Market Margin Call Redux and You May Call me a Fruit Loop

Well, Friday was quite a day in the market. Note that the indices fell off precipitously around 2 p.m. You'll see that happen from time to time. Margin calls (they start at 2) get made at that time. From the leverage stats, there are many leveraged players. If you have a brokerage (non retirement) account with margin, in general they will allow you to leverage double that. If you are tapped as a "day trader" which happens if you make x purchase/sells of the same security over a period of time (sorry, too lazy to look up the rules), then you get 4x margin that has to be closed every day. Here's what D. Willoughby of Barron's says this week about margin debt:

EVEN AFTER A RECENT DROP, margin debt remains within spitting distance of the all-time high it hit in July, and 43% higher than it was a year ago. It's become a source of concern to some investors who worry that it makes the stock market more vulnerable to a nasty tumble, particularly if equities' resurgence continues.

"High margin debts show the effect of over-leveraging and mispricing of risk in our financial system," says Scott Schermerhorn, chief investment officer for Choate Advisors, which runs about $2.7 billion. "It indicates that, despite the August runoff, there's still more problems out there. This will take a long time to work through the system."

So if you are heavily margined--let's say that you are betting that because it is the anniversary of Black Monday (and I'm sure LOTS of folks are still worried about that over this weekend as Monday comes around)--and the market continues to slide, then your positions decline to a point where you are forced to sell to keep the margin ratios.

Regarding margin accounts: They have a negative connotation, but if you do not have a margin account in a non-qualified (retirement) account, you might consider getting one. Why? Because if you restrict yourself to only cash transactions, you may be in a position that you cannot exit because the transaction has not cleared. It's flexibility. And, it doesn't mean that you have to use the 2x leverage, merely that you can be nimble to trade out of a position if and when it is called for. Violating your cash trade requirements can result in your brokerage firm freezing your account for 90 days. Your broker would be happy to help you with this.

Yesterday I did only a few things. All of them with green attached to them. Modest green, but green. I shorted GRMN at 115.556--I covered too soon, but it paid a bill or two. I shorted RIMM and covered at exactly the right time. At the time you never know what the stock is going to do, and I'm happy to scalp smaller green than accept bigger red.

I did close out my NOV FAST puts on Th. It was early, but one of our posters here reminded me of one of my rules--if I have a 30% or more gain in a put that I have > or = $2K basis in, I take it. I made $1K on a 2K put. FAST has acted strangely. Even yesterday when I expected it to drop like a stone, it showed some mid day strength and then slid. Bird in hand, is a bird in hand. I'm not going to look back and second guess.

SEED: I did reenter this position, though not at the most advantageous price. But this stock is stabilizing, and my basis is essentially my gain from my prior holding: house money. I'm mostly cash now, so I don't feel like I have itch fingers.

Now, you will think me odd for suggesting this next site, but I'm going to do it knowing that some of you will think that I'm a certified Fruit Loop. So be it. The site is Ray Merriman's Market Cycle site. Ray is a Financial Astrologer. Few things are as misrepresented as astrology. My intent is not to try to explain it nor defend it, but rather to introduce you to a psychological resource for your market observer tool kit should you choose to use it. Astrology is about symbolism, psychology and timing--the same sort of things that the market is based on. Do not underestimate to power of symbolism in manifesting behavior. You can find Ray's weekly column here. You can see for yourself if you find any of this of value to you. (I was startled to read one of John Murphy's technical books where he notes that the historical price of wheat fluctuates with great regularity with the lunation (moon) cycles.) Here's what he said last week:

Short-Term Geocosmics

The major planetary cluster in effect was centered on October 11 of last week. It involved the third and final waning square of Jupiter-Uranus (October 9), the Libra new moon and Mercury retrograde station on October 11, and the third and final conjunction of Venus and Saturn on October 13. I would expect that this week’s activity would be a reaction to those signatures that peaked last week (or early this week).

For this week, we note the following geocosmic signatures. The “Sagittarius Factor” (Moon in Sagittarius will take place on Monday and Tuesday, coinciding with Venus sextile to Mars on Tuesday. This is followed by the ingress of both the Sun and Mercury over 0 degrees of Scorpio on October 23, the next week. The Sagittarius Factor has a tendency to produce sharp price swings in some financial and commodity markets, like currencies, T-Notes, and Silver. The Venus-Mars sextile also has a rather reliable correlation to reversals in many financial and commodity markets within an orb of just a couple of days. It is likely going to be related to the October 11 critical reversal date in this instance, +/- 3 trading days.

The ingresses of Sun and Mercury – involving Scorpio – can coincide with a change of sentiment regarding interest rate or debt matters. The concern might about an increased in debt, either national or in regards to the level of personal debt. Perhaps a report comes out about an increase in foreclosures, bankruptcies, and business failures. Perhaps there is more spillover about the sub-prime fiasco of the last few years.

Keep in mind that Mercury is now retrograde through November 1. This is typically a time when technical studies become most unreliable. Support and resistance either do not hold, or fail to be reached as expected. Buy and sell signals are more like “fake-outs,” and markets flip-flop in very short spans of time (compared to usual). Usually we give very few recommendations to position traders during this period. It is better to be a very short-term trader, even day trader, ort stay out of the markets altogether and let others enjoy the confusion of contradictory messages and announcements from economic and political leaders.

Also, we will repeat comments from last week’s column. “Everyone knows about the “October effect,” when stock markets seem to incur a powerful sell-off. Well, the new and full moons of the Libra Sun have the highest correlation to highs from which those declines begin, or lows from which the declines end. This is a new moon week, and it happens on the day Mercury turns retrograde…. between October 8-27, Saturn and the South Node of the Moon will be conjunct. It’s possible that worry becomes heavy, and if prices do continue to decline into the following week, they may continue to do so for several more days. But in all likelihood, these signatures suggest that many declining markets will find a bottom by the end of this month, however sharp the decline is.”

Do not underestimate the power of symbolism on one psyche. The Stock Trader's Almanac is all about cycles and this or that. Like any sort of cycle analysis/divination, it is not always right. I surmise that it is the number of people looking at the cycle or symbolism and what it purportedly manifests that CAUSES the actual event rather than the obverse. Who's to know? I don't, but I do know that myth, symbolism and the stories we create around it are endemic to our being human and is very influential to our behavior whether we acknowledge it or not.

Speaking of myth and symbolism (one of my major reading interests along with comparative religion)--I'm currently reading Myths of the Dog Man by David Gordon White. When I'm done with the book I'll post a bit of it here. I am just beginning to read this book. I picked it up in a used bookstore on the lovely Chincoteague Island where we vacation every now and again. I've had it for a couple of years.

Our book club just finished reading "Spell of the Sensuous", and in our book discussion I remarked how dogs live in two worlds: ours and in nature. I posited that I thought that dogs served as an intermediary to the natural world that with our digitization of our lives we've removed ourselves. I immediately went to my bookshelf and pulled out this book.

For those who enjoy myth and symbolism, and find the case for the canine's presentation in myth--including apocrypha--you will find this book fascinating. I may do an update on this post later when I complete the book, but already I'm totally captivated by this book.