Newsletter Archives - Mad Hedge Fund Trader

Why My Boeing Trade Crashed and Burned

This trade was an unmitigated disaster, and hopefully it will be the worst of the year. I?m glad we had one of these because it provides a wonderful opportunity to illustrate everything that can go on with a trade. Every loss is a learning opportunity, and a loss not learned from is an opportunity wasted, and dooms one to repetition. Let me count the ways:

1) I was too aggressive on the strike. I should have matched my long August $70 strike with a short May $70 strike instead of reaching for the extra income by selling the $72.50?s. I got away with this on the (PHM) trade. Not so on (BA).

2) I shouldn?t have leveraged up with a 1:2 ratio. Those who did straight 1:1 spreads did much better and slept well at night. They saw only a slight opportunity cost as some losses were offset by profits in the August $70 puts as intended.

3) I was not aware that individual investors were so harshly treated by margin clerks. Hedge funds only get charged margin on the delta plus some small maintenance, which they then continuously rehedge. Most retail investors were prevented from doing this trade by broker policies banning naked put selling.

4) The Morgan Stanley guy who decided to price the Facebook (FB) issue on an options expiration day has to have a hole in his head. That only succeeded in increasing market volatility. I?m sure that when they made the call, they thought this would make (FB) go up faster. Instead, the reverse happened. On Friday, everyone?s portfolio effectively turned into a long Facebook position, tracking (FB) tick for tick. This did not end well.

5) This was a really unlucky trade. Although the global macro situation is pretty much unfolding as I expected, I didn?t think the rot would spread so fast once it set in. Even a one-day short covering rally on Friday would have turned this trade profitable. Thank Greece for that. Facebook too. It took one of the longest continuous market moves down, 12 out of 13 days, for this trade to lose money.

6) The only consolation is that those who had puts exercised against them and saw stock delivered into their accounts Monday morning at a cost of $72.50 were granted a huge short covering rally to sell into, with (BA) rising $2.85 back up to $72. This enabled shareholders to recover 85% of their losses on the position.

Taking in the entire May short option expiration play, and it is clear that this didn?t work. Add up all the P&L?s and this is what the damage came to:

(FXE) $127 puts? +$950
(FXE) $132 calls? +$950
(FXY) $121 puts? +$1,500
(PHM) $8 puts? +$980
(IWM) $77 Puts? -$5,544
(BA) $72.50 puts -$8,708

Total?? -$9,872, or ?9.87% for the notional $100,000 model portfolio.

Of course, this loss was more than offset by the enormous profits that we took in on our long put positions in the recent market meltdown. Since I initiated the short put strategy on May 3, the long put positions added a welcome 30% to the value of the portfolio.

We did get the protection against a sideways market that had been killing my performance in April. So it did perform its insurance function as intended. As I often remind readers, when you buy fire insurance, you don?t complain to the company when your house doesn?t burn down.

The way this strategy usually works is that you make money like clockwork all year, then one bad month wipes out two thirds of your total profits. That means repeating this play will probably work for the rest of 2012.

This also illustrates how the neophytes who attempt this strategy with tenfold leverage regularly get wiped out. What looks like easy money on the outside quickly becomes toxic waste on your position sheet. The rich uncle morphs into a serial killer overnight. When I look at those miracle 100% a year track record regularly touted on the Internet, this is usually what I find.

These calculations assume that you sold your (BA) at the close on Friday, which was a new low for the year. The net loss on the short (BA) May $72.50 puts comes to ($72.50 - $69.15 + $0.24 = $3.11). This subtracts (100 X 28 X -$3.11) = -$8,708, or -8.70% for the notional $100,000 model portfolio.

Oops

Facebook Flop Frustrates Ferocious Fans

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This had to be one of the greatest change of life weekends in human history, endured by one Mark Zuckerberg. On Friday, he earned $9.2 billion with the flawed Facebook (FB) flotation. On Saturday, he married a Chinese doctor and longtime girlfriend, Pricilla Chan. Then on Monday, oops honey, I lost $1.2 billion. Talk about a rocky start! Never mind that the precise timing was intended to undercut any future divorce claims, hence no prenuptial. Her cost basis is $38 a share, his is zero.

