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At Rick’s Picks, Every Stupid Rally Is a Short

By Rick Ackerman Posted on July 25, 2012, 8:52 am EDT Last Updated July 25, 2012, 5:09 pm EDT

Apple, the mother of all bellwether stocks, has taken a flying dive Tuesday night on news that Q2 earnings were merely sensational  (i.e., up a little more than 20 percent). Presumably unaware that Samsung’s excellent smart phones have been breathing down iPhone’s neck, speculators were evidently caught unawares when Apple’s earnings report included the peevish detail that iPhone sales had slowed markedly.  The ubiquitous product has accounted for most of Apple’s revenues in the last few quarters, so even a mild slowdown was bound to stampede pass-line bettors.  So, because of Apple’s bellwether status, does the stock’s apparent failure to soar to new highs on this latest earnings report portend tough times for the market as a whole?  Very probably, yes.  Without Apple to pull shares higher this summer, don’t expect them to make much headway.  Regarding Apple itself,  although we’d told subscribers earlier to buy the Sep 650 – August 650 call spread for $5 as a relatively low-risk bull play, because of the way the stock is acting this evening, we’ve recommended that the order be canceled.

Meanwhile, Rick’s Picks subscribers who followed last week’s advice to short the market are enjoying what has been a painful decline for most investors.  One of two trades that caught the precise top of the so-far mini-avalanche was the result of a challenge we issued to subscribers back in May to pick the perfect spot to short the Mother of All Bear Rallies. Permabear that we are, we have been top-picking for years (and also trading the rallies. Of course), never expecting to catch the actual Summit. Our goal, repeatedly, has been to get short at “a” top rather than The Top, and to make a few bucks even if we are wrong.  And if we are right? This time, perhaps?  That would be icing on the cake.

Judge for Yourself

Judge for yourself how we’ve been doing lately.  Last Thursday in the Rick’s Picks chat room, a Hidden Pivot-eer who goes by the handle “Crusty Buttocks,” announced to all that he was shorting the QQQs at 65.26. This subsequently turned out to have been just a nickel from the recent top at 65.31.  The QQQs subsequently plummeted to a low of 62.55 yesterday – a 4% decline in three days – producing a theoretical trading gain of as much as $1104 for each 400-share position. In fact, Crusty’s gain thus far has been smaller, since he took partial profits along the way. That is what makes it possible to profit on short positions even when they have failed to nail a major top, as will nearly always be the case. According to the terms of the challenge, if Crusty’s position is still profitable by today’s close, he’ll win a free annual subscription for himself and a friend, a private tutorial session, and a year’s access to weekly tutorial sessions held for graduates of the Hidden Pivot Webinar – worth a total of about $1500.  Think you can’t do what Crusty did?  Guess again. Many of the more than 800 students who have taken the Hidden Pivot course frequent the chat room and you can ask them yourself by taking a free trial subscription. Or click here for information about the upcoming webinars on August 1-2.  Once you’ve registered, you’ll receive a hard copy of the course manual, access to all classroom sessions both live and recorded, a CD-ROM with nearly 3000 annotated charts, and assorted other swag.

Missed by 20 Cents

Incidentally, the other short entailed buying puts in the Diamonds (which mirror the Dow Industrials) at around the same time Crusty was shorting the QQQs.  The DIA short recommendation went out when the DJIA was in the throes of a 500-point rally we had projected to exactly 13077. (Yes, we were bullish as all hell before the Dow reached the target.) The corresponding target for the Diamonds (DIA) was 129.51, and so we disseminated the following to subscribers, on July 16, with the Dow trading around 12727:  “There’s a bigger, bullish  pattern at work that goes back to early June’s lows, but the one we should focus on for now projects to 13,003. Traders can short this [rally] by buying four DIA September 126 puts if and when the underlying vehicle gets within 0.15 points of 129.51, the equivalent target.  The chart above shows the 129.51 target relative to the actual top at 129.71.   While it may not turn out to have been the Mother of All Bear Rally Tops, puts that could have been purchased that day for 2.04 have doubled and are trading around 4.00. To reduce risk, subscribers were advised to sell half the position and came away with 3.75 for the puts. That has effectively reduced the cost basis of the remaining puts to 0.45.  Under the circumstances, it’ll be hard to lose even if the Diamonds reverse and go on a bullish rampage.  A theoretical model suggests the Dow would have to rally about 1300 points to bring those puts down to 0.45!

