PPT Rescue, Housing Market Weakens

ppt manipulationToday we saw yet another day of ping pong trading, as I said yesterday that we should continue to see, only to end the day the exact opposite way we ended yesterday. However, if you look at the charts, you'll see that the bulls got a bit of the hand in our moves today (above chart). The volume explosion at the end tells me one thing. PPT. Throughout the entire day, we saw very low trading, probably due to people's concern with recent market volatility. However, directly following a strong downward push coming into the last remaining minutes of trading, a huge influx of volume entered the market, pushing the Dow up to end the day 70 points higher. PPT enjoys low volume days as we saw today, because they can really throw their weight around. Sure enough, manipulation came into the markets to cause this end of day explosion. This is why I am wanting larger volume levels to really position myself on the short side.

crash market stocks podcastThere were some positives for me that came out of today's manipulation. During early morning trading I noticed the how sluggish both FAZ and SRS were trading, even with having the markets trading in the red. In this type of volatile trading environment, this is not a good thing, as we have seen this market flip flop red to green several times the past few days. So as a caution, I went in and bought up some FAS options in case of another flip flopping day. This being my "double trading" strategy I discussed in yesterday's post. Because I am already positioned on the short side, I just stuck with the FAS options and opted not to buy into FAZ. As a result, I saw big gains with the options by day's end, which minimized my losses on the short side. Also, I feel good about going into tomorrow with some hedge as it is still a concern to me that we may get some word of bank stress tests results.

I received the question today about why it seems that the inverse etfs are getting killed so much more this time around than in times pasts. So I will give my best explanation why. Tracking these funds can be very frustrating. We are use to having numerical benchmarks to help track equities, like EPS, debt amount, balance sheets, etc. However, with the etfs, we have no constant data points to use as reference. All we have is the associated sector that the fund tracks. So, trying to set "resistance points" and other technical points can be difficult as the valuing of these funds are different than from normal stocks.

During the high flying $200+ levels for these ETFs, there is an important thing to remember. The VIX was at record levels (see below). As such, prices for options are at a huge premium considering the increase in the "fear index". Considering that much of the make-up of these leveraged etfs are options traded on margin, VIX levels highly effect the performance of these funds. Now that we have reached much lower VIX levels, the prices and demand for options have decreased, which in turn has caused for an acceleration in decay of some of these funds, especially the 2 and 3x leveraged etfs. In times of high VIX levels, these funds will perform much better.

vix effects on etfs
This is not to say that these funds will not perform well at lower VIX levels, but as you saw from SRS and FAZ today, they have tendencies to become more sluggish, even when their tracked indexes are performing in their favor. The lowering of the VIX was another big reason why I was cautious throughout March and April when purchasing these funds. Buying puts on the opposite fund has worked better for me during these times.

Even though we see ourselves in this stagnant, up and down trading mode, I do believe markets are about to make a move downward. After our perceived "strong" month of housing data in February, we saw today that indeed the market continues to go down for residental real estate as numbers came in under the expected amount. This is why I continue to say that it is better to value these numbers on a year over year basis instead of month to month. There are countless factors that make housing purchase vary month to month. In today's premium podcast (subscribe here), I really breakdown the housing market and report some critical data that talks of the time bomb that is about to explode in the housing market.

As a result, I will continue to use my "double trading" strategy as we remain in this indecisive market. I am still remaining cautious and waiting for better indicators to really position myself on the short side. I do believe the time is very near and we can see that with how the market is reacting from investor uncertainty.

Beware of being fooled by reported earnings. A lot of headlines (especially on CNBC) are manipulating earning reports to put a positive spin on it. The term "beats market expectations" can be very misleading for investors that are not looking at the numbers more closely. Many of the recent reported earnings have been "better than expectations." However, the year over year difference remains very discouraging as do many of their next quarter's outlook. I make sure to look very closely at the reported earnings report and not just read the junk headlines on manipulating hedge fund managing websites.

Tomorrow should be a telling day for the market and where we go from here. AM trading will be very influential in my decision of which, if any, moves to make. I will make sure to be on chat keeping everyone updated. Have a great night and Happy Trading.

PS - Good Free Trial: Morningstar Investment Research: Free Online Trial. 4,000 In-Depth Reports, Ratings. Data on 20,000+ Stocks and Funds.

11 comments:

  1. 5U Says:

    FF, you saw the article on the GE shareholder meeting?

    http://www.hollywoodreporter.com/hr/content_display/news/e3i888016761f9ec824f862a5c265de605c



    Also, any guess how this market trades with the "Stress Tests" ???

