Milk The Market Investment Blog

Happy New Year!

We’re in 2008 and I am still a bear. I had a good year, but a some big and lucrative projects put the trading on hold and I’ve been an investor for the last several months, as long term swing trader at best. Despite this, things worked out well for my portfolio being on relative cruise control.

I haven’t been playing ES/YM, for better or worse, for lack of time. I don’t see the ability to get back to day trading futures or equities for the next 6 months, so I won’t be commenting much in that regard. I will continue to adjust my long term portfolio and longer style swings (mainly shorts) based on the modified Rule 1 screener software. It has done rather well. I know many people were waiting for the public release, and at the time I was very close, but these projects were just too lucrative to try to split time with.

FCX was my best earner. LLNW was second (I was day/swinging this one for a couple months both ways). I have been light in gold for quite a while, but fortunately added positions in 2007. Also, after the inability to play future indexes daily, I took position with the Ultra Short S&P ETF, SDS, which did well, and would have been quite more significant in gains had I not timed it slightly wrong.

I still believe despite ramblings of people thinking we’ve seen the storm pass, that the storm hasn’t even come ashore yet. I think we will see a recession, whether by traditional definition or by modified standards based on modern times.

So here’s what I will be doing for 2008… I will be paying close attention to gold, buying dips, selling big rallies. If you’ve been watching TV gold already seems “played out”, so I’m worried about the contrarian aspect there, but I think things are bad enough that the sell off we wait until we get to at least $750 - $800.

I will be bearish in the indexes, likely taking positions accordingly against the overall indexes for a quarter or two.
I will be going long on unconventional some Rule 1 plays, and short swinging some inverse Rule 1 plays.

Although I believe we still haven’t seen the worst from the market, I will be cautiously evaluating one or two financials that have a ridiculous MOS coefficient and shouldn’t be hit with significant problems. Nonetheless, I am weary because we really do not know if there are problems or not. If there are, we’re not going to know until the execs open their parachutes. If there isn’t, the windfall from the rest of the coming mess could still beat down a stock that doesn’t deserve it.

Now, the million dollar answer… yes, the modified Rule #1 system screener will be released soon. I wasn’t far from being able to release it to begin with, so a few weekends will have a working system available for all. I will be adding more features on request and things I need to improve my ROI to the system over time.

Good luck in 2008!

Bookmark To

If you thought the fallout over the subprime lending “scare” had already taken place and the market was finding it’s bottom, I think its time to reevaluate that theory. As 3rd quarter results loom over the megacap financial institutions, it’s expected to see $35 billion or more put on the books as bad debt… yes, $35 billion.

According an analyst at JP Morgan, this will effectively wipe all profits off the books. According to Kian Abouhossein, “Banks will have made almost no money over the last quarter. Profits will be close to zero.”

Despite Greenspan’s possible actions that planted the seeds for this mess, he is economically astute beyond most. He recently told us, “The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly the bank panic of 1907″

I’ve had a bearish outlook, but I am now I am considering only taking short position setups in swing trades. Remember, when the market is bullish, bullish setups have better expectancy. When the market is bearish, bearish setups of better expectancy.

Bookmark To

If you are long term investor, unless you are really really confident fed will cut by 50 bps, be careful in new positions heading into the announcement on Tuesday. The FF (fed futures) is priced in at 50 bps, but there is a reasonable chance that it will only be 25. If it is only 25, disappointment will likely occur to a degree and could send the markets down, as 25 bps is priced in as a certainty in FF. A 25 bps cut is likely being reflected in current prices, though there may be surge or some type of frenzy on Friday due to retail investors who don’t know this buying up everything after the Fed announcement, or just because of general sentiment. In which case, that could lead to a long squeeze of sorts.

But that’s all hypothetical and getting the cart ahead of the horse.

Either way, this could be a tricky week to navigate if you are anything but a day trader. I like to take the side probability and not shear speculation, and right now the upside to 50 bps would probably be quite less than the downside of a 25 bps cut. So I will be waiting until later in the week before I start adding or taking on new positions as an investment.

Bookmark To

I’ve had a couple not so stellar ES sessions, and mid-day Monday I switched over to YM with great success. I had not played YM in a while, and still, the fills can be terrible in comparison, but the outcome was great. I’m going to stick with YM for a bit, if nothing else for psychological reasons.

I was up extra the early the other day and loaded up the platform to see how things were unfolding for the day. I saw a couple good setups developing on ES and took them. Bingo! I was up and decided it would be best to leave the rest of the plays for regular market hours. As I am closing out I see another setup, take it, winner. Now I’m starting to think “this is too easy”. And when you start thinking like that you get burned.

Around 8:00am EST, some traders who plan on making the market obviously show up. Next thing you, the gaming begins. Well, I was on the wrong side of it before I see it happening. Being a little tired, and a little incensed, I started breaking all the rules. I start letting emotion get involved, I start overtrading, both day one mistakes that have no business in a trading session.

That was the setup for a mental block on ES. Switching to YM helped that, and when I wasn’t interested in the e-mini, I switched over to scanning for small stock scalps, which were abundant.

There are several morals to this story. Never ever break the rules. It snowballs… what irritated you will only irritate you more. If you lost, you will only lose more. Avoid afterhours unless there is a specific reason for doing it. If you are playing afterhours, it may be indicative of a gambling mentality instead of a seeing a business opportunity.

If you find yourself in a situation where you consciously broke you own rules, you may find yourself in a period of uncertainty about your trading. When that happens, walk away for a few sessions and regroup, or try switching to another index or instrument for a period of time. Either way, the war is not won in a day, but it can be lost in a day if you try to force something or fall outside of your trading parameters.

Bookmark To

I’m not a big fan of wacky indicators, or really indicators in general. Almost all indicators are derived from price and volume, and hence they are lagging, especially averages. But can they assist in a predicting the future based on which way a line is trending for instance, sometimes… but I think the more important thing is that so many people believe indicators are the holy grail that you can predict what a lot of other traders (mainly retail) are going to do. So you do you fade those, or do you play along? Anyways, here’s an interesting video. And yes, as he states, whether what he is doing is right or wrong, you cannot argue with results.

Bookmark To