Starting to Position for Correction

Each day that passes, the type of stocks moving up are getting more and more speculative - bulls can say that is great because it signifies a 'broadening' of the rally; I'll take the contrarian side and say that while it is good to see speculation return, it signals froth. We are now in week 6 of an epic rally. I think every heavily shorted stock has been taken to the moon.

I don't go to all cash, but if this were a personal account I'd be doing that and sitting on the sideline willing to miss the last leg of a move up here. Since we never know when this relentless type of move ends (either up or down) I don't want to press too many shorts but I am beginning to build stakes for a decent sized pullback. That doesn't mean it happens today, or Monday, Tuesday, Wednesday - who knows. I just want to begin to get hedged to some degree although not aggressively.

I am cutting back on just about all my "financial" exposure - I didn't realize how many names I had until I pruned today

1. Mastercard (MA) not performing well and word is out that Obama's team is meeting with the credit card companies to discuss "fees" - MA could in fact be a short if it breaks the trend line we discussed yesterday. So far it is still holding; if it begins to bounce back north of $165 I'll get what I sold back.
2. Cut almost all Blackstone (BX) - a double top could be forming here. North of $9.50 it is back to bullish however.
3. Cut almost all Greenhill & Co (GHL) - a great profit, we bought last week at $68s - nothing bad about chart - just too much profit to leave on table.
4. Cut most of Morgan Stanley (MS) - been trading this between $22 and $25-$26. I did not add to my tiny short because if S&P 870 is breached it could keep running.
5. Cut some Regions Financial (RF) bought yesterday near $6.40 near $6.90. Earnings early next week.

At this point the we know the banks are minting money - if

Citigroup (C)

can make money, anyone can. And Citigroup is insolvent - that's how easy it is to make money.

BB&T (BBT)

reported a nice number today as we expected.

Wells Fargo (WFC)

and

Bank of America (BAC)

with their huge mortgage arms are going to making a mint of the rush to refinance - (BAC has Countrywide) - does anyone not expect it? Perhaps we can go up day after day on the exact same "news" but it seems a bit silly. So I believe we are now setting the stage of "sell the news" reactions rather than "my gosh if we give banks money for nothing they are profitable" Hence I am becoming cautious - I am more than willing to buy all of these names except Mastercard on pullbacks - they are all quite extended, as the Kool Aid is everywhere. We'll see how the stocks react next week. Further, there are a lot of non financials - some 130 S&P companies reporting next week, and unfortunately most don't have the government feeding them taxpayer money.

The only shorts I am pursuing right now are continuing to build Macys (M)(as long as it doesnt break over $13) andBed Bath & Beyond (BBBY). I am noticing as people run into speculative Chinese small caps they seem to have abandonded most of the Chinese large caps. They are not selling them hard, but they are not following the general market up. FXI is the one I am watching here - this chart does not show the moving average where I see it elsewhere but the 200 day is roughly $32.75. We were above that the past two days but while the market has staged some late day bursts, these large caps have sort of just sat there. This leads to 2 scenarios - either they are resting before next leg up, or their non-confirmation means they are set to lead down. We never know in advance, but to short a basket I am using FXP, which is the double inverse of FXI.

We face the exact same situation we were in 6-7 weeks ago. We are watching in awe a move continue in one direction without relent. At that time it was down, now it is up. Much like then, I expect the reversal to be quick and somewhat dramatic, but much like then, you can't jump in ahead of time too aggressively or you lose a lot of money. If the market is its usually wicked self, we'd see a jump over S&P 870 where every set of computer eyes in America is trained, causing the last shorts to puke out their positions, and longs awaiting a "breakout" to new levels to jump in - and then we'd reverse once everyone has their chips in. The last shorts would give up, after weeks of pain, and longs would be triumphant. That would seem too cruel, but let's see if it plays out. Stocks are wickedly expensive on 2009 earnings here, but right now no one seems to care - unless of course you are in the V shaped "we're going back to good times of 2006 by Thanksgiving" camp.

