the current market condition

I talked earlier about the qqqq's (nasdaq100) putting in a potential double bottom, while the other major indices, the spy(s&p500) and the dia(dow30) had not. This divergence creates a dilemma. In the past my experience shows that divergence in the major indices often does not last long. So will the qqqq's break below the support and the spy/dia come down to support and create a double bottom, or will the qqqq's tread water until the spy/dia come down to support, or will the spy/dia rally created a racing double bottom (a double bottom with the right leg down not going all the way down to the support level)?

Now it is becoming a little more clear. The qqqq's have not created a double bottom. The spy and dia are starting to form a symmetrical triangle (see here for a definition http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:symmetrical_triangle )

Now the symmetrical pattern often is a continuation pattern, which means once completed the stock continues it's move up if in an uptrend or down if in a downtrend. But often it is a reversal pattern, which means the stock changes direction from up to down or vice versa. Generally if the trend is not well established, meaning the trend has not been in place for a long time and is not well defined, then the possibility is that the pattern will be a reversal. Here is a chart of GS that shows this symmetrical triangle as a reversal pattern. Note that in this case there was not a real uptrend just a channeling between 230 and 170 or so. Note that the break out of the triangle's lower trend line was tested when the stock rallied back up into the lower trend line. At the point it failed to break the lower trend line to the upside confirmed the break to the downside.

Below is an example of a symmetrical triangle in gld that is a continuation pattern. Notice the triangle that formed in Nov-Dec last year. In this case it broke out of the upper trend line and never tested the trend line. Note in this case that there was a much more well defined trend in place when the triangle formed. Also notice that another triangle is forming as we speak.

The crux of the matter is that it may be difficult to predict the direction the stock or market will move after a symmetrical triangle forms. The most important thing is which way it breaks. It is also nice if it tests (and passes) the broken trend line but as with gld this does not always happen.

Back to the major indices or their tradable cousins their tracking etfs. Looking at the qqqq's we see a potential symmetrical triangle forming. The double bottom never formed. Also there is not a good place to draw a trend line and if you did it would be very steeply down, almost unsustainable down. So now I believe the potential is for the symmetrical triangle reversal pattern to form. Note this pattern is also forming in the dia.

Looking at the dia below we see a similar pattern forming. Although in this case there is a little more definable downtrend line that can be drawn.

The conclusion is that we are now seeing the major indices correlate in that they are all consolidating. They are all making a similar symmetrical triangle pattern. While we cannot know which way we will break from this consolidation, we do know what to look for. We look for a breakout and based on the direction we can get a sense of the direction of the next move. Since these are major indices I would expect a break and then test. If the test confirms the breakout then another significant move up of down can be expected.

On another note. When you look at the gld chart above we see another triangle forming currently. It looks as if it will break to the upside again. But I do have to wonder how much further gld can go without a major correction. It has had a very big run.
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Where i am at.

Over the last several years I have tried to get educated about basically how money works. The more I read the more I realized that I needed to start doing something to try to achieve financial independence. Having read Rich Dad Poor Dad by Kiyosaki and many other books I have started to look at money in a whole new light. While RDPD does not provide any concrete advice on how to get rich or reach financial independence it does provide a framework for understanding how money works. And I believe without that framework it is a losing battle to attempt to secure your retirement or reach financial independence. The reason is that many of the myths bandied around as fact are detrimental to your financial future. But that is a discussion for another day.

As a result of my education one goal of my life is to become financially independent. First what do I mean by financially independent. Well in my case I mean that I have enough passive income coming in every month to cover all my expenses and to provide me a comfortable life (basically the lifestyle I have now + a little bit more free cash). What do I mean by passive income? Well I mean income that I do not have to work for. As a simple example a stock dividend or rent on a building you have professionally managed are examples of passive income. It is income you did not work for. It is income that comes from your money working for you. One thing to note that in some ways a beggar that get's enough to live on is independent, but his income is not passive. If he does not go to work (begging) he makes no money.

If you think about it we all are trying to be somewhat financially independent by retirement. We try to have enough saved so that we no longer work, but have enough income coming from stocks, bonds, and investments to live on. The one catch is that we also hope for social security which makes us very unindependent.

So back to my goal of being financially independent. This is a great goal, but the question is how to do it? Well one thing I have learned the hard way is that this is going to take some time and it is not going to be easy.

One of my first attempts at this was to invest in Oil and Gas Joint Partnerships. Basically companies put together a group of investors to fund the drilling, completion, and production of an oil or gas well. In this case I have had some success and some failures. One interesting note is that I have been left with some concrete assets in the process. I still have two ventures that I do absolutely no work with, but which I get a check every month. This is the definition of passive.

