then we will see 15,000 on the Dow. But there's a long way to go till then. They are likely to come back and test that
1250. And with oil now trading at $106 a barrel, you can bet your booty it will retest. The weekly long term chart looking out 3 months is still RED!

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TRADEBUM

QUOTE of the Millenium:

Better to be out wishing I was in, then in wishing I was out!

Results for 2009: December 31 +43%

Results for 2010: December 31 +22%

Dog Trades of the Week

Some suggestions

BUY: FCX 51.50

SHORT: SPY 131.15 or use DXD or SDS as a hedge.

Short Ultra ETFs: TZA QID DUG. Buy these when market going up.

HEDGE: Short the Diamonds with DIA or if you are like me and don't want to short, try buying a Short ETF Ultrashort DXD to protect any long positions. *In a Bear Market I always keep minimum of 25shs to hedge my portfolio.

*if stock no longer listed it means we got stopped out or closed the position.

Questions? Just e-mail me at tradebum@gmail.com

DISCLAIMER: trade at your own risk.

*Wait until 10AM before you do anything. Market makers are adjusting the price. Wait for things to settle down then start to determine your plays for the day.

*watch TLT (treasuries) shows you when money coming in and out of equities

Go to bottom of blog page for some trading tips.

*taking profits means holding the position but taking some shares off. I usually add to my position again if it still looks viable.

SHORTING STOCK

Lets say you think GE is headed down in price. You would borrow 100 GE shares from A at say, $10, then sell them to B for $10, and when the price goes down to say $5, you would go into the market and buy them at $5 and give back the shares to A, pocketing the difference.

The Mechanics of a Short-Sale
by Andrew Tobin
When you sell stock short, you are selling shares you don’t own, hoping they will go down. Your broker just borrows someone else’s shares for you to sell. Eventually, you have to buy them back and return them (unless you’re really lucky and the stock goes all the way to zero and disappears, in which case there’s nothing to return). If you can buy the shares back for less then you got for them, you make a profit; if you have to pay more, you suffer a loss.

But where do brokers get shares to lend short-sellers? The first thing they do is look to see whether one of their other customers holds the same stock in a margin account. Anyone with a margin account has signed an agreement authorizing the broker to lend his shares. He will not know they’ve been loaned, and he needn’t worry about it either way. He’ll still get his dividend (it will come out of the short-seller’s account); he will still be able to sell at a moment’s notice. (The broker will just replace the shares by borrowing someone else’s shares. Or, if that proves impossible, he’ll "buy in" the short-seller, forcing him to cover his short — typically at a loss — and return the shares. This doesn’t often happen, but it definitely can. It’s one more risk of the hazardous short-selling game.)

Brokers love short sales, because although you take all the risk, they typically get the interest on the proceeds of the stock you’ve sold. That’s right: you shorted 1,000 shares of some stock at $50; well, that means the broker got $50,000 in cash money in return . . . but you won’t find that money in your account. It’s earning interest in his account, whether he be a deep discounter or the most expensive full-service firm on the block.
(Active, pushy customers can sometimes twist arms and, if they do enough short-selling, persuade their brokers to share some of that interest. But few even know to ask and fewer still will be told yes. If you do $20,000 a year in commissions, say, well, that might be a different story.)

If your own broker doesn’t have shares of stock in one of his other client’s margin accounts to lend you, he will call around to find a broker or institution that does have shares to lend. Harvard, with its $10 billion endowment, makes some good money this way.

When a broker or institution lends stock, the "rent" it charges is interest on the value of the shares. In other words, your own broker has to split some of the largess with the lender (making him all the less eager to share any of his share with you).

*to give you an indication of how crooked the market is lately, Fidelity has put out word that they will not lend out shares of IWM.

If you have more questions feel free to email me at tradebum@gmail.com.

IMPORTANT TERMS and DEFINITIONS

BANKRUPTCY
CHAP 7: a liquidation sale of assets and no more company
CHAP 11: a restructuring of debt and a new company going forward

LIBOR rate.
This is the interest rate banks charge each other for one-month, three-month, six-month and one-year loans. LIBOR is an acronym for "London InterBank Offered Rate" and is the rate charged by London banks. This rate is then published and used as the benchmark for bank rates around the world. The higher the LIBOR rate, the greater the stress on credit markets.

The TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills) is a measure of perceived credit risk in the economy. This is because T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. On the other hand, when the risk of bank defaults is considered to be decreasing, the TED spread narrows.

