Palpara Merchants

Reading the blogs and trading sites and watching CNBC Fast Money, one can infer that a growing number of traders are positioned too much in cash (aren’t we all when the market is moving up?) and are frustrated that we don’t get a pull back. Maybe I’m too young and too new to trading, but it’s been my experience since I started (around the time of the fall of Bear Sterns) that this market has a a riding lawn mower transmission- tortoise, hare, reverse. We just don’t get any ups and downs in short time frames that suit most human beings. We don’t get logical moves up, followed by logical moves down in the time frames that suit most people. We trickle up, rip higher, or go down without a pause, until we go the other direction. There have been exactly 3 buyable pullbacks since the March 2009 bottom. Nearly all the time has been passed by riding the upper Bollinger Band on the S&P.

You could hear a trader on Fast Money last night that was obviously under invested (again, like most of us) and lamenting about the oversold nature and how due for a pull back the market is. Today on the half time report, he called the close with two words: “Buy more” as if he had been buying for the past week. If this trader were intellectually honest, he would have said “Start buying small if you’re under invested” but trading is like trout fishing. The fish are always bigger when you’re telling your friends about catching them.

That is why the market will probably continue to move higher. Too much cash is anxious to get in. This is probably just market participant cash driving the market higher. Another round of retail cash hasn’t hit yet. I remember last year around the same time, when the Bush tax cuts were passed, a round of retail cash came it. You could see it from increased membership to trading newsletter sites and anecdotally from non-market followers putting extra cash into stocks. I have no idea what it was, but the relentless climb after the BP Macondo/ Deepwater Horizon fiasco was resolved and before the tax cut passing got a boost from new money flowing in. I’ll bet the same thing happens this year. The only way to keep up with this market short term, and beat it long term, is what I call the barbell strategy: torrid growth momentum on one end, nothing but cash in the middle, and slow growth, high yielding MLP, REITS, and telcos on the other end. Here’s an example: CRM, CMG, ISRG, NFLX, CRR, and LULU on one end (while these are all high growth names, it is a diversified group), 25%-33% cash, and NLY, KMP, and WIN (again, a diversified group) on the other end. This strategy excel in this straight up, straight down environment.

The US Strategic Petroleum Reserves will release 30M barrels of oil at base price of a little more than $112 (presumably, the barrels will be purchased by consumers of oil at prices lower than the base price). NATO has been “air striking” Libya since March. According to the CIA World Fact Book, Libya produces about 2M barrels/day of the world’s 89M barrels/day total production. Libya’s production accounts for about 2.5% of the world’s demand for oil. They produce a very high quality, light, sweet crude. Much of this Libyan oil goes to refiners in Italy that are set up to refine this specific type of crude.

I remain skeptical that the increase in the price of crude (WTI rose 10%-20% since the Libyan news broke out) was due to actual supply disruptions. The price of oil that we see quoted every day, is the futures contract for WTI (West Texas Intermediate). These futures markets are thin, computers and humans are the market participants, and generally, traders, not consumers of oil (the refiners, air liners, industrial co’s, etc.) control the day -to- day price movements (longer term, the consumers and producers should control the price if free markets work the way they are supposed to).

We, as a country, do NOT need to be depleting our emergency stocks of oil to get the price down at the pump before elections. We need to be encouraging increased domestic production of energy. The lower the price of oil, the less incentive there is for wildcat operations to get oil and gas out of the ground here in the United States. There are so many other ways to clear the weak hands out of the market- these are the traders that can buy futures contracts on margin. All the government needed to do was come into the open market, and blow out at-the-money strikes for the front and back month contracts with the SPR as collateral. We wouldn’t have had to sell any physical oil, and the cleansing of the market would have been quicker, and it could have been kept a secret.

