by OptionSage - March 9th, 2008 11:36 pm
Back in college I remember a professor starting a lecture by saying "A good teacher will always start a class by reviewing material covered in the previous class before moving on." That same principle of review holds tremendous value for traders. As tax season rolls around once again, I spent the weekend reviewing each and every position in my virtual portfolio in 2007 and I encourage you to do the same. In fact, I dare you to do so!
While the process is tedious, it is possibly one of the most valuable exercises you can conduct. Although last year was, in many respects, an easy year to profit given so many stocks had enormous bullish runs, you will almost certainly find – as I did – positions that make you want to kick yourself!
So how do you conduct this review process?
Each position should be analyzed from a number of perspectives. The first is the technical perspective. When you examine a position, do so with a technical chart open so you can see how stocks in question trended before you entered positions and how they trended afterwards. The most common result most traders find from this analysis is that too often they entered bullish positions near resistance levels and entered bearish positions near support levels. The result of these actions is typically to end up on the wrong side of trades and take losses time and again. If you find this occured in your trading, stop repeating the same mistake again and again!! To improve we must learn from failure!
Another potential landmine many traders experience is relatively big losses in the months of January, April, July and October. Why might that be? Earnings season takes place in those months. If you take nothing else from this article, remember earnings season can move a stock in ANY direction. You can listen to pure technicians all day long but they won’t help you whatsoever when earnings season comes around because fundamental news events can quickly and substantially derail a technical trend. The lesson to take if you discover this in your review is:
1) Take note of when companies are reporting earnings and
2) Add further hedging during earnings season.
Another factor to consider is losses. If you consider yourself a good trader and good at timing the market but are disappointed that you either lost money or didn’t make more, examine the magnitude of your losses very carefully! …
by Phil Davis - March 9th, 2008 6:02 pm
A big welcome to our new Basic Membership site subscribers, we’re finally on-line!
I’l have a special post up for the new site later but first let’s bury this lousy week quickly and make sure it’s dead. In last week’s wrap up, I headlined it with "misery" and this week was little improvement as the Bush machine, now upgraded with the Bernanke money dispenser, continues to chase our dollar to the bottom of the global currency pile. Still, despite the Fed’s $200Bn money grab announcied on Friday, interventionist talk on the part of friendly Central Banks stalled the dollar’s drop at 73.
As any good pilot knows, recovering from a stall is very tricky, and it’s still a long way to the bottom but when your currency drops 5% in 4 weeks after 11 consecutive down sessions, any day we don’t drop seems like a relief.
There was no relief from the markets, which saw the S&P financials drop 6% and the entire S&P fall 3% and jobs fell by 63,000, the biggest decline since March 2003. In my new role as Mr. Market Sunshine, I will have to point out that March 2003 was the beginning of a massive rally that took the Dow from 7,400 to 10,400 by the end of that year so I find it very amusing when everyone starts drawing comparisons in their doom and gloom outlooks but those people count on the fact that we are not students of market history and can’t be bothered to look things up.
Last week we had good and bad days, this week all the days were bad, with only end of day recoveries that led to bigger drops in every consecutive next day closes. We are back at 11.893 on the Dow, just 259 points above out 1/22 intraday low. We have effectively retested a 7.5% retracement off the 12,800 line that has been pivotal resistance both up and down since last March and I’ve been banking on the 11,900 line to hold, which is right exactly 15% below 14,000, which seemed like a reliable top.
My two probable errors have been miscalculating for the dollar, which I didn’t think would fall below 75 and underestimating the very negative effect adding BAC and CVX to the Dow would have. Unfortunately, as antiquated and useless an indicator as the Dow is, it is still the…
by Option Review - March 7th, 2008 3:28 pm
PFE – It’s a dour day for drugmakers (note our comment on Schering-Plough and the industry ETF below), and with Pfizer lingering 1.4% lower at $21.38 – spackling on its 15% decline for the year to date and just a buck a change above the multi-year low of $20.27 – option traders have put twice as many puts in play as calls in anticipation of druggy doldrums extending into the second half of the year. Even now some analysts are backtalking management’s hesitance to pursue to a major acquisition in order to prop up growth. Today its share price even shrugged off a federal appeals court ruling upholding a patent infringement case against Teva Pharmaceuticals in favor of Pfizer.
Today’s volume also bears out the anticipation of further declines, with what looks like bear put spread activity in the June contract between strikes 17.50 and 22.50 – in this scenario, the trader would sell puts at the 17.50 strike for 20 cents to defray the cost of buying the 22.50 put, which costs about $2.00 today. Further evidence of a downview for Pfizer shares can be seen in the September contract, where more than 10,500 positions in September 17.50 puts were freshly entered for about 50 cents – this premium reflecting only about a 16% chance that Pfizer shares will skid that low heading into September.
