January Top obviously too early; but only early

April 18, 2010 Update

The chart posted in March is still very valid. The difference seems to be that the B wave I expected was just a sideways triangle with very little retracement not allowing for a good exit point. However, it is possible that the top is in now with the big volume shooting star down day Friday. Looking for a break of the uptrend line currently at $1125 for confirmation of a trend change. More confidence that the Wave 2 top is in when $1050 gets taken out.

Notice too that Friday hit the 38.2% retracement-a potential reversal point. It also is the resistance area from the July 2008 wave 1 of 3 low. I am holding onto my TZA position which is now under water pretty heavily. It will easily make it all back when Wave 3 down comes.

________________________________________________________________
The January high, which I thought was a high probability for the Wave 2 top, was obviously an early call. The market has recently made new highs above that $1150 top. However I still believe that the market is in a topping process and not in a new bull market. I have taken a big hit for trying to pick the top, which is a bad trading move. Picking tops is a losing game. I had my rules in place and didn't sell as soon as the new high was made, as I laid out in my last blog. The way to play this next move is to wait for the top to show itself, then add to your position as you are proven right and as the market is falling, not rising. This will occur first when $1150 is penetrated, and even higher probability of being right when the $1050 low is again taken out. This should occur in 5 wave structures down at which point a 3 wave correction should occur. This 3 wave correction is when short positions should be added as there are many solid rules that can be used for stops, etc. I will take some of my losses on my shorts in the (Black B) next move down before the final push to the high and wait for the top to be confirmed before trying to nail it.

Updated Chart below.

Below are some reasons I am still bearish...

1) The waves look to have morphed into a triple zigzag top. What this means is the pattern reflects three separate corrective waves up. The key to recognize that this is not a new bull market is the internal wave structure. A new bull would have 5 waves up and 3 waves down at all levels. Looking at the move up since March of 2009, it is virtually impossible to find a clear 5 waves up that don't overlapor break key rules. The waves, therefore are corrective in nature and thus reflect that this is a corrective wave of the impulsive wave down from October 2007 to March 2009 which means no new high should be made above the 2007 highs.

2) Volume has not been as great as occured in the down move. In fact, volume in the January sell off was higher than most of the other advances in the market. This shows that the rally is being supported by fewer and fewer buyers.

3) The angles of the ascent are not bull market angles. In a bull market the initial thrust is fairly slow as the early movers push the market up and then the middle move should be the largest as the most buyers enter the market. The final move should also be strong as blow off tops and retail investors all jump into the market as it's peaking out. This has not occured this last year. In fact, the initial move had the most momentum, the middle move had less momentum, and now we have been largely flat for the last few months squeaking out new highs the last few weeks. This is represented directionally by the Blue A boxes on the chart. You can see almost a rolling over effect when connecting the As to the other As and the Bs to the other Bs.

4) The S&P as measured in real dollars is performing nowhere near as well as the nominal markets. When the markets are adjusted for the price of gold (real inflation and dollar deflation), the retracement is laughable at best. This is shown in the 4th line chart under the main chart. Take it as you will, but this could show that the markets are being propped up by cheap & easy money and not necessarily smart money. It also shows that even though stock prices are up, they are not moving ahead of inflation.

5) Bullish Percents: Bullish percents measure how many stocks are breaking out of point and figure patterns which helps measure the breadth of the moves. This indicator is still showing divergence, meaning more stocks participated in the rally ending in October 2009 than are participating and making new highs now. This is bearish and shows only those "big name" stocks are the ones moving the markets. This supports the theory that retail investors buy at the tops as they typically buy the big name stocks like Apple, Google, Cisco, and General Electrics.

6) Fundamentals: Have they really changed? Unemployment, Housing, Deficit, Social Mood...has any of this really improved?

Bottom Line: The moves up since March 2009 have been corrective in nature which means this is not a new bull market. With a typical retrace already occuring in the markets (between 38 and 62%), the time now is to be bearish again and not bullish. DO NOT CHASE THIS RALLY! It has been weak since October of last year and with the next B wave retrace price will be back to the October 09 levels as well.

