Stopped & Reversed! Long from 114

For those of you quick on the trigger and watching news, you would have jumped on board a lot sooner than my advice to cover all the way up at 114, but at this time we lost 0.90 on the short sale and are up 0.76 on the long right here.

With a Lehman buyout (takeover or take-under) potentially reducing the worry on Wall Street, this may create a blowoff peak here on this rally. Therefore, I advise exiting any longs in the following fashion.

1. Exit half at the opening on Friday.
2. Exit remaining half at 114.25 (114.76 last) on a stop.

This way we have a chance to participate on a further rally in the event that the reading of VIX as high as 26 has led to a decent medium-term bottom (fear induces long term bottoms, of course). I would assume that 112 would not be touched for at least a week or two if indeed this 26 reading of VIX has indeed put in a bottom.

What is most interesting to me here now is that the ratio of hard assets to paper asssets is down 50% in the past 28 trading days. I look at the ratio of Silver (SLV) to TBonds (TLT, 20 year bonds). The ratio has fallen from over 0.19 down to nearly 0.10 in literally 28 days. That's a CRASH, in my opinion. Oddly enough, from January this year to March, the ratio surged nearly 50% in exactly 28 days and put in its peak at 0.225. Perhaps there is something magical about 28 days, but I think this is an oddity. The drop is a result of many hedge funds and mutual funds liquidating positions en masse. The long-only ETF's that investors have crowded into have plunged in value this quarter to the tune of 25% or more. If you look at CGMFX, CGM Focus Fund run by Ken Heebner, one of the top performing mutual fund managers of all time, his fund peaked at the end of June and has fallen nearly 25%. His fund mirrors the action of most of the metals and mining shares, particularly FCX. See for yourselves. Even the best can get caught in the worst market conditions.

Stay tuned. Be well. Even though my timing on the last call was terrible, the strategy led to at least only a small loss at the moment.

Be well.

SELL SIGNAL NOW! DIA @ 113.09

I've been watching VIX & Put/Call for a few days now without much comment -

BUT

Today... with the Lehman news swirling around, an odd event has happened.

VIX went up to 26 today (25.04 as I type)

AND

the put/call is a lowly .67 right now at 3:21PM

Considering the possibilities, this action is indicative of "BULLS IN THE HOUSE" and not a low risk signal for longs. The only way I can see that this could be bullish is if the call activity is from new SHORTS who are using the calls to hedge their short positions. So, what we'd need to see in that case would be upward price movement to be bullish (insightful, right!).

Without hedging, I'll say that this is outright bearish, and here is how to trade it.

SHORT HERE: DIA @ 113.09 LAST
STOP & REVERSE @ 114.00

Risk = 1 DIA pt, potential = 2 pts.

Best to you,

Tim

3:25PM

Stopped out yesterday! Reviewing now for a new buy signal

The VIX has barely budged in the first hour of trading today. 10:50AM VIX is 24.36, up from 24 yesterday.

The put/call is running high, of course, with the move down in the market on the employment number.

The spike in put/call from 3:30pm to 4:00pm yesterday was, in hindsight, put buying to hedge against future sales of stock. But what we are looking for is a sign that potential sellers are hedged with put options.

We have to use tight stop parameters because the market is falling and the news is grim in the headlines. Typically these provide windows of tremendous opportunity AND risk at the same time.

The DJIA is moving 100 pts every hour or so, so that is concerning and makes risk-management more difficult.

Stay tuned.

10:57AM 110.95 DIA (DJIA etf - "Diamonds")

Buy Is More Logical Now:

In just a few short minutes, again, the put-call reading has jumped to 1.28 from under 1.00. This indicates to me that put volumes, coupled with VIX readings of nearly 24, up from 22, show that hedgers have hedged against downside risk and that there is now more upside potential than downside risk.

I have more confidence in this trade now, and we are "in" now that 11,216 has been hit on the way down.

11,220 last @ 3:47PM

Market is Poised to Rally: Reverse Strategy

11,252 last. From the last post, the put buying led to a further 90 pts down in the YMu8 contract to hit a low of 11,190. The bounce from there of 60 points should have taken you out had you not followed the "cover shorts" at 11,272.

The put/call backed off from 1.00 and dropped back down to 0.74 right after 1pm until 2:10PM. This means that put/call is moving around too much to pin it down for a 3 hour time frame. Based on that, it will require very tight stops and quick fingers on the trigger to exit according to plan.

Vix was just back at 1.00 indicating to me that it is safe to attempt a buy. Now I would look for 50 pts off of a recent high 11,266 (11,266-50 = 11,216) to enter long, and use only a 40 pt stop.
Exit at the close or 60 pts, whichever happens first.

11,224 last. 3:24PM

Exit

Market is Now Neutral: Cover Shorts at profits.

As of 1:05 PM with YMu8 @ 11284 (and a recent low of 11270)

The put/call has moved up to 1.00 indicating a more neutral, less bearish environment.

Cover shorts from 11262 earlier low + 50 pts, shorted at 11,312 for a modest profit of 30 pts.

I am tempted to go long, but will wait 1 hour to see how the market absorbs this put volume.

11,274 last.

Tim

Market Timing Using VIPer (VixPutcall) Strategy

11:03AM Thursday, Sep 4, 2008
YMU8 11315 last.

Strategy: Market is bearish. SELL RALLIES of 50 pts.

Call buyers are active and VIX is moving up sharply (now 22.88) today.

50 pt rallies should be sold, use a 40 pt stop. Calculate the 50 pt rally from the lowest low of today's decline.

Cover after 3 hours from the time you fill, or at the close, or trail with a 60 pt trailing stop from the lowest low after you fill.

11299 is the low for YMu8 today. Sell at 11349, stop 11389.