Here's a look at hoe the model portfolio did for the month of September (remember, I post all trades and ideas on the site before I put them in the model portfolio and often I don't even have time to make trades in the portfolio that I would like or in a timely manner).
A nearly 59% gain for September
Ranked #12
There are 13,215 portfolios competing and the WOWS model is #12 for the month of September.
I think that's a very strong statement in a very difficult market and this is without using options. I think some of our options traders may have done even better then this.
Where are we going next?
I've had a working theory about the market for about 3-4 weeks now and thus far it hasn't changed much, it is based on the charts first and foremost, and then some deductive reasoning. As you know, I closed all longs on Thursday and started short selling. Friday I used the market strength to sell short in to and am at my full intended position. There are several clues that we will be heading down early next week, I'm thinking Monday and I'm also thinking it may be a very dramatic and quick drop.
So far, over the weekend, the news out of Europe, which rotates in and out of the marker's focus (currently in focus again) has not been good. For example:
On Friday, it was noted that the Greek Debt Solution that needed about 90% of Greek bond holders to participate for the rollover and rescue to work, fell short coming in just under 75%; that effectively killed bailout #2 for Greece, but before the day was over, an announcement was made that the EU rescue mechanism, the EFSF would take up the slack, no one knows how since they don't own the needed private sector bonds. However, this entire ordeal is taking a massive political toll on the central source or European Stability, Germany. The German people are fed up with their tax dollars going to bail out other EU members who have not, will not and lie about taking the steps that they agreed to to get financing to keep them from defaulting, specifically Greece. Germans also recognize that although the PIIGS (Portugal, Ireland, Italy, Greece and Spain) are seemingly in the most danger, they also hold the biggest trump card as they can ask for nearly whatever they want, so long a they rig their numbers to look worse then they are, as they have been accused of doing, and the Core members have to comply so the contagion from the periphery doesn't spread to the core. This is literally the kind of animosity and resentment that has led to 2 World Wars. Nothing would surprise me moving forward.
Another idea meant to help in the crisis, the Eurobond, is being held up by the Green Party in Austria, while the ruling coalition tried pass a change in the Austrian Constitution to allow for participation in the Eurobond, the Greens and two other parties blocked passage of the vote which needed 2/3rd's approval to pass. Austria has significant banking problems as well as other seemingly healthy Euro countries (we are seeing the downgrades already). For example, their exposure to derivatives is 23x their total core capital in the banking sector. An adverse move of 4% in these derivatives would implode the Austrian banking system. The environment in Europe as far as the banks go is much like what we saw here in 2008 when banks said they had written off all of their bad debt and were well capitalized, just to have them come back a dozen more times with worse news. It's a confidence game and the banks are keeping things under wraps.
Furthermore in Austria, the hard-liner Finance Minister is opposed to expanding the EFSF bailout facility and when our own Turbo-Tax-challenged Treasury Secretary, Timothy Geithner went to Europe this week to offer words of advice, the Austrian Finance Minister had some words of advice of her own, "Put your own house in order before handing out fiscal advice to the Euro zone"... More on that, Timmy was not well received in Europe. Furthermore there are numerous political scandals brewing in Austria that threaten to derail focus on the E.U. as the scandals consume the national political scene.
More on Geithner....
What was Obama thinking when he put a bumbling NY Fed President who didn't handle the Lehman Era collapse very well and even made it worse by making toxic banks, into Super Toxic, Too Big To Fail Monsters-just look at BAC's acquisition of Country wide for a current example. Should BAC go down, we'll have a problem that would eclipse Lehman making the Lehman crisis look like a solar flare and the BA crisis SuperNova. BAC
Two years ago when Geithner visited China for the first time as Secretary of the Treasury, he spoke to a gathering of academics and college students. He said he supported a strong dollar (which history has shown is not true in the least as the Fed prints away as 11 on the volume dial) and that trillions of dollars in Chinese investments in America would not be unduly harmed by the economic crisis. The final one liner for the audience, "Chinese assets are very safe", which caused the gathered audience to break out in to a cacophony of laughter.
Fast Forward, this week in Europe....
Geithner travelled across the Atlantic to Wroclaw, Poland to meet with European Finance Ministers, they gave him about 30 minutes of their time, which is telling in itself, it take more time to disembark off the aircraft he flew over on.
