According to the recent TIM (Trade Ideas Monitor) report, the TIM Sentiment Index (TSI) decreased 0.3% week over week to 51.06, after decreasing 5.3% from 54.03 to 51.19 one week earlier (see last week's post, and previous post and the youDevise website for additional information on the TIM report). The TSI remained close to the neutral 50 value all week. Nonetheless, for the five trading days ending July 23rd, the number of new long ideas as a percentage of new ideas sent to investment managers did increase to 71.74% from 61.37% one week earlier. To date, longs represent 64.23% of ideas in July and 58.98% this year.

As for individual securities in the U.S. and North America, Phillips-Van Heusen (PVH), Darden Restaurants (DRI), and Potash (POT) were stocks recommended as longs by institutional brokers, while Qualcomm (QCOM), Perrigo (PRGO), and Williams-Sonoma (WSM) were recommended as shorts. The consumer discretionary, consumer staples, and energy sectors had long broker sentiment for the week, while information technology, health care, and utilities had short sentiment.

Tadas Viskanta, editor of the excellent blog Abnormal Returns, has put together a nice summary post (Closing the loop) on the new Covestor Investment Management (CVIM) model introduced by Covestor.com. In addition to providing his uniques perspective, additional comments from myself, Erick Schonfeld at TechCrunch, Zack Miller at New Rules of Investing, and Mebane Faber at World Beta are also provided. Check out the post if you are still interested in learning more about the model (Closing the loop).

Below are some links of interest (at least to me), just in case you missed them. A few have already been posted to Twitter.

• Economic calendar for Friday, July 24th (Briefing.com Economic).
• Earnings calendar for Friday, July 24th (Briefing.com Earnings).

• Wake up, we are in a depression, whether we want to admit it or not. So says bears Eric Sprott and and David Franklin (Infectious Greed).
• A little moderation in emerging market indexes, or anything for that matter, might be in order (Random Roger).
• As a trader, sometimes you just need time to recover from a loss (TraderPsyches).
• Some questions and answers on using Bollinger Bands (VIX and More).
• Ten myths regarding the subprime crisis (Clusterstock).
  
• America runs on small business (Carpe Diem).
• 229 billion reasons to squeeze the market (Zero Hedge) - there is a big supply of Treasuries coming to market next week.
  
• No business pickup for UPS in July (Clusterstock). Profit fell 49% to $445 million (WSJ). The company then forecast Q3 earnings below analyst's views. It would seem that the transportation companies would have to show some real pickup in demand before the economy can finally begin recovering, but the recent UPS guidance was not too encouraging. More in the "lower declines" and "some stabilizing" camp as opposed to "new demand" camp. Of course, that did not stop the market rally on Thursday. The job of halting the market was left to Microsoft.
• Bill Miller's Leg Mason Value Trust fund (LMVTX) is up 20% this year through July 21, with 55% of the fund in technology and financial services, both of which he sees as leaders in the next bull market (WSJ). Impressed? Actually, some are getting tired of hearing about Miller's comeback (Clusterstock).
  
• Warren Buffett's option to buy shares of Goldman Sachs has earned Berkshire about $2 billion on paper, or about a 40% return (Bloomberg). Maybe Buffett is not washed up just yet.
  
• Even with the rally, the AAII weekly sentiment survey still has the bears outnumbering the bulls (42.4% to 37.6%) (Bespoke Investment Group).
• On Thursday, someone made an options transaction involving 720,000 options contracts on the SPDR Trust Series 1 (SPY). The options transaction is one of the largest, and represents half the volume traded on the SPDR fund on a daily basis. The investor appears to have entered a one-by-two put spread using December options with strikes of $95 (bought) and $82 (sold twice). Wow. See post, and original WSJ article.
• Did Matt Taibbi cost Goldman Shareholders $800 million by making it a PR nightmare if they were to cancel half of their warrants? (Clusterstock)
• Breadth at an extreme as the 10-day advance/decline lines for the S&P 500 is well into overbought territory (Bespoke Investment Group).
• New correlation index being offered - CBOE S&P 500 Implied Correlation Index (VIX and More, Daily Options Report). The index uses a tracking basket of the 50 largest components of the SPX as measured by market cap.
• Does the semiconductor leader / laggard strategy have a flaw in logic? (MarketSci Blog)
• The deflation story/case told in pictures (Traders Narrative).

Twenty minutes after the opening bell on Thursday, an investor unwound a bearish spread in August options and entered a similar position in December options (WSJ article). Not really that newsworthy until you find out that the trade involved 720,000 options contracts on the SPDR Trust Series 1 (SPY), representing about half of the volume traded on the SPDR fund on a daily basis. As mentioned by the WSJ:

The investor who pulled the trigger on this trade appears to have set up a bearish "one-by-two put spread" in December options -- buying December $95 "puts," which convey the right to sell the fund, and selling twice as many December $82 puts.

