Irrational Exuberance Has Finally Given Way To Common Sense

Bitcoin reacted like a spoil brat to news that China exchange halts yuan deposits - link

Bitcoin halves in value on that news, volume spiked on this latest down move reaching an overnight low of $455 and currently at $588 (ah this looks to be an auspicious stop to some folks) This chart looks eerily familiar to anything that has rounded the top. Tulipmania and Irrational exuberance finally giving way to some common sense. I hope not many of Bitcoin devotees got burnt on this skid.

Bitcoin and the Next Tulipmania

Dec 07 2013 5:04 PM PST Screen grab of MTGOX.com Bitcoin Chart
I am old fashioned, gold and silver coins (bullion or numismatic) are what I prefer as an alternative asset class to cash (as a defense against the printing presses of the world's Central Banks). I do not understand the buzz with Bitcoin, nor its meteoric rise to stardom in the last 2 months. Yes, may be there is a finite supply of Bitcoins in this universe and if so yes, someone may choose at will to offer an unfathomable premium for one. I am willing to pay more (not insanely more) for something that is rare, unique and in a finite supply if that something has withstood the test of time. Bitcoin may be the former but definitely not the latter. It is a poorly understood concept by many who embraced it with blind faith, the concept of crypto-currency is definitely not new. See Bitcoin wikipedia page. With brilliant marketing and plenty of media buzz last 2 months the price of one Bitcoin surged to match the price of one ounce of gold. Now that to me is beyond insane. Many might secretly wished they had bought a few Bitcoins instead of working at their day job. Even if Bitcoin proves itself in the future to be a viable alternative transaction "platform", it is a platform plagued with so many unknowns today, with the exchanges located in some faraway places totally unregulated. It is like doing business with the underground drug lords. If someone were to hack into the network and you found your Bitcoins gone overnight who are you going to call? (Ghostbuster?) (and that has happened to some though not publicized). Yet many jumped on the bandwagon hoping to get rich on Bitcoins and never having to work for a living again.

Look at the screen grab of the Bitcoin trading chart on Mtgox.com above, taken on 12 07 2013 5:04 PST. A method of "exchange" this volatile cannot be a currency, it is poker chips at best. Something that went up this fast on pure speculation and hype will come down just as fast as soon as that hype dissipates. China halted acceptance of Bitcoin payment last week to be followed by Baidu doing the same citing unstable prices and Bitcoin promptly crashed to a low of $576 overnight (50% off its peak). Wasn't there a lucky person who drove away with a Tesla Model S paying with his (or her) bitcoins. Kudos, you are one lucky person. If you were smart, you would quickly sell that Tesla S and lock in your gains if the dealer has not come running asking for the car back telling you he has made a huge mistake.

Now that I have vented my thoughts on the next Tulipmania, I am going to curl up by the space heater this wintry evening and read Charles Mackay's book - Extraordinary Popular Delusions and The Madness of Crowds.We had picked up a copy of the 1993 hardcover edition published by Barnes and Nobles Books at a local Friends of the Library book sale. This 714 page classic, a Jesse Livermore's favorite, is definitely not an easy read, but I shall attempt to make some progress tonight.

My Reading List....Eight Website Links

My weekends and evenings are spent doing web research on stocks I own and potential stocks I would like to buy or sell puts on. I scan the web for headlines, opinion articles and scan the message board postings for comments worth noting. I look into short interest and insider buys or sells. Below are a couple of very useful links I use on a daily and weekly basis.

1. Top of my list is Insider Monitor - Find out if insiders are selling or buying - Link Here Type in the ticker symbol and your jaws may drop, you have been forewarned. Here you get a long list of insider buys and sells, dates, shares, share price and whether they are options exercise (See for yourself how much Google (GOOG), Apple (AAPL) and Priceline (PCLN) executives have been selling their stocks as share prices hit 52 weeks high these few months). Do you see what I see...There is not a doubt whom QEs benefited, and who has been buying up California's luxury real estate last 12 months courtesy of the Fed's printing press? Still think it trickles down anyone? Someone sends this link to the Fed please, they should see it for themselves.