HK – Last week, oil and natural gas producer Petrohawk Energy divulged quarterly earnings that far outclipped the market’s expectation – but it’s today that we’re seeing some belatedly bullish follow-through with a 6-fold increase in trading volume as its shares pare back 2.4% to $17.81. Today’s share price move sent call-side premiums sharply lower, but it doesn’t appear to have deterred option traders from putting themselves in the catbird seat for a break of the $19.11 52-week high. Instead, the comedown in call prices looks to have brought out the bargain-hunters in March 20 calls, which are being bought heavily for 20 cents apiece. Interest in the same strike extended into the April and June 20 contracts.
PVH – Calls traded at a three-month high in Philips Van Heusen, the retail brand holding company behind the Calvin Klein and Kenneth Cole apparel labels. With shares down .84% at $32.94, the prevalence of ratio call spreads in the June contract resulted in overall option activity some 39 times the level normally observed. It looks…
by Phil Davis - March 7th, 2008 9:02 am
Are we there yet?
This ride to the bottom is getting a little tiring but I still hang on to a shred of hope, much like Lot, I just need to find 10 righteous analysts to agree with me and we can spare the markets from destruction.
Unfortunately, also like Lot, I read and read and read and I watch CNBC and Bloomberg and (ugh) Fox Financial and I can find not even one righteous analyst to agree with me. This, of course, kind of makes me question my own sanity as the front page of the WSJ On-Line today carries the following (not skipping anything as of 8am):
- Problems Mount for Carlyle
- Housing, Bank Troubles Deepen
- Futures Stall; Payroll in Focus
- Collateral Call Goes Unanswered
- Regulators Push Banks
- Private Labs to Oversee Toy Safety
- Obama Fund-Raising Record
- Japan Nominates New BOJ Chief
- Israel Plans to Continue Talks
- Write-Downs Take a Toll at Fortis
- Ambac Raises Capital to Keep Rating
Is it just me or does anyone else have the impression that Murdoch is short on the markets?
Asia headed for the exits this morning with the Nikkei (down 432) and the Hang Seng (down 841) both taking 3.5% hits. As mentioned in the Journal, BOJ governor Fukui is being replaced by Prime minister Fukuda and he is choosing deputy minister Muto, who hopefully will be confirmed in short order.
Europe is trading off about a point ahead of our open with financials leading the downturn over there but surprising weakness in the miners, often a precursor to falling metal prices, which there is no evidence of so far.
The Fed Announced $100Bn of Term Auction Facilities at 8:15 to inject liquidity into the markets. These are 28-day loans so not a huge deal but it does give the financials a little manoeuvering room and also shows the Fed is on the ball and is working on the problem. Also the announcement indicated the Fed is working with foreign CBs to alleviate the credit crisis but the markets sold off on the news prior to the 8:30 jobs report on the assumption that something must be very wrong for the Fed to jump in like this (probably not the reaction the Fed had hoped for).
8:30 – Feb Non-Farm Payrolls declined 63,000 while wages went up 0.3% so that’s more stagflation. Manufacturing lost 52,000 jobs and…
by Phil Davis - March 6th, 2008 11:34 pm
Well this is now officially bad!
I think I may be the last guy left looking for a bottom here as most analysts are looking for retests of the 1/22 lows and most traders are looking for the exits. As David Fry points out in this S&P chart, investors were just slammed all day long with a "get me out" finish that literally had people screaming.
Yesterday I really felt like the guy in Animal House who stood in front of the crowd saying: "remain calm, all is well" as the crowd ran him over. Much like Supreme Court Justice Potter Stewart’s comment about pornography, I shall not today attempt further to define the kinds of shenanigans I understand to be occurring in the manipulation of the stock market; and perhaps I could never succeed in intelligibly doing so, but I know it when I see it, and I sure saw a lot of it yesterday.
I said to members yesterday afternoon that I couldn’t articulate a bullish position based on these truly AWFUL charts but I also couldn’t find anything I wanted to go short on. If there is nothing to go short on and I don’t want to go to cash, then I guess I’m a bull!
Trader Mike paints a dire picture of the financials with this chart:
This does indeed look terrible as does pretty much every other chart out there but let’s think, just for a second about the undelying premise here. BAC, for example, wrote down $3Bn last quarter – BUT, they earned $14.9Bn in 2007, INCLUDING THE WRITE DOWN! In all of 2003 they made $9Bn and for 2000-2003 BAC made $34.1Bn while in 2004-7 they made $66.5B.
This is not even comparing apples to oranges, this is comparing apples to bananas!
