March 2013




Weekly System

Starting Capital $10,000.oo
Trade Direction SPY: Incorrect
Trade Direction GLD: Incorrect
Trade Placed SPY: Yes
Trade Placed GLD: Yes
P/L: [-1060.oo]
Finishing Capital: $11,102
% return on total capital: 11%
% return on trade: [-100%]
# Trades taken: 7
Wins 4
Losses 3

Took both trades this week. Started off looking pretty good, but, ended badly.




If voting changed anything, they’d make it illegal.
Emma Goldman

The SPY COT number this week remains negative. It comes in at [-15.2%] and again we are looking for a short trade near resistance.

The GLD COT number comes in positive. Again therefore we would be looking for a long position in gold via GLD.

If you had placed a spread trade [long GLD, short SPY] this trade remains viable, there is no signal to close the trade. There should be some small profit accruing to the trade, depending on the expiry series selected.

Last week saw tremendous resiliance within the SPY ETF and the market generally. The dips were aggressively bought, only not by the COT traders. The buyers were the smaller “unreported” traders tracked by the COT report.

Their purchases jumped from [+] 34,205 to [+] 70,831 which is a significant increase. The difficulty is that they have no track record over time of being consistently profitable. The market did decline, although only marginally. It will be interesting to see in the continued selling by the Commercials, whether the smaller traders can hold the market aloft, or, even move it higher.

Gold moved higher but did not offer a great entry point into the trade, and the system never took the trade. Again this week however there is an opportunity to potentially get long and take a profit in GLD.

Technical Picture

The technical picture for SPY is one of a flattening trend. There is resistance at $156.25, which is about $1.oo lower than last week. The chart has all the indications of a strong trend starting to roll over.

GLD is the opposite, the short-term trend is now pointing higher. GLD is near the support area where given the opportunity you would look to get long. This price is $155.17 or slightly lower.

Both the charts now technically correlate to their COT numbers, previous weeks have been counter-trend trades which are always slightly more difficult, both from an entry point of view and a management point of view.

Buy $156.oo PUT [SPY]
Sell $155.oo PUT [SPY]
Open as close to a $0.50 spread as possible

Current Price: $155.6 Price Profit / Loss ROI %

116.25 $50.00 100.00%
131.36 $50.00 100.00%
147.27 $50.00 100.00%
155.00 $50.00 100.00%
155.50 $0.00 0.00%
156.00 ($50.00) -100.00%
163.18 ($50.00) -100.00%
179.09 ($50.00) -100.00%
195.00 ($50.00) -100.00%

Buy $155.oo CALL [GLD]
Sell $156.oo CALL [GLD]

Current Price: $155.55 Price Profit / Loss ROI %
116.25 ($50.00) -100.00%
131.36 ($50.00) -100.00%
147.27 ($50.00) -100.00%
155.00 ($50.00) -100.00%
155.50 $0.00 0.00%
156.00 $50.00 100.00%
163.18 $50.00 100.00%
179.09 $50.00 100.00%
195.00 $50.00 100.00%

With both trades [as usual] we have to wait to get the better prices, however, I think both trades will potentially trigger early in the week and move quite rapidly into profit, so be fairly alert for the market opening.

The macro picture remains one of a coin toss as to what may, or may not happen in Europe, the Sequester, is all but forgotten for the moment at least, and maybe that’s the last we’ll hear of it.

Bernanke and the Federal Reserve will bouy this market. It is simply that even with QE, we can have pull-backs…this is potentially one of those times. The signal to get long will arrive providing plenty of time to get long and profit from the dip that has not yet occurred. The dip that we had this week, all of 1% is not a dip worth buying.


The Cyprus resolution is taking shape as it looks like accounts with balances greater than €100,000 will be subject to a 30% hit to go toward meeting the requirements of the bailout. This news seemed to have visible impacts on iShares Italy (EWI) and iShares Spain (EWP) which were both down more than 4% yesterday.

If this true, the Europe crisis is just warming up.


