This morning's headline had me laughing.  "Loss, rally, rally ... now what?".  Now they're too lazy to even make up something that goes along with unexplainable gyrations of the market.  I suppose I should be happy since the daily justifications of price movement, which I think even in hindsight are inexplicable, were finally presented in such a way.  I'm a cross between a technical and fundamental guy, with a pretty big push towards technicals especially in shorter time frames.  I would think that it would make a lot more sense if price deviations on a day to day basis were presented in the context of a chart.  The moves in May and June clearly showed some abnormal breakdowns in price, but July has simply been bouncing about in a range.  Right now, we're on the high side of that range.  This is no big deal.  But I suppose if the headline read, "latest market price moves, no big deal", that isn't going to grab any eyeballs, now is it?  Plus, this is earnings season.  This is always a market mover.  Big swings in either direction.

I mentioned last week that I expect volatile times.  I think those are going to continue for a little while longer as things shake out.  Volatility makes the market interesting to me.

The impression of a turnaround that I posted last week was a sure sign of a top. 

Now we're back to doom and gloom.  The latest I've heard is that now the banks have been buying each others stock and therefore doubling their risk.  That doesn't seem to make a ton of sense.  There may be a degree of truth to it, but I have to think that this is a somewhat planned event.  It's hard to believe that banks are running out and buying beat down sectors, especially their own.  But I've digressed.

I wanted to take a look at a chart because while the news is all doomy and gloomy again, a chart will give us the true picture of where we are.

(click to enlarge)

As you can see now, we're clearly in the middle of this downtrend.  No real panic here and not really an extreme range.  What is noteworthy is the length and severity of this downturn.  I've outlined it with a red trend line.  This trend started in May and hasn't really showed any signs of letting up until last week.  The ladies on CNBC and CNN both claimed that they're hard pressed to find anything good about the market today.  Well I'm here to say that it isn't all bad.  The next few sessions will prove interesting for sure.

Right now, according to Marketocracy, my fund is not compliant.  The rules for compliance are:

1. You cannot purchase a stock so that it will increase your position to over 25% of your portfolio‘s value. If you violate this rule, your fund's effective inception date will be reset to the date that you bring the find back into compliance with all compliance rules, not just the 25% rule.
2. If a sub-25% position rises in value above the 25% threshold (without additional purchases), your fund will be out of compliance until you sell of enough to bring it below the threshold. (However, your inception date will not be reset.)
3. You may only hold up to 35% if your portfolio‘s value in cash. The other 65% (or more) must be invested in stocks. Real fund managers are paid to invest, not hold cash, and so the SEC requires that they meet this cash rule — hence we also require you to follow this rule a majority (51% or more) of the time.
4. Half of your long portfolio may be in positions that may not exceed 25% of the value your total portfolio value. That means that you can have two 25% positions taking up that entire half of the portfolio, or, you can have five 10% positions (since none exceed 25%).
5. The other half of your long portfolio may be in positions that may not exceed 10% of the value your total portfolio value. At the least, this means that you would need to hold 5 long positions worth 10% each. However, you can (and likely will) hold a few more positions to make sure you have some breathing room below the 10% threshold.
6. Negative cash balances may not exceed 5% of total portfolio value. If this happens for more than 7 days per quarter, you are out of compliance. That means that you may not spend more cash than you have to buy stock — or in other words, you may not use margin.

I'm clearly in violation of item 3.  I only have one open position right now.  Ideally, I'd like to keep the portfolio around 12-15 stocks and the rest (if any is left) in cash.  However, it's going to take some time for me to get there.  These stocks are wild and I've already bought and sold 2 positions (ZEUS, stop loss and AXYS, profit target).  I may extended the profit target and stop loss ranges if things get crazier.

The sole holindg of the fund right now is ICLR, which is currently down about 3%.  This morning, I'll be adding two more holdings.  HP and HIL have been flagged.  I'm going to open positions roughly 7-8% of the total portfolio's value.

I have reason to believe that there is some merit to the "cut your losses early, let your winners run" in the momentum situation.  Basically, I'm up against some serious volatility.  I'm going to get about this two ways, the first way, I'm going to stick to relatively strict profit targets and stop losses.  I will revisit positions at least once a week if not more frequently.  When I see a position that has a loss of more than 8%, I'm going to sell that position and replace it based on my scan criteria.  I am also going to set a profit target double that of my stop loss, so between 14-16%.  I reviewed ZEUS and AXYS this morning, ZEUS is down 8% and I've submitted a sell order. AXYS went to the moon based on  wonderful figures.  I've submitted a profit target ~15%.

I'm also experimenting to see how much I will have to manage this.  I don't have a lot of free time these days, so a daily review is unrealistic.  Also, I don't want to over manage it.  8% may not be enough wiggle room to let these picks make their upside moves.  However, I don't want to sit there and wait while something is dropping like a rock.

This is still paper money and until I have the "~" worked out one way or the other, it will stay at paper money or with no money at all.

You'll be able to see how the performance is at marketocracy by clicking here.