From Austria's Finance Minister, "I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone that they tell us what we should do and when we make a suggestion ... that they say no straight away,"
Apparently the German Finance Minister got in to a squabble with Geithner, when Timmy suggested how they should reinvigorate the Eurozone and tax financial deals.
The Finance Minister of Belgium said, "We can always discuss with our American colleagues. I'd like to hear how the United States will reduce its deficits ... and its debts."
From Reuters:
"Officials said Geithner was coming to propose how the region might try leveraging its emergency bailout fund -- the 440 billion euro European Financial Stability Facility -- to better tackle the crisis, much as the United States used leverage to handle the fallout from the subprime collapse.
But however good Geithner's intentions, the indications were that the meeting did not go as smoothly as he might have hoped."
"Jean-Claude Juncker, the chairman of the Eurogroup, was even more to the point.
"I don't think it would be wise for me to report from an informal meeting that we have with the treasury secretary. We are not discussing the expansion or increase of the EFSF with a non-member of the euro area," he said."
In other words, not only did Timmy stray from the point of the meeting to address and give advice outside of the reason for the meeting, but the Europeans were united in their scorn for the hypocrisy coming from the US when we have done little to fix our own problems.
And why all of this animosity from Euro Finance Ministers, lets take one paragraph of Geithner's words of wisdom for the Europeans...
"Of course your financial challenges in Europe are within your capacity to manage financially, you just have to choose to do it," Geithner told the audience, sitting cross-legged and slightly slouched in his chair."
This single quote raises many questions in my mind concerning Geithner's effectiveness here at home and hypocrisy abroad. One question I have regarding Geithner's remarks that seems to be glaringly THE central theme of the European challenge is this, I wonder if Geithner appreciates that the United States is one country and economic decisions only have to pass through one President and one Congress. Does he realize that the Eurozone is not one country, but an amalgamation of different cultures, individual economic challenges, many parliaments, Presidents, Prime Ministers and many totally different societies facing totally different challenges with radically different interests and each must work first to preserve themselves, and secondly the Union? Does Geithner get that? His comment above seems to indicate that he doesn't understand it any better then he understands Turbo-Tax.
More revolt from Germany, rebuke of the US and possible BIG TROUBLE for Greece, This out of Germany:
"Germany’s top two finance officials rejected using the European Central Bank to boost the euro-area rescue fund’s firepower, rebuffing a suggestion by U.S. Treasury Secretary Timothy Geithner.
Inviting Geithner to a euro meeting for the first time, European finance chiefs who wrapped up two days of talks in Wroclaw, Poland, today also said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.
The German stance risks leaving the euro area without sufficient means to prevent the crisis from engulfing Spain and Italy. Geithner floated a variation of a 2008 policy he developed while at the New York Federal Reserve that would expand the reach of the 440 billion-euro ($607 billion) European Financial Stability Facility using leverage in a partnership with the ECB, said Irish Finance Minister Michael Noonan.
“The EFSF’s sole purpose is the financing of states and that’s in order as long as it’s done via the capital market,” Bundesbank President Jens Weidmann told reporters today. “If it’s done via the central bank it constitutes monetary state financing,” which is forbidden under European Union rules."
In another slap down to Geithner, specifically for trying to change the subject and inject his opinion into a debate that was about something totally different.
"Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro region finance ministers, said yesterday: “We’re not discussing the increase or the expansion of the EFSF with a non-member of the euro area.”
And in a slap-down meant for Bernanke himself:
“We don’t think that real economic and social problems can be solved by means of monetary policy,” said German Finance Minister Wolfgang Schaeuble, speaking alongside Weidmann after the meeting of EU finance ministers and central bank governors. “That has never been the European model and it won’t be.”
He just basically rebuked Bernanke's entire position and all of his actions in dealing with the US crisis. Clearly the Europeans were agitated with Geithner. Now the question is how big of a man is Bernanke? Will he take this slap in the face in stride or will he make some changes to the extended swap lines providing the EU with desperately needed capital for their banks? Also, we are all human and Bernanke is one who is an Academic, I doubt he takes kindly to all of his policies being slighted. Just out of human nature, could this effect Bernanke's decisions moving forward in a kind of, "We'll see who is right"?
As for the Greek Drama...
