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CLARK'S GATE TIMING SYSTEM WEEKEND EDITION: THE GOLDMAN SACHS RALLY -- IS IT STILL ALIVE AND WELL?

|Includes:Caterpillar Inc. (CAT), ELY, FXF, UAUA

Clark's Gate Timing System ©
Weekend Edition

THE GOLDMAN SACHS RALLY: IS IT STILL ALIVE AND WELL?

How does the Goldman Sachs Rally look? Is it getting long in the tooth, thin in the forehead, weak in the finger-nails?  Not really.

Well, we really don't like this rally, mainly because we think it's being fueled by hot air and Goldman Sachs program trading.  Hot air, cheap (or free) taxpayer money, and more hot air -- and more Goldman Sachs high-velocity program trading.  Maybe that's the way it always is.  Maybe it is just the illusions that make the stocks levitate during a Bull Market -- a con job that makes people spend their money on things that don't really matter.

But we do know that there are certain elements that need to be in place for a real Bull Market to happen, for a real expansion of the economy.  First, and foremost, there need to be expanding employment, expanding wages, and manageable debt levels so that consumers can take on debt to make the economic mountain move toward Mohammed.  None of those three elements are in place today -- quite the opposite: disappearing jobs, declining wages, and the highest personal and national (and global) debt levels in the history of the earth most assuredly.

Still, the markets go up.  Thank you, Jim Cramer.  (Didn't Jim once work for Goldman Sachs also?)  It is the buying opportunity of a lifetime, isn't it?  Of course, no one seems to believe it but the 'hot money' overlords, the Goldman Sachs computer operators, hedge-fund masters, and the anti-dollar commodity bulls who are plastering paper all over China as if a Chinese bull had gonads the size of Taiwan.

Why is the volume so thin during this rally?  Almost all of the trading in the U.S. market is apparently being done by Goldman Sachs computer traders who can 'manipulate the markets in unfair ways'.  Remember when our friend from Russia stole Goldman-Sachs 'doomsday computer-trading machine' and U.S. Attorney Joseph Facciponti told a federal magistrate judge that, with the theft of the high-speed trading software, Goldman Sachs 'has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”  Really?  Goldman Sachs knew how to use the software.  Does that mean they can manipulate the market in unfair ways?

Sean Paul Kelly explains it this way:

 

This sort of quantitative trading seems to be one of the features of the Goldman program, and Mr. Aleynikov is being accused of downloading this program to an outside computer so he could bring it to his new firm and use it for trading there. But there could be many other types of quantitative trading, some of it “directional” in nature, wherein the algorithm is searching for a financial asset or market that is overbought or oversold and likely to reverse direction. These types of algorithms often compare current prices to a five, thirty, and fifty day moving average of prices for that asset or market, and if the current price violates one of these averages, a buy or sell order will be generated. These programs are so prolific that many individual investors follow these moving averages as well, and “pile on” to the computer trades once an average is violated.


The main criticism of these program trades is that they become self-fulfilling in at least two ways. First, the sheer volume submitted by a firm like Goldman Sachs starts moving the market back to the direction desired by the firm. As such, it sends a signal to the market that a directional change is occurring, and this tends to attract others to the trade, adding to the self-fulfilling nature of what Goldman initiated in the first place. Second, when such trades are done publicly, many individual investors join in and create the momentum necessary for Goldman to profit. Goldman need not publicize its intentions (in fact it operates with intense secrecy), but if it uses something like a moving average strategy that is monitored by tends of thousands of firms and investors, the trade can easily become self-fulfilling.


This is a polite way of describing computer algorithm trades, but less politely, it can be said that firms like Goldman Sachs bully their way to profitability. Their volume is so huge that they become the 800 pound gorilla which dominates the market. There is nothing especially proprietary about their computer algorithm under such circumstances, if large volume can more often than not compel the market to move in a particular direction.