2. Looking for information on short interest? I like Nasdaq short interest Link page. Here you will find info on short interest first of the month and mid month, days to cover and trend, whether increasing or decreasing. If you are looking for a candidate for a potential short squeeze play (and assuming you have done all your other research into the company, products or services and management and financials), this is a good site for an overall picture where the shorts might be active.

3. I watch daily Gold chart - Link Here and Silver chart - Link Here for major spillover moves in mining stocks. They can be found on livecharts.com and I prefer their charts to the charts on Kitco.

4. Indexq.org Link for my pre-market morning dose of overnight closes and summary of world market indices and currencies while I am having my cup of homemade latte

5. Kitco for macro news and technical analysis on gold and silver and other precious metals. Must read if you are interested in the hard metals

6. Volume Leaders, Price % gainers, % losers etc Link if I am looking for a new stock candidate to buy or sell puts on. I have this page open first 30 minutes of the morning market hour to help spot movers and find potential stock to add to my watch list

7. Folks at ZeroHedge - Link Here and the many interesting, enlightening and non mainstream articles I enjoy reading daily. All gloves are off here in the comment section so don't take them too literally

8. Last but not least, my favorite site and favorite folks at Dailyfx - link with their up to the minute real time forex and econ news and awesome technical analyses. I have learnt much from charts and videos you put up. I do not trade forex but use the charts to help me understand equity market behavior. A big Thank You

No, CNBC is NOT on my Reading list....

I used ThinkOrSwim Ameritrade. It took a little getting used to switching from Command Center, but I am liking it. All the info on one page(or two pages depending on how you set your screens up). Level II bids and asks, volume, implied vol and greeks for options, broader market indices and all the technicals you need to monitor a stock closely plus latest news, earnings date at your finger tips.

Hope you find the above links useful in your trading .

Buy Low Sell High, Limit Your Downside, Take Profit Often (In normal market I would let my profit ride but not this market right now)

Someone commented on an article posted on ZeroHedge yesterday and I quote "the market is so rigged and non-efficient that no position makes sense, and that taking any position is just gambling with cheaters at the table". Indeed, the market has become a roulette game, a market where its liquidity is powered by HFT's fast churning machines and algorithms. It seems each day the market decides on a fresh start and off she goes up and down (collective greed or fear), fundamentals aside. Dotcom bubbles deja vu. It is news snippet driven, and that 99% of the time is a rehash of someone's else post on twitter. Pre-market volume has dried up as no one dares to make the first move for fear of getting whipsawed once the bell rings. One never knows what is around the corner and which HFT or hedge fund will be calling the shots during the first 10 minutes and every minute after that. It is the biggest casino in the world.

Can a savvy stock picker still manage to come out ahead? perhaps. Traders and hedgies are pushing the envelope ever so slightly until it falls off the table, especially those who are playing catch up compared to their peers (or is it their bonus). There are two sticky notes on my walls staring at me that read "Buy Low, Sell High and Take Profit". I am learning to cut my loss early if I am wrong footed, usually this means within the next hour or close out my trade before the close. Cash is safer with me than parked on a stock in this volatile market environment. Increasingly many are talking of a market tipping over and heading south. For most fund managers, the reality is there is really no other place to park client's money if their mandate is to stay mostly invested (and doing with much trepidation) and as such equities are marching on at relentless pace. However, lately we are beginning to see signs of cracks.

I keep reminding myself that trading is simple, there is no need to over complicate one's trading strategies. Get out of something that is not working, has not worked, and stick with what works and has worked in the past. I have a handful of biotech and drug recovery companies I buy (and Sell) and that is working right now and I thank my lucky stars. I also own individual small miners as proxy to SLW, GDX and their underlying ETFs (SLV, GLD). I have been able to profit from these smaller names trading alongside the bigger names. I am still selling puts and calls to balance the volatility on my portfolio. The last few months, I tried to profit off short term momentum of a stock candidate. I am not buying any blue chips or utilities or any other hot shot that are all sitting at 52 week high. When the market crushes, I will have my pickings there.