I knew that when the stock closed pennies above the $38 syndicate bid on Friday that there would be a Monday MORNING massacre. I warned away people from this issue at every opportunity. When Wall Street starts drinking its own Kool-Aid you, can count on a mass murder to follow.

Brokers we urging clients to apply for 100 times the shares they really wanted in the expectation that that would get only 1% of their request. That paved the way for the ugliest broker confirm of the year, that you received the entire allocation that of Facebook shares that you applied for, and they were now down 13%.

By Monday, some hapless investors still had not received notice of the allocation. At least they are faring better than the suckers lured into the aftermarket to buy stock at $43, now down 30%. Think of the entire flotation as a full employment act for the legal profession.

There was enough mud on lead underwriter, Morgan Stanley?s face to fill Yankee Stadium. It is sad to see how low the standards and competence have fallen at this once great firm.? I am now seriously thinking of taking this sullied name off of my resume, even though it is an ancient entry. Don?t worry, they?ll get their just punishment. The losses on their Facebook Stabilization fund is thought to be as high as $100 million, wiping out any underwriting fees earned. Expect investors to defriend (MS) post haste. What was expected to be the biggest payday of the year for Wall Street turned out to become the largest bill due.

I made a killing on Facebook, not through any direct participation, but from the market timing it clarified. When the (FB) was down $5, the Dow should have been off 300. They fact that it wasn?t flashed a huge ?BUY? signal to me, enough to cause me to rush to cover all of my profitable shorts and flip my model trading portfolio from a big ?RISK OFF? stance to a moderate ?RISK ON?. So far, it?s working, with Apple (AAPL) up $25 since my call, and (IWM) rocketing two full points.

Global Trading Dispatch, my highly innovative and successful trade mentoring program, earned a net return for readers of 40.17% in 2011. The average annualized return since inception is 25%. That would rank it as the 35th most profitable hedge fund in the industry according to a recent Barron?s survey.

The service includes my Trade Alert Service, daily newsletter, real time trading portfolio, an enormous trading idea data base, and live biweekly strategy webinars. To subscribe, please go to my website at www.madhedgefundtrader.com , find the Global Trading Dispatch box on the right, and click on the lime green ?SUBSCRIBE NOW? button.

A Conversation With Charles Nenner

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I managed to catch my longtime friend, technical analyst, Charles Nenner, on the fly between London appointments yesterday. The must go to guy for big hedge funds, family offices, sovereign wealth funds, and high net worth individuals, says that the global markets are on the verge of completing round one of a major risk off trade, and there is much more to come.

A ferocious short covering rally could ensue as early as next week and run well into June. This is a rally you want to slam big time. A failure to reach new highs will lead to substantial new lows by August. To me, this means that the short selling opportunity of the year is in the process of setting up.

Intrigued, I asked Charles to go into as much detail on a ticker by ticker basis as London?s spotty cell phone coverage and bumpy roads would permit. I break out his answers below by asset class.

Equities

The S&P 500 will start one more run at a new high for the year next week, or the following week at the latest. A failure heralds a much more serious correction that could last into August. Use a downside break of 1,325 as a sell signal. The Russell 2000 looks much more dubious. Pierce $77.20, spitting distance from here, and we will soon be visiting $71.

NASDAQ (QQQ) has recently been underperforming recently and could lead any new charge to the downside. Emerging markets (EEM) fighting a monkey on their back with plunging commodity prices look even worse, and may not even bother to rally at all in this bounce. They look weak straight into July.

I covered a few individual high profile equities with Charles. He doesn?t like Apple (AAPL), which he sees touching $540, down $100 from the post earnings top. Ditto for IBM (IBM) which has probably squeezed out as much performance as it can for the time being. He says my short in Pulte Homes (PHM) will blow up in my face, remaining strong into July. Disney (DIS) looks pretty good and should maintain strength for a few more months. On the other hand, Boeing (BA) looks like it is rolling over and will track the indexes on any move south.