Now that I’m back at University I find myself having to study law the way that they, the powers that be, feel is the correct way to study law. I have become used to studying a subject, pick any subject, in my own way. No longer.

Rather than fight it, I’m trying to embrace it, as obviously, if I want the qualification I’ll need to comply with their rules. This means a lot of reading of areas that initially I probably would have passed on given free rein.

what you should focus on

I have adopted the above strategy as much as I can. For the markets however it makes even more sense. As events that affect the market are obviously beyond our control, worrying about what might/might not happen is a waste of brain energy. Worrying about our risk management however is not. Assume that at some point ‘bad stuff’ happens…are you ready to capitalise on that outcome in some shape or form?

There are many ways. One way, the way that I use, is simply to have a cash component as part of a portfolio designed to trade in the markets on the long side, indefinitely, or, forever. This cash component will be allocated based on market action or price. It has me selling high and buying low.

As this portfolio is designed to remain in the market at all times, I have the SPY ETF so that I do not have to follow the fundamentals of all the constituents…too much work. I have one portfolio as SPY a second using international indices. These results are a little out of date, but, not by too much.



The point is…have a plan. If you want to use my plan, simply subscribe to my duCati Report and you will manage your own portfolio to my system’s rules. Far cheaper than paying a Hedge Fund Manager to manage it for you, or god-forbid, some clown like flippe-floppe-flye.


Another that I haven’t heard too much from recently.

The problem here, is that the Fed’s zero interest rate policy has substantially reduced government interest payments. In other words, if the Fed raised rates on government debt you’d start earning a lot more on your savings because all those retirees who own US government bonds would instantly start getting a government subsidy via the interest payments.

Interest payments are not a subsidy. Interest is the discounted value for time. Present value is always more valuable than future value. The interest rate therefore based on time preference, reflects the supply and demand for capital in a free market. The market is not free. The government has intervened in the market and altered the price. This is not a subsidy…this is theft.

Interest outlays are part of the annual budget deficit. For instance, at present, the government pays about $225B a year in interest outlays. That’s about 1.4% of total debt with the current interest rate structure. Let’s say the government decided to raise interest rates structure to something equalling 4% of total GDP. That means the government would be paying total interest outlays of about $600B a year. That’s almost $400B+ more per year for savers to “invest and spend”. That’s a lot of money. And it’s a significant rise in the government’s budget deficit since the interest outlays are a cost to the US government.

So reduce public spending, pay down the debt and reduce that burden.

So, Rickards is contradicting himself here. He wants higher interest payments so savers stop getting “looted” and a lower government budget deficit at the same time! So which is it? If you want higher interest rates on government debt (which makes up a huge portion of private saving since most of the government’s debt is owned by retirees, pension funds, etc) then you’re implicitly in favor of more deficit spending. You can’t have it both ways here Austerians…

Yes, no contradiction at all. Simply two separate demands. Cullen Roche obviously struggles with the English language.


I haven’t heard much from Jerry recently. He’s back.

We hear it all the time. The Federal Reserve ($FED) is pushing/manipulating/forcing the market ($SPX) higher. There are a few different ways I’ve seen this argued.

The FED is improving the economy via ZIRP, QE, etc. This in turn is lifting the market.

The FED is forcing people out of risk-free/low-risk assets into risky ones. Thus forcing people into stocks.

The FED, buy ‘printing money’ is putting all this new money out there, which ends up in the stock market.

The FED (or its henchmen in the PPT) is literally buying the market.

Now, the first two are legit arguments.

Are they? Where or what is your evidence or basis [theory] for making that assertion? The market is higher yes…but as you will argue in a moment, the market is not the economy. So #1 is far from proven or accepted.

Argument #2. Who are “people”? Does he mean everyone generally, or institutional money, insurance companies, pension funds etc.

However, I personally believe the answer lies somewhere between the 1st and 2nd phrase.The FED is certainly doing its part in trying to get people out of risk-free assets and into risk assets.

