Wall Street Cyber Terror Attack?

In all my years in this business, never have I witnessed what took place last week and it begs the question, What really happened?

Were we attacked through the various electronic exchanges that exist today?

Since we still haven't received any answers and given the fact we have been attacked lately in a traditional terrorist sense, this has to be considered since it is unlikely that true sellers were panicking out of their positions to cause a 1000 point selloff in 5 minutes only to change their minds in a flash and bring the indexes back up just as fast.
I also have to be skeptical about the dismissal this week by homeland security officials about this possibility.

I mean if it were true, do you really think they would admit this? If they did, what would happen to the markets if people thought their investments could possibly get wiped out by an enemy combatant.

All the signs are there in terms of the label "targeted attack".
For example, 2 stocks with the biggest index weighting of the Dow Jones were taken down to have the most impact on the index value. Also, Accenture, a company engaged in IT consulting and security systems for the financial markets in particular was taken down to a price of $0.

This is a scary thought, I admit but former security officials like Richard Clark have been warning of this for the last several years and since I have never seen selloffs of this magnitude in such a short time frame without explanation, then we must consider the future possibilities that an all electronic trading system without the benefit of the former specialist trading curbs and a reinstatement of the uptick rule for shorting will raise the likelihood that it will happen again.

As a result of the event, several thousand trades were cancelled by the exchanges and there are no disclosures of whose trades were cancelled, why those particular trades were cancelled, and finally which I think is the most important question, Is who made the most off this event as well as who got wiped out.

All this tells me that the public is not getting the truth because these things can be traced in terms of actual trading executions unless these records were also erased or covered up.

So be careful how you proceed until there are actual answers.

Timing of the January Effect

History has taught us that the first week of January many times can give us an indication of how the market will perform for the year. This is known as the January Effect

There are many schools of thought behind this investment theory but probably the main engine for this type of forecasting logic, is that fund managers and investors take new positions after clearing out other positions at the end of the prior year for tax loss and performance reporting purposes.

For purposes of this post, we will take a look at a daily chart of the ETF, (DIA), which tracks the performance of the Dow Jones Industrial Average. The basic indicators shown are the 50 and 200 Day Moving Averages, along with a linear regression channel set at 1 and 2 standard deviations, and finally a trend line drawn from the November low. The reason for looking at the ETF is that we can get a better sense of volume levels as displayed along the bottom.

As displayed in the chart, we can see the Dow is at a major resistance level as marked at 90.82, Representing the December high and January 1st, yesterday’s action. This resistance is also marked by the upper band of the one standard deviation linear regression channel.

Another healthy sign is that the Dow broke through the 50 Day Moving Average from the November low and this is a level we have not seen for the last several months.

We are at key 30 day resistance level and today’s market action at one point gave up half the prior day’s gains. Certainly if we can take out that level in the next three days, than the January effect theory would be forecasting a healthy 2009 for investors.

What I believe makes this year different for this January barometer from a timing perspective, is the massacre selloff we experienced in the last few months as well as the realization this bear market has lasted almost 14 months which is a little more than the average time for bear markets but certainly a better opportunity to invest for a higher market later this year .

I see this market rising over the next few weeks as weaker earnings seem to have already been priced in the market and the new administration takes office giving us a clearer picture of the plan to get our economy moving again.

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Past performance is no guarantee of future results.

Likelihood for a Summer rally fading on Wall Street

Market players head into this trading week shortened by the holiday, but face a heightened sense of awareness that the story for stocks is about as unsatisfying as a season ending Sopranos episode.

While it is situations like this that investors look for, to grab stocks when out of favor and at lower prices, it is very important to stay overly cautious and wait for prices to stabilize before initiating new positions. At this moment, the trend is certainly downward and low participation this week will not help the cause for bulls.

The Federal Reserve board last week also helped to feed the bears by leaving interest rates unchanged and issuing a statement of their inflation concerns that was about as informative as my weekly trips to the local grocery store to buy milk at $3.80 a gallon. Of course of little highlight by Bernanke and his crew is the continued housing slump and self-imposed sub-prime mortgage mess that this illustrious group created when they raised rates in the first place that killed credit-challenged home buyers in the last few years.

Since I wrote the call to add positions to short the major market averages 10 days ago, the Dow Jones Industrials has dropped roughly 250 points or almost 2% with the SP500 following suit down about 30 points. Oil prices have revisted the $70 per barrel mark, interest rates have crept even higher as evidenced by treasury yields, and downward earnings revisions for stocks have outpaced higher estimates.

So what should you do with all these negative factors?

As a day trader, I am able to take advantage of the down days just as much as i am able to benefit from the up days. My short term trading ussually revolves around volatile stocks, indexes and ETFs. However my long term investing strategies see great situations in areas that have been bucking the downtrend and I see some great opportunities this summer to buy stocks as they are falling.

The industries and stocks I like right now are agricultural products(MON), utilities(UTH), envronmental services(WMI), oil services(OIH), financial services(NYX), and some select technology plays (CSCO,AAPL,YHOO).

Since I am overall bearish in the near term and looking to hedge any long positions in my portfolio, I like the ETFs that short the major market averages(DXD,SDS,QID).

