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.