All right, the old blogging software finally got on my last nerve.  There were just too many basic bugs in the thing and the last straw was justifiable complaints that people couldn't find anything since the calendar and category links seemed to be broken.  I think the only thing that worked right was the search and even it had cosmetic problems.  There have also been no updates to the software since I started using it.  This makes me think that it's probably been left out to dry.

So here's some new software.  It was a bit painful, but I managed to migrate all posts and your valuable comments over to the new system.  So far the back end administration stuff seems quite nice.  The layout is a little plain, but compared to the other layouts with this software, this is the most fitting.  Don't be surprised if I switch themes once or three times just to see how it turns out.  I do admit that this software seems clean and things are easy to find.  Everything seems to be in the right spot.

I hope it will provide a slightly better experience and those who only visit us once or twice are able to easily find what they're looking for.

Oh, and another pretty nifty feaure is that with a single click you can rate my article.  It's completely anonymous, so don't be afraid to give me the rating I deserve. 

Every day I'm feeling more and more convinced that maybe we did hit a bit of a bottom recently.  So there's a hurricane churning in the Gulf of Mexico and the price of oil plummets $5 per barrel.  Whu??  I thought if someone so much as passed gas next to a pipeline that would cause the price to shoot up at least $10-$15 in short order.  Wachovia loses $9 billion and XLF is up 1.5% today.  Er? 

It seems like when the news is really not so horrible and the market is tanking (read, last fall), we're in for a correction or bear market even.  Now the inverse is true.  The news is awful and markets are holding on to gains this afternoon.  Could this be the bear turning around?  I don't know.

<rant>

The headline regarding the Amex miss is

"Card giant's results underscore dire state of the U.S. economy, as even some customers with good credit histories fall behind on bills."

Well, duh!  Good credit histories which are represented through good credit scores outline the true problem with this barometer.  A good credit score is nothing more than someone who paid their bills in the past and has the capacity to have a lot of debt going forward (did you know that closing a credit card out can actually HURT your credit score?).  It does not seem to take net worth into consideration.  So someone who has been eeking by all of these years living the proverbial paycheck to paycheck American dream is experiencing their first lesson.  This lesson propagates to Amex's bottom line.

I believe credit scores should be banished or at worst, their significance diminished.  This "people with good credit" line that we'll undoubtedly be hearing more of is misleading.  I have a feeling that this will begin to irritate much like the "people with less than perfect credit" did during the home loan extravaganza.

</rant>

If I had to take a guess at this week's action, I'm going to guess that people are already going to get tired of hearing "we only lost 5 billion instead of 10 billion, pop the corks!".  The sell off in (good) financials was overdone most likely and last week was a pop back.  The better companies (C, JPM) popped back harder than the ones that could find themselves in serious trouble before this thing is over with.  However, I think we'll be giving back a little of those gains this week.  The only thing throwing a wrench into my theory on a quiet, down week is earnings.  There are some serious earnings reports this week, including my newest fund pick AXSYS on Tuesday.  I still think a lot of volatiliy this week as the reports are processed, but all in all, probably slightly down.

I hope I'm wrong.

I have a pretty good grasp on mean reversion type trading.  It's the cornerstone of most of my trading systems and typically what I use real money to trade with.  One thing I've never gotten the handle of is momentum trading.  My take is that mean reversion is great for vascillating markets.  Momentum trading is great in trending markets, particularly those trending up.  I've come up with some ideas over the last several weeks that I'd like to try.  I'd tell you more about them, but this is really throwing stuff on the wall to see what sticks.  I'll be refining this technique over the next several months, or I'll be throwing it away and going back to the drawing board.

To me, the key to momentum investing is trying not to get slaughtered during down trends.  I'm purposely starting right now (even though it's a little premature in my studies) because of the wild market conditions.  You'll be able to monitor my progress at Marketocracy and right now this is only paper money.  The MMF fund will start today with a NAV of $10.00 per share or $1,000,000 in cash.  No pretty pictures or graphs yet, however, the first buys will start today.  The two I'm starting the fund with are ZEUS and AXYS.

What's going to make this fund different for me is that there is going to be some discretion regarding which items I buy and sell and when I buy and sell them.  Typically in the past, I would generate a culled list from a series of fundamental and technical criteria and blindly buy and sell at periods defined in my plan.  This time, I'll rely on the noodle just a little bit to try and keep the fund out of danger.  Hopefully most of the screening and analysis will keep me out of serious danger.

Depending on the level of interest, I may keep the trade log public and rationale behind each buy and sell.

I asked the question yesterday if we're out of the correction yet in IBD terms.  IBD will typically say that a new rally begins with two big days up on higher volume.  Thursday seemed a bit like a follow through with everything but energy in the green.  I jumped out to the book store today to grab an IBD to see what they had to say officially and we're still in a correction.

Although I don't really subscribe to IBD methodologies, I do like to test things that are purported.  This is just another one of those things.

Reader "mike" commented shortly after the open yesterday that he would have a bit more faith in this being a bottom if things held up on Friday.  They did.  Things remain interesting.