If you are looking for a good book on the HFTs, read this book Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market

Good luck trading

A Trade At A Time...Staying Vigilant Amidst Market Volatility

Uugh...I have definitely been procrastinating here.

Update.....It is late afternoon Friday Nov 8, 2013, a day after the big sell off in the DOW, the Nasdaq and the S&P (from the get go in the morning, one we have not had in a long long time). Today is also the day the markets (miraculously) recouped all the previous day's losses (despite Twitter (TWTR) losing another 8% and Tesla (TSLA) trying to find support). One has to respect the market. The market is after all a reflection of the collective actions of the trading crowd and psyche - the greed and fear. The % of folks using margins to trade and the amount of leverage used is now as high as in the summer of 2007 during the Lehman crisis. Market indices seem to move in clips, my level II quotes have also not been orderly to my naked eyes. The culprit to me is the HFTs, hijacking quote feeds many seconds ahead and stalling some whether intentionally or otherwise. Often, my level II quotes on some stocks on Ameritrade ThinkOrSwim (TOS) look very disorderly while on others they look fine. This is how flash crash happens, bids being withheld to precipitate a drop in the asks from the unsuspected sellers. This market is Man versus Machine, it is clear ordinary investors are being had. Many have written about the HFTs extensively and I want to know why hasn't the SEC taken action! Do they need another 600 point flash crash before they act!!

So in the last many months I have watched my portfolio yanked 180 degrees, up and down and sideways and I am ahead by about 15% when it could have more if I had been more diligent. It is my own fault really. If I had known the Fed would be too chickened to taper and the DOW, S&P and the Nasdaq were going to make the 20-30% relentless climb in 2013, I would have put 1/5th of my money in a broad market index fund...hindsight is 20/20. The last 10 months have definitely been bad news is good news, business as usual with the Fed flooding the market with all the money it can print. Well, even PIMCO's Gross has his bad days, what about a small fry like me who is just trying to make some money from trading to pay her bills.

One can no longer trade on fundamentals, stock price defies logic and leaves even many professionals searching for explanations. It is the Flavor of the Month trade, the whatever is on CNBC trade. I find myself reaching for Alexander Elder's book "Trading for a living - Psychology, Trading Tactics and Money Management" on my shelf. I am a momentum trader, I get into a position if my level II data suggests good size bids and/or momentum. For me to put my cash to work and sell cash covered puts or add a position, I look for speculative stocks often in the news with moderate to high beta and implied volatility on their options of between 70%-130%. After all I am selling volatility in puts. When that volatility subsides (or time decay), I will collect a neat sum for the premium if the trade does not turn sour on me. This in essence is my trading strategy. I trade for a living, albeit a small one (my life is simple), so anytime I can scalp for profits I will trade.

If you are interested in Alexander Elder's books Here is the link on Amazon

In the past I would sell cash covered puts on a candidate I have identified, 2 to 3 months out for a nice 6-10% if they expire worthless come expiration time. In the last few months, the market has been so volatile that my puts would decay quickly and then it would just stall out as market or my stock get whipsawed. Often it would come under bear raid as they call it; traders emboldened by cheap leverage. Not surprisingly, this often happened on a bad market day coincided with momentum traders reacting to a negative opinion piece on SeekingAlpha. To me, the market has become nonsensical, the gyrations on individual stock much too big and it can only point to margin trading and participants trying to ramp a stock up or down and profit from it. 'Risks On" with the leverage one can get it seems. So I find myself pulling the trigger to close out a profitable trade sooner than ever before. For the same reason I no longer sell covered calls on every stock in my holdings but instead ride my positions and exit when share price reaches my target. If I had sold calls and the stock spikes a lot I would have to pay more to close out my covered calls and would therefore not be able to participate in the sudden big gain. I recalled Cramer telling his viewers that he does not want his viewers to sell covered calls (for the same reason). I am not a big fan of Cramer, however, his calls do move the market and many traders listen to what he has to say and take the cues from his show whether they choose to trade against or trade with his calls.