If you want to sell me BAC for the same price it was trading for in 2003 because it had $3Bn, $6Bn, $12Bn in losses based on an event they have hopefully learned a lesson from – FINE, sign me up! The same goes for C ($60.6Bn vs. $66.6Bn as a 4 year total AFTER $16Bn in write-downs), GS ($11.4Bn vs. $30Bn) or pretty much any of the other financial institutions that are under fire. We don’t buy companies based on recent losses, we are supposed to examine companies based on future earnings and the future…
by Option Review - March 6th, 2008 9:39 am
MNST – Job search and recruitment website Monster.com, long a squeaky cog on the buyout rumor wheel, appears to have jump-started the rumor circle again following news of an alliance with iHispano, a website for Hispanic and bilingual professionals. As shares in Monster.com staged an impressive 5% advance in afternoon trading to $27.11, its implied volatility surged 20% to 70%, making it one of the day’s top implied volatility gainers. Option activity gathered pace to more than 8 times the normal level, with heavy buying in March and April calls at the out-of-the-money 30 and 35 strikes. Volume in the April calls was more than double the open interest, as traders gleefully paid 200% higher premiums to lock in share price upside in Monster.com – a share that has traded as high as $50.28 over the past 52 weeks.
NTAP – Options in Network Appliance, the maker of network data storage and information management systems, have been all over the map in recent weeks – witness the events of last Monday, when vague analyst chatter sent overall option volume to 4 times the normal level as traders piled into April 22.50 calls. In the ensuing week, its implied volatility has lurched higher by one-third, and now reads 54%. Today, with shares posting a modest 2% gain to $22.99, traders once again bought heavily into April 22.50 calls at $1.85, combining them with the sale of calls one strike higher at the 25 mark for $0.85. It also appears that volatility plays are in favor in the June contract between strikes 20 and 22.50 – a buyer of this position pays a $4.15 premium (18% of the current share price) in the expectation of a move to the upside past $26.65 or to the downside below $15.85. A seller of this position would take in the premium in anticipation of very rangebound activity between those strike prices, essentially calling the market’s bluff given the very amorphousness of the recent share price appreciation.
HLS – Options in HealthSouth Corp posted 9 times the normal level of volume today on back of a 1% decline in its share price to $15.91. Shares in HealthSouth, which provides inpatient and outpatient rehabilitation services and long-term acute care nationwide, have given up 25% of their value for the year to date, and it looks like option traders aren’t looking for any rehabilitation in its share price…
by Phil Davis - March 6th, 2008 9:10 am
We have a lot to think about today as we need to decide what to do about these crazy markets.
We’ve seen some brief signs of strength but the dollar continues to fall and gold and oil continue to rise and something has to give at some point but that point may not be for another month – it’s almost impossible to call. The problem is that we can’t get a clear picture of what’s really happening in our multi-Trillion dollar housing crisis. Bloomberg writes an article about "Ghost Towns" of empty homes that point to a massive crisis on the same day that Marketwatch tells us "The Foreclosure "Crisis" is Overblown."
My current view on this is that, while we may indeed have an actual crisis on our hands, it is mainly priced into the market at this point although I thought the same about all the fear and terror being priced into oil and I’ve been dead wrong about that (of course it’s the death of the dollar that really pushed us over the edge). What’s not priced into the market is a bomb that blew up in Times Sqare at 3:45 this morning.
Whatever actually happened in NY, this can send a very strong signal overseas that our market confidence is strong if we manage to scratch out a decent day today. Much like I observed in Pakistan last week, an EU analyst will say "Wow, a bomb blew up in Times Square and the US markets shook it right off."
Another thing we need to shake off today is Carlyle Capital and I will look to buy some financials if they sell off on the news that Carlyle failed to meet margin calls on its $21.7Bn virtual portfolio yesterday. How can I say this? Because THIS is what I said about this issue way back on August 28th:
Also in denial is the Carlyle Group, who have agreed to "lend" ANOTHER $100M to Carlyle Capital Corp, "a highly-leveraged fund that has been forced to cancel its dividend and sell assets to meet margin calls less than two months after listing on Euronext Amsterdam." Carlyle Capital already used up the entire $100M they were "lent" LAST WEEK so it will be interesting to see how long this round lasts them. I love the word "lend" because it carries with it the…
by Phil Davis - March 5th, 2008 11:21 pm
I think the stock market is mellowing!
We only went down 500 and up 250 so far this week, that is MUCH less volatile than last week and we are still essentially flatling for the past month. That’s why our Long-Term Virtual Portfolio, which we’ve barely touched, is doing just fine – not touching it has been a brilliant strategy! We sold most of our calls on the 19th and 20th and the Dow is off about 100 points in the 2 1/2 weeks since. Sure it was up 500 at one point and down 350 at another but, today, it’s pretty much back to flat.
