The subprime meltdown hits hedge funds

20070830 News overnight that a London based hedge fund and this morning an Australian hedge fund were hit by losses from exposure to the subprime meltdown in the US. We have been hearing from experts on how subprime mortgages form a SMALL part of the US economy, so the effects will be minimal. Well, it depends on which angle you are seeing it from. If you were the fund manager of these funds or an investor in the hedge funds concerned, then it is a BIG part of the economy. What is important is not the size of the subprime, but the possible effects it has on confidence, either in business or investment circles going forward. Will fears of a slowing global economy hurt expectations and outlook. Equity markets relay on confidence to enable bull markets. markets. One thing is for sure, with all these losses flying around, there is for sure somebody on the other side of the ledger, reaping the rewards.

20070830 0913. FKLI Aug gaps up in reaction to the technology sparked rally on Wall St.

20070829 1715. 30 min chart shows the way.

20070829 1712. FKLI futures breakout had nice follow through to trade at 1265.5 at 5:10 pm.

20070829 1546. Stole this idea from a forex trader. The buy signal is triggered on the MACD turning positive at the same time (within 3 or 4 candles) of the price breaking through the 100 moving average. Let's see how it goes.

20070829 1245. In the morning, we used one of the many free pivot calculators on the web to get the FKLI futures pivots. Having an idea of where the pivot levels lie, provides a framework from which trading plan for the day can be hatched. This will provide the safeguard from falling into the impulse trading mode, where trades are taken based on price movement. Trading in this manner is the way to blow out the trading account with many losses.

2070829 0842. Some FKLI pivot levels to guide trading today. Pivots provide a guide or roadmap to trading chaotic instruments like futures contracts.

20070824 1715. FKLI goes on to a high of 1271.5, but closes down 1264.5.

20070824 1532. FKLI short at 1256 went a few points only in favour. Proper risk management will prevent a big loss for this failed trade. Losing is part of trading, one must be willing to lose to make money. Many stock players will not understand this principle, when trading leveraged instruments like futures contracts. However the afternoon brings the Reverse Trade, whereby one side of the breakout fails, we take the reverse breakout to the upside at 1261.5, which works out, at least to mitigate any losses on the first short trade. For those of you who still think Bursamalaysia is in Malaysia Boleh country, will go its own direction, compare the 5 min FKLI futures with the Hang Seng futures 5 min chart.

20070824 1138. FKLI on 5 min breaks the sell level 1256, so plan B it is.

20070824 1012. The 15 min chart shows the setup, so we might drop down to 5 min chart, to go long at 1261.5, with indicator momentum confirmation. This is the plan anyway. Plan B would be to short downside break.

20070823 1715. FKLI daily with some longer term moving averages. Without a close above these moving averages, It will be difficult to resume bullish conditions of the type we have seen during the first half of 2007.

20070823 1230. At the midday break today this is the dialy chart of the FTSE Bursa 100 index.(>95% correlated with the KL Composite Index) A good chart to be aware of.

20070822 1453 Up to the current time, what was it that can help traders stay on the right side of the trend? If you look at this 5 min chart, with the 100 and 50 simple moving averages, it is clear how we can stay on the long side of the FKLI futures today. Bear in mind that a trend only is valid for the timeframe one is watching, eg 5 min can be up, while daily can be down.

20070822 1245. AJust efore the 10:15 candle closed, my friend Andrew alerted me to the possible setup, asking if one was in the process of setting up. I wasn't paying attention this morning, but on checking the 15 min FKLI futures chart, sure enough it was staring us in the face, with breakout levels of 1226.5 and 1217.5. Prices broke to the upside, retraced (to a low of 1221, but not to 1217.5) and rallied to a high of 1235.5 just before the lunch session break. With proper risk control, one can stay with this trade, and hopefully get some reward.

20070821 1702. KLCI cash index retraces to about halfway of yesterday's range. Participants took a peek at the overhead wall of resistance and the psychological impact took its toll, prompting them to take profits. Charts provide some insight into the market participants' collective psychology, which is why technical analysis is seen sometimes as the tool to riches. Far from it, technical analysis only provides a structure or framework to organise the chaos that occurs in markets. Meanwhile, the rollercoaster wild wild west of the FKLI futures continues, down 20 points in the morning to up 13 points and ends over 30 points down for the day....

20070820 1702. Hang Seng futures closed up +1452 today, with FKLI +58. The daily KLCI chart shows perspective, with a close above the 200 ema. Next challenges along the road is at the 21 ema and 50 ema.

