A Sane Way to Trade Crazy Markets

Does the chart below of the Dow Industrial Average make you feel bullish? Bearish? Neutral?  We’re not sure ourselves. Although we’ve been using technical analysis for nearly 40 years, the chart doesn’t speak to us. At best, it leaves us with only a moderately bullish bias for the near term  — and a vague feeling that the meaningless price swings that have ruled the markets in 2011 could continue for longer than we would care to imagine, let alone explain  This is hard to believe, especially with so many dreadnoughts bearing down on the global economy and banking system. The U.S. is re-entering a recession that never ended for most households. China has hit the brakes in preparation for a slowdown in global trade, and the country’s real estate bubble appears to be deflating with a vengeance. Jihadists are planning naval “maneuvers” in the Strait of Hormuz. Bird flu and the bubbling Yellowstone caldera threaten us with extinction.

And there is of course Europe, faced with the impossible choice of either monetizing the debts of countries that will never be able to pay them, or letting those countries go bankrupt. We think it is the latter option that will forced on decision-makers, since rich-uncle Germany understands that throwing another two or three trillion euros of debt-money at the problem will not fix it.  In any event, the decision cannot be delayed for much longer, since interest rates for sovereign borrowers are becoming increasingly uppity. For Italy, most crucially, rates are edging back toward 7% — the extreme end of the red zone politically and economically – within days of each new phony bailout scheme hatched in Belgium. A disaster is coming, and it is only a question of when.

Like a Kite in a Gale

And yet, U.S. stocks continue to hover, to dive, and to soar like a kite in a gale. Through it all, the Dow is currently trading within 20% of all-time highs. We hesitate to credit the broad averages with “hanging tough,” since it is not hard investment decisions that have sustained the markets, but rather a sea of funny money.  Whirlpools, eddies and rogue crests of it drive stocks hither and thither, all presumably to no good end.  It mocks the idea of capital – of capitalism itself.  No longer does the Econ 101 equation Saving=Investment hold.  How can we speak of savings when they are offset by a quadrillion-dollar global edifice of debt that verges on collapse? More to the point, why would anyone invest in productive assets such as manufacturing when financial assets are so much more rewarding?  They are very nearly riskless, too, since limitless amounts of cash for financial speculation are available for next to nothing, and even when you “lose,” if you lose big enough, the central bank will make you whole again.

Straddling the Markets

Under the circumstances, which are diabolically unpredictable, Rick’s Picks has been playing both side of the market, locking in spread positions at little or no cost that will make money regardless of what stocks do in the next couple of months. Legging into bearish put spreads in the QQQ, we recently created a position that can lose no more than $20 theoretical but which could make us as much as $1200 if stocks fall between now and late January. That’s effectively getting 60-to-1 odds against a decline in the market. Soon after we locked in this spread, we began to construct its opposite — a bullish play in SPY.  Our goal ultimately is to have a mix of bull and bears spreads that have cost us little or nothing and which leave us genuinely unconcerned about which way stocks move over the next five weeks.  We also have a bullish trade on in the March E-Mini S&P that has produced a paper gain so far of $2700.  The trade was initiated at last week’s exact low, 1198.00. If you are curious about how we determined to get long at that number, click here for a free trial subscription to Rick’s Picks.  And if you want to learn how to do it yourself, click here.

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  • mava December 19, 2011, 10:19 pm

    Related links on Keiser (I typed the website wrong):

    Why Max Keiser and Jason Hamlin Are Wrong – Part II
    http://www.dollarvigilante.com/blog/2011/11/18/why-max-keiser-and-jason-hamlin-are-wrong-part-ii.html

    Why Max Keiser and Jason Hamlin are Wrong – Regulating Capitalism is Superfluous and Counterproductive
    http://www.dollarvigilante.com/blog/2011/11/17/why-max-keiser-and-jason-hamlin-are-wrong-regulating-capital.html

    Does The Economy Need a Referee?
    http://www.dollarvigilante.com/blog/2011/10/19/does-the-economy-need-a-referee.html

    • Buster December 22, 2011, 8:37 pm

      Very good links, Mava, & very much in line with my own thinking on the issues.

  • mava December 19, 2011, 10:11 pm

    Buster,

    Kaiser, btw, insisted on need for regulations, in a conversation with Jeff Berwick (search for Keiser on thedollarvigilante.com), the debate which, when continued, he thoroughly lost.

    Just want to warn you that the guy you think is giving you the truths, is “working for another team”. His aim is to give you a view of history that will prepare you to agree that it is essential that we have the thieves messing up our economy.

