By: Chris Rowe — May 10, 2010
More Greek Bull? Believe it and Get Hammered! Short the Squeeze!
Don't let the European governments play you.
Nothing great has actually happened over there in the last 48 hours, so if you're betting the skies will stay clear now that a bailout has been announced, you might want to reconsider your position.
Remember on September 19, 2008 when the S.E.C. tried to deliver a financial punch in the face to "the evil" short sellers in the U.S. by banning short-selling in 799 bank stocks? The market lost over 25% in 2 weeks, 35% in 2 months, and 45% in 6 months!
~ Pete and RE-Pete are having a race. Pete falls down, who wins?
The European governments are simply manipulating their markets higher, and they are doing so with tax dollars! Markets aren't rallying in celebration of a solution. Instead, the eurozone is simply stepping in front of a big short position and buying tons of Greek bonds (and they're willing to do the same for whoever else needs help in that neighborhood). It's causing short-sellers, who realize there is new demand keeping prices from falling any further, to buy back their short positions, thereby causing a short-squeeze.
For perspective, consider this the opposite of what happened in the winter of 2008-2009. Hedge funds, whose clients requested cash, were forced to dump tons of stock in great companies that they didn't really want to sell. That pushed the prices of those great companies even lower.
Well, in the eurozone, the shorts don't think Greek bonds should advance, nor should the euro, but they're forced to exit their bearish positions ... pushing prices higher. But nothing has really changed in the last two days.
Even the United States (the world's largest economy, which has the largest quota to pay to the IMF) has its tax dollars being used by European governments to bail out Greece and company.
Let's book some bearish profits on the next downfall, just like we did from September to November, 2008!
Don't get me wrong, I'm not saying the same exact thing will definitely happen all over again, but it's certainly very possible. And if it happens, you're gonna profit from it. But at the same time, keep in mind that the U.S. government had been manipulating its equity market higher for over a year quite successfully. Can the eurozone do the same? I doubt it.
Let's remember one more thing: The euro-mess just happens to be the hot story of late. It's not the only thing that can smack this market down. Whether the eurozone bailout is a magical silver bullet or not, the fact is in the U.S., the economy is far from perfect. And now that we've seen a sharp jolt in the market, the bears will likely start to smell the blood.
Last week in my article "Here's How To Profit When The Market Tanks" I talked about using an ETN to play a sharp decline in the market, or an increase in the fear level. Heck, I mentioned it would spike if the market simply stopped being so darn overly complacent.
Today I'll tell you I don't think you've missed the boat!
When the market sold off just 2 days after my article, VXX rallied from the level when I recommended it (about $22.00) to over $31.00 intraday and closed at $26.12. Remember, it spikes when complacency turns into fear. The next time it spikes, I want you to be in it.
It's not like you only had a 20 minute window on Thursday's quick intraday sell off of 1,000 points before the market reversed back up. VXX also rallied over $31.00 the following day (Friday) and even closed at a much higher price ($29.25)!
I'm not writing to toot my own horn (I generally outsource that job - just kidding), but to point out that you shouldn't make the common mistake of thinking this ONLY moves based on an inverse relationship to market movements. In other words, focus on the fact that it pops when people are FEARFUL.
Investors can experience increased fear even when markets are recovering and moving higher, although that wasn't the case this time. Just train yourself to think of this properly, and you'll be cranking out "misery profits" again and again.
I also want to thank "Tim" who left comments last week about the VXX, because he did point out that it doesn't track the movement in the VIX (CBOE Volatility Index) exactly. (Tim, this is in no way sarcastic.) In fact, it tracks the S&P 500 VIX Short-Term Futures Total Return Index. He also added an important link that will take you to a white paper on the security that shows some positives and some drawbacks.
The bottom line is it pops when volatility spikes (when fear spikes).
And while it may not track the VIX exactly (may be up by less or may even be down by more) it makes sense to trade this, as opposed to VIX options, which might barely move up or even move down when the VIX spikes. I don't get hung up on whether or not it tracks the index perfectly -- or even well -- when spikes in volatility mean 40 - 60% spikes in VXX.
