Is The Market About To Bottom?

When ever the herd/sheep/momo crowd get too overly bearish I tend to cover my short positions. This has worked for me in the past. It most probably will work for me in the future.

As I walked in this morning these two news items hit me in the grill.

PIMCO Sells Black Swan Protection
http://www.bloomberg.com/news/2010-07-20/pimco-sells-black-swan-protection-as-wall-street-profits-from-selling-fear.html

CBOE developing tail event index
http://www.risk.net/risk-magazine/news/1723335/cboe-launch-tail-event-index

This two articles scared me. I have been on the short side since late last week. The markets are on edge. JP and BAC's earnings were crap. IBM, TXN, ZION, and Atheros Communications numbers were in line but their guidance and or hard numbers were not great. Quite simply the revenues are not there. How much cost cutting can you do before you get real revenue growth? Texan's number was very good but the guidance is cloudy as Nokia their biggest customer has curtailed orders. IBM is an extremely well run company but very difficult to gauge with all of the moving pieces. Currency is a huge piece of the IBM Story. If the USD keeps going down you would have to be a buyer of IBM. ZION is a crap bank and should die. The CRE losses they have on their books is a disgrace.

So I came in this morning and noticed that the futures were down to 1055. This is a full 13 points below FV. Of course the media (CNBC/BBG) gets it wrong when they say the futures are down 8. They are down 8 from the Globex Session which opens at 4:30pm. The SP Futures closed at 4pm NYC time at 1068. IBM reported earnings right after the close and the futures dropped to 1065 before the regular session shuts down at 4:15pm. After they opened again they traded down to 1061 down 4. But really they are down 7. When the nitwits on TV tell you that the futures are down 8 its bad information. I can't believe that after all of these years the MTM still gets this wrong.

GS then reports on the surface a big miss. They come in at .78 instead of the $2 FC Est. The futures and GS both immediately dump. GS down to 140 and the futures own to 1051 or so. I am tempted to actually short more but I do read that the GS number is not clean. The actual clean figure is $2.75 a beat on the top line. Very good for the boys at GS. But the bottom line is not great as trading is way down for the quarter. What to do? I then wait until 8:30am for the housing starts figure. I know that housing is in the toilet and soon to be flushed, and they don't disappoint as they are down  worse than expectations. Housing starts like Non Farm Payroll is a lagging indicator. The Building Permits data which is a leading indicator is better than expectations. The market trys to figure this out and it rallies back to about 1055-1056. I cover some of my shorts at this point as bulls and bears prosper as pigs get slaughtered. So I am thinking we have all of this headwinds and the futures are down 13? HMMMMM. I would think the market would at least test 1040 on all of the macro news but its hanging in there. Its at this point I actually start to read the above two articles on Crisis Derivatives. These type of articles only show up when everything seemingly is going to hell. Why were these derivatives not created when the SPX was pushing 1220 at the end of April?

Net Net, this is just another case of a complex exotic and toxic product that are being created that never should be created in the first place. Instead of stabilizing the market they will just destabilize them. Its another huge bonus pay day for some banker/trader somewhere. I know this because I used to be one.

Its at this time my little friend who sits on my shoulder alerts to me....COVER YOUR SHORTS. And so I do.

Now I am not saying we are going to rally. We may go down to 950-1000 on the SPX before we rally. I doubt that as the tape is very negative at the moment and we have Apple, Microsoft, Amazon, and other reports coming up soon this week. I am thinking that the mood is so negative after JPM, GOOG, and BAC reported their results, especially after we got such a great report from INTC which put the bulls on good footing. The atmosphere got very negative very quickly. I think the mood can switch again to positive with Apple tonight and Microsoft on Thursday. This is just my thinking. My intermediate/LT has not changed. This market is not pricing in a double dip recession which is 2/3rd's assured. It's not pricing in a earnings slow down from such a DD recession. We have too many Yahoos who keep claiming that the market is cheap. This is entirely based on a still recovering market. Housing is having another leg down and employment even though not a disaster is far from healthy.

Too many negative MD/LT headwinds, but there is also too much ST negativity at the moment. So a rally back to 1080-1100 is not out of the question. I will just reload on the sell side at 1100.

How about this one?

Barclays Lists ETN That Rises When VIX Declines
http://www.businessweek.com/news/2010-07-19/barclays-lists-etn-that-rises-when-vix-declines.html

Do we really need an ETF that does the opposite of the VIX? The Leveraged ETF business is huge, especially the leveraged inverse 3X and 2X universe. I trade them all the time. The trick is to buy and sell them intraday as they work brilliantly in this strategy. Holding them over a period of time is hazardous to your health as many have told me. They tend to dissolve like a TUMS in your account. But come on! Inverse VIX Futures? Most people don't even know what the VIX is. They think its market volatility. NOPE! Its the 30 Day Market Volatility. This is a huge distinction. XXV has only been trading for a few days so there is not much hard trading on it as of yet but it does well in a steadily rising stock market as then Volatility drops. The stock market has become one big shout out to George Costanza as when George did the opposite things worked out well for him. Well, until it didn't.