This weekend provides no respite for the Greeks:
"The leader of Germany's Christian Social Union (CSU), part of Chancellor Angela Merkel's centre-right coalition, reiterated in an interview with Germany's Spiegel Magazine that Greece might have to leave the euro zone if it failed to meet conditions set by the European Union, European Central Bank and International Monetary Fund.
"If the Greek government and parliament can't or won't keep to the path then we shouldn't wait for the financial markets to force us into accepting reality. Then an exit of Greece from the euro zone must be conceivable."
G-PAP is not without his own pride...
George Papandreou was scheduled to meet with IMF Director, Christine Lagarde on September 20th in Washington, he was also to meet with Timothy Geithner the same day. His trip also included a stop in New York to address the United Nations General Assembly and was scheduled to be in the U.S from September 18th - September 23. However, some question whether bad news has already been delivered to G-Pap as the BBC reports that he has cancelled his trip to the U.S citing the seriousness of the country's debt crisis". However, many think he may have received bad news and decided to snub the US, IMF and UN in a sort of hissy fit. G-Pap's decision to snub the IMF/US comes 1 day after the E.U Finance ministers delayed a decision over Greece's next bailout loan.
More from the World Economic Forum:
The former U.K Prime Minister, Gordon Brown delivered a speech Friday at the World Economic Forum in which he said, "The euro cannot survive in its present form, it’s going to have to be reformed dramatically. We are I think at an hour to midnight in the way that we look at this issue." He adds"European banks as a whole are grossly under-capitalized."
More from Bloomberg:
"In 2008, governments could intervene to sort out the problems of banks. In 2011, banks have problems, but so too do governments."
"We’ve now got the interplay between banks that are not properly capitalized and sovereign debt problems that have arisen partly because we’ve socialized or accepted responsibility for the banks’ liabilities."
The EFSM is "not enough" and "substantially more resources" are required.
I personally have always felt that the EU currency Union was a bad idea, one size cannot fit all. If Greece had not been a part of the union, they may have been able to deflate their way out of many of their problems. Ultimately, I cannot see how the Euro can survive.
Now there are rumors of a Greek Default on September 20th, the first day of the Fed's extended two day meeting. For more details on why the 20th, read this article from ZH.
Now, the charts and market action....
It seems abundantly clear to me that there are plenty of suitable crisis to send the market lower on Monday.
First, lets look at the closing charts from Friday to see if there's any substantial warning regarding Monday. What we are looking for is a bias toward the opening on Monday.
DIA
IWM
QQQ
SPY
And the 30 min goes negative.
Now, I want to show you something that recently learned using a new indicator which is like a MACD for 3C, showing more or less, how much accumulation and distribution is present and for how long. I don't yet know f this is a general rule of thumb or just something we are experiencing in this choppy market, I suspect the second.
This 15 min 3C depth chart is during the bear flag or choppy market. Note accumulation n white and rally in Green. With only 1 exception, the days of accumulation match up perfectly with the days of rally. The only exception is this last rally and I think that had to do with options expiration as we saw 1 more day of rally vs. accumulation. So from recent evidence, it would seem that the market is due for a downside correction on Monday.
This is the clear bear flag that we are in that has caused the choppy trade, it is also what is keeping shorts in the game. From a Technical Analysis perspective, this is a large bear flag and it has already matured by making 5 points of contact, the fact that this most recent rally did not make it to the upper trendline makes the bear flag look even more bearish. This is why the short interest and margin ratios are running at 2+ year highs right now, the shorts are salivating watching this flag. I think, for reasons I will explain and because of the severity of the 3C charts, this flag will break down very hard and very fast. I also think the chance of breaking thorough the bottom support of the flag are around 95% and the chances of making a new low, below the August lows are about 75%. This would really lock in shorts and up the short interest and margin levels to historical highs that we haven't seen in many years. However, remember that Wall Street always loves to take the most sheep to the slaughter as it can at any one point in time. I believe this fall will occur over approximately 2-3 days maximum and maybe more like 2.5 days, which will mean it will have to be a pretty ugly decline.
Putting this in to perspective...
For at least 3 weeks I have had a working theory on how this market will develop because of things have seen the charts, I haven't changes my theory at all since I first mentioned it. In fact, I recently said that I think this next leg down will be the last and that it will likely make new lows, locking shorts in to their trade. Here's why...
Lets start with an overview of how the depth indicator of 3C works and looks on a historical basis.
