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Tuesday, August 16, 2022

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Monday Market Movement

Now what?

I wish I knew.  As I said in the Weekly Wrap-Up, we've been stuck in a range – which has been fine for us as 60 of 80 trade ideas from the last 2 weeks were winners and will be more so if we flatline or head south from here, as that's how we've been playing the market.  It's not that we WANT the market to fall, just like your doctor doesn't WANT you to have the flu.  But, when you show up at the office with a sore throat, headache, fever and congestion – he's going to tell you you have the flu and write you a prescription to help you get better.  That's what we do!  We analyze the market symptoms and determine a course of treatment.  We don't need to be bullish or bearish on any given day as it's far, far more satisfying to be right.

In Member chat this morning, we were discussing leap strategies regarding entries on (in this example) KO and we looked at the benefits and pitfalls of trying to establish positions at the top of a big run.  I mentioned that KO is not something I'd be looking at now as they are too near the highs and don't have any particular near-term growth catalyst (and the strong dollar may hurt their earnings, which are more than 50% international). 

In the Wrap-Up you'll see that the kind of long plays we went for were more beaten-down stocks that we still like long-term like SPWRA, VLO, RMBS. WFR, PARD…  Even in a great bull market like this one that may or may not be topping, there are still plenty of bargains to be had and, if we don't see any good ones today, it's still better to wait until earnings and bargain-hunt there rather than buy stocks just because your cash is burning a hole in your pocket (we went to mainly cash the last 2 weeks and many members are getting antsy already).  

Actually, having cash in US Dollars may be an excellent investment at the moment as those dollars could gain 10% as the dollar bounces back.  Commodities have certainly continued to fall over the weekend with gold at $1,141, oil at $74.71, siver back to $18 and copper $3.18 (our watch level was $3.20).   Futures are pretty lame overall, down about 0.3% at 7:30 but we’re still above our levels so don’t get too excited if you are a bear just yet.

        Dow S&P Nasdaq NYSE Russell Trans HSI Nikkei  FTSE  DAX 
Fri Close  10,388  1,105  2,194  7,182  602  1,926  22,324  10,167 5,289  5,785
27.5% Up 10,500 1,127 2,242 7,380 615 2,113 22,421 11,787 5,381 5,894
Recnt High 10,549 1,120 2,190 7,241 625 2,045 23,100 10,397 5,396 5,888
2.5% Down  10,128 1,077 2,139 7,002 587 1,878 21,766 9,913 5,157 5,640
July Base 8,200   880  1,750  5,600  480  1,650  17,500  9,200  4,200  4,600 
25% Up  10,250  1,100 2,187 7,200 600 2,062 21,875 11,500 5,250 5,750
Retrace 9,840 1,056 2,100 6,720 576 1,980 21,000 11,040  5,040 5,520

As I was looking at this chart, I decided to change the normal 2.5% up row (2nd from top) to the more relevant at the moment 27.5% up from the July base series, which is a more accurate reflection of levels that must be taken in order for us to take a move up seriously.  Notice that only the Russell has recently even broken that level in the past few months and they are now one of the indexes closest to failing the 25% line, just behind the NYSE, who already broke down.

As we've been tracking for a month now, the FTSE 5,250 represents a global negative if crossed below while the DAX 5,750 represents a bullish sentiment if held.   The Nikkei is closing the gap that was bothering me on the Dow (and now you can see why those EWJ calls made sense as upside protection) but the Hang Seng failed to hold 22,500 today and bounced just under our upside watch level in afternoon trading but, ultimately, failed as the market there fell 173 points on the day

Banks and the commodity pushers they speculate on have been leading the decliners in Asia and Europe.  The Nikkei got a pass as they are, like us, an import economy but, unlike us, they don't have a big mining and commodity sector to drag them down after leading the market higher like we do.  That's why EWJ was a good play for what we expected to happen – the stronger dollar popping the commodity bubble and causing a general global sell-off.  Keep in mind China's Yuan is pegged to the dollar so Chinese exports get more expensive when the dollar goes up, making Japan even more competitive

Over in Europe, Germany scrambled to pump another $12.5Bn into the economy while parliament was still in session, just a little spending money for the holidays.  One of the big news items holding Europe down today (and it may not do well for our industries either) as expectations mount that the US EPA is about to formally declare carbon dioxide to be a pollutant

An "endangerment" finding by the Environmental Protection Agency could pave the way for the government to require businesses that emit carbon dioxide and five other greenhouse gases to make costly changes in machinery to reduce emissions — even if Congress doesn't pass pending climate-change legislation. EPA action to regulate emissions could affect the U.S. economy more directly, and more quickly, than any global deal inked at this week's Copenhagen conference, where no binding agreement is expected. Electricity generation, transportation and industry represent the three largest sources of U.S. greenhouse-gas emissions.