Lastly, why isn't Pimco's Bill Gross a candidate for the next Chairman of the Fed? I am certainly not the only one who thinks he would make a great Fed Chairman. Wall Street bankers may not like the Bond king, he is however a sensible man if you read his investment letters and writings. America's financial future and the future of the next generation is much at stake here and another artificially created boom bust cycle will no doubt dethrone America and the Dollar from the world stage if that process has not already begun.

A good week

Like many of you out there, after watching your portfolio ride the gut wrenching ups and downs of the stock market in August and September, I swore I was never letting that happen again. Watching the market gyration, it was dizzying to say the least, like being on a boat in high seas. In today's trading environments where HFT and hedgies are always ready to pounce and the shorts lurking around at every S&P resistance, I have pared back my holdings and abandoned Buy and Hold. Financial markets have clearly changed and they are so interconnected that today there is really no place to hide. Markets go up and down together, one can no longer hide say in Emerging markets if US markets and European markets took a hit. Yes, you can still hide out in fixed income, but at some ridiculously "obscene" low interest rate if you are lucky, going backward with your money. I am better putting my money under my mattress at least I know where they are or storing them in physical gold.

So I operate now on the new mantra of keeping a position for only a few days, often just overnight or I would close out end of the trading day. I hate doing all that reporting on my tax returns but that seems to be the ONLY way I will be in control of my portfolio. It has stopped going backward and it is now growing steadily. The market is now driven by headlines, rumors, speculations and fundamentals is not a place to hang one's hat on right now.

So with that backdrop, I wanted to say that last week was finally a good week. The market chart is a 3 day chart. If we get a big rally (short covering induced most of the time), that rally may extend itself a bit more the second day after the media and all the smart people chime on it. Those sitting on the fence may decide to jump in so as to not miss the boat. Unless we have more positive news from day 2 to day 3, that rally usually fizzles out as longs get scared and took profit. On a market down day, it works pretty much the same way except the inverse. I watch market sentiments closely.

This past week, I decided to sell cash covered puts at or before 10:30am when market got sold hard from the open into European close, I then bought them at the end of the rally as shorts covered and was able to lock in the gains. I like not tying up my cash overnight as I never know what events are going to be brewing in Asia and particularly Europe that might affect the market. I also unloaded my last LVS position that I held for a few days for a nice profit on Friday. I had gotten out of my other LVS position the Friday before for a 8% gain. I did not like how LVS traded the whole week and Level II confirmed my fear. It went nowhere and had trouble breaking and staying above 45 convincingly (China's less than good numbers did not help). It does not mean we won't see it rally above 45 or 46 next week, such is the market today and everyday is a brand new day. The broader market also rallied on low vol. My gut feeling said to get out and reassess Monday morning.

What do I watch daily during market hours? without a doubt the EUR/USD and AUD/USD crosses. I have this feeling that a lot of traders pair trade currency and SPY as well as GLD concurrently and watching the currency chart gives me a heads up. I normally have the Dailyfx real time new feeds with the live forex chart next to Ameritrade Command Center on two separate screens and that format works well for me. I am up early, by 5am. With my home made latte in hand, I watch Bloomberg for overnight and early news and at 6am, I switch to CNBC and catch up on live actions and news/insights from the bond pits. The TV is really just in the background with my ears tuned to it. (Not to digress, but I bet the market gyrations would be cut in half if there is no CNBC seriously, everyone seems to be have an opinion on where the market and their favorite stock would trade and sometimes I think it became a self fulfilling prophecy). Aapl makes up some 9.5% of Nasdaq volume so I watch it closely for signals that market may turn one way or another on cues from Nasdaq. (shouldn't Nasdaq do something about this so we even out?)

I enjoy trading and watching the markets and how the financial world managed to self destruct with the subprime crisis. It is an interesting world we live in today. One thing is for sure, I am guarding my hard earned money like a hawk. My cash is safer in my hands than anyone else's !!!