Bonds

Charles was ultra-bearish on the Treasury bond market, believing that the 30 year bull market peaked last September. The current run to those highs will fail, setting up one of the biggest short side trades in the coming decade. His favorite instrument here is the (TBT), which he recommends selling puts on four months out. The expected disorder and thin markets this summer could take ten year? Treasury yields as low as 1.57% from today?s 1.78%, but won?t be able to sustain beyond that. His downside target for the 30 year is a gob smacking 2.6% yield.

Foreign Exchange

The Euro (FXE) has already breached his first downside target of $1.2850. If we can?t recover that level soon, next on the menu is $1.2420. His longer term charts are showing a final goal of $1.00, but he refrains from mentioning this to the media because it is so extreme.

The Japanese yen (FXY) has just completed a nice one month consolidation and will resume a major long term downtrend imminently. If the cash market clears ?80.60, pennies from here, a much bigger move down is in store for the ETF, from the current $122.40 to $119.70, then $114. The Australian dollar (FXA) is looking equally sick and could be printing $89.5 in the months ahead. Further interest rate cuts by the Reserve Bank of Australia to combat a fading economy in China will add fat to the fire.

?Energy

The wily Dutchman has been negative on oil (USO) since it peaked at $110 a barrel in early March. It has already hit his initial goal of $93. If the markets move into a broader ?RISK OFF? mode, we could see $68 by November, no doubt sending chills down the spines of oil men everywhere.

Natural Gas (UNG), the worst performing asset of 2012, is enjoying a brief rally that may continue until the end of May. After that, the ETF for this unloved molecule should crater from $18.90 to below $14 this summer, around when the gas storage Armageddon hits. Longer term, he wants to scale into the long side, but not through (UNG), which has a huge contango and the worst tracking error of any ETF alive. He prefers to participate in any gas recovery through Canadian gas producer, EnCana (ECA), which derives almost 100% of its revenues from CH4.

Commodities

Nenner was early in jumping all over the copper (CU) trade, which was the first asset class to peak this year, in early February, unloading the red metal under $3.80. He thinks copper could trade as low as $2.80 in this cycle, down 28% from here. He also has been negative on the grain complex for some time, and thinks corn (CORN) has another 10% of downside to go. There he wants to load the boat for a potential double in coming years.

Precious Metals

Charles argues that the precious metals will be anything but a safe haven. We could get a bounce in gold off of $1,510 in the near future. But if that make or break level doesn?t hold, the barbarous relic could be paying a visit to $1,369, delivering the gold bugs a fatal dose of insecticide. Silver may challenge $23 soon, and substantially lower if no one steps up there.

Charles hails from Holland, and has a long career that includes stints at medical school, Merrill Lynch, Rabobank, and ten years at the Vampire Squid, Goldman Sachs. He has spent three decades developing his proprietary Cycle Analysis System, which generates calls of tops and bottoms for every major market in the world.

Charles developed a huge following after 2007, when he accurately nailed the top in the Dow at 14,500 and urged his clients to put on short positions when everyone else was predicting that the market would keep grinding higher. Today, Charles Nenner counts major hedge funds, banks, brokerage houses, and high net worth individuals among his clients. To learn more about Charles Nenner?s cutting edge research organization, please visit his website by clicking here at http://charlesnenner.com/ .
I have been following Charles? daily research reports myself for many years, and found them to be uncannily accurate. Whenever I feel like playing a three dimensional mental chess game, I call him to argue about the connections between human behavior and mathematics, a key market driver.

I thanked him for his time, and offered to share a bottle of the fiery Dutch spirit, Bols, on his coming trip to San Francisco. I also told him that the next time Holland?s canals freeze over, an event that happens only once a decade, I would race him mano a mano in the "Elfstedentocht," a 125 mile race around the country?s canals on ice skates.

