Gee, Think.

The FOMC voted to pause their rate hike citing a slowing economy, but
they asserted that hikes may be resumed if inflation does not moderate.
Well I’m surprised that only one governor voted against the pause. I
thought there would be another quarter point hike. All the same, it
seems like the Qs may fall.
I was just watching the Qs action shortly after the minutes release.
There was one huge sell order, something like 1.7 million shares, then a
bigger buy order for approximately 3 million shares. Whoa! I can’t
wait to see how the tug of war goes. I’m guessing that slowing economy
means poor earnings reports which means contracting multiple, which
means stocks fall.

Today was a typical pre-fed meeting day showing volume around 60% of the
average. To my delight the Qs slid a bit downward, and my QQQUJs
touched 0.75 for the third time in 5 days. I couldn’t bring myself to
take defense action by selling again. I really think the Naz is going
to suffer tomorrow, rate hike or not. If there’s a hike, cash gets more
competitve versus the stock market, which at this point in the hiking
policy could do some damage. If there is no hike then the Fed is saying
that the economy is slowing enough that they don’t have to do any more
damage themselves. Hike or not, inflation is running hot and company
earnings are going to drop next quarter. They weren’t so great this
time around anyway.

Hey it’s Monday! Back to business!
Getiing right to it, I’m still looking for a drop in the Naz. I was
just perusing Robert Holmes’ daily pre-market update as I ride into
Newark. He reports what “seems” to be a consensus on the rate hike
pause. He also quotes a Cantor Fitzgerald u.s. Market strategist as
saying that the market has discounted the Fed’s move already. All
right, is suppose it’s possible that the market has already moved down
enough to prevent a huge sell off if the rates go up, but I believe that
there will be some sharp short term movement in the intraday chart
tomorrow based on what the Fed says accompanying its move. If they are
still hawkish they’ll scare the markets for at least a day. If they are
dovish we should see a rise.
The most interesting part of the pre-market summary was the updat on
international markets. The Hang Seng gained 0.4%, but London’s FTSE,
Japan’s Nikkei, and Germany’s DAX were all lower. I think that means
we’re headed down.

Today the non farm payroll numbers came out. We had only 114,000 new
jobs created last month. This was about 30,000 lower than the
estimates. This information was released around 830 am today. As would
be expected, the market gapped up. It continued to rally until around
1230. Then it started a serious downtrend into negative territory. The
Qs covered 60 cents of movement from plus 30 to minus 30 intraday.
I had opened a position in QQQUJ. That’s the september 36 put. I got
into this postion on the monday and tuesday before last. That’s
somewhere around the 24th. My cost basis for 16 contracts was 0.98.
When I checked the position after vacation, it was worth around 0.55.
Wowza! That really hurt! I saw it move up to 0.75 earlier this week on
movement around the time of inflation data coming out. I did not sell
out at that point though.
Earlier today the position was worth 0.45. When the market was
sufficiently dipped, I sold 6 of the contracts for a 120 dollar loss.
At this point though, I’m trying to reduce the amount of capital I have
working in this trade. If it goes further against me, I certainly
don’t want to lose more than 23 cents per contract. I should never have
lost more than 10.
So I still have 10 contracts out there. I’m pulling for inflation fears
to kick in big time on monday. Then hopefully I can exit at break even
before tuesday.

Some things I read on TheStreet.com:
“The 10 year bond has been rallying”
“September crude jumped 90 cents”
Those facts combined with the strong upward action in the Dow and Naz
today seems a little perplexing. Have traders already forgotten the
inflation data which just came out on tuesday?
Robert Holmes of TheStreet.com quotes Paul Nolte director of investments
with Hinsdale Securities saying “Investors were driven by earnings
today instead of inflation fears.”
Are these really investors we’re talking about? “Investing” in
securities implies that you’re in it for about 6 months or so. I’d like
to see if Adobe, AT&T, and HP are still up after the Fed mEeting next
week, and better yet in 6 months. My guess is that most of the action
today was trading rather than investing. Just a play with positive
momentum while it lasts for the short term.
I’m surprised that oil, stocks, and the 10 year bond were all up today.
I really doubt that will happen again tomorrow. It just seems out of
line with intermarket principles.
Granted, I read this morning that all overseas markets were up last
night, which gives a good chance that our markets will do well as well.
I’m not totally surpised at one up day. Why are the overseas markets of
Germany, England, and Japan all rising as well? That’s a good
question.