Apparently someone else is also not too impressed with recent revenue and earnings numbers, or at least wants to protect recent gains. See the following links for more information on the bear put spread here, and bear ratio spreads, such as the one-by-two, here. It will be interesting to see how quickly the trades pays off, if at all. Microsoft certainly helped the bears after the bell Thursday.

The graph below illustrates four bad bear markets over the last 80 years (from Doug Short, dshort.com, article), including the great depression (based on the Dow), as well as the 1973 oil crisis, 2000 technology crash, and the current 2008 credit/housing sell-off (each based on the S&P). Note: You should be able to click on each image to make them bigger.

Source: dshort.com

The second graph provides more specific return data for the current market, including the various rallies and sell-offs.

Source: dshort.com

When looking over the graphs and comparing to the current downturn to the 1973 and 2000 crashes, some may conclude that we are approaching the end game of the correction. If on the other hand they were to compare to the 1929 crash (graph below), it might be speculated that we may have another correction in the cards before entering into the long climb back from the abyss. Either way, the market certainly seems to be at an interesting point.

Source: dshort.com

Of course, this type of analysis often assumes some correlation/relation between the bear markets. Where it goes from here, and whether it follows the pattern of one of the other larger bear markets is just about any one's guess (even for most of those who claim to know otherwise). Yet, even without history being a perfect guide, it is interesting to see and learn about how things played out in the past. Regardless of their predictive nature, I recommend that you check out the dshort.com site if you have not already done so. There is a lot of good visual data of historical moves, each of which is easy to understand, interesting to look at, and of course fun to speculate about - even if you are not a technician, or someone who trades on past patterns. Most of the charts are updated daily and weekly.

Below are some links of interest (at least to me), just in case you missed them. Some have already been posted to Twitter. Not sure if I will keep this up daily, or update throughout the day as often.

• Economic calendar for Thursday, July 23rd (Briefing.com Economic).
• Earnings calendar for Thursday, July 23rd (Briefing.com Earnings).

• S&P 1500 most volatile stocks (Bespoke Investment Group).
• President Obama is proposing a new transaction fee for "far-out transactions," also known as derivatives, no doubt (WSJ). Of course, I guess this also includes any other thing that financial engineers can come up with. Less resulting risk, maybe. Less innovation, probably.
  
• Foreclosure activity by region (The Big Picture). California, Florida, and Nevada account for half of all foreclosure activity, with California roughly twice Florida's foreclosure level. And we wonder why the Terminator and his state are having problems.
• Speaking of California, Occidental Petroleum (OXY) discovered 150-250 million barrels of oil and gas in California (WSJ). Lawmakers are already looking for new ways to tax and regulate it - seriously.
  
• The (sorry) state of the M&A Markets (The Pragmatic Capitalist).
• Standard & Poor's adjustments in the way it accounts for certain loss and recovery assumptions is proving unsettling to the Commercial MBS market (WSJ). Some securities were re-rated as AAA days after sharp downgrades (Financial Times). Apparently, the Fed will only finance triple A securities. Whoops.
  
• Is the market exhausted? Check out the Divergence Index, and then you decide (Zero Hedge).
• AIG holds off on planned bonuses ...... for now, avoids pitchforks ...... for now (WSJ).
• That did not stop Morgan Stanley. MS's compensation soars to 72% of revenues (Clusterstock).
• Boeing has found a solution to the technical problem with the Dreamliner that has caused so many delays (WSJ). But you have to wait some more, as the company will provided updates a little later in Q3. Amazing. All kidding aside, the problem may be more serious than originally thought (Seattle Times Newspaper).
• A recent survey finds that investment advisers are predicting that clients will move more assets out of conventional mutual funds into ETFs (WSJ). The moves are being driven by concerns regarding both return performance and transparency. Past revenue-sharing-kick-back concerns probably did not help either.
  
• Edward Jones says no to offering leveraged ETFs (ETF Trends). They must not have been part of the previous survey.
• Some historical returns of the Harvard and Yale endowments, compared to other popular benchmarks, are provided over at World Beta. A bad year for the endowments, but diversification still helped over the long-term.
• Bottom line earnings beat rates are near highs, while top line revenue beat rates not so much (Bespoke Investment Group). How long can you cut costs, and jobs? Eventually the consumer is going to have to step up and buy stuff ... after they get a new job, or feel safe about their current job - may be a long time with a jobless recovery. Unfortunately, we cannot all help out by buying a new Camaro, even if we wanted to (Carpe Diem).
• Is Covestor Investment Management (A VC) the next big thing (Bull Bear Trader)? Basically, the system is designed such that you would have your own account, but could then choose from a number of investment managers that you want to follow. The investment managers could be in the financial industry, or more likely just an average investor like you. If you choose to follow the investment manager, funds in your account are used to mimic the trades of the manager. Check it out (Covestor). It sounds interesting (but there are concerns and questions).
  