  2. Anonymous Says:

    I am desperate to know if the markets will realise the reality and correct themselves. Holding faz at 13. I am feeling very low. Please advice :(

  3. Finance Fanatic Says:

    5U, I like the article. My first impressions is that bank stress tests will come back positive...manipulation, and they measure nothing.

    Ya, anon, this market has been very depressing as of late, especially if you're on the short side. Im trying to stay as hedged as I can for now, and wait until these strong indicators we see become a reality.

  4. Anonymous Says:

    FF,
    What is that final "thing" your looking for to be all in on the short side ?
    Manipulation can last for months by the Gov. ! Can't it ?

  5. Finance Fanatic Says:

    The biggest thing Anon, are stronger deflationary signals... From our latest CPI and PPI numbers, it shows we are very close... The deflationary down-spiral is what supercharged the downfall in the Great Depression. Manipulation can't last too long, because be assured companies are losing money. They may be "better than expected" but many are doing business in a way where they cannot sustain.

  6. Anonymous Says:

    FF,
    Yeah the whole " Beat expectations ", but losing revenue's is what the market seems to be glancing over right now. Scary to be long or short right now. FYI I'm the Biggest Bear there is...so Short is where my current pain is !

  7. Anonymous Says:

    FF,
    Do you see SRS being a high flyer again in the NEAR future ? From these depressed levels (never seen before)do you believe it will hit big numbers again ? Do you have targets for it ? ie.50,60,70 or higher ???
    Appreciate your input. I have been holding for awhile and don't want to sell it because no one bought in the 20's before this recent bull raid....It's never been this low. Thanks

  8. FMinus Says:

    FF, Great post as always. Just had a few questions I'd like to pick your brain on.

    1) You mention the Plunge Protection Team (PPT) in your article and how they can throw around their weight on low volume days. So does that mean the market can never really tank?

    2) We're right up against a major resistance line, if we break that, do you think the bear is finished?

    3) With the latest earnings season, I was suprised that most companies met or surpassed estimates. Keyword there is estimates. The analysts lowered their expectations so much, the companies would have to have done absolutely horrible not meet them... and some actually didn't! Am I wrong in my assumption here?

    Thanks again for your posts.

  9. Wendy Says:

    FF,

    why don't you short both FAS and FAZ and average up if one goes up and take advantage of times decay? They are both crap to me.

  10. 5U Says:

    SRS has been a pain trade

    Seems like Goldman, Merrill, JPM and Cohen & Steers are in cohoots

    Check out these Cohen and Steers links

    Last month Cohen & Steers was claiming responsibility for playing an instrumental role in capital raisings in March.

    Cohen and Steers March Letter

    http://www.cohenandsteers.com/downloads/monthly_insight_reit.pdf

    http://webreprints.djreprints.com/2121520921333.pdf

    But here is the irony. Merrill still has an UNDERPERFORM on their buddy's stock...Cohen and Steers.

    As of 4/23 ML Report:

    REIT rally forestalls asset shrinkage REIT rally forestalls asset shrinkage
    A rebound in REIT equities prevented greater AUM contraction in the quarter. At
    the market trough on 3/9, the DJ REIT Index had fallen 42.7% YTD, but through
    3/31 it rallied 16.8%. Its further 24.6% rise in April to-date, if it can be sustained,
    would likely enable CNS to stop its trend of AUM and revenue deterioration. Our
    current estimates, however, already assume +23% REIT appreciation in 2Q.
    A rebound in REIT equities prevented greater AUM contraction in the quarter. At
    the market trough on 3/9, the DJ REIT Index had fallen 42.7% YTD, but through
    3/31 it rallied 16.8%. Its further 24.6% rise in April to-date, if it can be sustained,
    would likely enable CNS to stop its trend of AUM and revenue deterioration. Our
    current estimates, however, already assume +23% REIT appreciation in 2Q.


    Impairment aside, earnings power still limited
    We will review our estimates after today’s conference call. The acceptance of
    REITs as a standard slice of asset allocations is a positive for CNS. However,
    given its substantially diminished AUM and limited earnings power, trading at
    39.1x 10E, we reiterate our Underperform rating on the shares.
    We will review our estimates after today’s conference call. The acceptance of
    REITs as a standard slice of asset allocations is a positive for CNS. However,
    given its substantially diminished AUM and limited earnings power, trading at
    39.1x 10E, we reiterate our Underperform rating on the shares.

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