It’s the same price pattern I’ve been highlighting for quite some time now, but perhaps now is a good time to define the pattern, show it, and state what it means for traders.
A lot of people are picking up on this pattern – or at least they should. What is it?
So far, every other day, the S&P 500 has tested the key 1,040 level exactly, and each time – including this morning – buyers have rushed in to support the market, causing a sudden up-burst in price immediately following the test.
The pattern can be described as such:
1. Market falls to test 1,040 (usually on a bad economic morning data-point)
2. Surge of buy-orders flood the market
3. Market bounces very sharply
4. Bears rush to the exits, buying-back shares in a short-squeeze
5. Market rallies to the 1,060 level (or beyond)
That’s the short-term pattern that has been in effect since last week that appears to be repeating into this week.
It’s like a cycle – sort of like Groundhog Day (the movie) – where you wake up and the events of the day repeat themselves exactly.
Traders who have caught on to this pattern early may have made a LOT of money this morning as the pattern repeated.
But this isn’t the only time this has happened – let’s take a look back at the two prior tests of 1,040.
Futures drop on the minutes which disclose increased economic weakness, which is sufficient for magical unicorns to push ES right back up.
On the economt:
In the economic forecast prepared for the August FOMC meeting, the staff lowered its projection for the increase in real economic activity during the second half of 2010 but continued to anticipate a moderate strengthening of the expansion in 2011... Real GDP growth was noticeably weaker in the second quarter of 2010 than most had anticipated, and monthly data suggested that the pace of recovery remained sluggish going into the third quarter. Private payrolls and consumer spending had risen less than expected.
On inflation:
The staff’s forecasts for headline and core inflation in 2010 were revised up slightly in response to the higher prices of oil and other commodities and the depreciation of the dollar.
On disinflation:
Participants viewed the risk of deflation as quite small, but a number judged that the risk of further disinflation had increased somewhat despite the stability of longer-run inflation expectations.
While no member saw an appreciable risk of deflation, some judged that the risk of further near-term disinflation had increased somewhat. More broadly, members generally saw both employment and inflation as likely to fall short of levels consistent with the dual mandate for longer than had been anticipated.
On the mortgage roll:
The Manager also noted the staff’s projection that, if mortgage rates were to remain near their levels at the time of the meeting, repayments of principal on the agency MBS held in the SOMA likely would reduce the face value of those holdings by roughly $340 billion from August 2010 through the end of 2011. The level of repayments would be expected to increase further if mortgage rates were to decline from those levels. In addition, about $55 billion of agency debt held in the SOMA portfolio would mature over the same time frame.
The Committee directs the Desk to maintain the total face value of domestic securities held in the System Open Market Account at approximately $2 trillion by reinvesting principal payments from agency debt and agency mortgage-backed securities in
Former TCW Total Return Bond Fund maven Jeff Gundlach, who since December has been running his own money at OakTreet-blessed DoubleLine, has just moved from “overweight” to “small underweight” on Treasurys. The gradual shift out of USTs is in line with the bond manager’s forecast made in June when the 10 Year was 3.1% that yields would drop another 60 bps to 2.5%. Yet the main catalyst for the selling is driven by the inability of the 10 Year to make a new record low, unlike both the 2 and 5 Years, both of which are trading at historical tights, no doubt facilitated by the Fed’s gradual encroachment of ever to the right of the entire yield curve. As Bloomberg reports: “this “divergence in behavior across the yield curve is very significant,” said Gundlach, who oversees $4.8 billion in assets in Los Angeles as chief executive officer of DoubleLine. “So while the fundamentals for low rates remain compelling, the message of the market action suggests that much of these now widely recognized fundamentals are reflected in Treasury bond prices.” We are confident that given enough time, and enough fiat linen printed, the entire curve will eventually be one flat line as the Fed (and Pimco) are now the marginal buyers of any resort in their attempt to make homeownership with zero money down, an interest-free endeavor. After all, you can’t have growth unless the animal spirits are rekindled, and this kind of direct intervention is the only thing the Keynesian acolytes at the Marriner Eccles building know how to do well. So where is Gundlach investing next:”We moved the proceeds from the Treasury sales into a mix of corporate bonds, including our first allocation to below investment grade corporate bonds.” Of course, with even traditional MBS and UST investors now actively gobbling up HY, we are very concerned that when the inevitable flush in the B2/B space occurs, and it always eventually does, there will be no marginal buyers of anything less than IG. But with a market as broken, technically driven and centrally planned as ours, who even pretends to think about what tomorrow may bring…