There is an interesting post at the A VC blog on a new type of investment approach, called Covestor Investment Management (CV.IM). [Hat tip to all the Twitter tweets that pointed to the link]. The post describes the CV.IM as:

"The world’s first retail Multi Managed account or MMA. With an MMA you can invest directly alongside professional and retail investors, managing their own money in their own account. It is a new category of Investment product that gives you access to expert managers like a hedge fund with the security and transparency of a managed account."

Basically, the system is designed such that you would have your own account, but could then choose from a number of investment managers that you want to follow. The investment managers could be in the financial industry, or more likely just an average investor like you, but possibly with more experience, and with a track record or strategy to your liking. If you choose to follow the investment manager, funds in your account are used to mimic the trades of the manager. In return, the investment manager could get some compensation for sharing his/her data, although they can also continue to share their investment ideas for free.

It seems that such a structure could have some advantages. First, the fee structure is certainly less than a mutual fund or hedge fund for following the free managers, and also much less for even those charging a following fee (listed as $120 per person per manager). The system could also end up offering a number of investment options and strategy choices for free. For aspiring investment managers, there is also the opportunity to "prove yourself" and your strategy, and make a little money in the process.

Nonetheless, there are a number of questions. While the company does have a system in place to report performance, it is not clear how much data is available, or how accurate it will be if trading data/history is introduced for new managers. It is also unclear whether or not the managers could somehow game the system, or receive an unfair advantage by front-running the followers. One of the founders did respond in the post comments section that there will be minimum liquidity restrictions to prevent some abuse, but the managers could still have an initial advantage over new followers. The minimum daily trading volumes of 10,000 shares and $50 million in market cap also seem a little low. It is also worth noting that the managers will most likely be timing their buying and selling based on what is most beneficial to them, and not necessarily your current situation, causing you to possibly incur a commission and/or tax event at an inopportune time. Such a structure could also lose the ability to take advantage of scale with regard to transactions, unless a large number of investors are already following a particular manager (scale advantages are still possible given that most of the funds will be with only a few brokers - so far TD Ameritrade and Interactive Brokers). Nonetheless, new followers would most likely have to pay higher per share fees.

Although there are still numerous questions to be answered, the idea sounds intriguing, and is certainly worth pursuing more. Check out the Covestor website to learn more.

Below are some links of interest (some already posted to Twitter). I may or may not continue with this, given that there are already some good link pages on the web (in particular, Abnormal Returns). Nonetheless, I may at least organize some recent Twitter posts every day or so.

• Today's earnings calendar (Breifing.com).
• Overview of High Frequency Trading (Clusterstock). HFT in C, BAC, and CIT explained (Zero Hedge). Interesting, and scary stuff. Are high-frequency trading and liquidity rebates keeping CIT over $1 per share? (Zero Hedge, The Pragmatic Capitalist).
• Insiders at Smuckers have been exercising options and selling shares at highs for the last two summers (WSJ). Should you?
• Developers Diversified Realty (DDR) to be the first in commercial real estate to use TALF (WSJ). Are alternative investments to follow?
• Who is laughing now? Variable annuities have been one of the better investments over the last decade (WSJ). But they are still boring.
  
• A Bloomberg Global poll has 61% of investors saying the world economy is stable or improving, with almost 75% taking a favorable view of Federal Reserve chairman Bernanke (Bloomberg). So naturally, he is probably toast.
• Is the NYSE Bullish Percent Index approaching lunacy areas? (ES & EC Futures Analysis)
• Calpers in down 23.45% for the fiscal year (WSJ). Now there is some talk about whether governments will need to sure-up various pension funds. But where will the money come from?
• Inverse relationship between price and volume (The Pragmatic Capitalist). Will this summer be different?
• StockCharts.com Charts on the Blog (VIX and More).
• Bull market for emerging markets (Carpe Diem). Topping, or just getting started?
• Do superstition and eclipses matter for the stock market? (Marginal Revolution) Groovy man.
  
• Death and taxes, and the federal budget. Where your money is going (The Big Picture)?
  

The moves in the markets since the March lows, along with the recent winning streaks for the indexes (see Clusterstock article) and various stocks (see Bespoke Investment Group articles here and here), are causing some investors to begin thinking about cashing out and taking some profits. Yet as many investors know, buying is often the easy part, while knowing when to sell can at times be more difficult without some defined metrics and discipline. When things are going good, no one seems to want to jump off the momentum train, even if there could be derailment due to worries about top line revenue growth and earnings that may not be a good as advertised (see articles here, here and here).

