Bailout Party Print
Thursday, 18 November 2010 06:04

Today is the day we celebrate bailouts.  The market is looking at a nice rally this morning as the Government Motors, I mean General Motors IPO begins trading & there is news of yet another rescue package in Europe.

The propaganda machines are out in full force on Wall Street highlighting how this "American Icon" has come climbing back from the ashes.  To me it is a sad reminder of how our country has changed.  Growing up in the midwest in the 1980's all I heard were complaints about how the Japanese were creating an unfair advantage because of the government support of their automakers and financial institutions.  Today they are having a party on Wall Street celebrating how we are doing the same thing our country used to rally against.  With Japan in the midst of a 20 year depression, let's hope that our politicians figure out a way how this will not lead us down the same path. 

At least "The Goldman Sacks" has made out like a bandit with this IPO and all of the other "stimulus" packages as "they make their living ripping off the American people" .  (If you don't know what I'm talking about or just want another laugh you MUST watch the "What is Quantitative Easing?" video we posted yesterday.  I think all of our Congressmen should watch this video as it really explains what is happening.  Just don't beat your head against the wall because "the health care is too expensive.")

Another reminder of the path our country is heading down is coming out of Ireland.  Back in September I identified problems out of Europe as one of the 5 things that could stop this market.  I wrote:

Greece is already asking for more money even though they will NEVER be able to grow enough to pay back their debt.  Ireland recently printed money, issued bonds, bought them with the printed money, and then used them as collateral to borrow money from the European Central Bank.  

Now with the Ponzi scheme Ireland has been running with the ECB about to crumble, they have decided they need to loan them even more money.  This is going to end very badly....we just don't know if it is in 2 days, 2 weeks, or 2 years.

Market Update 

Tuesday's sell-off MAY have been the start of a trend change.  It's not the first move that defines that, but what happens in the days after a major move.  On Wednesday, our Trend Capture System gave a sell signal due to the heavy volume sell-off and the weak bounce yesterday.  This followed the failed breakout above 1220 on the S&P.

Our Volatility System has partially offset the Trend Capture sell signal (for now).  This is a little known, but valuable system inside of our Enhanced Programs.  Basically, it looks at the market and the underlying volatility for 1-3 day opportunities where the market has gone down too fast.  As the market bounces back and volatility returns to more normal levels, it goes back to money market.  I think of it as a rubber band that is getting stretched.  It can either snap back quickly or it can break.

This system represents about 10% of our Enhanced Programs.  It typically thrives in Bear Markets because that is when you get panic days like yesterday.  Typically the most frenzied up days occur in Bear Markets NOT Bull Markets as fear often times leads to too much selling and greed kicks in as people try to bottom fish for opportunities.  It spends the majority of the time sitting in cash waiting for opportunities like today.  This is a VERY short-term trading system that is 20% (beta adjusted) of our Enhanced Programs (EPA & EGA).  The last five trades have all been profitable, although 2 of the 5 started with a down day:

  • 9/24 - 9/24 +1.03%
  • 8/25 - 9/01 +1.89% 
  • 8/12 - 8/18 +0.36%
  • 7/19 - 7/19 +0.30%
  • 6/30 - 7/07 +0.89%

The net change in our overall exposure is down from 100% in EGA to 75%.  EPA has fallen from 73% to about 63%.  Once the Volatility system issues a sell signal, the exposure will fall by another 20% in each program.

Income Allocator also has received several sell signals over the past few days.  On November 11 we stopped adding any new accounts as we received our first warning signal.  With this conservative program we use this signal as a way to potentially avoid an initial loss in new accounts.  With the sell signals in INA this week our exposure is down to around 30-35%.

As you can see, we are watching the markets DAILY for any changes in the overall trend.  Our systems will be watching to see if this Bailout Party is short-lived or if it is something that will reverse the recent weakness.

Information presented in this article is intended for informational purposes only and should not be mistaken for financial advice. While all attempts are made to present accurate information, it may not be appropriate for your specific circumstances.  Past performance is NOT indicative of future results.  All investments involve risk including those managed by Strategic Equity Management.




Related Articles