Thursday, January 31, 2008

Off the Charts

One of my funds consists of a mix of long and short US-traded equities which are held for a relatively short time (about 2 weeks). During bull markets, the fund only consists of long stocks; I've found that in strong up markets I'm lucky if I break-even on the down side, so I just don't play them. The long portfolio is divided into two categories: the first consists of high-cap, more blue-chip type stocks that exhibit stable chart patterns (low beta), and the second consists of lower-cap stocks that are more risky but who are showing good momentum. These are my “rocket” stocks. They usually trade under $30 and above $2, although I have held a few penny stocks that have shown good chart patterns on decent volume and have done well with them.

I add and subtract stocks from the portfolio daily, and search through hundreds if not a thousand charts to find my candidates. Final selections are made by further scrutinizing the charts not only a daily basis, but on a weekly, monthly, and sometimes quarterly basis. I also make sure that the 5-minute chart is “behaving” in a reasonable manner. I tend to discard low volume stocks unless they exhibit a healthy looking 5 minute pattern, meaning the price is more than just a random walk. Once the field is narrowed down, I check to see if their are any potential market moving events coming up. I look at earnings dates in particular. (Earnings dates can be gotten from various financial sites. Yahoo! finance is one, but I find easier to use.) In general, holding a stock over it's earnings release can be disastrous. It could be beneficial, too, but I'd rather not take the risk. If I have enough time, I'll check the news on a stock to see if there isn't something negative happening with the company such as pending litigation (stock holders lawsuits, accounting irregularites, etc.) or failure to file the appropriate forms with the SEC. These could all negatively impact the price.

During neutral or slightly down markets, I exit the rocket portfolio, lighten up on the big-cap long one, and initiate short positions. The number of shorts is half the number of the longs. The reason for this is that making money on the short side is riskier and the pool of potential short candidates is usually much lower than the pool of longs. During extremely volatile markets such as what we're going through now, I exit all portfolios. Cash, in this case, is king. I might play the occasional index straddle, but that's about it.

But I still surf the charts. Why, when I'm not going to be buying anything? Because perusing the charts gives me a sense of the market internals. Charts are a direct peek into the collective minds of traders.

What does this mean for today? I'm glad you asked! Today, I'm seeing a lot of upward momentum in the homebuilders and regional banks, but it's accompanied by much lower than average volume. This means the rally doesn't have legs, so if you're dying to buy into them I'd do so with a smaller percentage of capital. If the price action is subsequently supported, then you can start buying them with more conviction incrementally. Just in case.

The best homebuilder charts today are: SPF, WCI, OHB, and KBH. CHCI is the biggest percentage gainer on larger than average volume, up 62% to $1.20. There's no news to account for the dramatic price increase and it doesn't seem to be short-covering, either. But as fast as these small cap stocks can rise, they can fall even faster. I'd stay out of this one for now. WCI broke resistance yesterday and is steaming up 13% today. SPF and OHB are nearing resistance levels of 4.10 and 5.00 respectively, and if they break those on decent volume, I might be a buyer.

But beware! I still don't think the banks and homebuilders will be returning to the halycon days of recent years anytime soon. The credit mess is still unwinding and pundits such as Andrew Lahde, the current master of the universe in hedge fund world who bet big-time on just this scenario happening, believes that we've only begun to feel the pain.

On that sour note, I think I'm going to fix me a sandwich with the left-overs from that yummy pork roast Fifi made last night. (Burp) Speaking of my domestic dominatrix, she got up this morning at the crack of dawn and exited the short leg of the straddle that I knew she put on yesterday. She's out now spending some of the profits. Maybe she'll buy a little something for the person who gave her the idea...

Hope springs eternal.

Wednesday, January 30, 2008

A friendly disclaimer

I know I've mentioned sophisticated options strategies, but if you have never traded options or are a novice, PLEASE DO NOT TRY THESE STRATEGIES!

I've advised many people concerning trading their portfolios. It's not only my fiduciary responsiblity but moral responsibility to say, "Please do not invest in anything you don't fully understand."