So what should you do if you want to stay on the momentum train? One potential strategy is to consider a stock replacement strategy (see WSJ article), allowing you to lock into current profits while still maintaining some future upside in the stock. Replacement strategies are actually fairly simple, at least if you have some familiarity with options. To enter the strategy, you simply sell the stock of the company that has run-up, thereby locking in the gains. You then buy a call option on the stock, thereby giving you the potential to benefit from future upside moves in the stock.

As with any option purchase, you will need to define a strike price and expiration date. Fortunately, implied volatility has come down in in recent months, making the strategy a little more bearable, yet you will need to determine the cost effectiveness of the strategy at current premium levels. As a starting point, Scott Becker, derivatives strategist at Jefferies, suggest options that are at-the-money, with about three months until expiration (see WSJ article). ATM options will allow you to get in the strategy near your stock selling price, while the three months will take you to the beginning of the next earnings cycle, providing a little more information on the market and its reaction to current fiscal and monetary decisions - not to mention give you a little more insight was to whether the consumer finally steps up to the plate, allowing top line revenue numbers to start coming in higher. Others suggest deep-in-the-money options, causing the delta of the option to be near one, providing an exposure and movement that is closer to owning the stock (see Investopedia description).

As always, remember that while the strategy does allow you to offset some risk, and essentially stay in the position, entering any strategy will cause you to incur extra transaction costs and the bid-ask spread, with this strategy also generating a capital gains tax on your initial stock earnings (see Abnormal Returns article). Nonetheless, while no strategy is perfect, stock replacement may be worth considering as the market and your individual securities keep advancing, and corresponding implied volatility decrease.

Daniel Alpert of Westwood Capital and Jerry Webman of Oppenheimer Funds were recently on CNBC discussing the credit markets. Alpert mentioned that while the panic has left the market, and many banks are doing well due to widening credit spreads, the spreads are wide in-part since the assets on which many of the loans are made are still underwater. This gives room for some concern. Alpert also believes that while the recent funding for CIT was a positive, a bankruptcy at CIT is still about 50-50 given that their collateral will be difficult to collect upon. Alpert also still has some worry as to whether there will be enough capital available in the markets and banking system to absorb the level of losses that will still need to be taken.

Source: CNBC Video

Webman was a little more encouraging and believes that it is a positive that private funding was available for CIT. Nonetheless, credit spreads in the investment grade area are still pricing in defaults and poor recoveries at 4-5 times the historical averages, signaling that people are still cautious. Webman did mention one good trend that is showing up - people are breaking apart the "toxic" assets into their good and bad component parts, with the good assets being put back into less toxic and less complicated assets. This is good since banks are trying to become more capital transparent, which will allow them to make more loans of the type that CIT made. This makes a CIT-type of failure less difficult to deal with, and may explain the somewhat muted market reaction. Webman also believes that the latest earnings news is illustrating a gradual rebuilding of economic momentum, and strength in many parts of the financial world. With the current playing field, the big players will continue to be able to make money, even without the extreme levels of leveraged that were observed in the past.

Nouriel Roubini was recently on CNBC (the video is provided below) discussing his views on the economy, and clarifying his recent comments last week that were interpreted as being more positive than earlier in the year. Some comments/observations from the interview include the following:

• Roubini still believes the recession will last 24 months, causing it to be over by the end of this year.
  
• The recovery will be weak, sub-par, and below trend, with 1% growth for a few years.
• The "recovery" will feel like a recession, even if growth is positive.
  
• The unemployment rate will peak around 11% next year.
• Including partial employed/unemployed workers, the unemployment rate is over 16%.
• We have seen the worst, given that the free-fall in the economy is over.
• Nonetheless, even though we will not have an "L" shaped depression, we will also not have a "V" shaped recovery, and he has worries of a "W" shaped double dip recession.
  
• The slow and lower growth are being driven in-part by current debt and spending levels.
• There is a thin line as to when it is best to exit current monetary policy. This also adds risk.
  
• A second stimulus bill is needed by the end of the year (we need to wait until later in the year to let the current stimulus start working).
  
• The second stimulus should include more shovel-ready infrastructure projects.
  
• If the second stimulus is too small, it will not be effective. If it is too large, the bond market will panic. He believes it should be around $200 billion.
• He feels that the U.S. will be the first advanced economy to exit the recession. While China and India are seeing growth already, it will be weak until the G3 recover and start helping to drive their economies.
• Equities, commodities, and credit markets have gone up too far, too fast.
  
• There is possible downside surprise regarding marcoeconomic numbers, earnings, credit shocks.
  
• The risk in the market is still on the downside. Investors should continue to stay away from risky assets.
• The market will not test the lows of March (the levels of which were pricing in depression), but could see a sell-off below current levels and the March lows if his forecast of downward surprises in economic data come true (which he still expects to happen).
  
  Source: CNBC Video