Sour MLK

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Preface: Slope has historically been a very visual piece of work. Oftentimes a post of mine will be nothing more than a chart without a single word. This post is going to be quite different, because I have a lot to say. Read it, though, since there might be some useful morsels in here for you.

I’ve had nine dogs in my life, and none of them have been inclined to chase cars (well, except maybe for my little Cotons, who chased the UPS truck yesterday, since it’s always dropping off annoying packages). From time to time I’ll read the musing that dogs do, in fact, chase cars, but they wouldn’t know what to do with one if they actually managed to catch it.

I feel a bit like that right now. For six miserable years, I was fighting a bull market. In my naivete, I failed to grasp that scumbags like Bernanke would actually be willing to doom this country to countless trillions in debt just so his Wall Street buddies could re-establish their fortunes. I guess I’m just not cynical enough. But in spite of all the good reasons that The Market Should Start Falling Here, it never took place, and bears like me got run over, battered, beaten, and consistently disappointed.

A shift took place last year. It was slow, it was subtle, and it was in the context of a year (2015) which saw lifetime highs in almost all the indexes. But in retrospect it’s quite plain to see that the change took place, and in spite of what you read, it isn’t just as simple as the price of a barrel of crude oil going down. This was a sea change.

Thus, when the last retarded reason to prop things up (known as the Santa Claus Rally) expired from exhaustion on December 29th, the rug got ripped from underneath the market. As I’ve whined about countless times, I completely missed about 18 trading hours (mid 12/29 through mid 1/4) that would have been fantastic on the downside, and I’ve been torturing myself about it ever since. However, even though I was late to the party, I’ve done rather well with what the past couple of weeks have provided.

But here’s the thing: I’ve finally caught the car, and I can’t quite believe it. For months now, charts have been working better and better, and making money on the short side has become easier and easier. Indeed, it often seems far too easy, so much so that my long-abused psyche figures it’s some kind of elaborate trick.

But it’s no trick. You’ve got to realize – please, you’ve got to realize this – Yellen isn’t some kind of mad genius. She’s an old woman who should, in a just world, be a professor emeritus at some middling college on the east coast. She can have her little PhD and her little research papers, and maybe 50 or 60 years ago she might have enjoyed flirting with one of her teaching assistants. She doesn’t known business. She doesn’t know free enterprise. All she knows is how to print money and kowtow to her people.

Kuroda and Draghi are no different. Would you start a business with these people? Would you trust them if you and they were lost at sea and needed your collective wits to survive? No. These are lifelong academics and government employees, people! You really can’t get much lower on the scale of human decency and value.

But I digress. What I mean to say is that I desperately want to avoid the error I made in 2007/2008, which was not to take absolutely full advantage of the market’s downfall. It probably comes as no surprise to you that those were very good years for me. I think in 2008 I made something over 400%, and I did so with simple equity trading. To this day, I don’t know how I did it, because it doesn’t make sense arithmetically. But I do know that it felt like I was just printing money, and I also know I was furious at myself for not slamming the pedal to the metal and making even more.

We have waited a long time for this, and time is already feeling very compressed. It seems impossible to me that only last Monday (January 4) I was agonizing over having no positions and seeing the market plummet. I am quite serious when I say that feels like it was four months ago. Things have been happening so quickly, and in such a compressed fashion, that each day feels more like a week.

Earlier this week, I came to the disturbing realization that Gartman and I were saying exactly the same thing about what was about to happen with the market: that is, that we’d rally to almost 2000 before dropping again. This, in all seriousness, troubled me.

I have nothing against the man personally. Honestly, I don’t. He genuinely seems like a good guy. But empirical data suggestions that his prognostications are wrong in every instance I can imagine, and I can’t think of any indicator or commentator that has that sort of accuracy. Thus, when he called for the same move I was considering, I re-evaluated.

