Flat Stock Market signals 9/27/11 (7am)

Just a quick blog post; as our readers know, we were short the stock market going into the weekend after last week's emotional drop.  Our stock market models are currently as follows (S&P currently at 1145; calling higher in electronic trading):

• Long-term -- moderately bearish
• Intermediate-term -- oversold indicators neutral
• Short-term -- went long after Monday's rise.

As a result, we are currently flat.  

Some thoughts from another trader 9/26/11

Here are some thoughts from a hedge fund manager (J. Taylor):

... believes that Greece is going to default, that the euro will fall, and that the U.S. dollar's rebound has just started. It was his kind of week last week.

... positive on the commodity-based ones, such as the Australian and New Zealand dollars, despite their run-up. "We use commodities to forecast currencies," he notes. For instance, Norway's krone is a function of the price of oil, which he thinks is a solid long-term bet on the next growth cycle. In five years, he says, "we could see oil at $500 a barrel. I would be a buyer on dips of oil." But that's a trade for another week.

Read more here:
http://online.barrons.com/article/SB50001424052702304336204576582692220816096.html 

A Z-Trader's Thoughts on Recent "Vol" 9/25/11

Excerpt from one of our contributor's articles at SeekingAlpha:

Here are a few quick thoughts for these volatile conditions, during these difficult economic times:

• Don’t try and catch a falling knife. Most good trading systems will minimize risk and “stop losses” from accumulating. You can never tell how far emotions will carry a large market move.
• When “contagion” spreads, it is sometimes best to step aside and reduce positions because psychology and emotions can also spread – causing markets to move past any "reasonable" level.
• Many portfolio managers are reducing positions, so markets become more "correlated" to one another.
• “Diversification helps until it no longer helps.”
• Trade down to the level that lets you "sleep at night."
• From a trader's perspective, once the markets find footing, these "dislocations" may offer opportunities.

Read more here:
http://seekingalpha.com/article/295688-a-trader-s-thoughts-on-recent-market-volatility

Market Update; Trader Thoughts (9/23 - 7am)

The stock market has dropped swiftly and viciously the past few days.  This has impacted most other markets -- including crude oil, precious metals, commodities, currencies and fixed income.  A few quick thoughts from the blog's contributors who are traders and investors:

• Don't try and catch a falling knife.  We had a blog post recently about this...
• Trade down to the level that lets you "sleep at night."
• Stick to your trading plan and/or system.  Systematic approaches maintain discipline and reduce the impact of emotion and psychology.

We are writing an article for Seeking Alpha on some of these topics.  And in case you were wondering:

• Our stock market indicators are currently "overall" bearish.
• Our short-term indicators have dictated our stock market positions because the other indicators (long-term and intermediate-term) were neutral.  
• As our readers know, our intermediate-term and long-term indicators went to neutral on our last post on stock market indicators -- when the S&P was at 1216.  
• Currently, however, our long-term model flipped to bearish (depending on market action, this may change; we will keep you posted).  In addition the intermediate-term indicators are moderately bearish (but a look-ahead shows that the oversold indicator may flip to bullish in the near-term). 
• The S&P closed Thursday at 1130. 

Stock Market Indicators 9/17/11

After the stock market's snapback from an early-September -6% decline (S&P is now almost flat for the month, but remains down for the year) -- our overbought stock market indicators are now neutral.  Our last blog post for our stock market indicators was on September 12; our intermediate-term models went long -- when the S&P was at 1140.  The S&P closed on Friday at 1216.

Our long-term indicators remain neutral -- with the models looking for further directional information from the stock market.  As a result, our positions will be dictated by short-term trends.  

PIMCO & Bill Gross: Long on Bonds

Here's an excerpt from an interesting article on bonds.  We are currently "long" bonds as well; our models have been long bonds for a long period of time.

This report from one of my favorite blogs, Zero Hedge, fleshes out the details [emphasis added]:
…As the just released latest monthly Total Return Fund data indicates, PIMCO now has a substantial net long position in Government Related securities, at $51.5 billion (net of swaps), a more than 100% increase from the $22.1 billion in July (and a far cry from the $9.6 billion short in April).
That’s a big boost in government securities. The question is why are they doing this?  The ZH folks believe this is a ‘tell’ or an indication that Gross believes the Fed is going to intervene in the bond market in a big way by buying long maturity bonds.  That makes sense, but there may also be a simpler explanation, which I’ll get to in a moment.  ZH continues with thoughts on what the latest Fed intervention — Operation Twist or Torque or whatever it will be called — will do:
…the Fed is about to re-enter the securities market to prevent the latest re-depression with Operation Twist if not much more. So while it no longer makes sense to be short bonds (as Gross has figured out the hard way), what makes sense is to be very, very long duration, since this is what the Fed will be buying in Operation Twist/Torque.Earlier this year, Gross openly moved out of U.S. Treasury holdings and made a bet on higher interest rates.  That did not happen.  However, as all good portfolio managers do, when he’s wrong, he changes course.  Now, he has done that in a big way by going long and going back into government securities. ZH continues with a discussion of changes in the duration or average weighted maturity of the portfolio:
…average holding duration, which from 4.56 in July, has soared to 6.27 in August, the highest since 6.23 in October, and possibly the highest on record (that said our records only go back to 2007)…
Pimco Total Return is changing its portfolio in two ways:

• Duration: 
First, it is extending the duration to go long.  And, make no mistake, a duration of 6.27 years is at the long end of the range for this fund. I chatted with Kevin Winters of Pimco to get some clarification about the fund’s duration policy.  The policy is to operate in a range of up to two year over (or under) the Barclays Capital Aggregate Bond Index.   Currently, the BarCap Aggregate is about five years, so Pimco could actually go up to seven years duration.

• Government securities: 
The second portfolio change is that the fund is moving more aggressively into U.S. government securities.

Both lengthening duration and moving strongly back into government securities are big changes from earlier this year. The question I asked myself is why are they making these changes?  The ZH folks believe this is a ‘tell’ that Gross believes the Fed is going to intervene in the bond market in a big way.  That makes sense, but there may also be a second and more important explanation. 

Read more here: http://blogs.marketwatch.com/fundmastery/2011/09/13/bill-gross-pimco-going-long-again/

At Current Stock Levels... 9/12/11

our oversold indicators are flashing a "Buy" signal.  This intermediate-term signal is a step up from the "moderately bullish" signal given on August 23 (when the S&P was at 1162).  Currently, the S&P stands at 1140.

Note that our long-term model is neutral but may give a signal change over the next few days.  We will keep our readers posted.