***

Trading stocks, options and commodities in these treacherous times calls for great patience and skill. Click here if you’d like to see how Rick’s Picks approaches the challenge.

  • Robert July 26, 2012, 7:27 pm

    Every rally is a short, and every dive is a setup for the next rally…

    Welcome to the new age of technical trading, where the intensity of moves is nothing but a function of how many algorithms get triggered by the initiation of the move.

    and, since the number of algos that are out there waiting to pounce on any kneejerk can never be known (at least not as easily as the good old days of being in the pits and reading the expressions on the faces around you), the likelihood of being able to ascertain long term market bias from short term momentum is highly improbable…

    therefore, the real trick for the successful trader is to understand WHICH impulse moves are merely setups for a consequentially abrupt shift in the opposite direction, and which ones are indeed accurate harbingers of a true shift in the underlying fundamental bias of the market item being scrutinized.

    Most HFT algorithms maintain no position weighted bias – they simply exist to front-run every trade, regardless of the momentum or direction of the underlying move. For every algorithm that wants to chop your 1000 share buy order into ten 100 share buy orders, there is an equivalent number of algos wanting to chop your 1000 share sell order into ten 100 share sell orders….

    Rick Ackerman might barbeque me for saying this, but not every long (or even intermediate) term shift in trend is going to begin with an impulse move on the hourly chart. They can’t. In fact, I personally think the speculative chart based trading markets are getting to the point that ALL impulse moves will soon simply be a trigger to run to the other side of the boat and pocket a quick profit.

    Long term moves are therefore going to rely not on the news, but actually on whether said news is perceived and accepted by our collective minds as truthful and accurate, inaccurate/incomplete, or outright deceptive.

    So I read Cam’s comments above and think to myself “how does a shift in gold on the daily chart, taken along with some other shift on the S&P, really correlate to ANYTHING in terms not measured in hours or days?”

    The only correct answer is that it does not.

    We all do it all the time. we quote oft-repeated “rules” and correlations that are supposed to underpin common market psychology, and yet have seemingly been flat-out failing time and again over the past 4 years:

    1) Gold and the dollar move inverse
    2) The S&P moves inverse to the Fed’s balance sheet
    3) Corn prices move inverse to diesel futures…

    ad infinitum.

    I think the day is coming when the profiteers will shift the markets wildly, chasing ever-fleeting alpha, and the accumulation and preservation of wealth will fall to those who understand WHERE (whether it be indexes, sectors, or symbols) the profiteers are planning to shift their focus next…

    When you walk into a casino- what criteria do you use to determine which poker table you will choose to sit down at? What criteria do you use to determine that it is time to stand up and walk out of the casino and go home?

    Understand these thought processes and behaviors, and one day you will understand the real difference between short term profit motive and long term wealth management…

  • CamFitzgerald July 26, 2012, 4:28 am

    Are you sure I don’t know V?

    • Mark Uzick July 26, 2012, 4:46 am

      To both Cam and V,

      You’re both guessing…there’s too much missing data; the only thing we know is that we don’t.

      But it’s true: some are better at guessing than others. Now if I could only guess who.

    • Cam Fitzgerald July 26, 2012, 8:30 am

      First off Mark, I do not guess. Second, the anonymouse poster “V” did not make any assertion of value but merely criticized my post without making a valid case while suggesting my point of view was a gamble. Nameless people and ad hominem attacks have zero value. Maybe you can guess better next time which of us is correct. Just watch.

    • Mark Uzick July 26, 2012, 10:43 am

      Cam,

      Don’t let VLAD’s insults get to you – he likes pushing peoples’ buttons. Think of it as a complement that he’s interested enough in what you have to say to react to it. He amuses me, but I understand Rick’s concerns about the level of discourse.

      VLAD, I can’t say for certain, but if you could stop with the insults, maybe Rick will relent on your ban.

  • V July 26, 2012, 12:33 am

    funny indeed, all comments above, specially by cam f.
    “but what the hell do I know” is right, since you know nothing.

    so put all your money on your drivling nonsense, cam f., go do it, now.
    because I can’t wait to see you jump off a building.
    old fool splatter.

    • Mark Uzick July 26, 2012, 10:41 am

      Cam,
      no one can know future prices with certainty; if it was possible, the secret of how would eventually become public; and then prices would already be where they were going. (It sounds impossible because omniscience is impossible to Man. All the necessary data to is contained within the universe, but you’d have to be both the the whole universe and conscious of everything about yourself – literally God – to know the future. The best we can hope to do is to use our limited knowledge to increase the probabilities of a correct guess. Isn’t that enough for you?