My conclusion, after looking at the ES chart, was that the market simply wouldn’t make it all to 2000. Instead, it would exhaust itself beneath its broken trendline, which was at about 1950. And indeed, between Tuesday and Wednesday, the market managed to claw its way up to about 1947 before rolling over. I’m glad I went through this exercise, because it compelled me to sit tight with my shorts, and even add more, instead of waiting around for 2000 to happen, which it never did.

The biggest drama for me happened on Friday morning. I had, the day before, decided to at long last balance my shorts with some long positions of stocks that had been horribly battered. During Thursday’s trading, I accumulated 16 positions. Before long, all 16 were profitable. I continued added more, intending to beef it up to 40. I frantically entered orders, but the closing bell rang, and I wound up with 50 shorts and 33 new longs. The longs, as I suggested, were of utterly mauled issues, mostly in the commodity and energy space.

At that point, I felt better about being balanced, particularly since there were a lot of charts that were suggesting the selling was done. I vowed not even to bother looking at ZH or trading until I woke up the next day.

Well, you know what happened then. I fired up my screen, and my jaw hit the desk when saw the ES was down nearly 50 points. That was all well and good for my 50 short positions, but the 33 longs were massacred in pre-market trading, with some of them down 9, 10, or even 11 percent. I was furious at myself for trying to catch a falling knife. The longs were going to exact a horrible tax on my shorts, and what would have otherwise been another glorious day in the Great 2016 Bear Market was destined to be nothing more than a wash.

I considered what to do next, and I decided to do something I hardly ever do: for all my long positions, I removed every stop. There’s no doubt that I would have been stopped out of every single one of them, but I didn’t want to just get blown out at terrible prices without even having a chance to reconsider the charts. So I removed the stops (only on the longs) and decided to, as swiftly as possible, check out every single chart and either sell it or put in a looser stop.

The opening bell rang, and all the longs plunged. As I was going through my list, however, I was shocked: in almost all the cases, even though they were off to a bad start, the charts still looked like good contrarian plays on the long side. Indeed, out of 33, I kept 27 of them (the others, such as MRO, were just too hopeless).

By the end of the day, which included a sweep of the Dow losing five hundred points or even more, I ended up with the same 50 shorts and 20 longs. Most of the longs had survived the trip, even though the others had caused some harm.

But I’m glad to have those longs, because this bear thinks that the odds of a powerful counter trend rally are stronger than ever. Maybe this time, in the weeks ahead, we really will see a climb back to 2000. But here’s the landscape I see:

  1. There are many stocks in the energy/commodity space which are so egregiously cheap now that they represent a March 2009 kind of value which could produce very substantial double or even triple-digit percentage returns in a short amount of time;
  2. The short positions I still have are dynamite, but they are very prone to having their profits chipped away. I have 50 positions, and I’ll probably loosen the stops considerably, just in case this market refuses to find any buyers. Ultimately, I think they will all be a lot lower.
  3. Most importantly of all, I have an absolute mountain of charts that I would love to short at higher prices. The patterns aren’t just good. They are flat-out fantastic. I was jumping up and down in late December about how many good short setups there were, and obviously I was quite correct. If we get the kind of lift I’m hoping for (come on, Janet!) the opportunities to short the market after such a rise gives everyone a second chance to profit from what I think will be a far more meaningful drop in the market.

As for Slope Plus, well, we’ve been having a roaring good time, but I think the “easy money” (if there is such a thing) has been made for now. One recent example I’m particularly proud of is SolarCity, which I suggested as a short (or buying the puts) where the arrow is shown. Yes, it really was that accurate (although on Thursday I suggested maybe it was done failing, which it wasn’t!)

0116-SCTY

I doubt I’m going to have much to offer on the short side until we get a bounce, and Lord almighty, I hope we get a bounce, and a good one. The rest of this weekend, I think I’ll probably share my long positions.

Slopers are on a tremendous adventure together. This is history in the making. I hope you realize that. This is a year we’re going to remember until the day we die. I’m glad you are sharing it with me. It’s only been two weeks, and we’ve got enough memories for an entire year. Thanks for being here.