Terrible Timing and Analysis

I must admit, I had some terrible timing on my sale of SDS. I 'think' I should have held just a bit longer, as I think we are going to see a nice pullback over the next couple days. I'm still up about 1500+ for the year on this short play.

So why did I get scared out of this position: mostly a knee jerk reaction to the OMG, there is so much liquidity in the market there are too many dollars that need to be invested somewhere, and that is driving market prices up.

So I was trying to surmise what type of effect rising inflation would have on the big american comapnies. The top companies are listed here:
http://money.cnn.com/magazines/fortune/fortune500/2008/full_list/

So let's think about Walmart and how US inflation/weak dollar might effect them. Walmart sells stuff, typically at prices lower than other stores. Costs of imported goods (most of Walmarts sales) are going up because of the weak dollar. Sales are up, because of a weak economy and people are searching for the best deals because there dollar will go farther at Walmart. So one might expect Walmart's US stores to be somewhat offset by the volume of sales generated from there lower cost items. Walmarts employees are probably not seeing much of a change in pay or benefits due to current US inflation. Walmarts overseas stores are continuing to provide a steady supply of foreign income which should play when profits are converted back to dollars. If inflation causes Walmart's prices to rise, then it will also cause it's competitors prices to rise, so this type of retailer will tend to do well.

XOM, COP, and Chevron. Big oil companies. Well this a no brainer. It's like selling crack to a country full of crack addicts. Oil goes up, they charge more, and make more profits. Inflation, particularly of oil prices helps them. Demand in the US doesn't seem to get effected much by the price of a gallon of gasoline. People are still stuck in there cars getting from point A to point B.

Next you have Ford and GM. Dismal companies. They are only hurt by inflation. Inflation in incomes in low, costs to raw materials is higher, people buy less big ticket items because they are able to save less (and banks are taking less risks on loans). Oil costs too much, and I imagine the highest margin on vechicles are there SUV's and Trucks which people are shying away from. The only thing that can help the US auto industry is a major inovation in how vehicles are powered.

Next we see some financials. Terrible outlook. Despite all the easy money, they only can make so much money from lending, investing, insuring, etc. If the underlying economies growth is weaking so the financials will follow, but more amplified.

I'll take a look at some more industries later in the week.

Inflation

Haven't posted in a while. My trading has been pretty stagnant over the last couple months, minus a couple of short positions that I did okay with.

I did one S&P short (with SDS) that did really well. I did a QID that didn't work out well (shorting the QQQQ), and I'm currently shrot with SDS again. I had a nice rebound with ABB, and a few others, but in general, I'm still very neutral on everything.

My analysis: The fed injected a whole lot of capital, so we've gotten this little run up. The negative sentiment is still there on the mortgage crisis, inflation, etc... The fed can't afford to keep lowering rates, inflation is terrible highly correlated with never ending rise in oil. So how to play defense. So we may be in a little bit of an up run here, that will eventually peter out. If companies start reporting flat earnings growth, we'll see a long period of either slow decent of the markets, or rapid correction.

My feeling is that the fed will be forced to raise rates because of inflation, and without there being any real economic recovery the market will tank. Yup doomsday is ahead of us. If I were to bet, and I do bet.... I think we still might see a 10-20% correction in equity markets. The when part of that is kind tough

Of course, I could be wrong, inflation could just inflate the price of equities. So subtract inflation from those numbers, and things aren't so bad, but the overall index is worth a whole lot less.

Where to go... PST and TBT are double inverse ETF's of the IEF & TLT. Essentially a way to bet that rates will go up... and it pays interest. I'll have to check with kind of interest it pays, but I dont' think there will be much more upside in the TLT or IEF in the long run. However this is probably too safe a bet for an aggressive portfolio.

Double short

This week I bought a few shares of SDS. It is a spy ultra short etf. Attempts to return "twice the inverse of the daily performance of the S&P 500 index." So far, doing pretty good, up almost 5% with the market down almost 2.5%. Right now, it's just balanced to offset some of my other equities.

Here is a link to all the different short options offered by powershares:

http://www.proshares.com/funds?products=98616&fundType=

Playing with intraday data

I've been just messing around with intraday data for the last couple weeks. Mostly just indexes to see if I can come up with some mildly profitable strategies on SPY and DIA. So far, I can't say I have much to show for it.

I've been reading the David Aronson book; Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals. I've only read the first two chapters at this point and skimmed some of the appendicies, but I have a general idea of where he is going from the amazon reviews. My hope is to come out of this book with a better way to vet my trading ideas.

Keep printing the money

So things didn't work on like the scenario I outlined, however we did go down to the levels I anticipated. In retrospect, I should have liquidated everything, instead of half my positions. I missed my price target on going short by just a few cents again. So not a very good month for me.

So where are we headed next. Outlook is up to SPY at around 142.50, then more weakness. Same thing for DIA around 130.

I'm not as confident about my prognostication this month as I was last month. What I am certain about is that lowering interest rates was just a knee jerk reaction to the markets falling. There was a great article in the Van Tharpe newsletter I get about how the government 'fixes' the inflation numbers to make is seem like everything is under control. What is so convincing to me that we are experiencing inflation; it shows up every time I go to the grocery store, and my girlfriend complains about how expensive everything is. When I go to the gas pump it's all too obvious. Looking at the rents in my neighborhood, the cost to ride Metro, the cost to buy a car, my freaking Comcast bill... all up significantly.

There are spaces we are not experiencing inflation. Go to Best Buy and look at laptops or flat screen TV's. Definetely more quality for less dollars. We are also seeing deflation in the largest ticket item, houses.

So the fed is just lowering interest rates, to stop the deflation in housing. While, this benefits me as a homeowner, I'm not sure that it's the best plan for the economy.

New version of Wealth Lab

Got the new version of Wealth lab through fidelity yesterday. Haven't had much of a chance to play with it yet, but first impressions are very positive. I was able to run 3 years of 1-minute data in a matter of seconds. Looks like it will be my backtesting environment for at least the next few months. Unfortunatly I have read that order execution won't be until later this year.

Pieces

This a list of several different open source pieces that can be used to create your own homegrown back-testing, analysis or Automated Trading System.

Charting. While not a necessary component, it is a nice to have. I looked at
Swordfish charts which was a nice piece of code to do charting using WPF, however I ran into performance issues trying to put up too many plots with indicators on the screen. I also played with Nplot before deciding to go with Zedgraph. Zedgraph by far was the most complete, easy to use, with a rich set of features of the graphing software I played with.

Indicators: TicTacTec. 150 Technical indicators in code for free! This library is quite well down.
Some might also find Quantlib to be of use.

Feeds: OpenTick

Order Execution. All of the follow could be useful:
Maretcetera Platform
Quick Fix Engine
QuickfixJ Java implementation of Quick Fix.