If you take only one thing from my blog, please take this one.

As Suze Orman says, "It's your money."

Pork "Fed"

Well, it looks like Big Ben didn't disappoint the markets. The S&P popped up 12 points following the rate cut announcement, took a breather, and zoomed up another 15 points to 1386 only to fall as fast and even harder than it rose, closing at 1355, several points below the pre-announcement price of 1358. Like I said, market action following a much anticipated Fed decision tends to be a bumpy ride. Had you bought an index straddle like I suggested, you could have closed out the long side of an SPY 136 straddle for a 15-25% gain following the announcement. And if today's close is any indication of tomorrow's open, chances are good that the market will open on a down note giving you a chance to close out your position on the short side for a profit. Not bad for less than a day's work.

Fifi's been a bit smug this afternoon. She was peeping over my shoulder as I was writing this morning's blog. As soon as I was done, she disappeared into the kitchen, humming “The Marseillaise.” She has her own computer tucked away into a nook under the cookbooks where she keeps tabs on the latest recipes from the Food Network and fashions from Victoria's Secret, but I have a feeling she was using it for other nefarious purposes. She's a Wall Street ex-pat and I have a sneaking suspicion she took my advice and put some sort of straddle on the S&P. One thing she's not is a dummy. One thing she is is a very good cook, and the smells of her pork roast are wafting through the air. I'm already salivating.

I sneaked a peek at her recipe that she left lying on the counter. It's easy and smells totally delicious. Here it is, for all of you culinary buffs out there:

For a 3-4 pound center cut pork roast:

Marinade ingredients:

1/2 cup honey
1/2 cup soy sauce
1/4 cup white wine vinegar
1 cup finely chopped fresh pineapple (or canned crushed)
2 Tbsp grated fresh ginger or 1 tsp ground
2 cloves garlic, minced

Score roast in 1 inch diamonds with a sharp knife (1/4 inch deep). Combine all marinade ingredients. Pour over pork and marinade 2 hours or overnight in the fridge. Remove pork from marinade.

Grill pork over indirect, medium-low heat for 1 1/2 - 2 hours, or bake at 350 degrees for 40-50 minutes, or until the internal temperature reaches 155 degrees F.

Meanwhile, heat remaining marinade in a sauce pan. Bring to a boil, remove from heat, and reserve for basting.

During last 5-10 minutes of cooking, baste pork liberally with the marinade. Remove from oven or grill and let rest for a few minutes. Slice into 1/2 inch sections and drizzle with extra marinade.

Fifi's planning on serving the pork with a crisp green salad, steamed julienned parsnips dotted with a bit of butter and a hint of ginger, and steamed haricot vertes (thin green beans) drizzled with honey and misted with mint. Oh, and a nice bordeaux. She's French, remember?

After today's Fed roller-coaster ride, a good meal is very welcome. Bon appetit!

Posted by Dr. Kris at 6:15 PST

Fed Fun

Just a quick note before the Fed's interest rate decision in 15 minutes and then I'm back to my regularly scheduled blogging. If you want to have some fun and have access to a computer screen with a real-time data feed for the S&P Emini futures, do yourself a favor and watch the screen closely around interest rate announcement time. Having actively traded this index in the past before completely burning out (it's not for the faint of heart), I've watched the ticker during many interest rate announcements--talk about a rollercoaster ride!

Based on previous observations, if the Fed doesn't do what the market wants (in this case cut by 50 bp), you'll see the price plunge drastically within a few seconds. It'll stablize for another few seconds before beginning a steeper plunge that could last up to 30 minutes. This usual over-reaction will cause the price to slowly climb back up. However, if the Fed doesn't cut at all which is highly unlikely, then I don't see the price hitting any sort of bottom, at least not anytime soon.

The other scenario is that the Fed will do what the market wants (cut by 50bp). Watch the price shoot up for about 10-20 seconds before plunging back down to below the pre-announcement price. Sometimes the price can oscillate wildly around the pre-announcement levels before settling on a direction, and many times that direction is not necessarily up.