The US district attorney suggests that Goldman did in fact own a proprietary model and it will be harmed if this computer algorithm reaches the public. Presumably, other investors could trade before Goldman initiates its trades (front running). It may also be the case that Goldman has indeed found the Holy Grail – the secret behind how the markets work that allows one to create eternal profits as long as the secret is maintained. Thirty years ago a small group of traders noticed the stock market tends to trade in nine day cycles, after which it reverses direction, or based on certain rules these traders discovered, resets and travels in the same direction for another nine days. This secret provided profitable trading until more and more people learned about it; now it is widely known and used, and seems to work more than 50% of the time, but can now lose you money if you are not careful.

Goldman may have latched onto a secret such as this, the efficacy of which becomes diluted over time as others learn about it. This may be what it wants to protect. It may also be doing its own form of front running. It processes so many proprietary trades for investors that it must have a good institutional sense of the buying and selling pressure in the market. By harnessing this information across its customer base, it can take directional trades as the market does, before it becomes evident to the investing public what is happening. Tying its computer algorithms into its customer data base might generate significant profitable trades, especially since its customer base includes so many major hedge funds which dominate the market.

If you are of a conspiratorial bent, you might assume that Goldman Sachs is operating at least on occasion for the fabled Plunge Protection Team, a cadre of top government officials like Treasury Secretary Geithner and Fed Chairman Bernanke, who purportedly use government money to prop up the stock market or other markets. The PPT really does exist – it is mandated by a regulatory act – but whether it secretly operates to prop up the stock market is certainly questionable. If it did, we can at least say that Goldman Sachs would be the most logical candidate for the government to use.

J.S. Kim notes:

The announced breach of Goldman Sach’s trade secrets coincided with an inexplicable omission of Goldman Sachs from the NYSE’s weekly report of the most active trading programs for the week ending June 26, 2009, though on Monday, July 6, 2009, a NYSE spokesman explained to Reuters that “the exchange was to blame for Goldman missing from the list, adding the bank reported its data to the exchange correctly and on time.” Even if this fishy explanation regarding the omission of Goldman Sachs’s trading activity from this weekly report is true, Goldman Sachs in light of this recent development, has undoubtedly had to proceed much more cautiously with their trading activities given that there may be unknown persons out there privy to their every move right now.

What is highly curious, in my mind, is the fact that oil plunged 10.5% from a high of $71.60 to a low of $64.05 in just the last four trading days and the fact that US stock markets plummeted on July 2nd, before a major US holiday weekend, at a time when Goldman Sachs has most likely not been participating in markets at their regular activity level given these recent developments. Typically before a major US holiday, trading volume on US markets is very light.

During the recent rally in US markets from early March to early June, unidentified institutions have taken advantage of very low trading volumes to prop up US markets whereas higher than normal trading volumes often resulted in an aberration of a heavy down day. I fully expected July 2nd, due to the low trading activity that normally accompanies a pre-holiday market, to be a day when US markets would be propped up, yet July 2nd was a very heavy down day in US markets.

Secondly, every trader rcognizes the importance of Goldman Sachs’s activity in crude oil markets. In fact, if Goldman Sachs makes significant changes to the weightings of its GSCI (Goldman Sachs Commodity Index) components, virtually every commodity fund manager in America accordingly changes the weightings of his or her portfolio to mirror the changed weightings of the GSCI. I haven’t researched how many times in recent history the price of oil has plunged 10.5% in four trading days, but I’m guessing not too often.

Could stock and select commodity markets actually have been driven more by the free market forces of supply and demand than by market manipulation and by free-market intervention schemes for several days while “the invisible hand” of Goldman Sachs has been temporarily tied behind its back? Just a thought.

 

Daniel Tencer points out:


The New York Stock Exchange quietly announced last week that it would end its practice of requiring companies to report all their program trading -- a move that helps shield large investment banks, particularly Goldman Sachs, from public scrutiny.

The new rule means the public will no longer be able to tell if large investment banks are manipulating the stock market for their own gain, says Matt Taibbi, the journalist whose Rolling Stone article on Goldman Sachs’ role in asset bubbles over the past century has rocked the financial world.

According to previous NYSE rules, any company that carried out program trading -- essentially, large computer-automated trades worth more than $1 million -- had to report the trades to the NYSE, which then made the information publicly available.