Yields on 10-year notes were 3.12 percent when Gundlach made his prediction on June 23 during a speech at a Morningstar Inc. conference in Chicago. The
There was a time when Warren Buffett was actually a credible, respected investor, when his views were prescient, and when his every action was not predicated by some supreme hypocrisy merely seeking to perpetuate the ponzi market, and/or praise the status quo which forces his record bet on “endless” American growth to be aligned exclusively with what the Fed does each and every day, i.e., destroy the value of the dollar. Yet 7 short years ago, the very same Warren Buffett wrote a scathing op-ed in which he lamented the decline of the dollar, the surging US trade deficit, and pointed out that any profits he and Berkshire may make courtesy of his then brand new non-US FX longs, “would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar.” Well, the dollar continues to plunge courtesy of QE, and the pain is about to be far more acute once Bernanke really gets involved in the next 3-6 months. And the irony is that on November 10, 2003 Buffett admonished: “A perpetuation of this [dollar decline] will lead to major trouble.” So much for once held ideals. And ironically, the same Buffett who now preaches Keynesian ideals at every opportunity, concluded his letter as follows: “In evaluating business options at Berkshire, my partner, Charles Munger, suggests that we pay close attention to his jocular wish: “All I want to know is where I’m going to die, so I’ll never go there.” Framers of our trade policy should heed this caution—and steer clear of Squanderville.” It is no wonder then that reading between the lines, people tend to forget the brilliant investor that Warren once was, and focus on the two-faced hypocrite that his “assets” have forcefully converted him into.
As Tyler Durdenpointed out the EURCHF fell off of a cliff two hours ago. I think there is a story here worth noting. First let me say that we are no man’s land. Any part of the Swiss cross is a high-risk trade. Be guided accordingly. I doubt that tight stop losses will be executed if the SNB shows it’s hand.
Consider the timing of the collapse of the cross. It kicked off at 10:25. Why? Because “someone” knew that past 4:30 Zurich time the SNB was a no-show for the day. With that risk removed the “someones” sell hard and fast. Without the threat of the SNB the cross quickly corrects. It did it Sunday night in Asia. It did it NY yesterday. And today the cycle is being repeated.
This is a disaster in the making. The SNB has given the “someones” AKA the “market” a free ticket to coin money. The window is now open to trade around the SNB. If the door remains open, the players will continue to operate, the cross will go lower and there will be a crisis.
In September of 1992 George Soros (but really it was Stan Drukenmiller) broke the Bank of England. They made a bundle in the process. After that, the CB’s quietly agreed that they could not hand up winners to the market. By itself, it created a systemic risk. By making it profitable, it insured that there would a continuing “run on the bank” and the chaos that always goes with it.
The SNB has been doing exactly the opposite for nearly eight months. Their losses are FX player’s gains. It is a zero sum game in the short term.
I can’t imagine that this pattern can continue for long. There is no CB that is not watching this closely. They understand that this is a gathering storm. It is even more troubling that it is happening in a very similar fashion with the Yen crosses. The BOJ is just hot air. Like the SNB they are powerless.
If the CB’s want/need to stabilize speculative markets they have only one option. They have to re-establish two way risk. There has to be risks 24/7 that the CB’s will act. The CB’s have to step up and show they mean
As stocks continue to correlate with exactly nothing, and are once again lost in their own HFT dreamworld, which fools Atari in believing the toxic crap it is churning millions of times each second is worth something (and the exchanges gladly continue to pay liquidity rebates for said churn), the capital continues to quietly flow to safety. The EURCHF is now persistently hugging the 1.29 line, which a mere month ago would have sounded like suicide for the SNB, the 2s10s30s is unchanged on the day, as the treasury complex refuses to budge, and lastly, gold, which has surged from $1,234 to almost $1,250, as ever more money is put into safe assets. As usual, stocks (especially the high beta variety) are the last to get the memo. Once they do, the snapback will, as usual, be vicious.