After the 1929 deflationary crash, the DOW fell down to $195 from $387, a 50% drop. It then retraced back up over 50% to $300 in only 6 months just to peak there and fall down another 85% or so to below $50 by 1932. So, even after the dreaded 1929 crash, prices rebounded over 50% in just a few months only to be beat back down ultimately falling a lot harder and farther over the next few years. Just giving some historical perspective and to show that this has all happened before. Big % retraces occur often.

S&P Top in? "Summer" Rally finally over?

Update 2-19-2010
Updated Count doesn't change much just allows for more upside wiggle room. But, the good news is the market looks to be reaching the end of its counter trend rally and I still expect that sell off soon. $1150 new high is now the ultimate stop loss point but just ahead is the 62% retrace which is a prime rejection point.





Update 2-16-2010
It is very hard to stay bearish on days like today, but that is what 2nd waves are supposed to do and that is why you must have rules to trade by. 2nd waves are supposed to convince everyone that went short that they made a mistake. This looks to be occurring now. I have attached an updated chart with very little changes from the last one except the added days. The Sell Area in red is still in tact from the Feb 1 update and until this area gets violated, that sell signal is still valid. I am staying short until a breach of $1105. Right now is a very high risk reward as the next move should be down and down hard if my counts are correct. I will be adding to my short position with a tight stop of ~2% higher or ~$1110 with the expectation of the market falling below $1045 imminently.

Other things that keep me happy about my short position...
1) Negative divergences are robust today as shown on the bottom of my chart
2) Very choppy action the last week would be very hard to count as impulsive
3) Volume is nothing spectacular over the same period.
4) Market should move quicker in the direction of its prevailing trend which it did from the January top.
5) My sell area is still above current prices (theoretically keeps my position in the black)

Compare this chart to the original posted.





Update 2-1-2010
[I have updated the linked chart. Potential bottom on Friday with the correction starting today. The down move lasted 8 days, so a correction of 3-5 days could be expected. With the extensions downward, the target retrace and 3rd of a 3rd area has moved downward about 15 points. Therefore I am expecting to add some TZA to my longer term portfolio around $1100. If the move up easily takes out $1105 then I will hold off until $1120 to add even more. As before, prices can move up to $1150 before the down move count is invalid, so a pretty large room for error, but the ensuing move down should more than make up for it.]

Update 1-27-2010 10:30am
[Market looks to have extended its waves, but this does not change the total theme, just pushes the timing out another day or two]


After last week's sell off and then a new low today there is good evidence of a completed 5 wave count on the S&P500. What this means is the top could finally be in.

The attached chart is a continuation of the one I built yesterday which had us in the 4th wave triangle of an extended fifth wave. I was hoping for a fall below that triangle to complete the 5th wave of the 5th wave extension, which happened this morning. With that and the so far decent bounce in the markets, the 5 wave move down could be complete.

That means a counter-trend correction wave would be underway, which so far looks as such. Of course I will know more as the market reveals its pattern. But, with the five waves down and the pretty high confidence that they are impulsively down, I will be shorting the market in the target area outlined on the chart in red. At the minimum I expect another five wave move down after the completion of this correction, and given the size of this first five wave move down, the next one should generate at least another 5% move.

I will be adding some more TZA to my account probably tomorrow as an anchor and then try to nail the top in the target red area with another slug. I will have a first stop above $1125 (black area) as I don't think the market should penetrate the 3rd wave quick move down from Wednesday morning keeping in mind that retracements can have a tendency to retrace back to the area of the prior 4th wave which tops out at $1122.84. Ultimately if a new high above $1150 is put in then my count is wrong and I will cut all losses.

As always the link in the title is of a live chart which can be checked at your convenience.

