ARCHIVED COMMENTARY
Shorting
Papa Bear
For edition of July 24, 2006
The stock market would be collapsing right now were it not for short-squeezes triggered by our intermittently dovish Fed chairman. However, it should be painfully clear after last week’s histrionics that each successive goosing of share prices is attracting fewer suckers. Indeed, when the Dow Industrials surged 212 points last Wednesday, inspired by Helicopter Ben’s most recent, timid effusions, who other than a CNBC pundit could possible have believed the rally would be the start of something big? And other than for reasons of short-covering, what could conceivably have motivated a sane person to buy shares with such evident enthusiasm? I ask that question in all seriousness, since a plausible answer completely eludes me. Could there be more than a mere handful of investors who still believe the rosy statistics that the government’s economists put out each month? I know of only two dimwits who earnestly embrace this ongoing fraud myself, a couple of lurkers who send me “good” news each day concerning the housing sector. Get real, guys! Ponder the Dow Home Construction Index below and tell me what you see.
Meanwhile, I’ve been quite strident lately in telling you that stocks have nowhere to go but down. But that doesn’t make them any easier to short. To the contrary, we’ve found the task bedeviling, for a couple of reasons. For one, there will always be vicious short-squeeze rallies to contend with. As a case in point, we laid out shorts in Citi just as Wednesday’s bear trap detonated on the opening. This turned the August and September 45 puts that I’d advised you to buy from bargains into bummers, and although the puts came roaring back when stocks relapsed into week’s end, with Auggies purchased for 0.30 registering a 50% price increase overnight, the experience serves as a reminder that put options can never be considered a buy-and-hold proposition. But, you ask, what about the trader’s cardinal rule -- that we should always cut our losses and let our profits run? In practice, over the last thirty years there have been extremely few instances in which bears could have let profits run by holding puts for more than a few days.
Nail Down Profits
The lesson in this is that we should always try to nail down partial profits in put positions so that we can continue to hold some puts effectively for nothing. In practice, this is what we have always tried to do – and it has worked for the most part. But the problem remains of how to get short in the first place. This is easily accomplished in a bull market, since we need only look to initiate shorts at hidden-pivot rally targets. But we are no longer in a bull market, the epic bear rally begun in October 2002 having recently ended. This means that countertrend rallies will tend to die without reaching their hidden-pivot targets. The implication for us, as we saw last week in two stocks we tried to short – Beazer Homes and Fannie Mae – is that we will need to be much more aggressive in our approach than we’ve been in years.
However, up to this point, my advice has been only somewhat more aggressive. For instance, in recommending a short in Fannie Mae last week, I didn’t tie our entry strategy to a hidden-pivot rally target. With the stock trading just below 48 on Tuesday, I advised as follows:
Fannie Gas-Bag
“Any time this gas-bag wafts up to $50 we should try to short it. I have no specific hidden-pivot target to offer you, so buying puts will be more speculative than is typical for us. Nevertheless, you should bid 1.85 for four September 50 puts (FNMUJ), day order, no contingencies. That would be a good price for them with the underlying stock trading near 50.”
In the event, even with the broad averages going bonkers on Wednesday, Fannie got no higher than 49.09, and the puts never traded below 2.45. I should note as well that most other stocks failed to reach hidden-pivot rally targets on a day that produced the sharpest surge in years for the broad averages.
To further illustrate our problem, here is what I advised in Beazer Homes, a $40 stock that I am absolutely confident will eventually trade for under $5 a share:
Beazer a Dead Duck
“My downside target for this erstwhile dead duck is much lower, but perhaps we can catch a short-able top by stepping cautiously into Beazer's path today. The nearest hidden pivot above is 41.10, so I'll recommend shorting 200 shares at 41.09, stop 41.16. Please note that if the stop is hit BZH would be signaling additional upside potential over the near term to at least 42.59.”
Unfortunately for us, Beazer traded no higher than 40.40 during Wall Street’s latest whoopee-cushion rally. Knowing that the rally was a hoax, however, and that there will be many more like it as the Dow Industrials fall to below 1000 (!!) is not enough. To get short in what promises to be the worst bear market in history, we will need to stick our necks out more than ever before. Indeed, there can be no “comfort zone” for those who would attempt to leverage the Mother of All Bears. In practice we must guard against the possibility that this bear will be very different from all of the others – that it will not be a bear market to be leveraged and profited from, only survived.
