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Oversold and Melting Up

by: Trader Mark October 13, 2008 | about stocks: DIA / QQQQ / SPY    
Trader Mark

Trader Mark

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Would it surprise anyone to see the "biggest day gain in history" or "biggest weekly gain in history"?

This is a melt up if there ever was one. As I said, when this rubber band finally one day does snap it would be tremendous (reversion to mean). And this once again shows why bear markets are hard on bears and bulls alike - imagine entering this day positioned the only way you could be to make money the previous few weeks (heavily short) - you'd be decimated. We were fortunate with some market timing and eviscerating our short exposure Friday morning. Better to be lucky than good, but preferable to be both.

S&P 960 was that "resistance level" way back... Thursday. Now we'll see if it provides any resistance on the way up. We are SO oversold that the 20 day moving average is way "up" in the 1080s.

My plan, assuming we hold today, is to sell a next layer into any KoolAid move tomorrow morning. For now I just want to "keep pace" with the market, using about 65-70% of our capital - we entered the day with roughly 19% cash and we sit now around 30% after taking our first layer of profits in the AM. It is still too early to begin re-hedging. Remember, once we get through the credit crisis we still have to deal with an impaired economy. But all in good time. How quickly fear can turn to greed....

The financials are actually not acting too great here - I am wondering if this is due to dilution possibilities (i.e. when the government takes a stake in your company, each shareholder is diluted)

Our NAV just crossed back over $9.00 which means since August 2007 we lost less than 10% in the 15 month period ... which, in the sharpest, quickest downturn in history, I'll take.

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This article has 8 comments:

  •  
    Oct 13 01:35 PM
    Today has been light volume, so I wouldn't read too much into things. But I agree that we have a long way back up to revert back to the mean 20-day moving average.

    I do expect a retest of the Dow 7800 that was hit intraday on Friday. Until then, I am still mostly in cash.
    Reply
  •  
    Oct 13 02:04 PM
    Gold is still @ 835, even with the gains posted today. I still think there is some downside. I have been in cash since dow 13000 so even if i enter now i still will gain, but i believe i will wait for confirmation. I do not trust this market, to much pilaging of retirement accounts.
    Reply
  •  
    Oct 13 02:04 PM
    P.S. i own gold stocks as hedge on losses.
    Reply
  •  
    Oct 13 02:10 PM
    Final issue, gold is going down when the dollar goes down and up when the dollar is going up. Are pigs flying yet? Looking to see one. Look at today.
    Reply
  •  
    Oct 13 02:18 PM
    This so-called rally is what $3 trillion will buy you -- the generally accepted figure that central banks threw in over the weekend. All of these efforts have shelf-lives of minutes to a few days. Libor is down, but awash in market of central banks' cash...

    It is my personal feeling that the latest crisis with the banks is a question of solvency, not liquidity. I doubt any of the major banks, if they are really examined, are solvent. (Local/regional banks may be a different story...) I think the U.S. Government knows that the banks are insolvent and they are doing everything they can, along with central banks throughout the world, to cover-up the mess they got themselves into.

    I saw another posting where someone stated that the derivatives that were floating around may be as high as $100 trillion. Actually, during a conference of the IMF, it was described as $100's of trillions... Much higher than many people think... In any case, if I what I suspect is true, none of these major players are solvent and central banks will be unable to shore-up the charade without bankrupting their own governments.

    Savor the moment of today's rally. It is floating on air and currently being made by impoverishing large numbers of people throughout the globe.

    Some have accused me of being a short-seller -- I am not. In fact, I would like to believe that we are turning the corner and Humpty Dumpty is back together again. But I know too many businesses that are leveraged with perhaps one percent of tangible assets on the loans. All of my training in economics tells me to beware...

    Having lived in places like West Africa where systems have fallen apart, I wish that many countries will be spared this agony. I think something similar is coming to developed nations throughout the world, but I hope I'm totally wrong.
    Reply
  •  
    Oct 13 02:31 PM
    All banks are solvant if enough capital is injected into them. None of the derivatives are going to pay out anything huge if large banks are not allowed to fail, a la Lehman. The bears are out of ammo, they predicted everything would fall apart, it simply didn't.

    There may still be blow ups - National City is looking sickly still, for example - but if RBS is simply taken public (sic) and Japan simply recapitalizes Morgan Stanley as much as required, the short bank-killers will not get any more trillion dollar scalps.

    There is plenty of real capital, the issue was always whether the authorities would demand the destruction of all existing financial security values before finally getting off the bench. They looked into that abyss and they decided no.

    This doesn't mean it is happy days are here again. It does mean we've seen the low, and pass 1974. 1982 may still be years away. But in retrospect, the difficult period in between was one of the best times in all of history to buy stock, and so it will be again.

    Best times in retrospect does not mean "any stock purchase will be instantly rewarded with positive returns on all time scales". The relevant scale of these events is a decade and change, not weeks or months.
    Reply
  •  
    Oct 13 02:41 PM
    JasonC:

    "All banks are solvant if enough capital is injected into them."

    Of course that is correct. But how much is enough? What will "enough" do to the balance sheets of governments and their own solvency? I think the doctor is dying trying to save the patient. In this case, if the $100's of trillions in derivatives is correct, both of them are going to end up dead. All the central banks in the world won't help them... I guess you could print money until we all look like Weimar Republic II, the sequel.
    Reply
  •  
    Oct 13 09:11 PM
    Wall St. moves are due to fear and greed. Both these are destabilizing forces. If there is a sudden gust of fear due to some unforeseen events, the fear feeds on itself and generates even more fear. Similarly for greed,. The current crisis was precipitated due to government inaction when there was too much greed in the housing/banking sector. As elections are approaching and Paulsons friends are losing their jobs, the US Admininstration decided to act, and convinced other countries of the necessity to do likewise. As in navigating an Airliner, the Autopilot (Free market) does a pretty good job of navigating the plane during much of the flight. In tricky situations such a landing or takeoff the Human Pilot takes over.
    The markets rallied realizing that the Pilot (US Administration) had finally woken from it's slumber and were prepared to land the plane safely instead of crash. There are still dark economic clouds on the economic horizon, so bumpiness is expected but not a fiery crash. After landing whether the economy takes off as scheduled depends on whether the next US Administration believes in taking over the control for the TakeOff Phase or is too lazy and lets the AutoPilot do the takeoff. The US economy definitely requires US Administration help to takeoff. After TakeOff the Free Market can takeover till it is time for the next landing.
    Reply
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