So again, for now I am mostly just lightening up and building a cash stake, with some small entries on the short side. The risk reward will be switching each point we move higher, and many bulls are now taking on a pigmentation of pink - similar to what bears were 2 months ago. Let's see what this push over S&P 870 (when and if) does to the psychology. The last part of a move is the most parabolic - should be interesting; if we break over 870 I am going to try a quick ride on the long side with some ETFs and then try to jump back off if my scenario plays out in the coming hours/days.

The interesting situation developing is when the American people begin to ask why we are sending tax dollars hand over fist to banks who are making "record profits". ;) Doesn't that strike one as an odd dichotomy?

See Chris Whalen on Citi below - and after you listen to it please chew on this red pill and immediately forget it because facts have no place in the market :)

Disclosure: Long MA, BX, RF, GHL, MS, FXP; short MS, M, BBBY, FXI in fund - no personal position (yet)

Comments

[TheFounder:]

Agree. Sold all my longs recently. An increase rate of 31% in 6 weeks can not be sustained. Too much, too fast.

Apr 17 02:48 PM

[Larry House:]

Thanks. One thing that I have been watching is the volume. It has been okay, but it has not been at the levels you would expect (or need) if the market is really changing direction for keeps. I had just been considering that, and then the CEO of Euronet was interview this morning, and he pointed out that very thing--volume has not been robust, and he expects a correction--not all the way to previous lows, but a sizeable chunk of the way. Euphoria can only take us so far; the fundamentals of the economy have to show improvement to change the market's direction long-term. The trend is currently up, but the rally shows signs of topping out. Art Cashin of UBS is calling the start of a correction next week. No one knows, but the air is getting thin up here for this market.

Apr 17 02:49 PM

[Yohei:]

I just watched "The Black Knight" for the first time recently and am now sure I understand "Mr. Market" much better. "Mr. Market" is the Joker! Hahahahaa!!!

Apr 17 03:08 PM

[Asitoughtobe:]

Mark,

I am increasingly with your observation. I am certainly of the mind that the markets are due for a pull back. And my actions have been preparing to take advantage when that happens.

According to OptionARMageddon.com with data sources as of Nov. 30 our banking leverage ratios were reported to be the following: BAC - 39, JPM - 29, C - 66, MS - 23, GE - 140, GS - 21 and WFC - 45 .

What happens when the government publishes their bank stress tests? This run up is not sustainable.

Apr 17 03:11 PM

[Drew Arnold:]

Great timing, the S&P is about to hit resistance at 875. Look for a pullback and then consider adding some long positions back in.

Apr 17 03:56 PM

[William Cowie:]

"...if Citigroup (C) can make money, anyone can. And Citigroup is insolvent - that's how easy it is to make money."

Welcome to the wonderful world of taxpayer money. It is this seemingly unending stream of our money that's sustaining the rally that would (should) have pulled back a few hundred S&P points ago. This is a new element, there's no history from which to learn - our government and the market are making this up as we stumble along.

That makes it impossible to judge whether we're getting primed for a correction or not. All bets are off with this level of craziness (and, some would add, corruption) going on...

Apr 17 04:39 PM

[ralphie:]

this guy TraderMark has got it nailed; he must be doing this all day every day, because his comments can only come from watching multiple screens minute by minute, day by day;

yesterday and today were exactly the same feeling as thur 5 mar 09 and fri 6 mar 09; at that time could not stay in a short for more then 10 minutes without the heebie jeebies; but i never figured this market as good a hump from 670 to 870;

mr. cowies' comments are on the mark too; maybe that's why we blew thru any sane spot on the way back from the early March trough;

for what is was worth, i just straddled 20 or so positions with a few hundred shares long/short in an effort to turn a buck and keep from falling asleep; however, day's end found me buying a few hundred SPY at 87+ long, so I am now convinced that his 2-8 days is bulleyes; I did the same thing fri 3/6 on SPY at 67 short, a type of perverse way of telling myself change-is-a-coming

Apr 17 05:55 PM

[InvestBaboo:]

Before you give TraderMark credit you should go look at his past posts and see how many times he has had his behind burned due to his shorting activities. If he did what the charts told him to do he would be long all this time and make a ton of money. The trend is your friend till the bend at the end and there ain't no bend to see at the present! Any bend you see is the one you imagine when you let emotions mess with what should otherwise be a very rational and analytical reading.

