1) Global central bankers are lifting interest rates in unison, and slowly draining global liquidity.
2)
3) Crude oil traders unwound a $15 per barrel Iranian "war premium" after Europe's big-3 signaled a split from the Bush administration's campaign for UN economic sanctions against
4) Weaker crude oil prices triggered a rout in the gold and silver markets.
Gary Dorsch: http://safehaven.com/article-5916.htm
Crude: Accumulate closer to 58-60/ in the next two + week.
A sharp decline from 77 to 61 ---clearly catches the attention of both bull and bears. Given a bearish stance on crude, I am glad to see this decline. I must say as a rational investor this downside action is highly surprising.
Near-term recovery pending as stated last week but clearly buyers are stepping away and selling near-term bounces. At this stage, looking for consolidation with worst case scenario of $58.
One has to look at current levels closer to February 2006 and October 2005 levels to get a clearer long-term perspective.
Again crude did go from 20 – 70 and that move is still intact. I wonder if the summer mid-east conflict was a key contributor to a climbing irrational move closer to$77.
Perhaps, $68 is the key resistance level and $58-60 is an area of interest in the next two weeks.
Net/Net: Next two weeks I would stay away from this trade and find further downside extremes. Then one can step in and accmulate or bail out of a trap.
Further upside move in the markets clearly shown by advancers expanding from 57,318 to 176,522 in CBOE put/call data. Looking for pullbacks this week in tech/retail related themes.
Coming into September, I was looking for further upside move in the VIX - but volatility has been tame in this upside move.
Clearly, the fed speak day will offer further uncertainty and volatility. A decline in VIX from 14-11 is visible in near-term charts.
CHART: Last week clearly tech rally continues exhibited by acceleration in semis. OSX - sluggish performance continues and this inverse correlation is shown in the above charts.
Rotation into tech out of commodity related names.
Decline in crude: a theme which has worked and due for a near-term recovery.
Broadly speaking: Weekly momentum remains positive from deeply oversold levels. Near-term pullbacks pending but how much downside does the anticipated downside move offer?
Rotation out of defensive themes Since the May's correction, defensive themes have outperformed XLG - (top 50) outperformed most groups in the market by recovering 9% since July 18th low. ` further on Large Cap out performance like the Dow Jones + 7% YTD.
In the past few weeks further confirmation of beta related rally. Further showcased by weakening relative strength iin utilities and Consumer Staples.
Searching overdone themes:
Recovery in Tech and Consumer - Along with other severely underperforming sub-groups. (like homebuilders, retailers etc).
Approaching upcoming 'daily sell' might be an an opportunity to reiterate working themes
Given the abundance of attractive charts, perhaps focusing on established leaders with strong relative strength can identify quality names. For example in technology...DRIV, ATML, ASML, MU, AKAM, WEBX, ORCL, CTSH, and VARI.
Plenty of Econ data approaching along with Fed decisions. And the start of earning season can all create shifts in Macro/broad market behavior. Making sectors themes even more significant.
TIVO: continuing on a media theme. Attractive pattern similar to DTV. $6-8 range for many days but a long worth sticking to with an exit at $6. Wheather playing the options market for a tight range in the near-term the bias of an upside move is attractive. Worthwile going long in this range while accumulating on any pullbacks and let the market figure out the rest.
As the NFL season is officially underway; many recognize Direct TV for the Sunday NFL package. Well, chart has built up with a strong relative performance and worth a look in media space.
Breakdown: Break above a multi-year trading range between $14-18. Difficult to find growth especially in small cap. Volume building positively here and despite strong recent price appreciation, - add to pullbacks.
Cable remains a competition but a theme Wall Street neglected and will play catch up to the buyers from earlier this spring.
Net/Net: attractive risk reward on pullbacks closer to 18. - An investment long with an exit around 16.50 with Major support at 14.
“The last time the absolute pricing of implied volatility was as low as this was in 1993, but interest rates were much lower then, 3% instead of 5%. Since options have been listed, I don't think there's ever been this kind of opportunity on a relative basis between option pricing and interest rates. The bear market was a long time ago -- four years ago -- and the market hasn't had a 10% decline in over three years, and people have gotten a little lazy and forgotten what it's like to have a downturn” – Barrons article.