Good Luck

GMR Update

I sold all of my GMR shares yesterday with the big run up in price the last 2 weeks. The reason for the big rise is of course unknown, but there have been a few analyst upgrades and some articles in some papers about the cold weather increasing the need for tankers. Contrary, I read an article this week in the FT about the significantly hot temperatures in the southern hemisphere which could mean less need for oil and tankers in the coming winter...who knows. That's why I don't invest based on the press or other analyst's work. I do my own diligence when investing; it's the only way to make sure my interests are 100% represented!

Also, looking back at other share price runs on big volume for GMR, one occured in May and another in August and October which all eventually peaked out on the volume then sold off to give the run all back.

Regardless, I don't like what their latest earnings report says, and I particularly don't like them raising more debt (why are they raising debt and why at such high rates?). There also has been very little news since that announcement which would most likely mean either a deal or some more bad news; the same way the company was quiet before yanking the dividend and becoming more gloomy.

At $8.25 I am taking my profits and will revisit the company if the price falls below $7 again where my existing cost basis is. I think the stock is too expensive with the knowledge I currently have. See below for some quick math on that.

I posted some comments on the yahoo finance message board summarizing my thoughts. In particular there is solid support around $7 for this stock, so that is why I waited to sell until yesterday instead of when the earnings report came out.

I have copied my message board posts below...

12-16-09
Post 1
I apologize for not being caught up on this stock. When I heard the conf. call I sold most of my shares with the announcement of the semi surprising divy drop, but havent done the deep dive analysis needed. The surprise to me was the additional debt needed.

Some quick math below...
This all comes down to how much the ships are worth TODAY and will be in the next few years? That is a way to come up with the terminal value and assume what can pay off the debt principals. As long as the company's Enterprise value is less than its "market" book value (terminal value) plus future cash flows (which I have assumed at a generous $50MM/year) I am okay continuing to hold this stock.

Quick math after new debt and current price says EV~$1.64B and assuming $50MM/year FCF discounted at at least 15% (rate now way up with increased debt load) says in 5 years FCF is only worth $167MM today. That means the fleet needs to be worth well more than the $1.3B the latest Q has (needs to be worth at least $1.5B) to support thh current share price.

I am disappointed and have sold a bulk of my shares. I think the writing on the wall was when the CEO was leaving and took the huge $20MM or whatever it was bonus.

I am way behind on this stock, but did the company disclose how they were going to use the $300MM debt? If my memory recalls this rate is well beyond the existing debt on the books of around 5-6% which I assume is because it is not backed by the assets, which the quick math above would support. Also, if it is true the company is using the debt to maintain the divy, then no thanks...paying 12% to give me a tax effective 4% yield is hideous.

On the surface I need to be convinced that my cash flow estimates are wrong, or that they are using the new debt for something more than "surviving" or dividends.

I keep trying to give this company one more quarter, but with the latest surprises, I believe its time is up.

On the positive side there does appear to be strong support at any price below $7.00.

Post 2
I agree with some of your points, but at what discount rate are you willing to accept that "things might improve in 2010-2011"? That is potentially at least 2 years from now and 3 years from earlier this year when things started heading south. Your discount rate must be at least 15% now since the company just issued at 12%...that's a lot of time value.

If things truly are going to get better, don't you think the markets would reflect that?

I am not trying to argue, just saying that I think there needs to be more solid footing to buy this stock than "the cycle will turn upwards" as that upward turn may not come for 3-4 years and it almost certainly will not be anything like the one of 3 years ago.

Also, in times like these most companies are scaling back debt, and GMR is approaching crazy debt coverage ratios (EBITDA/interest)--it's as if the company was just levered up as if it was private equity owned!

I wonder how secure 2010's contracts are and at what rates???

The hidden Decline in the Stock Market

Below I have created a very interesting (and I think very telling) chart. I have taken the S&P500 index and adjusted it for inflation by using the price of Gold. The green line graph is the $SPX as typically measured, in US Dollars (at $1092 as of the time of the chart). The candlestick graph is that of the S&P500 divided by Gold which takes out the $USD part of the equation.