I could also let my emotions run wild and make extremely bullish projections or bearish projections depending on how I am feeling at a given time. If I stick to purely charts and metrics I gotta say we are looking at continuing rally next week. All the short positions TraderMark is currently carrying will likely burn him next week.

Apr 18 02:13 AM

[basehitz:]

I don't believe the rally is justified either. As another poster noted, volume is not encouraging. Unfortunately, I sold too soon. But I won't short yet. Seems every couple days, someone gooses the market again. Whether it be yet another govt bailout, analyst upgrade, financial firm upside surprise, whatever. It seems an orchestrated attempt to jawbone the rally higher. Therefore the delay is shorting.

On another of your posts Mark you noted the 10 years wated by longterm investors that bought the permabull mantra of those types. Fortunately, that was not my sad tale. Nevertheless, I was infuriated yesterday when Power Lunch (aka cheerleading central) was reminding viewers that they were saying all along you need to stay in the market or miss the first part of the rally. They (conveniently) failed to mention they were cheerleading all the way down from 1500 and now those who followed this advise are now 40% underwater even after this impressive rally. I almost can't watch CNBC without getting pissed off anymore.

Apr 18 08:46 AM

[AndrewBaker:]

That is the problem. The trend is your friend until it changes, and at the same time the recent bull run flies in the face of fundamentals and common sense. It's very difficult to ride this uptrend when your gut says it's gone too far and must change. But it won't until it does, I agree; and I don't know when that will be. Add to that, that when I stated a bear view some time ago, I got more marked up than down, and now it's gone the other way. So, there are a lot more bulls on here now than some weeks back. Maybe I'd best stop reading and hearing about the market, and just keep watching the charts: at least they are totally unbiased.

Apr 18 09:11 AM

[ain't no fo...:]

Cheerleader Central in the form of Maria Bartiromo, Dennis Kneel, Erin Burnett and Goldilocks Kudlow ALL shook their fingers at us stupid consumers on air in the late winter/early spring of 2008 and accused Americans of "talking ourselves into a recession" - evidently we just needed to keep spending irresponsibly and stay chirpy chirpy happy happy like all their shills (you listening Erin?) and there would be no recession and green money trees would grow to the sky.

You get what you pay for with Cheerleader Central, which equals exactly ZERO.




On Apr 18 08:46 AM basehitz wrote:

> I don't believe the rally is justified either. As another poster
> noted, volume is not encouraging. Unfortunately, I sold too soon.
> But I won't short yet. Seems every couple days, someone gooses the
> market again. Whether it be yet another govt bailout, analyst upgrade,
> financial firm upside surprise, whatever. It seems an orchestrated
> attempt to jawbone the rally higher. Therefore the delay is shorting.
>
>
> On another of your posts Mark you noted the 10 years wated by longterm
> investors that bought the permabull mantra of those types. Fortunately,
> that was not my sad tale. Nevertheless, I was infuriated yesterday
> when Power Lunch (aka cheerleading central) was reminding viewers
> that they were saying all along you need to stay in the market or
> miss the first part of the rally. They (conveniently) failed to mention
> they were cheerleading all the way down from 1500 and now those who
> followed this advise are now 40% underwater even after this impressive
> rally. I almost can't watch CNBC without getting pissed off anymore.
>

Apr 18 12:36 PM

[Happydaze:]

You can buy this mkt, but just realize what you are doing.
Bulls are paying higher and higher multiples when yields are near extreme lows in an environment where earnings are decreasing.

The S&P RARELY goes up as much as it has since March in an entire year!