[Climate]

The spokeswoman said that the EPA is confident the basis for its decision will be "very strong," and that when it is published, "we invite the public to review the extensive scientific analysis informing" the decision.  EPA action would give President Barack Obama something to show leaders from other nations when he attends the Copenhagen conference on Dec. 18 and tries to persuade them that the U.S. is serious about cutting its contribution to global greenhouse-gas emissions.  The vast majority of increased greenhouse-gas emissions is expected to come from developing countries such as China and India, not from rich countries like the U.S. But developing countries have made it clear that their willingness to reduce growth in emissions will depend on what rich countries do first. That puts a geopolitical spotlight on the U.S.

So we're going to be watching our carbon levels as well as watching our market levels to see which way things go.  We have already shorted the Transports last week (IYT) and we're already short the Dow (DIA) so this climate bill may just be the straw that breaks the camel's back this week.   Dubai still isn't off the table and metals and oil can fall hard, especially if we get a short-squeeze going on the dollar, which may become pronounced if we hold 76 today

We are not light on data this week with Consumer Credit today but then we have to wait until Wednesday for Wholesale Inventories followed by the usual Jobs Report on Thursday and Trade Data but Friday is unusually busy with Import/Export Pricing, Michigan Sentiment, Business Inventories and, the Big Kahuna for the week, November Retail Sales, which we already know were not good but that won't stop people from being surprised all over again. 

Volume should be light so anything can happen but we'll be watching copper at the $3.20 line and oil at $75 to see if things are really breaking down from a demand perspective.  As discussed in the Wrap-Up, we went into the weekend still loaded for bear but, if the levels do hold – we're going to have to respect that and we'll add some more upside plays, mainly to cover as we're not flipping until we have clear break-outs. 

We talked a lot about jobs last week and I wanted to leave you with this video, from Mish's great article on real unemployment numbers we carried over the weekend:

 

 

 

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judah, you weren’t confused.  There is no rigid rules on adding the long PUT vertical.  With the market looking toppy, it’s recommended that we have at least 1x of the vertical for every short strangle, especially if you are new to the scheme.  I did a 4x when the VIX was high enough to finance it and still have a positive Theta.  In general, we would have more long PUT verticals when we are more bearish. 

Peter D, Thanks, again. I’m going to start with the Jan SPX short strangle–you gave me target numbers last week.  I’ll probably give myself a little extra cushion on the first one.  I have a lot of cash I’m otherwise not putting to work and I’m too bearish right now to jump into many new positions.

Going to drink…..
Alcohol Cuts Risk for Heart Disease by One Third

CEPH/Phil – they released some data, popped and now the run is over.  I think I noted last week that it was baked into the price so we should cover a bit harder.  I thought you were referring to CEPH at the time, since we were discussing it.

Sheeze, now I am confused.  Celgene you mentioned and the price was baked in (CELG), we talked about Cephalon (CEPH) earlier….whew.

September beef plus beef variety meat exports were down slightly from August, with the January-September cumulative total falling further behind last year’s pace, as beef exports continue to struggle amid market access restrictions and difficult global economic conditions.

Commodities, phooey look at beef prices if we believe there’s a global recovery. People that make money eat dead animals. Cant eat copper.
http://www.dailyfutures.com/livestock/

Hi, Peter D,
I’ve been looking at RUT.  Due to the "35% concentration rule" of PM, I begin to branch out to RUT.  A few questions on RUT versus SPX.
(1) What’s your estimate of margin requirement if a short RUT option all of a sudden becomes really close to ATM?  In comparison, you mentioned $100 (per share) for SPX.
(2) RUT’s options’ bid/ask spreads seem to be narrower than those of SPX.  Is that correct in most of the months?  Can you get filled more easily?
(3) Do you play put spreads on RUT (ala "crazy plays")?  I guess they should provide the same level of protection.  I’m thinking maybe 1 RUT strangle + at least 1 put spread.
(4) Do RUT strangles generate about the same percentage of profits as SPX strangles?
 