Some interesting observations out of BofA’s Jeffrey Rosenberg this morning, who plots the inverse correlation between the 2 Year yield and the Fed Fund futures implied time until the first Fed tightening. No surprise there, as the correlation is pretty much inverse, with the lower the 2 year yield goes, the further out into the future is the Fed’s expected first tightening episode. Given the recent (expected and confirmed) collapse in the economy, this is no surprise. What is somewhat interesting, however, is plotting the increasing probability of a Republican control of the House versus the Fed’s liquidity mopping expectations. Here, the two correlate almost one to one. This can be interpreted that the longer the economy deteriorates, the greater the revulsion toward the current political regime. Hopefully the consequence of this observation, that the Republicans will endorse a perpetual dovish stance on the Fed, is not true. Although at this point believing that the Fed will ever tighten again before there is a (violent) regime change seems quite naive. Lastly, some very bearish considerations by Rosenberg, who now estimates that the expiration of the Bush tax cuts will have an impact of 2% annualized reduction in household income worth about 1.3% of GDP, and that “such an increase if not reversed could trigger a double-dip recession.” Setting aside the fact that we already are in the dreaded double D, the question of just how much worse the economic reality will get unless there is something done on the tax front, bears consideration by whatever is left of Obama’s economic team.
First, here is BofA’s observation on the 2 Year yield to Fed Fund correlation:
In only three months, expectations for the Fed have shifted from tightening to expansion of Quantitative Easing, reflecting deceleration in the economy and rising deflationary expectations. Correlated to this shift in monetary policy expectations, fiscal policy expectations are similarly shifting, as evidenced by increasing odds of a Republican house. Despite last week’s focus on the next move in monetary policy, fiscal policy shifts – and most notably the expiration of Bush tax cuts – likely hold as great an importance as changes in monetary policy. In the figures below, we highlight two measures of policy expectations.
In Figure 1, “Months to First tightening” is based on Fed Funds futures markets. This
Bachus Hensarling Letter to Schapiro, and Our Comments.
This morning we awaken to find the Bachus/Hensarling August 24th 2010 letter to Mary Schapiro in our inbox, which we include as an attachment for you to read. Ever since the HFT industry formed their own lobbying group in Washington DC a few months back, we have expected a letter like this to surface. We certainly have expected it to surface given the recent anti-HFT media attention post May 6th. Please allow us summarize their letter for you.
“In 2008 markets functioned exceptionally well. High Frequency Trading is beneficial to all. We all benefit from their liquidity. If it goes away we will all suffer. Spreads have never been narrower. Costs of trading have never been lower. There is no evidence that flash order types are bad. Don’t make any changes unless you have more data. Turning back the clock on innovation will do harm. With our bias in mind, please answer in writing to us by September 10th, 2010 the following 15 rhetorical questions.”
Had we told you this letter was written by the HFT lobby, you would have shrugged while commenting that such drivel is what you would expect that lobby to say. Perhaps we all should shrug less, and be more alarmed, that it comes from two congressman up for re-election, and written on the Committee on Financial Services letterhead. Incidentally, you can see who contributed to Representative Bachus so far in 2010 here : Open Secrets Bachus, and you can see who contributed to Representative Hensarling so far in 2010 here: Open Secrets Hensarling.
We understand how politics work in the United States. We know there will always be certain groups that have the ear of certain Congressman. However, let us compare this letter, with its open-ended and one-sided blatant bias with the well thought out letter from Senator Kaufman dated August 5th, where he analyzed our market structure deficiencies and offered up 9 separate potential solutions Kaufman Letter to Schapiro.
The Bachus/Hensarling letter states as fact that the US markets functioned exceptionally well during the financial meltdown of 2008. But did they? Where is the Congressmen’s data to support that claim, aside from comments made by HFT proponents? In addition, their letter wants us all to ignore…
And meanwhile in Europe, things are going from horrendous to abysmal. The EURCHF just touched on a fresh all time record low, as everyone is now funneling their capital, deposits and assets into Zurich, Geneva and Bern. Hungarian debtors are now writing in pain, as is Phillip Hildebrand as the Swiss export industry is one foot in the grave. All those in the market for a new Patek perpetual calendar will have to wait.
I could not help noticing that China’s imports from Japan fell 16.2pc in December. Imports from Taiwan fell 6.2pc. The strong yen strikes again: Honda decides to build a high-performance hybrid Acura in Ohio – instead of its home nation of Japan. The firm’s continued shift in p...
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In an effort to reach the angry mob, CNBC's Rick Santelli goes all Sesame Street on the numbers behind the US Debt Ceiling Rise. Focusing for two minutes on what this practically means for every man, woman, child, and politician, the shouting Chicagoan points out that when the US breaches this new limit then the world's entire population will be on the hook for $2,346 each (and $52,409 per US person).