This entire rally has been about fear: short covering fear, bull fear that they are going to miss the train.

What has baited people into buying is "beat by a penny".

Recently, for instance, BBBY (Bed Bath and Beyond) "beat" the
earnings estimates and the stock rocketed up 28% in one day!

But in small print buried in the report, the real fact was that YOY earnings were DOWN 18%.

There you have it, short fueled mini-mania, desperate longs racing to catch the train shoving the stock within a couple of dollars of its 2008 highs. And all based on Wall Streets favorite game: "Beat By A Penny".

Since the earnings came out 7 trading days ago, the stock is no higher and the volume has dropped significantly.

I could repeat this scenario over and over, citing examples and hard data.

We know what this has led to virtually every time in the past.

Is it really "different this time"?

Apr 18 01:24 PM

[RiskReturnO...:]

Rollover in emerging markets should be watched carefully (FXI, EWZ have been leaders, but reversed Friday). If commodities (especially copper) pulls back next week, looks like SPY has made a short term top ... perhaps time for 50% retracement of previous run-up, maybe next leg down ending at 800 for a nice round number.

Apr 18 02:07 PM

[Roger Knights:]

"The trend is your friend till the bend at the end and there ain't no bend to see at the present!"

It's all smooth sailing until we go over the waterfall—i.e., hit a 5% + down-day. If you're long, keep those stops in place, or your eye on the screen and your finger on the trigger.

Apr 18 02:13 PM

[woodsey:]

My high school economics teacher back in the thirties warned, " The wolves will shear the sheep."

Apr 18 05:22 PM

[basehitz:]

"Happydaze" brought up BBBY. From Barron's:

"Leonard Feinstein, a co-chairman and co-founder, sold 1.1 million shares through family trusts and a charitable foundation, banking $34 million, or about $30.90 per share. Warren Eisenberg, the other chairman and co-founder sold 1.05 million shares for $32 million, also at about $30.90 per share. Neither had sold stock in more than two years. Each owns about 2% of the company's shares"

These guys sold $64 million in stock, about 1/3 of their combined position. Boo Yah!

If you have a subscription:
online.barrons.com/art...;mod=yahoobarrons

Apr 18 07:55 PM

[cynewulf:]

With the U.A.W. in power pray for help from the almighty, but right now cash is still a safe park, when the bulls run for cover. The cover is where the bears live. Bulls need to stay together for their own protection. they cannot continue to run. I give them at most a few more trading days. Who wants to play Musical Chairs?

Apr 18 08:17 PM

[PROXIMO:]

Dragon--Say what you want about Erin, she's hot. Just think if someone could transplant a brain into that.


On Apr 18 12:36 PM wpdragon wrote:

> Cheerleader Central in the form of Maria Bartiromo, Dennis Kneel,
> Erin Burnett and Goldilocks Kudlow ALL shook their fingers at us
> stupid consumers on air in the late winter/early spring of 2008 and
> accused Americans of "talking ourselves into a recession" - evidently
> we just needed to keep spending irresponsibly and stay chirpy chirpy
> happy happy like all their shills (you listening Erin?) and there
> would be no recession and green money trees would grow to the sky.
>
>
> You get what you pay for with Cheerleader Central, which equals exactly
> ZERO.
>
>

Apr 18 08:25 PM

[Baboon:]

I wish the market to keep climbing a bit higher ( around 890 would be nice ) so I can short it at higher price.

Apr 18 08:50 PM

[strovej1:]

With the fundamentals so much in question and the ability of the market to defy logic for very long periods of time, the current mantra that the rally is due for a strong correction seems to be just so much guessing-- strongly influenced by the Gambler's Fallacy. While I have seen some very good arguments for why the market should/will pull back, if you listen to the television commentators and read the limitless market experts, the opinion seems to be that the market has run so much that "it can't possibly continue". that is the same as saying "I've flipped heads 10 times in a row; therefore, I am due for tails". The odds haven't changed.

Apr 18 09:11 PM