My Go To Source for Charts

The "Elfstedentocht"

Charts Are Breaking Down All Over

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They say a picture is worth a 1,000 words, so here are 4,000 words worth. My friends at www.stockcharts.com put together this series of charts establishing beyond any reasonable doubt that the ?RISK ON? trade is breaking down across all asset classes.

Everything is breaking down, simultaneously and in unison, including the S&P 500 (SPX), Gold (GLD), Silver (SLV), Oil (USO), Copper (CU), the Euro (FXE), the Australian dollar (FXA), and the Canadian dollar (FXC). In the meantime, Treasury bonds (TLT), (TBT) are moving from strength to strength.

The news from Europe can only get worse. An American recession, considered impossible by strategists only a month ago, is now looming large as our own economic data continues to deteriorate. The flight safety has exploded into a stamped, driving the US dollar index up 12 consecutive days, a new record.

I have included a cartoon below from my old employer, The Economist, that neatly sums up the implications of the Socialist win in the French presidential elections. German chancellor, Angela Merkel, is meeting French president, Fran?ois Hollande, for dinner at Das Austerity Euro-Caf?. Austerity preaching Merkel is having a miniscule single sausage for dinner, while Hollande is enjoying a sumptuous repast and obviously ordering the most expensive wine from the list.

The cartoon would be funnier if it weren?t so true. Austerity is now suffering a retreat on the order of Napoleon?s retreat from Russia in the winter of 1815. Her Christian Democratic Union party suffered its worst post WWII defeat in last weekend?s North Rhine-Westphalia elections. It is now looking like Germany will have to accept a higher inflation rate as the price for bailing out Europe, something it is loath to do. Needless to say, this is terrible news for the Euro.

If these charts continue to break down, as the news flow dictates they should, here are my immediate downside targets.

(SPX)? 1,280
($INDU)? 12,200
(IWM) $70
(FXE)? $126
(FXA) $95
(GLD) $150
(SLV)? $25
(USO)? $32
(CU)? $22

Don?t Worry, She?s Picking Up the Bill

Strong Dollar Spells Death for Commodities

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Panic is on deck, to use the baseball terminology that my foreign readers are often attempting to decipher. That is the only conclusion one can reach after getting gob smacked by the price action this morning. Copper got spanked for eight cents, oil burned $2, gold shed another $26, and silver puked 70 cents.

The tantrum like stock behavior in producing and equipment companies, like Freeport McMoRan (FCX) and Caterpillar (CAT) has been atrocious. How many of you out there know that JP Morgan (JPM) is the largest holder of futures contracts in the silver market and just got hit with a massive margin call? Why is all this happening on the 100 year anniversary of the sinking of the HMS Titanic?

Blame it all on Uncle Buck, whose recent steroid treatments has enabled him to unload the pounds, shed the fat, and adopt a new, more virile attitude towards life. Every other currency now looks like a 98 pound weakling. We now awake each morning to be greeted by the latest disastrous headline from Europe that accelerates the capital flight from the continental currency.

The Euro (FXE), (EUO), is deteriorating from bad to worse, with the foreign exchange community now clearly gunning for the next short term support at $1.26. Look at a ?10 note these days and it has recently printed upon it ?Abandon hope all ye who enter here.?

Traditional diversification currencies, like the Australian (FXA) and Canadian dollars (FXC) are now biting the hands that fed them, dragged down by their export commodities? pitiful performance. Hard as it is to imagine, the Ausie has been the world?s worst performing major currency this year, even underperforming the dreadful euro. Australian readers who followed my advice to pay for their summer vacations in advance at the $1.10 that prevailed at the beginning of the year are smiling. Those they didn?t are now looking for a discount caravan at a remote, dingo plagued campsite somewhere in the Outback.

The Japanese yen, the currency that everyone loves to hate, has perked up to a flight to safety bid while the rest of the world goes to hell in a hand basket. We are currently in between Bank of Japan quantitative easings there, so don?t expect this to last much longer. The tipping point into hyper debt driven, economic Armageddon there creeps ever forwards with each passing day on the calendar.