In my futures trading days, I ALWAYS made sure I was out of the futures market during Fed announcements. I can withstand the gnarliest rides at Magic Mountain, but my stomach was no match for this carnival nightmare.

If you have a small amount of risk capital, one way to play the Fed decisions is to take an ATM (at-the-money) straddle position in the Q's or the Spiders. Woo-hoo!

Posted by Dr. Kris at 11am PST

Tuesday, January 29, 2008

$$$ in the Garbage--Update

I wanted to update some of my findings last night, but due to software difficulties, the analysis took hours instead of the 15-20 minutes I anticipated. My apologies for the delay. Dimitri and I pored over the results of our preliminary quick tests, searching for parameters that might enable us to distinguish the winners from the losers. We found several parameters that seemed to separate the men from the boys. Unfortunately, these parameters are specific to the research program that I use and if I mention them, they won't have any meaning to you unless you're using the same software. What I can say is that in general, the cruddiest, lowest-priced stocks turned out to be the biggest winners while the more attractive, higher-priced stocks were the biggest losers. Who knew?

After modifying our search criteria to include our new parameters, we back-tested it through all Up market periods beginning from 9/7/04 to 11/1/07. (We went into cash during the down cycles.) Our search criteria were the following:

1. Maintain a portfolio of at most 10 stocks.
2. When a buy signal is triggered, buy stocks at the next day's average price. (I don't like buying at the open.)
3. No duplicate buying of current holdings.
4. No stop/loss was set which means that stocks were held for the entire Up cycle, even if the price dropped to zero.
5. 50% margin account used.
6. $9.95/trade commission fee.
7. Profits/losses were added into the buying power of the next Up market cycle (i.e., the buying amounts were not fixed).

The results were staggering. Beginning with just a $5000 investment in a margin account, the final total at the close on 11/1/07 would have been $2,252,882 (including account interest) for a return of 44,958%! But of course, when things are too good too be true, they usually are. Looking at the actual trades, we found that the number of shares that were bought by the computer greatly exceeded the 65 day average volume and probably exceeded the entire stock's float.

Out of a total of 33 stocks purchased during the entire time, there were 9 winners and 24 losers. However, the size of the winners squashed the losers. The biggest percentage gainers were the following:

MRFD: 154,250% on 272,000 shares (avg. vol. = 3100 shares) (price went from 0.001 on 9/7/04 to $1.60 on 6/1/05. This stock later peaked at $13 on 2/20/07--WOW!)
AWTI: 1949% on 4,048,000 shares (avg. vol. = 20,000 shares)
NSTLQ: 698% on 4,129,000 shares (avg. vol. = 18,500 shares)
MXDY: 649% on 9,090,000 shares (avg. vol. = 34,000 shares)
USXP: 600% on 105,181,510 shares (avg. vol. = 95,000,000 shares! This trade may look feasible, but its chart suggests that it's the market makers who are creating this volume and it's the market makers who are probably the only ones making money.)

The largest losers happened to be the only stocks whose beginning prices traded over $1:

SVXA: -94% (from $150 to $10.50)
ADSD: -89% (from $26.25 to $3.15)

Fortunately, both stocks were bought early on with a small amount of capital so their impact on the overall portfolio was minimal. However, if I were to actually trade these, I'd certainly set stop-losses (10% for SVXA and 20% for ADSD). Since the majority of the stocks trade in millicents, setting stop-losses on them is rather ridiculous.

So, what did we learn from this exercise? Plenty. Penny stocks can be very lucrative but they are fraught with inherent drawbacks, the obvious one being the limitation on the number of shares available for purchase. One also has to remember that trading stocks on the pink sheets involves going through market makers where for one, the bid/ask spread maybe large (as is probably the case with USXP), and two, you might need special permission from your brokerage firm to trade these. However, if you have some extra dough that you don't mind losing, then you might get lucky and strike it big--big enough to fund your retirement account or send your kid to an Ivy.