Unlike stocks, options have an expiration date. Unless a company goes bankrupt or buys back all its stock, the stock investor always has the choice to wait for a price correction. Sometimes that wait represents the triumph of hope over experience, but more on that elsewhere.
That expiration date makes calculating an option’s value more complicated, but also more accessible to some of the powerful statistical tools developed over the last few decades.
Two of the more common methods for evaluating options involve measuring their intrinsic value and their time value.
The ‘intrinsic value’ is the amount by which the option’s strike price is ‘in-the-money’. Strike price is the contractually set price at which the underlying asset would be bought or sold, if the option were exercised. ‘In-the-money’ means the strike price is lower (for a call option) and higher (for a put option) than the current market price.
For call options: IV = Asset Market Price – Call Strike Price
Since options have an expiration date, but are purchased on some prior date their value changes as the expiration date nears. That change in time results in a decay of the value of the option as a trading instrument.
An option with two days remaining is generally worth less than one that gives the investor three months to act. At expiration the option is either in-the-money, in which case profits are possible, or it’s out-of-the-money and the investor incurs a potential loss.
Time value is the amount by which the price of an option exceeds its intrinsic value.
For call options: TV = Call Premium – Intrinsic Value
[For put options:
IV = Put Strike Price – Asset Market Price
TV = Put Premium – Intrinsic Value
Note: The ‘premium’ is simply the cost of the call or put.]
For options that are ‘at-the-money’ (strike price = current price), or ‘out-of-the-money’ (strike price higher/lower (call/put) than current market price) the option has no intrinsic worth at that time. It only acquires value in so far as the market price can change, i.e. it has only time value.
For example, suppose MSFT (Microsoft) has a current market price per share of $27 for a June 30 call. The ‘30′ refers to the strike price, not the expiration date. If the premium is $2, the option is out-of-the-money - since: $27 - ($30 + $2) = -$5.
I.e. if you bought the call and exercised it immediately you’d lose five dollars (plus commission costs).
Since, the option has no intrinsic value (negative intrinsic value isn’t allowed), why would anyone execute such a trade?
Because an out-of-the-money is less expensive than one in the money and the further out-of-the money the cheaper it is. There are many trading strategies that utilize this fact as a hedge or for potential profit. Given a three month period, the market price may well rise to more than cover the premium and produce a profit. That’s what makes optionMSTR: Following recent recovery to $90- stock is overbought near-term
A short candidate at $90 exit at 92 closer to the 200 day mva. With reward levels 85, best case 80.
Despite price recovery from summer lows, intermediate-term downtrend in tact along with overbought daily momentum.
WFR: Quarterly recovery in recent trading action: (watch near-term behavior as a pullback name for Q$).
Looking for pullbacks at $33- chasing long trade here not timely, but FUNDI- support case. Q4 attractive set up.
NVDA: Like the intermediate-term but near-term short.
Trade: Short for pullbacks from 26-22.
Investment: Following pullbacks add for Q4 recovery corresponding with positive recent fundamentals.
BGC: a rare working momentum stock that has outperformed the market/sector.
Up over 160% since Q4 2006. (a cable play).
Looking for short here after recent highs of 39.50. (exit point)-
Reward: 50 day at 33.- any disappointment in this name is a valuable short play.
Defined exit of 39.50 helps manage the trade.
RBAK- use weakness to add – an idea for Q4.
Shopping for Q4.
Well, Homebuilders mentioned earlier. A decline in Sep can offer even a bigger recovery.
In the consumer discretionary space, homebuilders are the highest beta space.
Retail: Beaten up summarizes the story in Q2/Q3- but value traps are being set up in areas from stores to restaurants
Deep value search has to be justified with the Macro call. And currently not a timely trading short but a time too look for attempted bottoms or further downside extortion.
Regardless- an area of interest for Q4 rally especially higher beta names.