The Kondratieff cycle is a long cycle, typically lasting 55 to 60
years. It was discovered in the 1800s by Nikolai Kondratieff. I’ve
been reading about it in John Murphy’s “Intermarket Analysis” lately.
Today I reread part of his discription on it.
Part of me thinks that these cycles can’t really be correct. It seems
unlikely for there to be such recognizable and repeatable pattterns.
However, this particular pattern has proved correct over the last 250
years. If the data supports it, I should have a hard time refuting it.
I have heard that there are issues with whether these long term models
use an inflation adjusted stock index. When I was reading Frost and
Prechter’s “Elliot Wave Principle” they mentioned that some of the
elliot patterns were more recognizable under the inflation adjusted
Dow.
Doubts aside, the Kondratieff cycle calls for a “winter” declining
period starting in 2000 and lasting upwards of 10 years. One of the key
markers of winter is deflation, which I’ve read was experienced in
2000. The next marker is falling commodities prices. I’m not sure if
we have those yet, but I’m going to keep this theory in the back of my
mind.

So now I’m really glad that I held onto the put position I established
last monday. It seems like the market is starting to head back toward
fear of the Fed because the inflation data is staring right at us. The
fed has promised to be data driven, and now the traders that were really
hoping for a pause are stuck in a bad spot.
This could be a place for me to cut my losses and jump out, but I don’t
think that the fear will subside so quickly, so I’m going to hang in
there.

I’ve been reading more of John Murphy’s “Intermarket Analysis” book
lately. He has a couple chapters that discuss various business cycle
theorys and what they mean for the financial markets. As I understand
it, the idealized behavior is this:
1. Bond prices rise
2. Stock prices rise
3. Commodity prices rise
4. Bond prices fall
5. Stock prices fall
6. Commodity prices fall
Steps 1, 2, and 3 are part of an economic expansion. Steps 4, 5, and 6
are part of an economic contraction. The expansion is positive growth
and the contraction is negative growth. The time between steps 3 and 4
is when the economic growth actually turns negative, but it is decling
from the middle of step two to the midlle of step 5.
So, having read this theory on the business cycle and it’s relation to
financial markets, I’m going to try and plot our position in the steps.
Everyone who’s paying attention to the stock markets can see that we’ve
just experienced a major downturn. We also know that commodity prices
were soaring during this downturn. The commodities were corrected as
well if I remember correctly but I think they are still heading up.
This last week was a great week for the Dow, Naz, and S&P, but are
stocks done falling?
I think bond prices have been falling because yields have been
increasing. I think this means we are somewhere around step 4, which
would nake this an early recession. If that’s true we should see stocks
and bonds continue to fall over the next months. Commodities should
join the fall eventually as well.

Ah yes, let me tell you about the skelton in my trading closet. It’s
evidence of everything a trader could do wrong. It’s so bad, it’s
embarrassing.
Those of you following along know that I entered a bearish position of
the Qs last Monday and Tuesday. I thought that I was SOOOOO right in my
play that I could leave the position open while I went away from the
market for THREE days. Ah. It’s painful to write about.
So now I’m coaxing myself into believing that I can still hold on to
what could potentially wipe out my trading portfolio. It’s a sad
situation. I’ve already lost 50% in the trade but I’m still clinging to
it. I’m thinking to myself that the trade obviously wasn’t right last
monday and tuesday, but maybe it will be right by next monday or
tuesday. Oi!

Today’s Volume in the Qs was just above 65 million. That’s less than
half the average daily volume of 120 million, making this days activity
exceptionally light. The Qs drifted 10+ cents up, 10+ cents down, and
then settled right on the money at 37.11. Uncanny. I think they
drifted down a couple cent post market hours, but still, what a strange
day. Why is the voume so light? Is everyone too spooked about the
upcoming economic data?
What really confused me was seeing the Dow down 30 points and the Naz up
10 points at the same time today. I’ve never seen a day with that kind
of spread between the two markets. Usually they move in the same
direction, and about the same amount in percentage terms. Today’s
divergence was spooky.