I do think this approach has some value that requires further examination. What Dimitri has suggested is that we go back through our previous simulation and purchase the same stocks with the number of shares totaling at most half of the average daily volume. As long as our simulation recommends the stock, we'll be adding to its position (instead of buying it all in one lump) on a daily basis. That's a much saner way to do it, but it's going to involve a lot of input by hand and many hours of toiling over a hot computer.

I hope Dimitri isn't planning on watching the Super Bowl...

Addendum: I know you're probably chomping at the bit to see what stocks my model is pulling up for today. Here's the top 20 of the 37 stocks that came up:


Posted by Dr. Kris at 1:08 PST

Monday, January 28, 2008

Money in the Garbage

Dimitri is my stock and strategy czar. I say “czar” because of two reasons: One is that he originally hails from Moscow--a place that he endearingly calls The Gulag, and two, his word cannot be refuted. In short, he's a sullen dude but with the cool, exotic looks of a tall-dark-'n'-handsome Rasputin with piercing blue eyes. He's been the source of some heart fluttering among my female friends, but seems to have the opposite effect on Fifi who shoots him a wary eye when he isn't looking. Historically, there has been friction between the French and Russians, and, alas, history seems to be replaying itself in my presence.

Well, last week Dimitri and I were sitting around reviewing a few of Dimitri's new stock strategies while Fifi took her morning “The Young and The Restless” break. (Fifi now wants to move to Wisconsin because she thinks that everyone there is thin, gorgeous, and wears designer duds to milk the cows.) The preliminary results from the strategies were less than encouraging, and both Dimitri and I looked a little disheartened. Apparently, Fifi wasn't as engrossed in her soap opera as we thought she was, and she turned her head at the commercial break to announce that Dimitri's strategies were “garbage” which made him turn red. But it gave me an inspiration. Before Dimitri could swat Fifi with a rolled-up Wall Street Journal, I leapt up and said, “Have we ever looked at really cruddy stocks before? You know, the ones that trade on sheets so pink they might as well be maroon?”

Both Dimitri and Fifi shot me looks like I had just lost all my marbles but I went on, saying that I know how risky trading these stocks can be, but might not the potential upside be enormous? How about we look at stocks whose value is greater than its current price? Starting to warm to this idea, Dimitri said that he'd run with it.

Preliminary Results

Two tests were run: one during the Up market cycle from 9/27/07 to 11/2/07, and the other during the current Down cycle from 11/2/07 to 1/25/08. Here are the results:

9/27/07-11/2/07 (Up Market)
Avg. Annualized Rate of Return: 262%
#Winners: 21
#Losers: 25
#Break-Even: 54

11/2/07 - 1/25/08 (Down Market)
Avg. Annualized Rate of Return: 11%
#Winners: 15
#Losers: 38
#Break-Even: 47

The vast majority of the stocks that appeared in these tests traded under just a few pennies with most of them trading in the “centa-cents,” or hundreths of a penny. During the Up market phase, we found that the winners boasted huge gains. Ten of them gained over 1000% with one gaining an astronomical 20,000%. Conversely, the losers were large, too, but none of them topped a 1000% loss. Clearly, we were onto something that required further investigation.

Later today, I'll post how we refined the search further and honed in on only the winning stocks. I'll also give my perspective on actually implementing such an approach. For now, garbage rules!

Posted by Dr. Kris at 1:18 PST

Friday, January 25, 2008

Trump Coup

I was awakened early by the heavy rains and unable to sleep, I dragged myself to the computer. Luckily, Fifi couldn't sleep either and she had a cup of French pressed mocha java waiting for me. Asking her if perhaps there mightn't be a doughnut or bear claw to go with it, she shot me a “You're lucky to get the coffee, missy” look and said that she was going out to walk the pooch. Oh well. And here I thought she had a heart...