Credit Related: (Housing related stocks)
Barron’s: An article examining the “overdone” sell-off in housing. I like the discussion but rather wait into Q4. As a bear this sep/early October can be rewarding to short select groups. Although, I agree with waiting for strength in homebuilders give the extreme oversold conditions. Fundamentalists are certainly interested here and given the beta of some names like TOL-a strong recovery can help managers Alpha.
Negative Housing perhaps becoming too fashionable of a story on Wall St.
Homebuilders have corrected since August 2005 and have given up close to 40%+ of their value.
REITS: Mortgage Lenders are vulnerable but a tricky play in finding the right name in the group.
Some brokers have expanded to the mortgage business and remain a question mark.
LEH and BSC- remain shorts to consider on a timely fashion.
I am interested in LEH short in the near-term .
• Did the trade's chart pattern conform to the criteria in our plan?
• Did the market as a whole support the direction of the trade we chose? (Every equity trader should have some clear rules about this in his or her trading plan, with a specific set of market criteria to cross-reference.)
• Were the precise entry requirements fully met, thereby legitimately triggering our participation in the trade? (I can't tell you how many students of mine confess to being overly anticipatory in their trading, entering a whole host of positions that never really triggered.)
• Did we hesitate once the entry requirements were met and then find ourselves chasing the trade?
• Did we use the proper position size for the trade, according to our rules?
• Did we locate our stop loss for the trade in the correct place?
• Did we obey the stop loss? (This is probably the most important issue of all. If we make too many errors in this department, we are bound for an early exit from our trading career.)
• Did we allow our position to fall (rise) all the way to the stop loss, or did we pre-empt it? (While this is not as serious as the issue above, there are traders who constantly eject themselves from perfectly good trades on the slightest hiccup, dramatically changing their overall trading odds.)
• Once the trade started to move in the desired direction, did we implement a trailing stop loss, and if so did we place it correctly?
• Were our targets for the trade chosen with a healthy reward-to-risk ratio in mind?
• Were those targets placed correctly based on support/resistance considerations?
• Did we hold the position all the way until we reached our targets, or did we take profits early?
• Did we add more position size once the trade was underway, either by averaging up or down? If so, was this allowed under our rules?
Dow Jones: Similarity 2002: (Mid-term Election Year)
Amazing discovery in the chart patterns of the last Mid Term Elections.
After peaking in May 2002 and a failed recover in the summer, DJ Index topped on August 17, 2002. A major decline in Q3 02 setting the lows October in a Mid-Term presidential cycle.
Repeat? Easy to conclude from a recent historical observation but never hurts to recognize past performance.
Clearly just stating the similarity in seasonal patterns.
SPX:
Over 50 % of stocks in the S&P 500 Index are highly influenced by the top 50 Mega Cap.
A key detail to recognize when analyzing US markets. Looking at the RSP (S&P equally weighted index) one can observer the down trend
Defensive leadership and shift towards higher liquidity serve as reasonable for explain the S&P strength following a broad market correction on May 2006.
'Pound the table' on these shorts while the market continues its consolidating phase.
Begin to plan ahead for potential rate cuts in the upcoming winter.- An inverse behaviour of long/shorts in current state.
Two questions: Gold as shelter play and value bargains of US retail and technology names.
Soft landing economic expectations can be miscalculated. Truth yet to be realized while overall consensus has stuck to that story.
Overall, bearish view might have been triggered in thoughts of traders/mangers making it actionable.
Geopolitical tension can be an additional contributes to a slowdown in equities.
Finding Misplacing of overbought names is a difficult screen given correction since May. - Since amost groups have corrected
So shorting the weak is the right approach despite the beaten up levels and value trap is worth avoiding especially at this junction of the macro outlook.
Rates sensitive themes continue to struggle as continuation of the FOMC sentiment. Credit worry as long awaited is finally being recognized on wall street.
Downside move Led by homebuilders and mortgage lender weakness. CFC, LEND, TOL etc. Credit related themes continue to be at risk despite the positive analyst consensus on the street.