Take a look at the charts below for the US Dollar Index and it is obvious that things may soon get a whole lot worse. For starters, the dollar has only rallied back to the midpoint of a multiyear range. To get back up to the top of that range it needs to appreciate another 10%. To understand why this is a problem, look at the second chart that proves a tremendous inverse correlation between the dollar and commodities. A strong dollar always leads to falling demand for the hard stuff.

The third chart suggests that the other grotesquely overvalued asset class, US stocks, is also cruising for a bruising. Commodities led equities in this downturn by three months, as they usually do. If they break support here, then they will easily drag the (SPX) down to my medium term target of 1,275, off a heart thumping 10.3% from the recent top. If the economic data continues to worsen on a daily basis, as I have been chronicling on a daily basis for the last two months ad naseum and ad absurdum, then we have a clear shot at the fall, 2011 low at 1,060.

Oops, There Goes My Equity Portfolio

Why is Gold Broken?

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Gold bugs are puzzled by the recent collapse in the price of the barbarous relic. Physical demand has been outstripping supplies for some time now and threatens to reach all-time highs. Demand for 100 ounce gold bars by the 1%?ers is as high as it has ever been. Negative real interest rates for almost all Treasury securities also underpin the bull argument for gold.

Mine supply of the yellow metal is just 2,200 tonnes a year. This does not include Russia or China, where production is entirely consumed domestically and never reaches the world market. China alone bought 64 tonnes off the international market in February. Other non G6 central bank buying continues unabated. India?s gold import duties were rescinded, which had been the explanation from the drop from $1,700 after widespread strikes by the country?s jewelers.

But paper selling of gold through ETF?s like the (GLD) has delivered a stiff dose of insecticide to the gold bugs, causing prices to plummet. It is all a broader symptom of the global ?RISK OFF? trade which has gripped assets of every description, smashing any diversification assumptions about gold. Watching the economies of the biggest sovereign gold buyers slow has not exactly thrilled speculators. The tightening of margin requirements by the CFTC two weeks ago, originally intended to damped oil speculation to get gasoline prices down, had the unintended consequence to paring back other commodity and precious metals prices as well.

Hints from Ben Bernanke that QE3 is on hold delivers a sucker punch to gold holders every time. And as we saw on Tuesday, the slightest hint that the International Monetary Fund will sell gold to rescue Europe is good for about a $50 down day.

It looks like gold will hit my downside target of $1,500 fairly quickly. Too bad some dubious price action spooked me out of my puts too soon last week. This would have been the home run of the year if I only held on for two more days. Welcome to show business.

Beyond that, the chart below shows major support at $1,425. To get down to $1,250, you need to see a true double dip recession, which the recent soggy economic data has been hinting at. I am sure we will see my long term inflation adjusted all time high of $2,300 in the years ahead. But you may have to suffer some serious pain along the way to get there.

Goldfinger Stared Me Down Once Again

Check Out (HDGE) to Limit Downside Exposure

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While scouring the markets looking for great ways to participate in the current slide in the equity indexes, I discovered a real gem. The Advisor Shares Active Bear ETF (HDGE) offers a rifle shot at the true garbage in the market, low dividend companies with deteriorating fundamentals. Run by former Bass Brothers associate Brad Lehmansdorf, it includes such well known losers as Goodyear (GT), Green Mountain Coffee (GMCR), and Open Table (OPEN). Think of it as garbage distilled.

The fund addresses many of the shortcomings in other short index ETF?s like (SH) and the 2X (SDS).While they get the direction right in a down market, they also throw out the baby with the bathwater. Sure, you are happy to sell short a lot of stocks with bleak futures. But you are also shorting Apple (AAPL), IBM (IBM), Intel, and Cisco (CSCO), not something you necessarily ever want to do on pain of death.

It has been working like a charm since the April 2 peak in the markets. (HDGE) delivered an awesome +15.2% gain, against a much more modest +6.6% for the 1X ProShares Short S&P 500 fund (SH) and a fall of only -5.8% in the S&P 500 (SPX). (HDGE) is in effect delivering a downside outperformance compared to the (SH) of more than 2:1, which makes a long (HDGE)/short (SH) strategy look kind of interesting. What is particularly impressive is that it does this without leverage, qualifying it for investment in many plain vanilla IRA?s and 401k?s, and posting it on the menu for many individual investment advisors.