Perusing the charts, I found one in particular that stood out, not just because it's up almost 9% on the day which attracted me to it in the first place, but because of the overall chart pattern. It was TRMP, Trump Entertainment, which as everyone knows is owned by “The Donald.” Now a 9% gain sounds pretty good, but looking at the overall chart, the stock is down by a whopping 78% from just a year ago and 82% from its all-time high set in November, 2006. Today, it's trading around $4.20, and had you shorted it a year ago, you would have made a cool $14.50/share.

Smelling a rat, the smart institutions began heading for the exits as early as June of last year. Just two weeks ago Moody's announced that it's keeping the company's credit rating on review for a possible downgrade because of rising competition in the casino area, and this announcement came after Trump restructured its debt instrument. Moody's said that a possible downgrade would affect about $1.25 BILLION of debt!

On top of that, it was just announced that Trump's much-publicized 26 year old daughter, Ivanka, is being added to the company's board. I don't want to bash Ivanka--I like her. I saw her on Oprah and she came off as a very poised, intelligent, down-to-earth young lady. She said that she was a straight A student at Wharton, preferring the company of a good book to a night-club--a refreshing change from the Paris Hilton's and Britney Spears' that dominate the media. Heck, if God could assure me a kid like that, I would have had ten of them, and I can't blame The Donald and Ivana for being unabashedly proud. But to put a 26 year old on your board???

What I really don't understand is why everyone on CNBC and on Trump's show, The Apprentice, is kissing his butt. You'd think he was Warren Buffett the way he's treated. I know Warren Buffett, and believe me, Donald Trump is no Warren Buffet. (Okay, I don't know Warren Buffett but I was dying to say that.) I mean, even the mighty Jim Cramer (who is probably worth a lot more than Trump) calls him “Mr. Trump”!

Is this respect deserved? If you had been holding Trump stock for the past year, what would you be calling him? Whatever it is, I bet it wouldn't be Mr. Trump. If the boardroom of The Apprentice were filled with his top shareholders, who do you think would be fired?

Let's hope that today's stock turnaround is real, if only for the sake of Trump's image. Maybe if the stock increases enough in value he'll be able to afford a good rug instead of combing his hair over from the back of his head. Fifi thinks it makes him look like a duck. Speaking of Fifi, she just came in from the rain and brought me a chocolate croissant from the French bakery up the street.

Maybe she does have a heart after all...

Posted by Dr. Kris at 10:30 PST

Thursday, January 24, 2008

Market Musings

Well, Fifi's prediction of a market turnaround is holding water or “eau” as she would say. The S&P 500 has been oscillating slightly around the 1345 level, unlike yesterday's wild 30-40 point swings from the open. The VIX has settled back down from its recent high two days ago of 37.50 to around 28. I won't feel confident about dipping my toes on the long side until the VIX settles below the 25 mark--if it falls below 20, then I truly think the market (and the economy) will be out of the woods for a while, but who knows when that will be?

Although all of my investment decisions are based purely on my own technical analysis and fundamental research, from time to time I do listen to CNBC and read other financial newsletters and blogs, basically as an excuse to avoid having to work and to keep out of Fifi and Dimitri's way. (Dimitri is my sullen trading strategist whom I'll introduce later.) Anyway, there's been talks of consolidation in the airline and banking sectors, but so far I'm not terribly thrilled with what the charts are showing me. Both the XAL and the BKX (the airline and banking indices respectively) having been falling with the major markets in recent months because of the current economic conditions which everyone knows about and of which I'm not going to rehash. My focus is from a purely technical standpoint.

Regional Banks are showing signs of a turnaround. I wouldn't jump into any of them until market conditions improve, but for all of you party-hearties out there, the ones that have exhibited the best performance in recent days are the following: PVTB and CNB today made minor break-outs; CASB, BBT, COLB, FULT, BXS, UMBF, and SST all have made great gains and some are nearing their break-out points; DRL has been a steady climber for a while and though it hasn't made any spectacular moves, it hasn't given up much, either. It staged a break-out today as well.