I can probably agree here.

However I also believe the economy is healing.

Contentious statement. Can he justify it?

Now, one must remember that the stock market is not the economy. It does not reflect everything in the economy. I don’t want to get too fundamental but basically the market (Let’s take the $SPX) reflects the conditions of the 500 companies listed in the index.

Here, I agree.

So just because unemployment is high, it doesn’t mean other parts of the economy are not healing/healthy.

Healing is a process that eventually leads to healthy. If the economy is healing, the inference is that it is not healthy. But let’s look at his arguments.

For example, here’s an interesting chart that shows US Corporate Profits vs the S&P 500 ($SPX). You can see a basic relationship here. Corporate profits increase, the stock market increases. Simple as that.


The problem with “profit” is that in nominal terms the chart may be accurate. Is it still accurate when real returns are calculated? Further, and this is the question Jerry fails to address…why are nominal profits higher?

If we look at the Fed data of ‘real’ GDP growth from 2008 till 2013, we see only 0.74% compounded GDP growth. That is in a period when the Fed added 9.75% compounded to the money in circulation.


fredgraph (1)

With that much liquidity added, is it not reasonable to suggest that the origin of ‘profit growth’ lies not in the recovery of the economy, rather, in the money/credit expansion that was a result of Fed QE/bailouts?

Here is the CPI data.

fredgraph (2)

Even the conservative CPI provides for 2.75% compounded inflation in prices. If you looked at petrol prices, healthcare and education, you would see a different story.

Petrol prices at 22.95% compounded.

fredgraph (3)

You must first understand that the CPI excludes petrol and food prices…as they would hideously distort that 2.75% inflation figure.

While we are on the topic of corporate profits…what are the weightings of various industries within the index? Could that have any impact? For example, the commercial banking sector, the recipient of endless bailouts and QE: could their weighting in the index have an influence upon the ‘earnings’ of the index.

I will have to return to this later. I have early classes today and cannot waste too much more time on this.


From around blogoland;

Quote of the day

John Boorman, “Always be thinking, what is no-one expecting? What would surprise everyone the most? What would hurt everyone the most? The path of least resistance can also be the path of maximum pain, and right now that path is higher.” (Alpha Capture)

The best case in Cyprus will still have negative features. Can the fallout be contained?

I intentionally used the “C word” despite knowing that it invites the smart-aleck comments. Many believe that a major lesson from the subprime debacle was that policymakers (famously Bernanke) thought that the impacts could be contained. This example is raised whenever someone tries to get a handle on the possible impact of some event.

Terrific timely discussion chart from Mary Ann Bartels & Co. at MER showing the extent of bearish anticipation of a correction:


Investors Intelligence (II) sentiment data shows 34% of newsletter writers are expecting a correction. The prior two corrections occurred with this level at 34.7% and 35.1% respectively.

Bartels adds that “newsletter writers need to capitulate and remove their calls for a market correction in order to get a contrarian bearish sentiment extreme.”

When too many investors are looking for a correction, it reflects that selling has already occurred. That implies less supply, less downside pressure, and the potential for pros to be forced back in. It is the Long-only side version of a short squeeze.

Then of course, no jaunt around blogoland would be complete without stopping by flippe-floppe-flye’s

Wall Street is going to be overflowing with cocaine tomorrow.
Get ready for the traditional sunday night bailout, sending futures to the freakin’ moon.
Futs up.
Silver, gold down.
Euro up.
Bears’ morale down.

That was Sunday night…by Monday, he’s selling.

“The Fly” is in Liquidation Mode
By The Fly – Mon Mar 25, 2013 10:59am
I sold out of CTRP, USG, ANR, raising my cash position to 50%.
I’m not bearish, per se, just not into stocks at the moment. Some of my funds are going to be earmarked for fixed income.

Fixed income?

The overall tenor is one of: everyone is bearish, so let’s get long.




I follow two markets in the newsletter, SPY and GLD. Trades were triggered in both markets this morning.

Next Page »