Market Update

I have been suggesting for the last week or so that I thought the market was weakening at that I am thinking we will start to accelerate to the downside. But enough of opinions, what are the facts I look at?

I look at a large number of studies and different sentiment indicators, but a few simple systems seem to work time and again.

1. The VIX has closed above the 21 day moving average and as of today the 5 day moving average is crossing the 21 day. This is a simple signal that works well on the VIX. Also the MACD of the VIX has made a cross signaling the VIX may rise (and markets fall).

2. 5 days of distribution the last few weeks. Heavier volume down days in the market are what Investor's Business Daily uses to track the market trend. Today was 5 distribution days for the NYSE.

3. Put/Call ratios (both equity and total) have recently made relative lows against standard deviation bands of the 10 day average. That indicates complacency and that is not good especially in a downtrending market.

I would again suggest bearish trades on BNI, DD, DIS. I would hold off on AZO until I see a more clear break down. However, most stocks follow the market, and if stocks start to come down hard, I think AZO is likely to as well.

Pete

SDS Trade Exit

The short-term model for the S&P 500 is now oversold. The current price of SDS is 66.90 for a nice gain up from 64.19 at entry. I recommend an exit on this. I would be for letting this trade ride for a while if the initial stop is maintained. But that will add more volatility to your portfolio.

Pete

Trade Updates

The SDS trade is doing well so far. The short-term model is back near oversold. Ayone in this could consider exiting tomorrow morning, but I will wait to post the exit until the short-term model does enter the oversold region. I will not be looking for a bullish trade at that point though. I feel that we may be close to a breakdown type of point in the market.

Also, the FRO put option trade made headway today. I will plan to hold that trade till expiration, but anyone in it may want to consider selling at 100% gain or 150% gain.

Trades I would make today include DD, DIS, AZO, BNI all for put option trades probably with October expiration and at-the-money or in-the-money strikes.

Pete

New SDS Trade

The short term model is very very close to overbought. It is close enough that I am going to suggest an inverse ETF trade. I suggest buying SDS the double inverse fund of the S&P 500. This will rise as the markets fall. For anyone trading this, for a risk management standpoint I would use a stop loss of 62.50. The current price is 64.19 and that is the price I will use for tracking the trade.

I had suggesting exiting the previous SSO trade already even though the short-term was not extremely overbought. I would definitely exit it now if you haven't already.

As an aside, I think ENER would be a good put option purchase right now. Also, I have puts on TEX which looks to be forming a triangle pattern that I would expect to break to the downside.

Trade Recommendation: Buy SDS with a market order today, 8/28/2008.

Pete

SSO Exit and Market Update

SSO opened at 61.60 today and that is what I will use as the exit price for this trade. The entry price was 61.66, so this is essentially a breakeven trade. The short-term model never made it to overbought, but everything I have been looking at had suggested that the market would move lower soon (as it has today), so I wanted to err on the side of caution this time.

If the market ends down today in higher volume, as it appears it will, that would be 5 distribution days since the recent follow through in July. Five higher volume selling days in the space of 4 weeks is what Investor's Business Daily suggests is almost always enough to send a market into a deeper correction. So, the volume pattern is another reason to be careful in the market now.

Pete

VIX Update and What I'm Watching

The VIX has made 12 lower lows since the July highs in the VIX. I consider anything 12 and over to be stretched and time to start expecting a reversal in the markets. Also, despite the large price gains today, the volume on QQQQ and SPY was very low, which does not convince me that this rally will last.

The short-term model is close to overbought, but not quite. I am going to suggest exiting it on Monday morning, as a bit of personal judgement on this one instead of waiting for it to get more extreme.

Three trades I would take immediately are STZ, DIS, and DD. All these would be short sales or put option trades.

Pete

Updates on Commitment of Traders Reports

I wanted to give some updates on current CoT data.

Right now the Commercials (smart traders) are net long (meaning they are buying) natural gas to a greater degree than any time in the last 5 years or more. Both the commercials and the large speculators net positions are at extreme levels that have corresponded with bottoming in the commodity the past several years. For non-commodity traders I would look at UNG which is an ETF that tracks natural gas.

Crude oil is also in a similar position to natural gas. Both commercials and large speculators are at extremes corresponding with past buying opportunities. However, I have discussed in past posts, that the commercials were in an extremely bullish position even before the huge sell off the last month or two. Also, I have discussed in past posts, that the price action of crude oil is more consistent with a decline off a major top and may have further to go down before a truly great buying opportunity exists. USO is an ETF that tracks oil for those interested. Also DIG is a leveraged oil and gas ETF that will move about double the amount of oil and gas.

The "smart" commercial traders are continuing to decrease exposure to the US dollar as it has made a dramatic rise the last 2 months. Large and small speculators are both upping there exposure greatly. All three groups are at extremes relative to standard deviation bands of the data. UUP is a relatively new ETF that will rise as the dollar rises. I do not have a lot of interest in this ETF because I would rather trade something more volatile like USO (which will generally go the opposite direction of UUP).

These data raise the possibility that we will see a return to a declining dollar and rising energy prices soon. I trust data over other conceptual arguments, but I think there is something to be said that our country may be moving into a deflationary time as consumer spending drops dramatically with the baby boomers passing their peak spending years. How this will balance out against still relatively strong Asian demographics for several more years I don't know yet.......that's why you always control your risk in any investment. Trust your data, but follow a good risk management plan in case it doesn't pan out.

Pete