The market is seeing through this short-sited ploy and trying to retest the lows from yesterday. Absolutely no follow through from yesterday’s afternoon rebound. Monday should be either a gap up, or a gap down. My bet is a gap down, but not with confidence, as the NYMEX 3-2-1 crack spread is breaking down today after a lower high made on 6-17-2011. This means lower gas prices at the pump, and that will be good for retail. It’s no man’s land out there- we’re not trending and we don’t know where the low is yet (the 200dma is holding so far, but isn’t that obvious? My guess is that it breaks on Monday). If you’re shorting, your a moron, because we’re more than 7% off the highs, and the odds don’t favor even more of a decline. If you’re buying heavily, you’re a moron because (get ready for irony) we’re only 7% off the highs, and who’s to say 10% or more isn’t in order after a double from the March 2009 low? And if you’re not buying or selling, then you’re just a spectator. Spectators are the guys that wish they were players. So we gotta do something. How about selling some calls against your remaining long positions if you have a hefty gain. I’m writing some covered calls against my CRM. I like the Jul 150 for $2. There’s a nice idea for a Friday in this miserable market.

As of Thursday, just after the Jobless Claims number came out, the futures are down 100. What happened yesterday? FDX, BBBY, and KMX say things are good and getting better. Didn’t DE and CAT just raised their dividends recently? Yea, I’m pretty sure they did. Does is matter to these cyclical companies’ stocks? Nope. Their stocks go down endlessly, but you feel like a moron if you sell as they break down, because on the first oversold bounce, they spike up almost to where you bought.

I think it’s safe to assume that everybody has an understanding that Greece cannot pay its debts and never will have the ability to repay in the foreseeable future (at least for the next 5 years let’s say). So the only option is for Germany and the IMF to assume their debts. Trichet would rather stick a needle in his eye than allow the seemingly best option for every country to be carried out: kick them out of the Zone. This seemingly obvious option would nullify the use of Greek bonds as collateral. As we learned from Bernanke’s speech yesterday after the FOMC rate decision, the European banks are loaded up with periphery (PIGS) exposure. And Bernanke told us that our banks are loaded up with European bank exposure. If Greece is allowed to default, the market will have to re-price a lot of risk very quickly. There’s lots of room for error if it’s forced to re-price quickly. The disaster scenario is easy to envision (make sure when you imagine how it will play out, you use the words “systemic” and “contagion” a lot in your vision).

So we have captains of industry telling us that things are getting better, and they are putting their money where their mouths are by increasing dividends and guidance. And we have the “contagion” disaster scenario that is has a good probability of happening but an unknown time frame (Germany will get sick of paying for Greece’s living high on the hog at some point, but there is a long road down which the can to be kicked). Either the market is way wrong in dumping their stocks, or the market is looking out to the horizon and seeing what the captains don’t- rough waters ahead.

We don’t have to pick who wins this macro vs. micro fight. We just have to shorten time frames, ditch the bull market strategies of building positions on the dips, and be willing to sell entire positions on the first sign of strength, keep the rest of our capital in high yielding utilities like SO and REITS like NLY, and trust that we’ll be around with our money in tact to play the next bull market, or the next leg of this bull market. But for now, we assume we are in a trading range or a downtrend until proven otherwise.

This is the hard part of trading, because trend-following technical analysis doesn’t work. You’ve got to be good and candle stick analysis a pick bottoms and tops with lose, but disciplined risk management stops (John Murphy’s Technical Analysis of the Financial Markets is a good place to start for brushing up on the Japanese interpretation of candles). You don’t want to give away your money to the computers, nor do you want to let the market do what it does best: confuse you to the point of inaction.

While standing in queue at the crowded farmers’ market for my usual Sunday bacon, I grew worried that for the second week in a row the bacon vendors would be out of my favorite bacon by the time I got to the front of the line. I contemplated how much that 1lb of back-fat was worth to me as their inventory was being reduced and sold to any one that left their house early enough to stand in line and the pay the $8 the bacon vendors were asking for each 1lb. I couldn’t imagine a more inefficient way for those bacon vendors to get rid of their inventory and for the buyers of bacon to purchase their product.

From the back of the queue, I shouted “8 and 1/4 bid for 1 bacon!” and waved my hands toward me repeatedly (indicating I was a buyer). The response: nil. So in the line I patiently remained and waited my turn to purchase my bacon. What a way to spend my time. Unfortunately for the pit traders in Chicago, the same ambivalent feelings towards an open outcry market are pervasive in the world of trading.

From FLOORED- a great depiction of how this market is going extinct in an 8 part series.

Part 1

Part 2

Part 3