This chart is very telling from the standpoint of an American investor. The Rally of the past few months is what I am coining, "the rogue rally". Since July the market has risen significantly, but this chart shows only a portion of that was for reasons other than the $USD decline. In fact, this chart peaked in August suggesting that since then the primary driver of the rally has been the decline in the $USD (increase in Gold's price).

If this is true then in fact the market peaked in real dollars in August and has been making lower lows ever since. Another way of thinking about this is that Gold (inflation) has been rising faster than the market and that an investor is actually losing ground from a purchasing power perspective since August.

A theory resulting from this is if the dollar is in a bottoming process (Gold Topping) then I expect the market to also be in a topping process. Also, the spread between the two indices is pretty wide. I expect them to converge over time as they did during the decline.

The same divergences I am seeing in the cash index are also showing up in inflation adjusted charts as well. Just another tool supporting a topping process may be playing out.

Another version of the options index

I read an article today that got me thinking about this index. The theory is that most speculators buy call options near the tops and buy put options near the bottoms. Therefore, you can use an options index as a contrarian indicator. Even better since 2004, the CBOE has given us data that allows us to split equity options and index options. Simplistically the big boys use the options index and the speculators use the equity index more. The speculators help us to pick euphoric highs and lows since they are usually wrong at the tops and bottoms.

Looking at the chart and the history there is some pretty favorable data that may help us confirm the next top. The way to use this chart is not to look for a peak or trough in the index and call a bottom or a top, but to use the chart to help confirm a top or bottom and tell you when things are getting a little out of hand. I have also added moving averages to help smooth out the data.

Right now the index and 30 day MA are below .60. This has only occurred a few times in the past few years and not once since the 2007 top. Those times have also in all 4 instances called decent few months tops.

This is just another indicator that is helping me get comfort that the market's top will soon be upon us.

Market Update 10-16-09; Still think top is soon.

I continue to think the top is very close. There are now numerous technical signals that lead me to this. For one, there is a possible 5 wave move in its final gasp. Also, volume continues to be weak. Divergences are all still very strong. And, all the markets are still in typical retrace area. See the chart below and compare to the former post Market Update 8-31-2009. Not much has changed as far as technical signals when looking at the two charts.

It will be interesting to see if the Dow closes above 10K today, my guess is yes. I may put a small put on the market at the close just for fun.

On another note Gold and the US Dollar also look to be at potential turning points. I heard on CNBC today that Tiffanies is going to be selling gold bricks, and Pisani said "looks to be the top in gold", which I agree with. There are other reasons to think gold is close to topping as well. The reason I mention the Dollar and Gold is that all these markets are interconnected and should all turn around the same time.

Good Luck

5 waves down last week; Expecting another similar move tomorrow

2:30pm 9-30-09 Link updated. Updated Count...3 leg down instead of 5 says something else is going on.


I was out last week, but noticed that the moves over the last 3 days last week seem to trace out an impulsive wave. Similar to my post back in June, this setup is looking comparable. I see a five wave move down off of a new high price of $1080. Initial five wave moves always have another five wave move to follow after a correction. So far it looks like today is that correction and thus I expect another five wave move south in the days to come. Pretty crazy to call a big down move after a hefty move up like today, but we are still in retrace territory and the waves say it so. A safe short would be right now with a stop very close above.

Options Index indicator topping point?

Quick post but this index is looking toppy. It has been pretty reliable confirming tops and bottoms previously. Something to watch out for...

Market Update 8-31-2009 Summer Almost over and so Might be the Rally?

It has been a month since I last updated and expected a 10%+ rally in the markets to the retrace zone. So far that has played out quite nicely. The corrective moves I expected in between haven't been the cleanest, but overall the continuation of the summer rally has not disappointed and has satisfied my expectations. Compare the attached chart to the one from last month.

Right now, though, there are reasons to be cautious. It looks like the market may be playing out a 4th wave triangle the last few days which would be a warning sign that the top could be coming soon.

