Ukraine or Not: BIDU, FB, GOOG, GS, NFLX, PCLN, QQQ, UVXY, etc...

The above positions are all in place either via puts and/or equity short positions (core shorts or expected trend positions). For instance the QQQ March $88 Puts look like they'll be fine, I'm very happy with all of the other positions as well.

One thing I've had a lot of questions about (I suppose because I like geo-politics and have covered them and what they mean to the market in the past) is how Ukraine will effect the market and the first thing that comes to my mind, especially with the Russian Central bank hiking their rates by an astounding 150 basis points which hasn't been seen since 1998, just before Russia defaulted on their sovereign debt (bonds) and their currency collapsed. The reason I note this period is because it's when the "Smartest guys in the room" (which is an incredible episode that I encourage you to read about) nearly took down the U.S. Financial system, I'm talking about Long Term Capital Management which was the all star money management team founded by the head bond trader from Salomon Brothers as well as 2 Nobel Prize winners in economics, Myron Scholes and Robert Merton of the Black and Scholes Options pricing model. Like now, they were using heavy leverage (like the Carry Trade leverage of the USD/JPY), but unlike now they were heavily vested in the new Russia (as well as some other positions that went against them) and the bet went badly against them at full on leverage. LTCM produced returns (after fees) of +21% their first year, +41% their second year and +41% their third year, they were the rock starts of money management.

At the start of 1998 LTCM started out with an AUM (Assets Under Management) of $4.7 Billion Dollars. They had a pairs trade go against them and by September they were experiencing a flight to liquidity. LTCM started September with $2.3 Billion in assets, 3 weeks later they only had $400 MILLION dollars left, all of the rest fled the company in a period of 3 weeks, yet LTCM still carried over $100 BILLION in contingent liabilities effectively putting them at 250:1 leverage.

At this point LTCM was looking for funds to bail them out when a consortium of Goldman Sachs, AIG and Berkshire Hathaway offered the partners a buyout of a mere $250 million dollars , remember at the start of the year they were worth $4.7 BILLION dollars. Warren Buffet gave the partners 60 minutes to accept the deal which they did not, as a result the F_E_D ultimately had to step in and bail them out and by 2000 LTCM was dissolved. 

I mention this because when I think of Russia and the high amount of leverage in the market via FX carry trades like USD/JPY which are often at 100:1 leverage, the lesson of, "The Smartest Guys in the Room, LTCM" always comes to mind.

That being said, with everything that's going on, I'm very happy with the above positions that are in place and while I would not be so naive as to say the Ukraine has nothing to do with this, we have seen other geo-political nightmares from nuclear, to Syria to the collapse of friendly Middle Eastern governments that were essentially taken over by terrorists and the chances of war, chemical war, nuclear attacks and all out halt of oil through the straits of Hormuz has done very little to effect the market.

Furthermore, this is what we expected long before the Ukraine, before the Olympics even were in full swing. Running a quick search (because I wrote about this so many times prior to February 7th, I found this, the exact reason we were expecting the market to move up... Changing Sentiment from February 6th. Some excerpts...

"I've been getting a lot of retail sentiment updates...So today's sentiment report is not surprising in the least...

"Practically everybody on my stream was calling for the 200 day as if it was a certainty yesterday."

 ...retail chases the move and the sentiment has clearly been bearish, that's typically when we see the H&S volatility shakeout back above the neckline which it appears we will see, this accomplishes about a half dozen things, they're all well documented in my 2- part article on the member's site, "Understanding the Head-Fake Move".

Since Dow Theory can be difficult to explain in a short period of time and since there have been revisions to it since first recorded in the WSJ almost a century ago (Charles Dow owned the WSJ), the best visual example I can give is the beach and tide.

If you go to the beach and wait for a wave to break and roll up to its highest point on the beach and then stick a wood stake right there in the sand, over the next few hours you'll see that the waves are either coming further up the beach (an incoming tide or bull market) or are receding, an outgoing tide or a bear market, but no matter what the tide, the waves will still roll up the beach and the market is exactly the same.

... this (*the predicted strong move up that had not started yet) would be a wave in the larger tide rolling up the beach even as the tide is moving out.

In any case, you know I expect a move strong enough to change sentiment (*because as of that date, sentiment was very bearish with traders expecting the SPX 200-day average to be broken while we expected a strong upside move that would change sentiment to the bullish side which has since happened), but there are no victory laps in the market so we'll keep watching, but if this is as we suspected, then there's not going to be a lot to do other than take care of the positions we entered in expectation of this move (because we had already entered "Hitch-hiking longs until we were high enough to enter core shorts), look for some new entries and at a certain point when we are seeing distribution on a large scale, move in to core short positions like GS, PCLN, NFLX, GOOG, etc."

February 6th 2014 "Changing Sentiment"...

My point in showing excerpts from one of a number of posts at that time was to show we expected a strong up move and had already entered longs for the move, more importantly we expected the move to be used to change sentiment and just like a wave rolling up the beach in the form of the February rally, it was in my view and still is, within the context of a larger OUTGOING TIDE.

So, when I'm asked about Russia and the Ukraine, I want to simply point out that the bearish resolution to this rally was something we expected before it even began. Take the charts of assets we have recently profiled as possible positions/trade candidates and note their charts and divergences...

BIDU

BIDU 60 min's leading negative divergence was in place LONG before any Russian/Ukrainian situation.

FB

 FB 30 min is one we saw over a month ago and had been keeping an eye on looking for an entry, again, before any of the current news.

GOOG

GOOG's 60 min chart had already been marked with a "Black Dot"  long before any current fundamental news flow, it was just a matter of timing/entry,  as I said in the post above from early February, "There won't be much for us to do except watch-over long hitch-hiking positions until we get in place to enter core shorts like GOOG".


GS

 GS's 5 min shows the accumulation area that was being talked about at the time the post above was written, however there were already long term negatives and it was just a matter of waiting for the "Sentiment changing move on the upside" to run its course, this 5 min GS chart seems to clearly indicate it has run its course and therefore makes the entry look like a nice entry with much lower risk.

NFLX

The same is true of NFLX on this 5 min chart, the signals that represent the tide were already negative, it was just a matter of waiting fro the wave to stop rolling up the beach and enter as it started to roll back down the beach as the tide continues to go out.

PCLN

PCLN 5 min is the same scenario over again, all of these were set up long before Russia's invasion, these were the very stocks referenced in that post almost 4 weeks ago.

QQQ

 The 30 min QQQ Puts, the March puts I have felt would be fine have turned and are so very close to being at a gain, again I like them very much and feel they will bring in a gain.

VXX / UVXY

And if this February rally were anything other than what we expected it to be (and our expectations were in place long before the actual rally started as you can see by our line of thought in the excerpts from the early February post above), we wouldn't expect to see this kind of leading positive divergence in VXX and UVXY during such an "apparent" strong move up, why the need for so much protection as the leading positive divergence points out?

So far, I'm VERY happy with these positions, I'm also very happy with our trend expectations predicted more than a month in advance, plenty of time to set up positions and take advantage of multiple trends/trades.

So yes I do think the Ukraine is helpful, especially as a 30-second CNBC soundbite as to why the market is doing what it's doing, but if you followed our posts through late January and early February, you would have expected the same market action right now and would not be surprised so apparently it doesn't have as much to do with the situation in the Crimea as some would have you believe.