BTW, I tried to buy more SPX put spreads today, as IV goes down, and they are cheaper than last week.  But I have a hard time getting filled, even though my offer is at mid-point between bid/ask.  I am wondering if an offer to buy RUT put spreads would be easier to get filled due to their seemingly narrower bid/ask.  I might give it a try tomorrow.
 
One more question: I’m curious what happens if the "35% concentration rule" is triggered?  Is it something you have to scramble to fix within 24 hours (sort of like a margin call)?  I hadn’t pay attention to this rule until I saw your post last Friday.  Thanks for the warning!

I’ve been watching NYX, getting into a range here where it may make for a decent trade

SPX strangle/Judah: I started playing with SPX strangles under Peter’s guidance about 2 months ago.  You are in good hands!
One little suggestion from a 2-month-old strangler: Sell 2 (or some even number), so that later you can apply the PSW rule "if in doubt, close 1/2".

cwan/RUT – good questions.  The answers are as follows.  Have fun!
 
1- The margin is directly proportional to the underlying price.  RUT is at 603 and SPX is at 1103, so RUT margin requirement is 55%-60% of SPX.
2- Yes, the Bid/Ask is much smaller on RUT.  The fills are similar to SPX in my experience.  Both are slow, except the first and last hour.
3- Yes, the RUT are also hedged with the crazy plays.  I wish they have $5 strikes in RUT as $10 strikes are wider than I like, but it works for the crazy plays.
4- The RUT should generate more profit than SPX as the options premium are higher.  However, the wider strikes and higher volatility kinda reduce the profit margin as any adjustment is more "costly" to do.  This is a "soft" point that is hard to explain, but you’ll see it after 6 months.
5- When the 35% rule is triggers, the margin goes up.  If you have enough cash in the account, it’s not a worry.  Otherwise, it’s a normal margin call, which you can trace back to the 35% rule.

Phil:
 
On stocks that you like long term, say BA, how do you manage gains? BA is on a nice move up. Not clear what your rules are for taking profit on stocks you like long-term, or how you decide to cash out.

Really?, why am i surprised…this country is done done done..

China State Construction Engineering Corp, the largest contractor in China, has bagged a subway ventilation project worth about $100 million in New York’s Manhattan area, marking the construction giant’s third order in the United States’ infrastructure space this year.
The contract was given to China Construction American Co, a subsidiary, the Wall Street Journal quoted a source as saying.
"The new project, along with the $410-million Hamilton Bridge project and a $1.7-billion entertainment project it won earlier this year, signals China State Construction’s ambition to tap the American construction market," said Li Zhirui, an industry analyst at First Capital Securities.

In the first three quarters of this year, the Chinese construction giant signed more than $2 billion worth of contracts in the US market. China State Construction was also the contractor for a high school, a railway station and the Chinese embassy in the US.

http://www.chinadaily.com.cn/bizchina/2009-11/24/content_9028469.htm

 
But, while the financial crisis may be growing, Dow Jones reported that Bank of America Corp. bought an additional 8.4 percent stake in China Construction Bank Corp. for $7 billion, so it now holds 19.13 percent of China Construction Bank with an intent to exercise an option to buy more shares in the bank.

http://www.infowars.com/bank-of-america-buys-stake-in-china-construction/

When are Americans going to wake up, its all coming together Mayor Bloomberg

Indeed, excluding Monday’s deals, portfolio managers this year have already snapped up more than $132 billion of dollar-denominated bonds from companies with credit ratings below investment grade, according to data provider Dealogic.
That’s still shy of the record $143.5 billion in 2006, but is nearly three times the $47.7 billion worth of bonds sold in all of 2008.
The market for investment-grade debt has also been strong, setting a record with more than $1 trillion sold this year.

http://online.wsj.com/article/BT-CO-20091207-712175.html
And more firms are expected to take advantage of conditions before buyers turn their attention to 2010.

Ford Motor Credit launched its $750 million 10-year bond with a yield in the area of 8.375%. The latest deal marks the fourth time Ford Credit, which carries a highly speculative triple-C credit rating, has tapped the junk bond market in 2009, having raised $3.85 billion from its three previous forays this year, according to data provider Dealogic.