The problem with O&G Partnerships is that they are very hit and miss. You really need to invest large amounts of money spread over many projects to reduce risk. I do not have enough money to do this right. It also will not make you rich. This is my key discovery. The returns of some projects can be huge, but because you need to spread out the money the net returns of your overall investment is much less.

If I had a lot of money sitting in a pile I would invest 20% of it in these projects as net overall I would make a decent return on my money. But earning 20% does not get you financial independence. Also to do it right you either need to hire someone to find and invest or you need to do it yourself which then is a job.

What I have learned is that I need more control over my money. I cannot just hand it to someone and expect them to make me money. There just is no incentive for them to do well with my money.
As a result of this experience my conclusion is that to achieve financial independence I need to start my own business. But what business and how do I do it? Well more to come in my next post.
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Exited the qqqq's

While i needed to go out of town and did not feel comfortable leaving my long qqqq positions on so i exited Friday of last week. We still appear to be in the same position as last week. We may be forming a double bottom on the nasdaq 100. We also may be forming a double bottom on the S & P 500 as well. In this case the double bottom would be distorted in that the second low did not make it all the way down to the first low. This is actually a position sign.

Before i rush out and buy a bunch of stuff i need to understand if this potential double bottom is different from the one put in on March of last year. One difference is that at that time the 50 day moving average was above the 200 day average. This is a more general bullish indicator for longer term institutional investors. Right now things are different in that the 50 is below the 200 and both a pointing down. Another differnce is that in March the market was in a consolidation period for 3 months before the double bottom formed. Right now we are clearly in a decline not a consolidation period.

My guess is that if the bottom forms we have limited upside potential. I keep trying to figure out what is the near term target we could expect. Getting to 13000 on the dow seems the furthest we could go at this time. What is the impetous to get to 14000 again? So for now i will sit out and watch. I do have a small gold position i am sitting on. It is starting to look like a symetrical triangle is forming. Although this will be smaller than the one that formed in Nov-Dec of last year, this sets up for a possible further rise. As always we don't know until the pattern completely forms and then breaks out. If it breaks lower then i'm out.
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long and strong? Not really.

Well i started taking some light long positions in the qqqq's today. I am doing this because we are in the process of testing the January lows in this ETF and i believe it is likely we will see a bounce here. I am not very confident as this market is brutal, but I'm stuck dipping my feat in somewhere.

I think the biggest concern I have is that the nasdaq 100 (qqqq etf) is the only major average that is at the January low. The S&P 500 and dow jones industrials still have some ways to go before hitting the lows in January. So we have a divergence here. The fact is the tech stocks as represented by the qqqq's have been beat up a little bit more than the rest of the market. That is why they are already back to test the January low. So will the tech stocks lead a bounce here or will they mark time while the other averages decline further to catch up? This is impossible to say, but i do know we are at some significant support on the qqqq's.

If you look at the January low it was a little below 42, but this is also the low put in on March of last year. In March a strong double bottom formed and the ensuring rally raged all the way to 55. Given the level of support going all the way back to March of last year and the action today which saw a significant rally before the bears took some shots, I think that this level is not going to just be sliced through without a fight.

I'm not calling for any long term rise in stocks from here, even though you can see if this level holds you could form a double bottom, I'm just looking for a rapid short cover rally which should last no longer than the last one. If we break 42 we have to bail.

The other concern is the bond insurance companies. If more finally get downgraded or someother really bad news comes out this could trip things up pretty good. But i have to think that some of this is starting to get priced in.

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walking away and the quitclaim deed

I am reading over and over again the efforts of some counties to force banks or homeowners of homes that have been abandoned to pay to clean or keep up the place. In the case of a homeowner who has stopped paying a mortgage and moves it is not always the case that the bank takes the home back.

You as the homeowner own the home. It is titled in your name. The urban myth that the "bank" owns the home is not true. They have a security interest in it, the mortgage, but do not own it. Just look at the county title records for proof of this. The result of this is that if you abandon the home you are still responsible for it until the bank formally takes it back. But what if they don't?

There are more reported cases of banks not taking the homes back because they "lost" them or just don't want to pay for the process of getting them back. So who owns it? Well the original homeowner still owns it. As such you are still responsible for taxes and upkeep. In these cases homeowners are being dragged into court to pay maintenance costs the city incurs to keep the home from becoming dilapidated.