But, under new regulations (PDF) published last week, that requirement has been removed.

"The NYSE announced that it will no longer be releasing its weekly program trading data," Taibbi wrote in a blog posting. "This is quiet obviously a move designed to make it even more impossible to track what’s going on in the NYSE and shield, in particular, Goldman Sachs."

Taibbi argues that the move is designed to protect investment banks from bloggers who are exposing the companies’ stock market manipulations. Goldman Sachs is singled out because the investment bank’s share of principal NYSE trading has gone from 27 percent at the end of 2008 to fully 50 percent of trades in recent months.
 

Charles Duhigg writes in the New York Times:

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”

The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.
 

Ok, I am definitely in the 'Let's Dismantle Goldman Sachs' (and every other corporate institution that  is 'too big to fail') and scatter them to the wind -- because any istitution that is too big to fail is dangerous to America and to America's democracy.  I got that out.

The Goldman Sachs Rally definitely is still on its legs and has more room to run.  See the chart below, which shows that the S&P 500 index is approaching short-term overbought; but it's momentum still shows it has room to run.

 
 Our top 25 -- those that showed the most momentum gain this week -- are:
Top 25 Momentum Gainers
TBT Short T-Bond 20+ Year ETF
MRK Merck Pharmaceuticals Weekly
HAL Haliburton Inc. Weekly
RHT Red Hat Inc. Weekly
CA Computer Associates Inc Weekly
IBB Biotech ETF Weekly
EMC EMC Corp Weekly
BWLD Buffalo Wild Wings Weekly
SBUX Starbucks Weekly
XOM Exxon Mobile Weekly
IBM International Business Machines Weekly
MMM Minn. Mining & Manufacturing Weekly
ECH I-Shares MSCI Chilean Index Weekly
DHI DR Horton Inc. Weekly
CSCO Cisco Systems Corp Weekly
CSUN China Sunergy Weekly
GG Goldcorp Weekly
BMY Bristol Meyers Squibb Weekly
HPQ Hewlett-Packard Corp Weekly
CAT Caterpillar Corp Weekly
ORCL Oracle Inc. Weekly
BLK Blackrock Corp Weekly
BNI Burlington Northern Santa Fe Corp Weekly
PCLN Priceline Corp Weekly
DRG Amex Pharmaceutical Index Weekly
Click to enlarge

Generally speaking, a large gain in weekly momentum translates into an increase in upward price momentum for a few weeks.

Here's our Bottom 25:

Bottom 25 -- Largest Loss of Weekly Momentum (Highest Loss to lower loss)
DXD Short Dow Index ETF Weekly
MYY Short Midcap Index ETF Weekly
DOG Short DOW 30 Weekly
PSQ Short QQQ Index ETF Weekly
SH Short SP 500 ETF Weekly
QID Short Nasdaq Index ETF Weekly
STJ St. Jude Medical Weekly
UUP Powershares DB U.S. Dollar Bullish Weekly
VIX CBOE Volatility Index Weekly
PNC PNC Financial Svc Weekly
MCD McDonald's Weekly
BAC Bank of America Weekly
SLM Sallie Mae Inc. Weekly
PEP Pepsi Weekly
C Citigroup Weekly
NKE Nike Inc. Weekly
KO Coca-Cola Weekly
UAUA United Airlines Weekly
AIG American International Group Weekly
ELY Callahan Golf Weekly
PEIX Pacific Ethanol Weekly
FNM Fannie Mae Weekly
FRE Freddie Mac Weekly
HGX Housing Stock Index Weekly
BKX Banking Index Weekly
Click to enlarge

I really don't like a lot of stocks on the Top 25 fundamentally, including CAT and SBUX.  Starbucks seems headed for bankruptcy -- how many yuppies are going to wipe the Starbucks ritual out of their lives over the next year, never to return?  I think a lot.  And Caterpillar?  It just lost $700 million and expects next quarter to be worse.  It has laid of 20,000 workers and expects to lay off more.  It announced earnings based on cost-savings -- which, of course, are non-recurring -- and the stock shot up.  Based on what?  Not on the 'bottom line', which is negative -- but because the company beat 'street expectations' -- that is, it lost less than a bunch of know-nothing cheerleaders (who probably own CAT) expected.