 
Current coupon agency mortgage-backed securities were flat for the day, but bonds made up of mortgages with higher interest rates were fairing better, according to Kevin Cavin of FTN Financial.
The reason is that prepayment speeds, the speed at which more expensive mortgages are refinanced and taken out of bond pools, were slower.
"Basically it means that even though rates are at an all-time low, the borrowers that are credit impaired just can’t prepay their mortgage, they can’t refinance," Cavin said. "That means there’s less prepayment risk in those higher coupons, so they’re worth more."
The current coupon spread over a blend of 5-year and 10-year Treasurys was flat at 138 basis points.
 

Cwan, Thanks for the suggestion, and I learned from your questions to Peter as well.  Sounds like you are moving from SPX to playing both SPX and RUT for January.  I’ll be a month or two behind you.

My point about BAC, they chose to destroy shareholder value instead

BofA could sell at least part of its stake in China Construction Bank, which it values at around $9.2bn. Barclays Capital analysts noted that BofA would not reduce its stake until 2011 but said the terms could be changed if the US bank agreed to compensate the Chinese state-owned lender. Moreover, BofA has agreed to issue $1.7bn in restricted stock to employees in lieu of cash bonuses this year

Kustomz which part do you think is destroying value?
Assuming the restricted stock vests over a few years, it could be much better for shareholders than paying out cash.
Besides if the debt market is tapped out, why not go for an enormous interest free loan from your employees…..

Kustomz which part is destroying value?
You could argue that over the long haul restricted stock is much better for shareholders than paying out cash.
Besides, why not grab an enormous interest free loan from your employees. It’s gotta be cheaper than issuing debt……

Celgene (CELG) fell today also because it is buying a private biopharma for 340M upfront, and an additional 300M if certain milestones are met.  With this dip and the Revlimid data, I would go long on them.  We should wait for the charts to confirm, b’c for now they show a downward movement.
 
ARIA – for those who bought in many months ago from one of my posts, they are moving up again after a dip to 1.75 (I hope you bought in there).  Their PIIa (proof of concept – POC) drug works to some extent in blood cancers.  They are looking to partner the project, so they should move up to the $3 range again.  I would not chase here, but you could sell the front month 2.5 P for a nice entry tomorrow if they fail.
 
CEPH – one of their mAbs failed in a clinical trial today (for a small market endpoint).  More data for a larger trial in asthma is due next year.  After hours they are moving up, so looks like that gap will be filled.  I would sell the 55 Ps tomorrow at the mid/end of the day to make sure movement is in the right direction.

phil anything we can do about our full covers – don’t really want to short after the drop

Phil:
This is from Friday night, concerning my trying to understand what 55% bearish means to you. My take-away is that if a $50,000 portfolio gains $5,000 (10%) on a 100-pt Dow drop, then you say you’re 10% more bearish than bullish, so 55/45 bearish. Actually the whole portfolio could be in bearish bets that have a beta of -10 (-10% for a 1% market gain). That’s fine. Just trying to understand that this is what you mean. Have I got it?
 
Percents/Chaps – You can have $80,000 in bullish bets and $20,000 in bearish bets and still be 50/50 – it’s all about what the net effect is of a market move on those positions.  So the main thing I look as is what is my net movement on a 100-point Dow move up or down.  If the Dow drops 100 points my portfolio goes up $5,000 on $50,000 worth of positions than I was 10% more bullish than bearish.  Of course that needs to be confirmed by a move 100 points up taking me $5K the other way but, luckily, that happens every other hour in this market.  So I’m not staring at deltas or running massive calculations or setting up spreadsheets – I just want to know what I’m going to make or lose in a big market move.

Phil:
 
And this is from last week, so this shows how to determine how many mattresses you need.
 
In the grand scheme of things in a balanced portfolio, ideally the naked DIA puts make you about 60% bearish and a 1/2 cover makes you 55% bearish and a full cover makes you neutral (to get more bullish than that you can kill the covers entirely or just buy more upside plays).

Phil could you pls clearify for me one thing about nutral condition of portfolio ( when you have time and good mood)
right now my portfolio little bit bearish ( by Beta weighted) and I check Analyze graph of TOS and it is showing that if tomorrow market drop 10% my portfolio will be very bulish by delta ( something like 70/30 bullish),
so by logic to keep portfolio balanced I will need to add bearish positions, but from other point of view I probably need at that time cash out my winning shorts and add to loosing longs ( or add new longs) which make my portfolio even more unbalanced ( more bullish)
so how we should handle this situation?

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