A great conclusion from Financialsense.com: http://www.financialsense.com/Market/barbera/2006/0808.html
History strongly suggests that while Energy stocks, Utility stocks and Consumer Household Product “Staple” Stocks can be defensive at various times there are a few concepts that stand out. They are:
1. During the course of most bear markets, the end stages of a bear where there is panic, liquidation can take these groups down very harshly causing them to give back a good deal of the defensive gains they may have accrued during the broader equity bear market. In essence, if a bear market continues for too long a period of time, as in the 1973 to 1974 and 2000-2002 bear markets, these stocks have a tendency to give up the ghost and succumb to the selling pressures in the final stages of the bear.
2. If one of these groups is deeply depressed going into a bear market and has for several months or years been out of sync with the broad market (underperforming) there is a good chance it will shine in a down market and live up to its defensive potential.
3. Ultra-tight Fed policy and very high real rates makes it almost impossible for any of these groups to perform well, so at some point, the switch from defensive names to cash is necessary if the Fed appears intent on strangling the economy.
4. None of these groups really holds up well in a crash, with the possible exception of Utility stocks, which in years prior had big dividends. Today, the new equivalent might be the Energy Trusts which frequently sport ultra-high dividend yields as many utilities now only pay mediocre returns.
5. Gold Stocks tend to have the strongest non-correlation to the market but will only hold up and perform well if the price of gold itself is gaining momentum and showing tenacity in the face of whatever economic event is driving the bear market. If Gold rolls over, the Gold Stocks can very quickly turn into a high risk proposition and can very quickly give back accumulated gains.
Watch for names that rallied on decling volume
Indexes appraching resitance level from July highs
Short-term momentum indicators remain overbought.Despite postive indcation from the weekly momentum, not convicend on the sustainablity of the run.
FOMC: Trading Ideas:
Long QQQQ around 2pm/ Short RKH at 3-3:30pm.
Nasdaq too beaten up/ Banks extended : Pair Trade.
10 year Yield: after peaking on jun 28 further declines continue, while next support remains at 4.94.
Gold: 600 supports – appears extended versus other moving averages.
Market View:
Additional noise war speculation on Oil Services but rather watch the 200 day mva—as a support level.
Like this short to be continued but would like to avoid the war noise that can be distracting.
Regardless…watch the OIH closer to 200 day mva of 138
BA: a daily buy on technical signals watch for trading pullbacks before adding to accumulate and build on strength. – News helps the case but a substance trade based on indicators as well.
Deeply oversold near-term, 50 day at 83 as resistance level. Accumulate close to 74 level.
BTU: further short for a quarterly play…extended and quick entry. Exit on shorts.
http://www.pring.com/articles/return.pdf
Basically, Pring argues that the multi-decade peak in optimism that occurred in 2000 has not yet been worked off. He writes: "These types of secular market turning points have always been followed by massive bear markets like the one that developed in 1929, or multi-year trading ranges as witnessed in the 1900/ 1921 and 1966/81 periods."
But Pring does add this caveat: "It's important to understand that while the position of the long-term indicators looks extremely ominous from a primary trend point of view, they have not been confirmed with a negative 12-month moving average crossover by the S&P [500]. And until that happened, assume the primary uptrend is intact."
Pring looks monthly closing prices, and right now he calculates the 12-month moving average will be about 1255 at month's end.
Graham was a value investor. He looked for well-run companies with low-priced stocks. Among his selection criteria:
* The company must not be a financial or technology concern. Graham favored more basic industry-type companies. Followers of Buffett, who know of his aversion to technology companies, now see where that aversion originated.
* The company needs annual revenue of at least $340 million. He wanted the predictability of developed companies, not young, developing ones.
* A current ratio (current assets divided by current liabilities) of 2 or more. This is a measure of liquidity. The more liquid a company is, the less likely it is to get into financial trouble.
* For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). This too is a measure of liquidity.
* Companies must increase their earnings per share by at least 30% over a ten-year period, and EPS must not have been negative for any year within the last five years. These are companies that have proved themselves over time.
* The P/E ratio, based on the greater of the current P/E or the P/E using average earnings over the last three fiscal years, must not exceed 15. Stocks with moderate P/Es are more defensive investments by nature.
* The price-to-book ratio multiplied by the P/E cannot be greater than 22. Graham liked tangible assets, and this is a measure of them balanced against the stock price