20070820 1600. After a few weeks of being MIA (missing in action) the setup reappears. We might want to revive this setup again as the market gets back to 'normal'.

20070820 0911. Many say this decline is similar to Feb drop in markets due to China. However a look at the 200 ema (for cash KLCI) shows the technical picture for this decline at least is different. Prices pierced the 200 ema now is coming back to test the level, which is resistance. Market may not be out of the woods yet.

20070817 The 60 min FKLI made a reversal on 17 Aug 2007 on the 60 min chart. Was it insiders at work, or was it buyers snapping up cheap stocks at oversold conditions? Later on that night, the Fed announced that it dropped its discount rate by 50 bp. This is the rate by which commercial banks and authorised dealers can borrow money from the Fed on the short term money market. As we all know, that market in the US and Europe had ocmpletely frozen up, with banks fearful of rolling over short term money on an overnight basis. Basically, the leveraged finance market totally shut down with no deals done. Hedge funds and Leveraged buy out kakis, and mortagage originators have some reliance on this means of financing. With redemptions, the hedge funds are stuck without cash, so they just sell whatever assets they have, which leads to the crash this week of equity markets. OOther markets followed eg the carry trade on JPY was unwound, bond prices readjusted. This is the 'repricing of risk' occuring in the marketplace the TV are talking about incessantly. In the big picture, fear drove the selling in markets, and if this leveraged financing market doesn't recover, the markets fuel that has driven the equity market's meteoric rise may not be enough to fuel the recovery to the highs.

Looking at the 60 min chart, we might want to watch the upper channel line as the basis of the next trade.

20070817 1702. KLCI closes below long term weekly trendline.

20070817 1230. KLCI cash chart shows the carnage on the equity market on Bursamalaysia. See the similarity of the chart with the EURJPY forex cross rate. This is an indication of the effect of the carry trade unwinding, which some brilliant persons, like Klaus Wellerschoff of UBS Wealth Management, already foresaw. ( see June 6 post) Taking naked shorts on the highly liquid currency pair, with the added advantage of leverage pays off hansomely.

20070817 0945. FBM100 cash index 90 min chart gives perspective of the prevailing trend.

20070816 1715. Price action for the FKLI on a turbulent day for regional equity markets.

20070816 1230. 60 min chart of the KL Composite Index cash. Sometimes having an idea of 'floor trader pivots' can aid in providing structure to trading.

20070816 1112. KLCI looks extremely oversold, some rebound is expected soon. (it is already up 6 points or so off the lows) The downtrend line is in place.

20070815 1702. The big test in the days ahead for the KLCI. 200 ema support, coupled with the trend channel line, question is: Is there support there?

20070815 1523. Cash KLCI is almost there to the 200 ema. Can it find support there? The adage on Wall St regarding key levels of support and resistance is: "The first test is a fade, the second is a GO"

20070815 1136. KLCI cash market plunges today, joining the global rout. The 200 Exp moving average level might provide the next level of support. As we said before, the focus now is on preservation of capital, and not cowboy trading, unless of course one has the short position to take advantage of the downtrend. The world equity markets (with the exception of China) paints the scenario of the following story. 3 weeks ago, 500 people went into a warehouse and set up boom boxes with plenty of food and drink. So they had a big party. However, unknown to them, there is only one 6 foot door as the exit, and there has been a gas pipe leakage all the time. Now somebody lighted a match and KA BOOM. Everybody is now rushing to the one small exit door and only a few has got out. The rest are still stuck inside the burning building and trying to get out."

20070815 0842. Daily KLCI cash chart gives some perspective as to which side of the market to be NOT on, which is the long side, if you were a positin holder. The beauty of futures is that you can still trade long, on an intraday basis.

What you are getting when investing in the stockmarket?

20070614 Some dodgy transactions involving hanky panky might be what you might get. This transaction brings to question several issues, fair value accounting, true and fair reporting, transparency etc. How is the newly restructured company going to carry this block of share investment in its books? The big question is, why transact the off market deal at 3 times the market price? Since same 'internal' group, just use the market price lah. One make, one lose, net net nothing lor. Little wonder many retail investors are shunning the market.

20070810 1702. A bearish day for the KLCI. The question, now is whether there will be any support going forward, as the global liquidity crunch (short term money markets) continues to stir the hornet's nest. Simple Fibonacci analysis of the weekly chart along wit trend channels may provide the lcues.