Here s a daily # depth indicator of the SPY over a period of nearly 20 years. We see an inverted wave like pattern, the deeper crests are heavy distribution, the shallower troughs are accumulation. Wherever you see a white box, that indicates an area of accumulation. Above are major market events. First the Tech Bubble and look at the corresponding indicator reading, then at the first white box from the left, the accumulation period that started the 2003 bull market, the 2007 Housing Bubble, followed by unprecedented stimulus in early 2009 where you see an accumulation box and the 2010 Jackson Hole Speech by Bernanke introducing QE2.
Now the charts...
I noticed something in the long term daily charts of the market and recently in the longer term 2 days charts that defied the presence of that bear flag, or at least suggested something else was going on. It should be remembered and never forgotten that the Federal Reserve met on Friday, July 29th with the biggest Wall Street players under the guise of what to do if the US debt ceiling wasn't resolved, apparently the Fed was asking for opinions, or so we are told. However, the following Monday is when the sell-off started in earnest. Many have said that Bernanke needs some market destruction as political cover to introduce any kind of QE3, whether it be operation Twist or more of the same. Bernanke sees the stock market as a symbol of the economy and much has been written about this. Consider for a moment where we are now compared to March of 2009, is unemployment better? Is GDP better? Is inflation better? You can pretty much answer no to every one of those questions, yet the market went on to gain over 90% from the 2009 lows to the 2011 top. Bernanke's policies clearly were stock market positive. He often mentioned the "Wealth Effect" created by the returns in the market as evidence of QE working. Keep this in mind as we move forward with the charts.
IWM
QQQ
SPY
And the SPY hourly chart. Look how much more shallow the 3C depth indicator is now then it was during accumulation phases during the top, look how much longer it has lasted, even though price is much lower.
In my view, something is going to be the catalyst to send this market higher. One obvious catalyst could be Wednesday's 2:15 FOMC announcement. If the Fed came out with something that got the market excited, it could explain what we are seeing here. That would mean the drop we are expecting would have to happen very fast, Monday, Tuesday and maybe part of Wednesday.
Of course there's the Fed knee jerk reaction to consider. Almost without fail, after the Fed speaks, the market has a knee jerk reaction from an hour to a day or so and it is almost always the wrong reaction as the market almost always reverses and does the opposite. For instance, if stimulus was announced, there may be an initial knee jerk reaction sending the market lower because traders are spreading the word that the Fed is panicked about the economy, the next day the view may shift to the Fed is being proactive and reverse that move.
But how will we know?
The thing that I'll be looking for is 1) a severe decline 2) a new low would be a bonus 3) all of this to happen before the Fed speaks on Wednesday and most importantly, 4) aggressive move in 3C showing Wall Street taking their profits in to the decline. If 3C shows extraordinary positive divergences in to the decline, I would think that the Fed would be announcing something market positive and look to shift to a long position quickly. 3C should give us the notice we need.
If this happens, what would it look like?
Considering the meeting and the market crash right after it, I believe Wall Street is already in the know. Why do we fall so severely in late July / early August and with nothing from the fed except a couple of winks, manage to put in a series of higher high and lows? Why didn't the market spill it's guts again and head lower? What has hanged that is that positive to support the market? Nothing!
However, if this is true, if this does come to pass, we have a VERY obvious bear flag, we have 2+ year highs in short interest and margin usage. A new low could create even a bigger bear trap an this market would likely shoot up like a rocket once the top of the bear flag is taken out on massive short covering, it would also make Bernanke look like a genius / hero. The resulting move would likely take us to new highs. How precious metals react will depend on what type of operation was announced. They could gain, especially if the move is considered inflationary, or the could lose if equities go in to "Risk on mode" and t appears that is where you'll get the most bang for your buck. Hopefully we'll know the story on PM's before Bernanke speaks. For those who think, "This market is not that rigged!" Understand that the WOWS portfolio wouldn't have generated nearly a 60% gain in 2 trading weeks if inside information was not at work as we are simply following Wall Street. Also consider that it would be in Bernanke's best interest to let a BAC make money at their trading desk to raise funds then to have to bail them out.
So that's my working theory, it needs confirmation and we must always remember that often we have the correct strategy, but tactics and timing can often be unpredictable. However, this is a view I have had for more then a few weeks and nothing on the charts has changed it, only reinforced it.
I hope you enjoyed the article and have a great weekend.
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