Of course, quality comes at a price, as I am always at pains to point out to my own readers. Management fees are a hefty 3.39%, although that comes down to a reasonable 1.5% when manager rebates are factored in. The dealing spreads on these esoteric ETF?s can be quite wide, so it is wise to place a limit day order in the middle market to avoid being taken to the cleaners. If we get a brief short covering rally in the market you might find me in this one with a trade alert. To learn more about this enticing exchange traded fund, please visit their website at http://advisorshares.com/ .

Looking for Some Good Short Plays

Euro Crash Warns of More to Come

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A few years ago on the Old Square in Brussels, a delicious luncheon of moules marini?res paired with an excellent white burgundy with some European Central Bank officials ran far longer than expected. They were attempting to convince me of the long term viability of the Euro, to no avail.

That seriously delayed my departure from Belgium to Salisbury in the English countryside to visit some clients resident at Highclere Castle, which is now the subject of a major TV series. I raced my twin engine Cessna at full power into the sunset, across the English Channel, past the white cliffs of Dover, because my destination airfield had no lights. By the time I arrived it was too dark to land, my alternate airport at Southampton had suddenly closed because of a crash, and I only had 15 minutes of fuel left.

I knew that the pub at the end of the grass runway kept a radio with the tower frequency always tuned in. So circling at 1,500 feet overhead in the pitch black darkness I called in and ordered a full bottle of Ron Rico rum. I told the bartender to pour out 16 shot classes and line then up on the bar. I then broadcast my predicament and said that anyone who would take a rolled up newspaper and dip it in the rum, set it on fire, then line up to light the runway would get a free pint if I landed successfully. I said that if I didn?t get help immediately, I might take out nearby Stonehenge, or perhaps Salisbury Cathedral, in the imminent crash.

Within seconds, I could see the flaming torches dispersing along the field, some in a somewhat drunken fashion. I landed right between the two ragged lines of my improvised landing lights, which lit up the field as clear as day. It was the first time that I landed on a runway that was living, breathing, and even staggering.

As I taxied to my parking space, the starboard engine ran out of fuel and shuddered to a halt. So I just abandoned the plane there to retrieve the next morning. Needless to say, I bought rounds for the house that night until no one was left standing.

Watching the Euro shatter its four month support line this morning at $1.2950, I felt exactly as I did all those years ago in the dark skies over the Wiltshire countryside. The concern was that my put options would run out of fuel before the currency made its big break, forcing me to crash and burn, as I almost did over England. The move sent my short position in the beleaguered currency soaring, and rendered the calls that I sold short only yesterday into dust. It was a good P&L day for the Mad Hedge Fund Trader?s model portfolio.

I am now seriously thinking of becoming a card carrying member of the Greek Communist Party, for it is their young leader, a Mr. Alexis Tsipras, who provided the final straw that broke the camel?s back. Its leaders threatened to challenge the legality of the recent bailout in court. Is Greek rescue package number three now in the cards? The development threatens to undo all of the hard won progress made this year towards resolution of the continent?s sovereign debt crisis. Did anyone expect that asking people to vote for their own austerity and starvation was going to work?

Long term currency watchers had been mystified as to why the Euro had held up so well in the face of such obviously collapsing fundamentals. The markets were rife with rumors of European Central Bank support at $1.30 to prevent a widespread panic that would ignite wholesale Euro dumping. My own theory was that the trade became so obvious and one sided that hedge fund short covering prevented it from falling further. Today, the fundamentals turned so dire that massive selling finally? cleared out? those positions, which is how these things always end.

All I can say is that when it rains, it pours. The profusion of the market developments that I have been predicting all year have suddenly come true in the last few days; the awful April nonfarm payroll, a global synchronized recession that is accelerating to the downside, and the end of the grotesque overpricing of the US stock markets. Also coming home to roost are the contagion effects on all ?RISK ON? assets, including equities (IWM), commodities (CU), oil (USO), the Euro (FXE) (EU), gold (GLD), silver (SLV), and a huge flight to safety bid for the dollar (UUP) and Treasury bonds (TBT).