Investors hoping for a Summer rally after the holiday week when earnings season kicks off are likely to be disappointed. They are better off to wait and see what the results look like this quarter to better guage when the market will react and head to new highs. This trader doesn't see it happening till the end of the year.

Performance table of highlighted posts:

Post Date Post Item Post Price* Current Price** Return Pct.*** Time Period****
07/02/07 YHOO NA $27.13 NA NA
07/02/07 AAPL NA $122.04 NA NA
07/02/07 CSCO NA $27.85 NA NA
07/02/07 NYX NA $73.62 NA NA
06/22/07 BX ($35.98) ($29.27) 18.6% 1 Week
06/20/07 QID $45.50 $45.69 0.4% 2 Weeks
06/20/07 SDS $51.01 $52.72 3.4% 2 Weeks
06/20/07 DXD $48.82 $50.15 2.7% 2 Weeks
Combined OIH October Strangle 2.0% 3 Weeks
06/08/07 OIHVK $6.20 $3.80
06/08/07 ODLJO $8.80 $11.50
Combined OIH July Strangle 13.6% 3 Weeks
06/08/07 OIHSM $5.20 $1.10
06/08/07 OIHGL $11.00 $17.30
06/08/07 OIH $167.03 $174.73 4.6% 3 Weeks
06/06/07 FIW $21.18 $21.73 2.6% 3 Weeks
06/06/07 PHO $20.35 $20.92 2.8% 3 Weeks
06/06/07 CGW $25.68 $25.57 -0.4% 3 Weeks
05/30/07 WMI $39.27 $39.07 -0.5% 4 Weeks
04/13/07 UTH $144.21 $141.65 -1.8% 11 Weeks
04/05/07 MON $58.30 $67.58 15.9% 12 Weeks



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* Post Price is the price as quoted in post or the highest price on the day of post/long positions or the lowest price on the day of post/short positions. () indicates short position.
** Current prices based on the close of trading June 29th, 2007

*** Return percentages do not include dividends, fees or commissions.

**** Time period is the time since the original post, rounded off to the nearest weekly period.

Time to Short the Market?

Market players are facing plenty of reasons to exit positions and avoid any near term selloff in the coming weeks. Geo-political instability in the oil markets and rising interest rates are putting pressure on stocks and the lack of a strong follow through on the recent retracement has given traders a clear signal to avoid long positions while taking a breather. With earnings season around the corner, it is going to take some very strong results or hints of lower interest rates to come, before this market finds it's way to new highs.



When these occasions arise, the ultra-short ETFs that track the major market indexes are a great way to hedge current portfolios without exiting all an investor's long holdings. The three funds that track the Dow Jones 30 Industrials, the S&P500 and the Nasdaq 100 are, respectively, DXD - The Ultra-Short Dow 30 Proshares, SDS - The Ultra-Short S&P 500 Proshares, and QID - The Ultra-Short QQQ Proshares. The funds strategies are leveraged so that they track the major indices at twice the rate of their individual moves. If for example, the Dow Jones Industrial Average falls 1 percent for the day, the DXD - Dow 30 Ultra-Short Proshares, should rise by 2 percent for the day.



Now as for how much size to take in relation to your portfolio, this trader generally believes that a hedge position should not exceed 30 percent of the overall portfolio, unless the position creates a "true neutral" overall position in the market. If not, then the hedge position should not exceed 15 percent of the overall portfolio. For purposes of tracking, I will update readers on positions of 200 shares each representing a total investment just under $30,000 which would be roughly 30 percent of my model portfolio.



The positions I executed when the indexes and where the funds were trading at the time of execution.



Dow Jones 30 Industrials - 13,652.55 - 200 shares of DXD $48.82

S&P 500 - 1533.87 - 200 shares of SDS $51.01

Nasdaq - 1946.82 - 200 shares of QID $45.50

Stock Market at a critical level for investors

Stock Market chart watchers should pay close attention to what the major averages do in the next couple of days, especially the big daddy Dow Jones Industial Average.



If we pull back in the next couple of days then a classic double top would start to form on the daily chart which will probably lead to a second major pullback as we experienced in the end of February. Of course if we break out to new highs then that would be healthy so long as volume is strong, however already early into the first quarter earnings season, results are starting to disappoint.

I am using this opportunity the introduce the six major market average ETFs to my model portfolios. Details will follow in a later post today. For now, this may be a good time to take any near term profits and hold back to make new entries at lower prices.

I am executing long entries into 3 managed exchange traded funds that short the Dow Jones Industrial Average, the S&P 500 and the Nasdaq 100.

DXD - Ultra Short Dow 30 Proshares, SDS - Ultra Short S&P 500 Proshares, and QID - Ultra Short Nasdaq 100 Proshares. These three funds are managed funds whose objective is to move at twice the rate of the underlying moving averages.

I am also executing short entries into the three regular exchange traded funds that represent the same underlying averages only the objective is to match the indexes at the same rate of return.

These are DIA - Diamond Trust Series representing the Dow Jones Industrial Average, SPY Spyder Dep Receipts which tracks the S&P 500 and QQQQ Powershares QQQ series trust which follows the Nasdaq 100 Index.

The objective is to get a gain over any near term (1-4 weeks) correction where we will close our shorts and buy into these same funds at lower prices.

Detailed posts will follow on each of these positions.