There are also other reasons to be cautious such as the negative divergence showing between a few key indicators and price (see chart). Also, bullishness is at a peak as the Bullish %s are higher than they have been since 2006 and anytime since the rally began. Another item I continue to watch is the weak volume. It is expected over the summer and in particular August, but it has to raise a caution flag as the rally continues on less and less volume.

I have also attached a longer term chart of the markets below. Notice how miniscule the rally of 40-50% looks compared to where we were in 2007 as well as 2000. This rally is following very closely to what occurred in 1931 after the crash but before another huge brutal move down to the ultimate 1933 bottom which is another reason to be cautious.

Summary: I will be looking to get short before I get long, but will wait for more confirmation before I make that trade. Now is a good time to take any profits on longs as the risk reward is now high for those positions.

GMR June 2009 Quarterly Update - Warning Signs?

Blog links to transcript of earnings call...

GMR reported earnings July 30 for the quarter ended June 2009. Overall it was a little surprising...not necesarilly negative (yet), just a little surprising and cause for caution.

The one thing I had been banking on for at least another half year has ceased...GMR will drop its dividend policy significantly down to $0.50/year from $0.50/quarter. Or, from a 20%+ Yield down to a 6% or so yield. The CEO gave multiple reasons including 1) using that cash for other opportunities (acquisitions), 2) the market being terrible (spot rate market), 3) the yield being too high ("paying $2.00 divy on $8.00 share price is stupid" was his quote).

Here are my thoughts on this...

When I saw the earnings report the night before and read that they were dropping the dividend I expected a big sell off in the stock. After hours the stock peaked down 10%, but at the end of the next day (July 30) finished down around 7%, which honestly is not that bad considering its volatility. Also, the sell off was pretty much all after hours, not much happened during the day or while the conf. call was going on as far as price goes. More so, over the weekend and by the end of the day Monday, the 1st, the stock gained all of it back. It seems as though people updated their cash flow models and realized the fundamentals are still coming out positive and the only thing that has really changed is the dividend policy...which is all pretty much true.

That is exactly what should happen when you change just your payout ratio. In fact, many models will give credit for plowing back that cash into the business versus paying out (depending on discount rate used).

At the end of the day and if you read my investment philosophy, price speaks loudest and price has not said anything negative about their plowback decision, so the street obviously is not that upset about it and/or already had the news in their models.

But, here is the meat of my thoughts...

GMR has a history of buying back shares and doing acquisitions. The CEO also said it is "stupid" to pay a $2 divy on an $8 stock...which is debatable. BUT, just 3 to 6 months ago, the market, stock price, and divy policy were all the same and they chose to pay out cash in dividends versus keep the cash. So, why the change of heart so soon, when nothing has really changed at all since 6 months ago. My thoughts are they are going to try a different route with the cash such as buying back shares and/or they already are working on some target acquistions and would much rather use cash than equity to pay for it (especially with the stock price this low). It was comforting to hear the CEO say equity is the most expensive way to pay on the call. If one of these 2 routes is taken, I will be fine with it.

Buying back shares for a lot of people is the smarter thing to do because of the double taxation on dividends...again debatable (primarily true, but there is value in getting income streams versus relying on the markets for price). So, hopefully they will start buying back shares again. I will be able to tell thru the quarterly filings.

If next quarter they are not buying back shares and not hoarding cash and only paying down their cheap 5% debt, then I will have a red flag on my plate. It would tell me that they are more worried about their debt load than other uses for their cash...especially at their such low interest costs.

SUMMARY: I continue to hold, hoping that they will be buying back shares which should thoeretically lift the share price, but I am now cautious because of the surprise change of heart with seemingly little change in any of the 3 factors named by the CEO. Quick math: currently with 54MM shares, each $54MM of EBITDA should be worth $1 in share price...we shall see by October.

Let me know if any questions.