20070810 1103. FKLI dialy chart vindicates the decision not to get caught up with the "long term buying opportunity" advocates. In times like this, preservation of capital is more important rather than dream of riches by 'buying stock for the long term'. I went to a seminar organised by a broker "Investment Outlook 2nd Half 2007" two days ago, and the speaker said something like, "election coming, some positives like projects blah blah". But give credit to him, as he said momentum was down and KLCI targets 1240. That is the way sell side research operates, giving opinions for both side of the market, inconclusive in the end, because their purpose is mainly to get clients to churn commissions for the firm.

20070810 The ECB, European Central Bank and FED, BOJ moved to add liquidity to the system respective monetary system. Liquidity is getting tight, could spell the end to the 'liquidity driven bull market in equities'. Bu here in Malaysia there are still cries of "fundamentals are good, more projects to come, election coming, buy cheap stock". Time will tell what happens.

20070709 1715. No 15 min setup today. But with the moving averages providing resistance, FKLI futures trended lower during the afternoon session of trade. Being aware of what is happening on the higher timeframe (daily chart) helps keep one from being on the wrong side of the trade.

Put warrants needed

20070809 1230. If you open up the Call Warrants sector, there is a dearth of call warrants over companies and even over the indices of KLCI and HSI. But there is something striking, there are no put warrants. This show the one way nature of Bursamalaysia.(except for the FKLI futures contract where one can short while the 90% who can only go long lose money, which is the law of the markets) So, trading the FKLI is far superior to stocks.

In this one way (up) market in Bursamalaysia stocks there are only a few ways to make money:

• Insider trading. You are in cohorts or know people in high places or investment banks/corporate advisors, so are privy to inside info, can 'buy on fact, sell on fact'. If you don't believe me, take a look at any stock chart of a stock that had just made a material corporate announcement. See for yourself how the stock has run up way before the announcement to make the news public.
  
• You have 'contacts'. Those who are the runners who spread 'news flow' for the stock operating syndicates. Just hear the tips, buy and HOPE. But in financial markets, when hope comes into the equation....as in right now in the 'correction', you will get screwed in the end when the music stops and you are still holding the box.
  
• You had a wad of money (preferably about RM1m) four years ago, so bought into blue chip stocks. Collect 2.5-3% dividend per year, ride the ups and downs, and now reap the harvest of 60%-70% gain.
• You were a great thinker with a cunning mind, using 'value investing' principles, buy stocks years ago at below their intrinsic value.(you need a team of people to sieve through the thousands of companies around the world to find value, hopefully you got $ to pay their salaries in the meantime), This is a good and safe way to make money, however it can be like watching grass grow, but in the end you will end up with a bountiful harvest in the forest. The returns will look spectacular if you encounter a multi year bull in equities, but will ge screwed once the market goes into downtrend.
  

20070809 0856. FKLI August futures retraces, could be facing resistance at the longer term moving averages. MACD momentum is still pointing down though.

20070808 1715. FKLI futures movement on 15 min chart today. The breakout from the upper level proved to be the good one.

20070808 1117. FKLI looks like breaking out to the upside, might look for longs at 1272, with appropriate stops.

20070806 The media are always behind the eight ball. Sharemarkets worldwide are crashing down from blow off tops and we see such headlines. (6 Aug 2007 Business Times) The analysts might well be right, but most sell side research nowadsys serve only one purpose, to generate commission for their employers. Some would also say as organs for the stock syndicates to get bids the syndicates to unload to unsuspecting retailers. I wouldn't believe them for anything.

20070803 1715. A forgetable week of trading for the setup. Increased volatility, bad executions, lagging quotes, lagging charts, very few setups that worked. Let's hope the market gets back to normal next week. However, many might have got burnt this week from the 'washing machine' volatility. I suspect the locals are the only ones nimble enough to make some good money this week.

20070803 1435. FKLI sets up some levels for the breakout 1302.5 1293.5 (horizontal lines). It is Friday afternoon, let's see if the levels bear fruit today.

20070802 1715. Price ation on FKLI today showed no levels. Been a volatile few days for the FKLI futures contract, with frequent insession price gaps and large moves.

20070801 1715. FKLI futures made a big move to a low of 1275. Makes the short trade from the iitial breakout look pretty good. But it is best to keep perspective. these big moves are not the norm, and occur in times of high volatility.

20070801 1245. FKLI daily chart, as we alluded to earlier, kissed the moving averages yesterday, providing the opportunity to get short. However yesterday was the expiration of the July contract, the August contract closed at 1361. Shorts taken would still do well today. Intraday shorts has nice outcome.(see 15 min chart)

20070801 1120. Breakout levels for today 1344 and 1335.5. Break for the FKLI futures was to the downside.