Friday, October 15, 2010

Market Turbulence

Market ends nearly flat on broad index in this week. However there is turbulence in which opportunistic day traders may make a fortune. Unfortunately the speculative trading portfolio is not able to take advantage of market fluctuation. The trades were made at the wrong timing, sometimes too early or missing the right time. Stock trading is not pure gambling and the skills can be improved with experience and knowledge.

As mentioned previously, the portfolio has stock holdings with sold call option obligation. The majority of sold call options expire in the money. The underlying stocks appreciate much faster than initially thought of. Therefore option buyers will exercise the right to purchase the underlying stock at the option price. The stock portion of the portfolio will drop to a low percentage next week. Although it remains optimistic on market outlook, short term market oscillation may provide a more favorable entry point for stocks acquisition. There are holdings on bullish leveraged ETFs. The total holdings including hedging are currently more than 100% of portfolio value. In earlier post it is mentioned that leveraging can amplify profit as well as being destructive to the portfolio in unfavorable condition. From prior experience during the financial crisis, it should be very cautious of the impact on portfolio. A declining market and forced liquidation can quickly shrink the portfolio value.

In the last two days of this week, there are some institutional investor selling to take profit. This increases trading volume and drags the market down. There are also some buying from other institutional and individual investors to support the market. It can be seen that there are now more participants and the market dynamics may shift. Nevertheless, if the market becomes calm again, it is more likely that the pattern will be slow drift upward rather than steep dip.

As the guest in the Yahoo! article "Buy "Things" Not "Paper": Chris Martenson's Case for Commodities vs. Stocks" says, “All I see is a wall of liquidity that is eventually going to be chasing too few things”. But he parked his wealth in resources, not stocks.

Although market sentiment is bearish, it continues to climb the wall of worry. Equity stock market is an engine for wealth creation/destruction as well as wealth transfer. The majority of investors, both institutional and individual, suffered from the financial crisis. However only a small portion benefited from the aftermath rally. The total wealth is still less than the peak but a small percentage of people actually grow their wealth much larger than before the financial crisis. Thus the concentration of wealth makes the selling pressure very limited, for most kind of property including the currently most popular bonds and treasuries, commodities, and the least popular stock equity. The unpopularity of stock can be understood because of the wealth destruction during the financial crisis. Currency in the form of cash should be a safe asset but the low yield annoys the holder. Real estate is currently in a state treated by investors similar to the gold when it was valued around 400USD an ounce. It remains flat for extended period of time before investors jump in again. Many investors think that it is undervalued but there is no buying to push the price higher.

The market is liquidity driven. The probability for property to move in the upward direction is higher than in the downward direction. The speculative trading portfolio is currently concentrated on leveraged ETFs holding. Unlike the portfolio during the financial crisis, there should be enough buffer to maintain the portfolio for the market to move in unfavorable direction for reasonable amount before full recovery if achievable.

As mentioned in the Yahoo! article "Barry Ritholtz: Stick With "What's Working" and Don't Fight the Fed", "This market has had repeated opportunities to roll over, to fall on bad news, to follow other courses lower, or to take a modest sell off...and turn it into something more dangerous," he writes. "In just about every case, Mr. Market has refused to cooperate with the bears."

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