A boating analogy

Andrew Lo, a professor at MIT, is that rare individual who is, at the same time, a big time trader, a technical analyst and a top academic researcher. Pretty much anything he says about the financial markets is of value but I have singled out this little gem from a NYT article:
“Now that we have so many boats in the harbor, you can’t whiz by at 50 knots without rocking a few boats. In the middle of the ocean, your wake has no impact, but in a crowded harbor, a fast exit can cause quite a disruption.”
You can guess what he is talking about, namely what happens when too many hedge funds using the same strategy panic and/or need to get out of their positions all at once.

If we must stay with the boating analogy and I am by no means a boating expert, I would say the solution to this problem would be to either leave the crowded harbor and find a new, isolated part of the wide ocean (i.e. find a new strategy out of the infinite universe of profitable trading strategies, no limit there but the human imagination) or lower your speed big time and be very very mindful of what the other boats are doing (de-leverage and improve your risk management). Both solutions can be implemented in parallel. However, finding a new winning strategy requires creative thinking, even contrarian thinking, something big institutionalized funds will have trouble with, leaving opportunities to new (or not so new but reinvigorated by the new found volatility), smaller and more nimble operators.

GOOG update (2)

Decisive.

GOOG update: up and running?

In a previous entry titled GOOG trouble written the day after Google's somewhat stunning earnings miss on July 20th, I had noted that the ratio GOOG divided by SPY (in other words Google relative to the S&P 500) always seemed to stall at a certain value (incidentally around 3.5).

Well, it appears that resistance was overcome today as you can see in the first chart.

Obviously, this level must hold in the next few days for it to be meaningful but should it hold, I believe GOOG will make new highs between now and the next earnings report. It would also be positive for the market as a whole, Google being a market leader and all. Now, if this scenario plays out as scripted, I would suggest getting rid of all longs or hedging a big portion of them....before earnings. Just in case. Once bitten, twice shy.

On a different note, I've been reading Greenspan's book and I must say I'm pleasantly surprised. I expected bland, close to the vest Fed speak. What I got so far (I'm half-way through) is introspective, penetrating analysis in eminently readable English. A few annoying self-congratulations here and there but hey, he's Alan Greenspan.

Since we're at it, here's another point and figure chart. This one is the chart for USO, the oil ETF. It too just gave a buy signal topping 60. As you can see there is much room to run before we even get close to the all-time high at 74.6. I'd say 65 would make as good an initial target/resistance as any.

Some traders dislike USO because it underperforms the price of oil and is therefore a poor proxy. It very likely has a design flaw as shown by the fact that oil is indeed making new all-time highs while USO isn't. Having said that, if we forget for a moment that USO is related to the price of oil and analyze it as we would any other stock, the fact remains that it is a good long.

Ebullient bullion

It's not often that I post a point and figure chart but passing this one up would be akin to criminal negligence.
Depicted here is the chart for GLD, the gold ETF.
As you can see, it has, after failing many times, overtaken its resistance at 68. Now don't forget that in point and figure charting, closing prices don't matter, only highs and lows do. So all that matters is that GLD traded above 69 today even if it closes below 69 (which looks like it will, as of this writing).
That is a very bullish development and gives very good odds that GLD will soon make new highs above 72.26.
Gold is said to go up when inflation threatens. With all the market turmoil, central banks around the world have to either stop raising rates or lower them, and this despite the fact that inflation measures are still in overheating mode. No wonder GLD is feeling the heat. It could be melting up soon. Keep an eye on it.