I thought this summer might be boring. Perhaps I could be wrong. And you wanted me to manage your money? Anyone for a return flight to Brussels to finish that bottle of wine?

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Highclere Castle

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A White Burgundy

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The Brussels Old Square

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A Cessna 340

My Advanced Instrument Landing System

Greece to Germany: Drop Dead!

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That is what the head of Greece?s opposition party said this morning in the wake of elections where voters resoundingly rejected austerity in any way, shape, or form. Ditto for France, where the Socialists rode a wave of resentment against the incumbent conservative government. Looks like I will have to pack a red scarf and schedule some time for manning the barricades during my upcoming Paris strategy luncheon. My front teeth are still kicking around somewhere on the Left Bank from the last time this happened, in 1968.

The results couldn?t have been more decisive, with president Francois Hollande capturing 51.7% compared to a stumbling 48.3% for Nicolas Sarkozy. Sarkozy conceded defeat five minutes after the polls closed, and presumably went back to the ?lys?e Palace with his fashion model wife, Carla, to start packing. After studying Carla?s picture below for a considerable amount of time, I would have to say that Sarkozy was the real winner of this election, as he now has plenty of free time to spend at home.

It turns out that I was also a winner of the French elections, as I went into them short the Russell 2000 (IWM), the Euro (FXE), Boeing (BA), Pulte Homes (PHM), and US Treasury bonds (TBT). Overnight, the S&P 500 (SPX) traded all the way down to 1,354 before rebounding during US time, putting 1,325 on the table.

Only my short in the Yen (FXY) came back to bite me, and that was just a nibble. I also used the big volatility spike last week to establish substantial short volatility positions which are doing quite well today. I think we may be able to really coin it in coming weeks with these positions, before the summer doldrums set in.

Longer term, I believe that the outcome of the weekend European elections will be a longer period of uncertainty with greater volatility for financial markets. If Europe kept you awake at nine before, now you have even more reasons to become a late nigh TV rerun addict.

French First Lady Carla Says Good Riddance

The Bad Economic Data Deluge

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Traders were sucker punched this morning with the release of the April ADP showing that private sector hiring came in at a flaccid 119,000, some 56,000 less than expected. This signals that the Department of Labor weekly jobless claims due out at 5:30 AM EST could be equally grim, and the Friday nonfarm payroll even worse. My sub 100,000 forecast for the latter is looking better by the minute.

They were preceded by European Purchasing Managers Index figures showing that the continental economy is falling off a cliff faster than anticipated. Following was the New York April ISM, plunging from 67.4 to 61.2, and March factory orders shrinking from +1.1% to -1.5%. The economic data are clearly moving out of the frying pan and into the fire. If you want to see what the early stages of a recession look like, this is it, up close and ugly.

What amazes me is how the stock market has been able to hold up against this onslaught of deteriorating fundamentals. I have argued all along that hedge funds have been on a buying strike this year, either sitting on the sidelines or dabbling with minimal token positions. That means there are few left to sell at market tops. The subterranean level of market volatility confirms this view.

It is also true that stock indexes are rising more from a lack of sellers than from any big influx of buyers. That is verified by trading volumes that are half of what they were a year ago. And the few buyers that exist are long term in nature, like pension funds. They seem to be willing to look across any valley crated by a downturn in share prices created by the current weakness in the economy. If they are focused on a yearend share price levels that are at, or higher, than current prices, they don?t care if the indexes take a 15% detour downward, or if individual names give back as much as 30%. These guys only reallocate once a year.

That is all well and good if the summer dip is a little dell, vale, or glen that one might appreciate in a Thomas Kincaid painting. If it turns out to be a Grand Canyon, that is another story. Then they will all be puking out at the bottom, as they have done for the last three years.

Is This Your Summer Trading Strategy?