So if you are considering walking away what can or should you do? Well first you need to consult a lawyer and a CPA. You need help on the legal and tax consequences of the decision. In addition one small thing to consider if you live in a state that has this type of deed is the quitclaim deed. In California the quitclaim deed simply states that the grantor (the homeowner filing the claim) gives up any interest in the property. Now I am not a lawyer and am not giving legal advice, but the point is this may help assure you have at least a record that you gave up all claims to the property.

In this case it may create many weird issues because this deed just releases claim to the property, it does not really transfer interest such as with a grant deed. So when you bought the place you got title via a grant deed, you relinquish title, and then who has title? I'm sure the lawyers would have a field day with it.
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ps - see a lawyer if you are considering walking away. if you do this you cannot undo it. So if things should turn around you won't be able to claim ownership or sell it or anything else.

They shot csco today

Very interesting after hour action in cisco. I was listening to the first part of the conference call and everything was fine. They made the numbers and the stock was rising a little. I left and came back an hour later to find out it was down 8% or so. The crux once again was guidance. As usual lately the guidance going forward was tepid. It is unlikely any company can escape the negativity right now. The crux is that the E in the P/E ratio is open to interpretation and is not very reliable right now.

This is great news for me as i'm short right now. As always the difficult part for me is to switch over to a more bullish tone when necessary. I'm starting to think that some of these stocks are really getting cheap, even if you whack off 20% in future earnings. The problem with bear markets is that you can never tell how far down we will go.

So i will look to the charts to show the way. If we hold the recent lows we could setup for a nice double bottom which could lead us into a steady increase in stocks over the next few months. This sounds counterintuitive, as we will still be in or just entering a recession, but it is just too easy right now to just short any stock before they report and make a chunk of money. This game will get played out soon.

As far as all the old and new horsemen? I think they all are dead.
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I can only hope more people ... walk away

More stories of people walking away from their homes are making it around the news these days. My first reaction was that wow these people are irresponsible. Many of them knew exactly what they were getting into when they signed on the dotted line, but now that the house is going down in value they are walking away, even if they can afford the payments. The people i am talking about are generally not sub prime because they otherwise have good credit and as i said, they can afford the payments. In these cases they choose to not pay.

There is a pro and a con to this situation. On the one side the fact that these people walk away is a good thing. Look the fact is that for them to stay they will basically have to dip into or in many cases wipe out any meager retirement savings they have. This will just create the next big disaster when all these people reach retirement age and can no longer work, but have no money saved because they tried to save their house. There already are cases of this. Since your house is a liability and not an asset, giving up the few assets you have to save a liability is a recipe for disaster sure to be followed by a steady diet of dog food come retirement time.

The bad thing about this situation is that the investors must be pissed. Look if i bought a mortgage security with the understanding the rate was going up and it was low risk because it was "independently" rated AAA, how do you think i feel if you freeze my rate or the borrower just walks away even if they can pay? Furthermore how do i feel if you prevent me from foreclosing to try to recover my losses?

See what the dumb dumbs running the show are not telling you is that the last few years of the real estate boom were a lie. They were fabricated out of really easy lending standards and cheap money coming from foreign investors. Could you have had the boom without these foreign investors buying these securities? The answer is clearly no! So what do you think is going to happen when you try to go to all these investors that you are screwing over for more money? I'm sure you will get the middle finger.

The point is that the credit bubble is not going to be fixed anytime soon. The investor side of the equation is such that they will not lend again soon. I imagine many dumb pundits on cnbc would give some lame excuse why this is not so, but remember they are just plain liers. Even if they do start loaning again they must charge much more to cover

1. extra risk due to possiblity of the government freezing rates or changing the terms of the loan agreement after the fact.
2. extra risk due to the new acceptance of walking away
3. extra risk to cover legal costs to make sure you have actually recorded title correctly
4. extra risk due to lack of available 3rd party insurures.

Inspite of the negatives of people walking away i view it as a good thing in the long run for the country as a whole. The reason is that it highlights an acceptance of a misstake and a willingness to move on past it. Trying to hang on to a home that is depreciating even if your rate is frozen makes no sense. The home is not magically going to be worth more 5 years from now.

One interesting note the rate freeze proposals. Think about number 1 above. One of the key benefits of doing business with and in the US has always been our stable legal system. The rate freeze just wipes out one of the benefits of doing business in the US and makes it a liability. If you think about it how can you make an investment here if the government can come in after the fact and just invalidate your legal contract? The answer is you can't do business here. I think this under reported fact will effect our economy for decades to come

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