  • gary leibowitz July 25, 2012, 2:55 pm

    AAPL didn’t seem to lose market share so much as their clients are holding off for the rumored iphone5. As for other companies making inroads to their businesses, they can try. In some cases they will actually succeed. Their future growth however is still very bright, with exceptionally high profit margins. Everyone has been trying to copy their formula, and so far few have succeeded.

    On the market as a whole it is interesting to see the futures up on the DOW and SP500. If it holds and we get a positive close I would view that as a good sign.

    Generally speaking earnings are showing remarkable resilience. The longer this market stays above 1300 (1290?), the better the chance of a huge spring board affect. In fact I was hoping for a low going into August.

    Gold seems to still be following the health of the general market. I would be very surprised if they detach anytime soom. Whenever rumors of default or a slowing economy surfaces Gold doesn’t seem to want to rise. That suggests to me that the initial run up from here will be with an expanding economy or at a minimum expanding spending.

    • Cam Fitzgerald July 25, 2012, 5:50 pm

      Looks like you are going to get your wish Gary. We are setting up for quite a healthy rise in the S&P as I see it. Gold has bottomed along with the Euro so I see metals rising in tandem with most commodities (although the healthiest upside for corn and wheat have already been taken). Silver is an absolute bargain at todays 27 and change. I could be a bit early but I was calling the bottom in metals trades yesterday and it was not a long wait for satisfaction as gold rose alomst 30 dollars since that time. But what the hell do I know since I don’t follow impulse charts.

    • C.C. July 25, 2012, 6:41 pm

      AAPL is reasonably sound, as long as global discretionary income keeps a floor under it.

  • mario cavolo July 25, 2012, 10:40 am

    I just read there was a recent WSJ journal suggesting that the FED is getting “more ready” whatever the hell that means to go for whatever QE is needed…perhaps this is what gold is telegraphing….my earlier comments about an inflationary future bodes well for gold and other related assets….

    • Andrew Gutterman July 25, 2012, 4:25 pm

      Mario,

      What inflationary future do you see with the 30 year bond below 2.5%? Are you saying that the market has got it all wrong about the future of inflation?

      I remember the late 60’s and 70’s. The market didn’t have any problem at all anticipating the inflation that was to come, bond rates soared.

      Why is the market wrong today?

      And please do not tell me its all because of what the FED is doing. Yes, the FED is buying long notes to pressure the rate, but the amount the FED is buying over time is a drop in the bucket of the $550 billion traded every day in the Treasury market.

      Thanks,

      Andy

    • Bam_Man July 25, 2012, 6:00 pm

      Forget about what the “treasury market is saying”. There is no “market” in Treasuries. There is only the Fed, distorting and mis-pricing risk beyond all belief.

      Once it gets to the point where there are no more capital gains to be had, and only puny coupons and possibility of huge capital losses, the “hot money” will flee the Treasury market all at once. How many hedge funds do you think buy these 10- and 30-year Treasuries with the intention of holding them to maturity?

    • mario cavolo July 26, 2012, 10:19 am

      Andrew, I expect a continuing expanding, inflating future for the next 50 years, no different than the past 50 years. While along the way, we will have reversals, recessions, crises, but in the end, continued expansion and inflation across the globe. Why? Because the world is expanding.

      Pepsi Global CEO Indira Nooyi, Nobel economist Robert Fogel, the IMF, the UN and Goldman Sachs all basically expect global GDP to hit in the neighborhood of 200trillion from today 40 trillion, with China and U.S. continuing to have the lion’s share of that. Keeping in mind also that 50% of S&P 500 company earnings come from all across the globe, more and more from the APAC region.

      That’s it in a nutshell, while of course I have no idea as neither does anyone else on th eplanet in terms of predicting what the future really may hold….wayyyy too many variables of both the random and nasty, evil kind…

      Cheers, Mario

  • Cam Fitzgerald July 25, 2012, 10:08 am

    “Night Owls: Gold Is on the Move!”
    ——————

    So…..might you now agree that I am not overthinking Rick? As I told you yesterday, GDX and GDXJ have bottomed. There is another dynamic at play now and you had best position for a Euro bounce and precious metals strength. We are at the small end of an early re-entry opportunity in my opinion. There is no metals crash coming. On the contrary, the future of gold just got a lot brighter.


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