We’re certainly not out of the woods yet – after all, we’re in the middle of a recession, but it’s a pretty mild one so far and we had some very encouraging news today from our ISM report, which came in at 49.3, which is contraction but not as much as the 47.3 estimate and much better than last month’s 44.6, the main cause of the big dip we had on 2/5 that send the Dow from 12,600 to 12,200 that day.
Considering oil is up 20% since that date and gold has climbed another 10% and the dollar has dropped over 5% – we’re not doing so bad to be holding 12,200. Someone must be buying something besides oil for our indexes to hold up like this for a month despite the reams of "terrible" news we are subjected to day in and day out.
After 7 weeks of inventory builds we finally had a draw in crude this week as a few refineries came on-line and sucked up 2Mb more than were processed last week. Any reason is a good reason over at the NYMEX and oil finished at $104.52 on a $5 gain for the day after touching $104.95 before stopping. We gave up on the DIG puts we wanted but did switch to the SU $105 puts, hoping this move was a blow-off top and not just a brief rest on the way to $125.
As you can see from this chart, we’ve passed our April 1980 inflation-adjusted high of $103.76 and we did it without even waiting in a single gas line, truly amazing! OPEC did, in fact, keep production levels unchanged with a spare production capacity (NOT a shortage!) of 4 Million barrels a day.
by Phil Davis - March 5th, 2008 9:05 am
There isn’t too much to say about yesterday’s action: Oil went down, the transports went up and we had a rally. As I’ve been saying for a month, it’s up to OPEC to save the market because our own leaders are incapable of handling it themselves. Even Bernanke has now broken with the Administration and is pushing for more aggressive measures to address the housing crisis.
"The current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions," Mr. Bernanke told the Independent Community Bankers of America in Orlando yesterday. With negative equity, which means a home is worth less than its mortgage, "a stressed borrower has less ability…and less financial incentive to try to remain in the home. In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure than reducing the interest rate."
I am very pleased with this as this is part 3 (Invest Back in America) of my 3-part program to end the housing crisis that members sent to hundreds of Congresspeople in January and step by step, point by point, we’ve seen various elements of the plan start to show up in mainstream discussion. Now if only they would adopt my plan (same article) to bring oil back to $60 or less we could have our country back!
Bernanke’s modification of my proposal, having the banks simply take a principal reduction to restore equity, is fine in principle but is very unlikely to be followed universally and a plan as radical as this needs to be pushed on the banks, not dependent on their good charity. Bernanke is an academic and prays that the banks will have the good sense to save themselves before $2.6Tn in mortgage debt falls into negative equity but I’d feel better if we maintain a separation of Church and State and use some good old fashioned legislation .
I’ve even got a good name for my program, it’s called ForecloseShare. ForcloseShare allows homeowners facing foreclosure to opt to force the banks to become co-owners of the equity of their home. This gives the homeowner a principal reduction of 50% and drastically lowers their effective mortgage payments, allowing them to stay in…
by Phil Davis - March 4th, 2008 9:13 pm
We’re getting into a little day trading so I figure it’s a good idea to do the occasional autopsy report on a trade so we can see how everything went.
We started our new Day Trading Virtual Portfolio (DTP) yesterday with $100K, taking the cash from the very boring Bargain Basement Virtual Portfolio and killing the Old $25KP so we could quit while it was still over $45K. This is a very important thing with profits – they are not profits if you don’t take them off the table!
There are rules to day trades: Rule #1 - Always sell into the initial excitement. Rule #2 - When in doubt, sell half. Those should sound familiar. Another big day trading rule is try not to lose more than 10%, 20% at most. You can lose 10% 9 times and one double will get you profitable but if you lose 20% on two trades and just 2 others for 10%, you need 6 10% winners just to get even. That’s a lot of work to make no money!
So we enter day trades with very specific goals. Like yesterday, I took 20 BA Apr $85s for $1.75 in the DTP. Had I thought it was going straight up, I would have played March but I didn’t trust it (and for good reason it seems). Committing $3,500 to this position is 3.5% of the virtual portfolio. I’m usually willing to go to 20% with my day trades as I’m generally only working a few at a time so this one has a long way to run. Today BA went down but so did the market so I just didn’t want to change it today but the call is already down .45. That’s a $1K loss and is about a quarter of the most I want to lose on a full position (20% of $20K out of a $100KP).
At this point we could either walk away or move it. I’ve decided to buy another round at $1.15, today’s low so we’ll hope for a nice low open tomorrow and pick that up. That will lower our basis to $1.45 and, at $1.15 we are down .30, just about 20% but of "just" $7K, which is 1/3 of a full position so we are under our 10% rule. Unless we get some kind of great market rally I’ll be out of this trade even as it already failed it’s mission and it’s…