    Most economic commentators, even the ones that supposedly “on your side”, and even the ones that are making supposedly “revealing” movies, are actually enemy saboteurs, – they have an interest to see the government survive.

    • Buster December 19, 2011, 11:13 pm

      Yes, I know. I don’t suppose Max Kaiser or Jason Hamlin are anything other than sincere in their views though, & many of these guys believe that we need more regulation. I expect we’ll end up getting nothing less than that, unfortunately. As I have often stated here, I view the governments’ only civil responsibility as to issue justice based on common law, not meddle in the free market with regulations which, seemingly without fail, ends up favouring some group at the expense of another, thereby distorting things with ongoing consequences. Eventually the bad guys tend to get to make the decisions on the favours, too.
      Generally, I agree on some points but disagree on other from all of these commentators, just like we all do with eachother here. Hopefully, through open discussion we gain the discernment to see the flaws in various opinions we have at some stage. We all see things from different angles too, which is all good, too.

  • Buster December 19, 2011, 7:51 pm

    http://www.goldstockbull.com/articles/the-u-s-government-has-the-power-to-end-the-fed-and-issue-debt-free-money/

    Included in the above call for education of the public about money is an interview by Max Kaiser of Bill Still, from the documentary ‘The Money Masters'(available free on Youtube), which is the 15th most watched film on the internet in history, and well worth watching by anyone who wants to understand the history & root cause of the financial problems we endure. It details why a gold standard was not an antidote to the Banksters when it was in effect previously & why.
    I can’t recommend this documentary enough. It should be compulsory viewing in our education systemto help prevent tyranny.

    The Kaiser report is known for it’s hard hitting coverage of the financial world, and interviews with leading financial personalities of our time. Sometimes ones quite familiar to all here, too, BTW!

  • John Jay December 19, 2011, 7:39 pm

    Robert,
    I think the Supreme Court is going along with the agenda. They could have easily passed the word that they desired a case challenging the Patriot Act as soon as it became law. Or “signing statements”, or 4th Amendment trashing at airports, or the 10th Amendment in general. And it has been ten years since the Patriot Act became law and the descent into tyranny began. Nine judges that are expert at Constitutional Law know what is going on and say nothing. Ron Paul is the last hope to restore the Republic as far as I can see. If he doesn’t win, it’s best to make as much money as you can and stay out of trouble with the government.

    • MTG December 19, 2011, 7:43 pm

      Couldn’t agree more. If I had more assets, I’d also be trying to hide them far a field and have some plan to flee in case things take a truly ugly turn (however unlikely).

    • Carol December 19, 2011, 10:02 pm

      JJ >> “Nine judges that are expert at Constitutional Law know what is going on and say nothing.”

      That is BECAUSE they know what is going on so they CAN’T say anything as nothing is “wrong” with the actions taken or being done to “US citizens”.

      What is more interesting is that after 157 years and much education given by Steve and others on this forum how is it that you still don’t know or understand the 14th amendment?

      Once you or anyone accepts the US citizen status you/they lose all CONstitutional protections as US citizens are under CONgress’s 100% jurisdiction whereby CONgress can then do to them ANYTHING they want to and it is “CONstitutional”.

    • Steve December 19, 2011, 10:17 pm

      Posted above. The s.c. provided a statement in the early thirties:

      ‘We shall hold the constitution in trust until such time as the people tire of this experiment in democracy’

      The 14th amendment is a private political act over which the court has no authority until someone uses force to compel conversion of the person.

      EVERYTHING IS UNDER THE 14TH AMENDMENT

  • Robert December 19, 2011, 6:54 pm

    A great sage of the markets has said many times:

    “When you don’t know what to do, do nothing…”

    I am as completely defensive financially as I’ve ever been. I own not a single index fund, and not a single Bond. I maintain some leveraged exposure to the bond markets, with a bias weighted slightly more heavily to the short side.

    I only own stocks and equity in companies that I believe can grow even under current circumstances, and with whose cash flow I want to maintain a future claim on.

    I own more foreign currency than I ever have, and the only secular market trend I have any faith in is the PM’s, although even there I am decidedly neutral in my expectation of significant future gains.

    If this thing were a chess game (which it is in many ways) I’d be positioning for a stalemate- There appear to be no moves of significant strategic advantage available on the board.

    If it were a poker game (which it also is in many ways) then I’d be picking up my chips and leaving the table, because It would be readily apparent to me by now that the dealer and at least one other player are passing signals.