Money Center Banks (i.e., the larger banks and multi-nationals) are doing a bit better than their regional peers. The foreign banks especially are out-performing US based banks, and many of them gapped up in today's trading action. Most notably, BBV and WFC are looking strong; BCH and USB look good, but they are more volatile stocks. For those of you chomping at the bit to buy Citigroup (C), I'd stay out of it until it broke resistance around 31.50.

Bright spots in the Investment Services sector include JNS and AMG which are enjoying a few days of decent gains after a long period of suffering. The gains look to be more than short-covering, but as Fifi reminds me, looks can sometimes be deceiving. IBKR has been in a long-term uptrend and is up today, but to my seasoned chartist eyes, if it doesn't manage to break it's previous high of 34.15, then it could be shortable if it falls below the $30 level. NITE has also been doing well and is under heavy accumulation. The volume today has dropped off and with the topping tail, it looks like it might be running out of steam, at least in the short term, so if you're looking to buy it, you might want to wait a few days.

I'd still stay out of the Homebuilders, although DHI has made an impressive comeback recently and today broke minor resistance, although on light volume, so beware! On the insurance side, LFG broke out today on heavier than average volume.

Market Beaters: Only two stock charts look interesting today. The first is IDIX which has almost doubled in price since the beginning of the month. It broke to a new all-time high of $5 today, albeit on lighter than normal volume. The second is PTEC which jumped over 18% in the past two days and broke to a new yearly high today on much heavier than normal volume. This stock has a history of making huge short-term gains followed by longer periods of steady declines, so be nimble and set strict stop-losses if you're planning on trading this puppy.

Market Losers: Almost forgot to include these! In down markets, I try to pick five shortable stocks, but today could only find three that piqued my interest: SBKC, SURW, and ALO. They've all been in consistent long-term downtrends, and if you're thinking of playing these to the short side, just make sure there are no potential upcoming market-moving events (earnings releases, FDA drug approvals, etc.) From my years watching biotech stocks, they can be a potential time-bomb when it comes to shorting because of take-overs, FDA approvals, new drug research data--you name it!, so do so at your own risk. Please.

That's it for now. Dimitri wants to show me the preliminary results on a new strategy that he's working on that he says are intriguing. It may be his Russian nature, but he tends to get over excited, so well see. I'll let y'all in on it a little bit later.

Posted by Dr. Kris at 12:26pm PST

Wednesday, January 23, 2008

The Dow Transport Turn-Around

Fifi, my French housekeeper, or “domestic dominatrix” as I prefer to call her, was doing some dusting around around my desk a short while ago while I was out walking the dog when the bugle bell on my charting software went off. Being a technical analyst at a major Wall Street institution before burning out and choosing to make my life miserable, she looked at the alert and saw that not only had the Dow Transportation index (DTX) put in a solid bottom, but had broken through the 430 resistance level. She told me to come in as soon as possible and take care of this matter at once.

I looked at the chart and shot her “And what am I supposed to be seeing here?” look. Hands on her hips she knitted her brow in disapproval, “Have not you learned anything in your 15 years of trading, Dr. Kris?” she said in her thick Inspector Clouseau-type accent. “Don't you know that zee transports are usually a leading indicator of stock market direction? And cannot you see that the VIX [volatility index] is nearing historic highs and zat means zat zee market is getting extremely oversold? Also, in zee past, oh, hour or so zee equity VWAPS [volume-weighted average at price--a measure of institutional buying or selling] have just shifted from very, very negative to very, very positive?”

I looked at her sheepishly and replied, “Um, sure...”

“So what are you going to do about eet? I'll tell you what you are going to do about eet: You are going to buy index options or options on the quatr' Qs [QQQQ, the Nasdaq 100 tracking stock], zat eez what you will do,” she said while shaking her feather duster at me.

The scowl on my face must have been too obvious because she turned on her heels and left the room with a harrumph. According to Fifi, she is never wrong, but sometimes markets can be even more fickle than French maids. Time will tell if Fifi's predictions will come true...but just in case she might be wrong I'm tempted to take a more conservative straddle position.

Posted by Dr. Kris at 12:10pm PST