Market Update - The Bigger Picture

It's been awhile since I updated the current market status and after 3 months, it's finally doing something. The market looks to be making its final move up after a sideways correction. The sideways correction from May thru June can be considered "the pullback" I was waiting for. Now it is time for the final leg up.

An easy target would be to say A=C which would be about 33% or from $870, quick math around $1100. Another target is the fibo retrace zone between $1000 and $1200. I am waiting for a pullback then going to get slightly long. As with anything dealing with the markets, nothing is certain, and this initial leg up (when it completes), satisfies a minimum requirement. I am not saying that it is the top, just that the possibility is there. I will be able to tell based on the ensuing pullback.

Something else to notice is that all the markets are in a similar spot and we can look for clues based on them. As always the nasdaq is leading the way. Also, the bullish percent should show a topping point above 70, but look for possible divergence. One final indicator that is giving a clue is the RSI which is showing the first point since the bear above 70.

Getting ready to get long for a 10% or so move...

Good Luck.

Possible Head and Shoulders Top Forming Part 2

Two weeks later and the pattern continues to play out. We dipped down to test the neckline again, which was expected, at which point the media and everyone else jumped on the head and shoulders play (usually a sign that it won't pan out). I think it still has an outside chance to, though.

Here's what would need to happen...the market would need to stay below $930 (the previous right shoulder high), and once again it would need to dip below $880. With the neckline now changed, the target is actually lower in the $810 range.

The other option is that the market topped today as the former neckline's retest and we continue down to play out the original head and shoulders pattern I posted on the previous post 2 weeks ago (Absolute Strategies: Possible Head and Shoulders Top Forming)

Possible Head and Shoulders Top Forming

I have put most of the explanations on the attached chart, but the market may be trying to form a head and shoulders topping pattern. It is still too early to tell, but wanted to get it on the radar. It should take a few more weeks before confirmation.

If we fall below $880 again, where there is significant support dating back 6 months+, then this chart may be very valid. I have put in blue dotted lines showing the possible path the market could take to validate this pattern.

Ideally the market will fall below $880 and come back to retest the "neckline" trendline at which point would be a very high risk reward short around $890 with a stop above $900 and a target of $830.

Stay Tuned. You can click on the title link to see how the pattern progresses in real time.

Market Update 6-23; A turn for the worse update

Update 6-26: Bounce was larger than expected and any move above $927 will kill scenario 3 bear market.

Quick update and chart on my post last week. The move down has satisfied its initial requirements with two 5 wave moves down very similar to what I posted should happen on the 16th (see chart then and now). Therefore, I am taking some money off the short table and moving to wait and see mode.

Now comes the hard and sometimes frustrating part...how the ensuing correction looks will give me an idea if 1) this down move is over and we get another big move north, 2) just the initial decline before a bounce and then another similar move down, or 3) the start of the huge decline. So basically 3 possibilities 2 with near term upside, one with long term upside, and one with long and short term downside...so no clue at this point, which is why I am in wait and see mode.

But, last and this week is how you make money trading the waves!

Put Call Ratio - Fear creeping back into market?

The put call ratio has been one of my favorite indicators. It started to fail toward the end of the bear this year and not giving as reliable signals, but it looks like it may be coming back into play.

As you can see in the chart, the put/call ratio had bottomed out below its long term lower support of around .85 puts for every 1 call bought on the options market. The indicator is now in an uptrend and is quickly climbing back into its 2008 average range of around 1 to 1 puts to calls. This could be telling us that the market is becoming more fearful. On the chart I have also drawn vertical lines at market tops and bottoms. Historically this ratio has helped call these tops and bottoms as you can also see on the chart. Also, you can see that the indicator shows where ultimate fear occurred, which was in the October decline. It is rare for the market to be so complacent as it was the last 3 months, which could be a sign that the rally wasn't going to have the kind of fear it needed to continue indefinitely.

If this market is about to fall again, I expect this ratio's moving averages to approach the 1.25 puts to calls resistance as it did at previous bottoms.