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Vancouver Seminar
We’ve engaged the Pan Pacific Hotel for the Vancouver seminar in late October, promising an event that will be just as enjoyable for spouse and kids as for attendees. The facility is central to many of the amenities that make Vancouver such a great town. If you’re interested and haven’t contacted me yet, please let me know via-email . Is this seminar for you? Here’s a prospectus so that you can decide for yourself:
Trust Yourself,
Not Some Guru
Would you like to be able to forecast trends and price swings so accurately that you’ll never again have to seek advice from the supposed experts? That is the goal of the Hidden-Pivot Seminar: to teach you to read the markets so confidently that you will come to trust your own judgment over that of gurus who forecast for a living.
My proprietary Hidden-Pivot Method derives from a few simple principles that I’ve developed and honed over the last twelve years. It is the simplest and most powerful method I have ever found for predicting trends and price swings accurately and with complete confidence. Moreover, it works in any time frame and for virtually all types of securities, including stocks, indexes, commodities and options.
Inhale…Exhale
The system is based on the theory that stocks and commodities are constantly trying to balance yin and yang energy as they move around. Their ups and downs are analogous to breathing in and breathing out, and in the end these complementary actions must offset each other precisely. The trick to understanding how the process works in the securities markets is to visually match up trend segments that are part of ABCD patterns on charts.
Consider as an example the chart of eBay below. The key number is 28.89, the presumptive D target of a pattern defined by points A, B and C. The target is what I call a “hidden pivot,” and it is calculated by subtracting the length of the A-B segment (3.90) from point C. In the example, the resulting value is 28.89, a mere two cents from where eBay actually turned. In retrospect, we see that this would have been an excellent spot to buy the stock using a stop-loss as tight as a nickel. It also would have provided a precise target to enable disciplined short-covering.
A Simple Trick
The visual trick to identifying these patterns is really no trick at all. You simply find the B-C leg first, then move backwards to locate A. Those three price points are all you will need to calculate a D target. Note that the B-C leg is simply any countertrend move that looks like it might eventually be the axis of symmetry dividing an AB impulse leg from a CD follow-through leg.
That’s all there is to it. Since the system is based entirely on price action, you won’t ever have to consider trading volume, oscillators, channels, MACDs, trendlines or any of the other conventional indicators that most technicians use. And with just one more trick, you will be capable of forecasting as accurately as those who do it for a living. You need only locate the exact midpoint of the B-C segment’s second leg. Once you are able to find this specially endowed hidden pivot – a simple task for the trained eye – you will never again need an “expert” to tell you what a stock, index or commodity is likely to do next.
The Hidden Pivot Seminar is held over two days, during which time you will learn how to spot the most promising ABCD patterns. You will also learn, in under 20 minutes, a surprisingly easy way to use stochastic indicators and other oscillators to enhance your timing. Finally, you will learn how to use hidden pivots to manage risk so that you will always know exactly when to cut losses and when to let profits run.
Free Mentoring
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An important feature of the seminar, at no extra cost, is post-grad mentoring in a hidden-pivot chat room set up by some of my students. Here is what one of them, Hunter Reynolds, recently had to say: "We have all come a long way. I think everyone here is making a little $$, or we would be doing something else by now. I can honestly say I am up about ten percent, maybe a little more, since your class. I am pretty conservative. I just trade from the long side, but I'm getting really good at picking the hidden-pivot reversal points for the uptrend!"
I should tell you that seminar grads who frequent the chat room are coming to understand my method as well as I do. Indeed, some have adapted what they learned in highly effective ways that I could not have foreseen. Buttressed by the continuing lessons of the chat-room, the Hidden Pivot Seminar offers an opportunity to acquire powerful analytical tools that will serve you for a lifetime.
A Student’s Experience
Here is what one of my grads, Hunter Reynolds, had to say recently about the chat room:
"We have all come a long way. I think everyone here is making a little $$, or we would be doing something else by now. I can honestly say I am up about ten percent, maybe a little more, since your class. I am pretty conservative. I just trade from the long side, but I'm getting really good at picking the hidden-pivot reversal points for the uptrend!"
Dates are not yet firm for a fourth seminar to be held in Sydney, Australia, but it looks like it will take place either in November 2006 or February 2007. The class is filling up, so do let me know soon if you’d like to attend.