The difference between the LIBOR rate and the overnight index swap (OIS) rate is another measure of credit market stress.
When the LIBOR-OIS spread increases, it indicates that banks believe the other banks they are lending to have a higher risk of defaulting on the loans, so they charge a higher interest rate to offset that risk. The opposite applies to a narrowing LIBOR-OIS spread.

As far as commercial paper is concerned, the A2/P2 spread measures the difference between A2/P2 (low-quality) and AA (high-quality) 30-day non-financial commercial paper. The spread has plunged to 48 basis points from almost 5% (500bps) at the end of December.

Goldie Locks Economy: Yeah Right...

9.5 year inventory rate on Housing

More ARM's sold to PRIME borrowers than subprime and BofA is the largest lender of it with Wachovia a close second and prime defaults are rising faster..

Fannie Mae asks government for more cash to cover the losses..

Commodities like Oil, Food and sugar are rising..

CRE (Commercial Mortgages) collapsing and alot of commercial loans were sold at the peak of the market in 2007..

Wages are declining along with jobs..

Consumer Debt: 2.5T
70% GDP consumer based..

Credit card defaults continue to rise at alarming rates while banks rein in credit to ALL borrowers..

But the best of all: 1.2 Quadrillion of Derivatives WORLDWIDE...

*And how are companies supposed to have earnings?

Books

A Demon of Our Own Design by Rick Bookstaber
Debt of Honor by Tom Clancy
Den of Thieves by James B. Stewart
How the Stock MArket Works by Dalton NYIF
How We Got Here by Andy Kessler
Liars Poker by Michael Lewis
Manias, Panics and Crashes by Kindleberger and Aliber
Options as a Strategic Investment by Lawrence G. MacMillan
Team of Rivals by Doris Kearns Goodwin
Technical Analysis of the Financial Markets by John Murphy
The Ascent of Money by Niall Ferguson
The Best Investment Book You'll Ever Read by Daniel R. Sorin
The Big Short by Michael Lewis
The Forgotten Man by Amity Shlaes
The Intelligent Investor by Benjamin Graham
The Power Game by Hedrick Smith
The Shack by Wm. Paul Young
The Smartest Guys in the Room by Bethany McLean and Peter Elkind
The Trillion Dollar Meltdown by Charles R. Morris
Unconventional Success by David Swensen
When Genius Failed by Roger Lowenstein
Women & Money by Suze Orman

TRADING TIPS

Technical Analysis is not an exact science. It is all about probabilities.
*Technicals follow charts not fundamentals. When we are in a bull market again then I will follow both.

Trading is about following what the institutions are doing with their money, whether they are hedge funds, pension funds, banks, etc.

*It is a good idea to have two accounts: one for Long one for Short

Stocks to help you follow the money:
IWM EWZ SPY XLF QQQQ GS IBM
If $ coming into these stocks/ETFs (price and volume going up) then institutions are likely coming into market. If $ flowing out, well then, you get the picture.

Volume. Its the specialist who sets the price and its volume that tells you if the price is justified. Ex: if price going up but volume going down, then price not justified, so proceed with caution.

S means support. Institutions not willing to sell below the support price.
R means resistance. Highest price an institution willing to pay.
PC means your profit center. Price between these two.
PP means peak profit. When my stock hits R then I take my profits and hold 25shs.

STOPS: you can protect your money by placing a stop order below the support or just put a 2 point stop after each purchase. If it drops $2 in price then your position is sold and your losses will be minimal. If stock starts to go your way, then change to a Trailing stop to protect your profits.
*in this market if you put only a 1 point STOP then you will constantly get stopped out. So 2 or 4 is better.

Due to volatility where VIX above 20 each day, it is difficult to trade quickly. This is why you have to keep a hedge on.

Hedge: either you can short the DIA, or you can buy an ETF short like DXD. Paid $16 dividend end of 2008. If I am long 1000 shs then I would keep a hedge of at least 25 to 50%. In this market I have kept 50 shs on at all time. I can always add to it. DXD works opposite of DIA. You would buy DXD when market is up. DXD should be trading under $58 to buy. On Jan 5 low was around 50. Bought 100shs. When it reached PP on Jan 20 at 63.98, I sold 50shs. So I still have my hedge and I made some money on it. You can do same by shorting DIA.

I generally trade the DOW 30 stocks and try to trade the same ten stocks. I get familiar with how a stock trades and can keep a better eye on the specialist who makes a market for that stock.

If you have questions or would like some help setting up your own trading account email me at: tradebum@gmail.com

copyright 2009

THE DAILY TRADING RISK

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Wednesday, March 23, 2011

GET OUT!

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