Can we really have a rally that does not include some of our bottom 25 names: PEP, KO, MCD, C, NKE?  Well, Citicorp is heading out the door apparently, no matter what we are being told by the talking heads on the boob-tube.  BAC?  More trouble ahead -- at least that's what this week's momentum indicator is saying.

 
 

The folks at Clusterstock explain this chart: "Today's chart is a wonky way of gauging banking industry health, based on a data series collected by the Fed. It shows the percentage of assets held at banks whose allowance for loan losses exceeds their total non-performing loans -- a key sign of health. In other words, the vast majority of banking sector assets -- over 80% -- are currently in institutions where loan loss allowances (ALLL) are below total non-performing loans."

That is to say: US banks are still in trouble.  Some 56 have been closed so far this year; and more are coming.  Wait until the Commercial Real Estate bubble actually pops -- Benanke admits it will probably be worse for the economy than the residential real estate crisis was.  Hold on to your hats.

How is the CGTS Weekly Portfolio performing?  We are up 41% since March 2009.

 
CGTS WEEKLY PORTFOLIO 7/24/09 - Since March 09
Trading Profits

Active

Cost of Percent System   Trades Active Trades Gain           M5 (3) $23,808 9 $90,000 26.45% M5 (7) $141,745 22 $220,000 64.43% M5 (10) $98,380 11 $110,000 89.44% Momentum $22,827 41 $410,000 5.57% Momentum #2 Long Term $536 1 $10,000 5.36% M4 Plus Long Term $274,879 41 $410,000 67.04% MA 5 MA 40 Long Term $83,765 31 $310,000 27.02%           Totals $647,068 158 $1,580,000 40.95%

NEW SIGNALS FOR THIS WEEK.

CGTS New Trading Signals for Week of 7/24/09

M5 (3)

Short-Term Trading Objective    
FXF Swiss Franc ETF 91.94 enter long
XOI Oil and Gas Index 969.08 enter short
UAUA United Airlines 3.79 enter short
M5 (7) Short-Term Trading Objective    
JPN Japan Index 105.85 enter long
N225 Nikkei Japan Index 9944.55 enter long
Momentum Intermediate-Term Trading Objective    
JPN Japan Index 105.85 enter long
N225 Nikkei Japan Index 9944.55 enter long
AMSC American Superconductor Corp 26.84 enter long
CAT Caterpillar 42 enter long
FJESX DWS Japan Equity Fund 7.54 enter long
M5 D Trade Short-Term Trading Objective    
ELY Callahan Golf 5.27 enter short
Click to enlarge
 
Here are some charts of the new trading issues for this week.  We're a bit uncertain about shorting XOI, the Gas and Oil Index, since its momentum is clearly climbing.  But our short-term trading indicator is giving a sell signal (we aren't confident that this will make money).  We are more confident about shorting UAUA, United Airlines, as its momentum is flat -- and more downside seems inevitable.
 
 

We advertise ourselves as short-term traders, but our long-term portfolios (above) are doing very well during this GS Rally.  BVSP, the Bovespa Index, is up 104%; and BLK is up 126% since March of this year.

 

We are showing some of the short-term trades we closed this week (M5 -3 trading instrument).  A short-position in QID (Short Nasdaq Index ETF) gained 21% in two weeks.  And a long-position in SBUX (Starbucks) gained 27% in two weeks.

 
 

More information on this system can be found at

home.mindspring.com/~mclark7/CGTS09.htm



Portfolio of CGTS Trades for 09 can be found a (I have been lax in updating this site and will try to do it this week)::

home.mindspring.com/~mclark7/cgtsportfolio09.htm



MJ Clark
Clark's Gate Timing System
Hanoi, Vietnam
84 4 221 92210



 

 
Stocks: CAT, FXF, UAUA, ELY