The Weekly Leading Index (WLI) growth indicator of the Economic Cycle Research Institute (ECRI) posted -6.5 in its latest reading, data through January 20. The latest public data point is a reduced contraction from last week's -7.6 (a slight downward revision from -7.5). This is the highest level (i.e., least negative) since early September. However, the underlying WLI declined fractionally from an adjusted 123.3 to 122.8 (see the third chart below).
Early last December Lakshman Achuthan, the Co-founder of ECRI, spoke with Tom Keene on Bloomberg Television's Surveillance Midday. You can watch the video on the ECRI website here, with bold heading Recession Update. The eight-minute video is well worth watching in its...
Some combination of better made cars, and less Americans able to pay new car prices has conspired to push up the average age of U.S. vehicles to a new record high. Reflecting this sea change, one of the best investment g...
Shares of battered tech company Research in Motion (NASDAQ: RIMM) are seeing much strength during Friday's trading session.
Fairfax Financial Holdings released a 13G filing with the SEC this morning, in which they disclosed a 5.12% stake in Research in Motion.
Currently, shares of Research in motion are up over 4% at $16.85. Over the last year, Research in Motion is down over 72%.
Research In Motion Limited is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. RIM provides platforms and solutions for access to information, including e-mail, voice, instant messaging, short message service.
Top 5 RisersStockRatingAnalysisASBCBUYMany analysts are expecting higher than previously expected long term growth from Associated Bancorp, and its near-term earnings outlook is also improving.CZZSTRONGBUYThe recent earnings history for Cosan Ltd shows significant improvement while projected valuation continues to rise.STLDBUYProjected value continues to rise for Steel Dynamics while long term increases in earnings growth are also becoming more widely expected.PSESTRONGBUYAn increasingly attractive expected long term growth rate and a significantly higher projected valuation from just a fe...
Major markets and major index ETFs corrected slightly today after the stock market’s euphoric party yesterday
Major markets suffered a slight hangover today, as the S&P 500 dropped .57%, the Dow Jones Industrial Average dropped .18%, the NASDAQ dropped .46% and the Russell 2000 Index dropped .34%, after yesterday’s crazy Fed and Tech Sector induced Wall Street Party. The NASDAQ, in particular, partied very hard, so hard in fact that the NASDAQ reached its 11 year record high.
The major market index ETFs were hungover too as the SPDR S&P 500 ETF lowered .51%, the SPDR Dow Jones Industrial ...
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This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).
We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options.
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Here is the virtual portfolio weekend update. Basically a recap of the positions and some notes about the trades. As usual, I'll post the previous week's P&L for comparison. Not the greatest of week in general!
AA Money
Only transaction last week as we bought back the AA Feb 9 puts on Tuesday for close to a 70% profit. The idea is to sell another set of put as soon as we get a chance.
Previous week P&L - $400.00
We lost some ground this week, but we'll keep on selling premium!
FAS Money
We also lost some ground in this virtual portfolio, but we have sold plenty of premium for the coming week. A little correction would go a long way to help! On Wednesday we sold the FAS Feb 72 puts (already good for 50%), on Thursday we added the Jan4 78 calls and on Friday we had to roll the Jan 78 puts to the Jan 80 puts. We were hoping for these ones to expire worthless on Friday, but a late stick killed that hope.
Previous week P&L - $4372.00...
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Here's the latest Stock World Weekly. We discuss the Fed's next move, and it's new policy for more QE-cating. Brief review of Sabrient's trade ideas for 2012 (already doing well) and a few new buy-writes from Phil and Pharmboy. Enjoy! (Feedback appreciated - give some life to the comment section below.)
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Finding new and exciting Biotech companies that target novel mechanisms is like trying to find a needle in a haystack. Sure there are many companies working on cutting edge science, but investing in those companies to reap the rewards of their work is a very dangerous game. More often than not, companies fail because the mechanism does not pan out, the compound(s) do not have pharmacokinetics (get into the body or last very long in the body), or an adverse event happens that knocks years off a development timeline. In addition, the stock can be manipulated by market makers so investors don't know which way is up. I approach investing in biotechs as a long term prospect. I continue to like our current portfolio of biotech companies (join in chat for many of those plays), and we continually add/subtract shares and sell/buy options on ...
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(