The volatility has been whacky lately, so the market has once again captured my short term interest.  Remember this when the posts go dry for days at a time.

But one thing that I was looking for yesterday was the technical "follow through" to Wednesday's big day up.  To borrow from IBD (Investor's Business Daily), they claim that bottoms form and breakouts begin when the market is in a down trend but has two substantially higher days on substantially higher volume.  What does the chart say?

It certainly looks like reasonably good volume and Thursday's volume was higher than Wednesdays, so is now the right time to get back into the market according to IBD criteria?  I'll pick one up this weekend and see what they say.

As for me, I don't buy into this hypothesis a whole lot.  I buy when things are relatively low, sell when things are relatively high.

Welcome to July expiration.  Another one in the books, folks.

Everything went nearly according to plan until yesterday I realized that I forgot to do something.  My plan was to hold the MSFT put until the day before expiration because MSFT reported earnings.  I didn't mark my calendar and now I get to pay the price.  At the present time, it is trading down sharply, down nearly 5% pre-market.  The earnings report wasn't that bad, but the market is quite irrational these days, so anything could've sent it to the floor or to the moon.

So it could be a fun day for me.  I'll be checking on MSFT throughout the day for sure.   Oh, and for those just tuning in, I'm holding the $25 strike, so I still have some wiggle room.

The GE put was never at risk. I don't take a lot of credit typically, because I believe a lot of this is probability driven, but I honestly feel I just bought the GE put right.

I'm still feeling pain on the C assignment from last month. If you recall, I sold a put at 22.50, which was WAY WAY WAY out of the money. <laugh>. Well, that was easily assigned and while C made up some ground this week, I'm still hurting.  Yesterday, I sold a call for .51.  I lock in a relatively small loss if that is assigned.

So now I'll be flat on the short put side and looking for opportunities. The bounce this week has made things look a little pricey in the short term. I'm going to sit back and wait for things to look a little sweeter. I'll be watching my usual suspects (GE, MSFT, etc) and of course, some others.

Would be interested in hearing other option ideas for August.

Well, I did a little experimenting this go around.  I sold the Aug 20 calls for a .51 premium.  If assigned, this locks in a loss on the C position of $160 per lot (I've collected $90 in premium so far).  I needed to rub some ointment on the burn and I was willing to accept a reasonable loss for some juicy premium.  If C goes unassigned, I've decreased my cost basis and can sell some calls again next month.  Hopefully I'll be selling the 25 strike to lock in a profit rather than a loss.  But you can only get what the market gives you.

Comments welcome, followers not.

A couple of months ago I was talking about one trade per symbol in your trading system.  It was difficult for me to think that major components of major indexes could be at serious risk when I first began developing trading systems.  It's always hard to look at a GE, a Microsoft or even the largest auto maker in the world, GM as falling 50, 60, 75% or more over the course of just a few months.  I just want to point out that it does happen and is happening now.

One of my trading systems trades the Dow components individually.  It flagged GM, naturally, as a mean reversion candidate.  This happened in May (about the time I wrote the first article) when GM was around $20 per share.  We know how the story goes from there.  GM was trading as little as $9 this week.  That's a hell of a drawdown especially if you were averaging down the whole way.  Not to say that GM won't bounce back, because I don't know, but if you started buying @ 20 and kept adding to the position, you either have nerves of steel or you're sweating bullets.

After I wrote the previous article, I've been giving this a LITTLE more thought.  There are two things that seem to whack your profitability in trading systems.  One, limiting to one trade per symbol and two having stop losses.  However, both of these are vital to your long term viability.  I've discussed using option spreads instead of stop losses before and maybe this is an idea for getting exposure to a couple more trade signals on the same symbol.  Instead of buying more shares, consider buying plain calls or puts (not usually the best choice because IV is probably high and theta will chew you up) or buying an option spread such as a vertical or maybe a butterfly or calendar (if you really have a strong feeling about IV).  Now you can expose yourself to short term movement without the risk of blowout.

I'm going to explore this as my trade signals dictate.  With the market being as rocky as it is, I've had plenty of signals for the same symbol that I've ignored, or more aptly, RightEdge has ignored for me.

I don't know why I'm getting a kick out of this, but FDIC insured was always just fast lawyer speak at the end of banking commercial.  I don't think anyone ever considered whether or not their account is/was insured before opening an account somewhere.  Fortunately, I think you'd have to go out of your way to open a non-FDIC savings or checking account at any bank.  But what's truly comical is that now FDIC is coming up in normal conversation.  When was the last time you and your loved ones talked about FDIC?  Do we have it?  What is the max insurable amount?  What do we have at risk and where?  And I've even heard a story of a little old lady who has withdrawn her entire life savings out of a big bank here in Atlanta.

Just so you don't have to look it up, the FDIC insures $100,000.  To basically insure more than that, you need to open multiple accounts.

I once said if I had to run around town opening up bank accounts to make sure all of my funds were FDIC insured, what a wonderful time that would be.