My next point was to follow up on VXX based on the recent $1 trillion eurozone bailout, announced on Sunday, and how VXX will be giving you another opportunity to capitalize on stupidity -- er, I mean irrational exuberance. (I always admired how Greenspan masterfully pointed out global stupidity with such class.)
So far the eurozone has been the gang who couldn't shoot straight. I've lost count of how many bull prodding "solutions" and PROPOSED "bailouts" they've announced, but every time, soon after, the bullish sentiment fizzles out fast.
And let's not forget what the term "bail out" means. Depending on the spelling it might mean either getting water out of a boat or jumping out of a plane with a parachute. But to this kid from Queens NYC, it typically referred to someone who needed money to get out of a bad situation, temporarily, until a future time when that someone faced the music (and was sentenced to hard time... or avoided punishment).
Which Will Be the Fate of the Eurozone?
Sure, maybe a bunch of broke countries will be able to lend each other money. Sure. And heck, maybe it DOES make sense for the European Central Bank to literally accept, as collateral for loans, junk-bonds that have seen their default insurance (CDS) go from $5,000 to over $900,000 to insure $10 million of Greek debt for a five-year period. (And that's up from $250,000 in January of this year.)
But to me, that just doesn't sound like a rosy picture.
Quote from The Wall Street Journal: "The ECB said its decision to buy bonds was justified by governments' agreement to greater fiscal discipline, abandoning resistance to asset purchases just days after ECB President Jean-Claude Trichet said the idea had not even been discussed."
These guys seem like they are pulling all night benders (like Paulson, Bernanke, Geithner and the giant bank heads did in 2008) and coming to work, weathered, making decisions while they're about as focused as you would be after that kind of stress.
I don't know folks. This seems eerily similar to when I wrote to you on September 23, 2008, before the crash, talking about not buying into the U.S. bailout sentiment. In the Tycoon Report article titled "Read This BEFORE the Treasury Bailout Plan is Announced!" I told you to sell into it and sit on the sidelines or get bearish. I even showed you a market commentary that members of The Trend Rider literally wrote in suggesting I make an exception and share it with the general public.
On September 19, 2008, the SEC temporarily banned short selling on 799 bank stocks and stocks rallied (were technically forced, or MANIPULATED higher). On September 23, the plan was presented by Henry Paulson and Ben Bernanke to the Senate Banking Committee (who rejected it as unacceptable).
Well, in Greece, on April 28, 2010, the country’s securities regulator banned short selling on the Athens stock exchange. Then on Sunday, we hear about the the $1 trillion package (about 750bn euros). Just like our government wasn't actually in agreement on the details, we just may see the same thing from the eurozone (would that be out of character at this point?).
By the way, the package consists of 440 billion euros in guarantees from euro area states, which is something we are hearing little detail about. The eurozone has been revising and adding to their bailout plans much like the wrangling that went on among members of Congress over the terms and scope of the U.S. bailout. Aren't most of these countries broke?
I only wish I was able to get to you before the euro bailout was announced, because we saw the biggest market gain in over a year. But I have a feeling it's not too late. In fact, you'll probably have an even better chance to take advantage of the insanity.
Hopefully, as you read this, the market is rallying. I would be very careful about playing the bull side here. Because it may be just that -- the "bull" side.
VXX may not track the VIX perfectly, and it may not even track the S&P 500 VIX Short-Term Futures Total Return Index perfectly. But it DID jump about 45% within about 48 hours after I wrote about it. So I really don't care how perfectly it tracks. (VIX options are WAY far from tracking perfectly, and can be dangerous here).
Hey, I'll be the first one to play both sides of the market. I have both bullish and bearish positions on right now. Soon I'll have a more bearish model portfolio, and as the market evolves, I will too. Financial markets are a dangerous place to "stick to your guns". So I strongly recommend you stay tuned and keep reading your daily dose of The Tycoon Report for updates on any changes in stance.
Until next Tuesday -- stay safe, stay hedged, limit your downsides, and don't believe the hype.