    • Mario cavolo December 20, 2011, 1:50 am

      And we assume that foreign currency hoard includes lots of rmb?…M

  • MTG December 19, 2011, 5:32 pm

    The problem as I see it is that we have a situation that is almost a perfect storm of negativity, but with no follow through.

    Europe is a political mess, but every incremental worsening of conditions there sees an incremental lightening of their refusal to print.

    We are in some type of lull in the hurricane, at least according to the folks at ECRI. Every time that someone predicts armageddon, the indicators don’t follow through. Also, if they did, I suspect the policy response would be similar to that in Europe. Every significant weakening would be met with intervention.

    Finally, China clearly has a train wreck on its hands with the real estate crash. However, they have trillions to throw at the problem and even more if they wanted to print, which they seem more than willing to do.

    Put it all together and one should be short. The market should be dropping. However, it can’t when market participants see the wizard standing behind the curtain with his hand on the lever. In my mind, it will be hard to get a big drop without someone bazooka-ing this mess back up.

    • Mario cavolo December 20, 2011, 1:49 am

      Issues yes but no trainwreck there…loads of new found happiness and riches would be a better description… M

  • jeff kahn December 19, 2011, 5:29 pm

    Technical analysis is most useful in a free market, which operates under the laws of supply and demand. That doesn’t apply here anymore.

  • ken horn December 19, 2011, 4:55 pm

    Boy oh boy, talk about “the market climbs a wall of worry”. RA certainly enumerated some of the major worries, but I would submit there are MANY more. A watched pot never boils folks, but when this market gets hit hard (and it will), everyone on this thread will look back & say “I can’t believe I didn’t get short/shorter. It was so obvious what was coming. It was screaming at me. Happens every time.

  • Rich December 19, 2011, 6:01 am

    Rick, like your idea of sane trading.
    Dow down hard, bonds and dollar up strong
    ’bout right until further notice…

  • John Jay December 19, 2011, 4:14 am

    I think we are getting close to the end game. When the jackals start attacking each other (MF Global/JPM) you know they have run out of easy prey. I read that even if you had paid for gold in storage at the MF it may be liquidated anyway by the “Trustee”. Now, even outright theft goes unpunished. As long as you commit murder or theft on a grand scale, the government will stand behind you. They are busy chasing down 6 stray cows in N Dakota with a USAF drone, and 85 year old females at JFK. The Senate votes 10 to 1 for martial law and the end of due process and habeus corpus. I sure hope Ron Paul gains some traction, Newt G is already talking pure insanity about arresting Federal judges that don’t toe the line among other things. Even the Supreme Court, which is the closest thing we have to the ancient Roman “Tribunes of the People”is silent as the Bill of Rights is ignored more each day. Et tu, Supreme Court ?

    • Buster December 19, 2011, 4:16 pm

      Mmm, interesting times indeed..

      Where are we heading I wonder.
      ‘Getting close’ I’d agree on, since people are starting to wise up faster the further things go. When that awareness reaches critical mass the system will be trading with itself & not profitable enough to justify itself. This is when the whore will be turned on, since this organisation won’t be much use to the governments if she doesn’t have enough dumb sheeple to fleece anymore. In one day alone last month 65,000 people transferred their bank accounts to credit unions in protest at the corruption of the financial system. The scum may have had the bailouts etc but they’ve really blown their cover world wide in the process. The rivers of Babylon are gradually drying up!
      I suspect that Ron Paul may well be a part of this scenario -of the government turning on the global organisation of banking-financial/corporate-military/media-religious run by the Elitists. However, there will be consequences of this monumental event…the acumulation of wealth & power that their form of management allows also gives the ability to sustain a dominant military on the world stage. Taking this away will open up other problems. I suspect there will be war in the middle east in the not too distant future thereafter. There will likely be some nasty ‘fireworks’ going off, too.
      But maybe that’s getting too far ahead of things at this stage.
      In the meantime…
      Get your ass & your assets out of Babylon if you can!

    • Robert December 19, 2011, 6:42 pm

      John Jay-

      All very salient points…..

      The silence of the Supreme Court indicates only one of two things to me:

      1) The Justices are un-American, or
      2) They know and fully support the “behind the scenes” agenda.

    • Steve December 19, 2011, 10:13 pm

      Robert, in the early thirties the supreme court said something similar to this ‘We shall hold the Constitution in trust until such time as the people get tired of this experiment in democracy.’