Friday’s Fickle Finish – We’ll See How Durable the Markets Really Are
by phil - May 24th, 2013 8:19 am
Durable Goods at 8:30.
Other than that, we're just waiting to see what happens next. As you can see from our Big Chart, we're testing resistance lines from both above and below and today we'll get an idea of which way things are trending but, of course, we are still not ready to go bullish as the Russell STILL is not over 1,000 for two consecutive days (or one, for that matter).
That's what's been keeping us cautious and now we have a genuine concern that the Dow may actually fail it's -5% line at 15,200 – that would be a very bearish signal!
The Nikkei, of course, fell 1,000 points in a day after having run up from 9,000 to 12,500 since October, so a 28.5% pullback, while the Dow has gone from 14,500 to 15,500 since late April and we had a 300-point pullback to 15,200 before bouncing. That's 30% of the short run but the long run in the Dow has been from 12,750 in November to 15,500 on Wednesday (thanks to GS's S&P 2,100 call) and that's 2,750 points and 30% of that is also around 1,000 and we sure hope THAT doesn't happen in a day!
The Russell is up 225 since November (see Dave Fry chart), but we had a nice consolidation move in April as they retraced the 175-point move (at the time) a textbook 35 points (20%) from 950 to 915 and now we're at 1,000 and a pullback to 955 would be very healthy before heading higher. Anything less than that and we're still firmly on our bullish track
This morning we took a poke at shorting the Russell in the Futures (/TF) at 980 and they fell to 976.50 but back to 979.50 already so nothing very exciting so far. Oil got beaten up enough ($92.50) that we flipped long on it yesterday and those contracts are currently +$1,000 at $93.50 but it's gasoline we're excited about as we liked /RB long at $2.80 (our Morning Alert to Members) and they are already at $2.81, for a quick $420 per penny per contract and we are expecting a nice run as the NYMEX traders look to screw as many drivers as possible over the holiday weekend.
That's one thing you can count on in this market – the public will…
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Thrilling Thursday – Dip at Last, Thank God Almighty Dip at Last!
by phil - May 23rd, 2013 7:48 am
Wheeeeeee – what great fun!
We finally got a move in the market that wasn't up yesterday and the thrill is back in the markets all of a sudden. Congratulations to anyone who followed our early morning tweet yesterday at 3:24 am, which was:
Futures Fun: Good Chance for Quick Gains Shorting /CL, /NKD and /TF $$ $IWM $USO $EWJ #Futures — bit.ly/YYHM2c
Those Nikkei Futures ended up dropping a cool 1,000 points for a ridiculous $5,000 per contract gain and THIS is why we love the futures as you can usually stop out with a fairly small loss but, once in a while, you can get some spectacular gains.
We're now looking to go long on a possible bounce over the 14,700 line (now 14,665) in the Futures as the 7% panic may be just a bit overdone. Europe was down about 2.5% earlier this morning but seems to be holding that line and the FTSE is "only" down 1.7% – all because the Fed Governors weren't 100% doveish (only about 80% doveish). What a silly, silly market this is.
As you can see from our Big Chart – it's much ado about nothing, so far as this long-needed correction hasn't even violated our 2.5% or 5% lines. We overshot and now we correct – it's the way of the World, my friends. In fact, last Friday, we made our final adjustments to the $25,000 Portfolio and we expected this drop, as you can see from these adjustments to our main hedges:
- QQQ – May $70s now $3.90 can roll straight across to June $70s at $4.15 for .25 credit. We're $5 in the money on the longs and happy to add a $70/75 bull call spread if we have to roll callers up further but, for now, we're locking in profits on the $67/70 spread which is $5 in the money yet priced at $1.50 so – if we end up paying the callers $4 that's -1.65 against the gain of $4 on the longs – we can live with that but, at the moment, the position shows a $1.45 loss on the short calls vs a .51 gain on the longs. This is why you need to understand how the options work over time and not be ruled by current
…
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Which Way Wednesday – Russell 1,000 or Bust!
by phil - May 22nd, 2013 7:41 am
The woods are lovely, dark and deep.
But I have promises to keep,And miles to go before I sleep – Frost
Poetry, that's what we got from the Fed's Bill Dudley and James Bullard yesterday, as they both hinted that – not only is the Fed likely to continue QE for "an extended period of time" – but they may EXPAND IT FURTHER if the economy doesn't turn around in the near future.
That's right, the economy sucks and the Fed knows it, even if "investors" don't. Of course, we're in that bad news is good news thing as the bad news keeps the free money flowing from the Fed and, as I say over and over again – a rising tide of money lifts all Financial Ships BUT, that has nothing at all to do with the underlying Fundamentals of the Global Economy, which continue to sink into the abyss.
Of course (and here's where the above chart becomes useful, the same could have been said in 1921 and 1933 and 1974 and 1987 but not in 1942, when we had that really big war to create so much demand we had to ration stuff! Despite my current caution, once inflation does kick in I have no doubt we will hit 2,100 on the S&P (see yesterday's post) – just not quite yet.
What we have at the moment is a frenzy of anticipation that things will get better but it's always "next quarter" or "after the summer" or "next year" while we ignore the NOW that doesn't look so hot.
That's putting us into a pretty extremely overbought position on the NYSE Summation Index (from Dave Fry) and, as you can see from the last 3 years of our rally – this usually doesn't last very long without a pullback. So, forgive me for being cautions just because we did, in fact, drop 10% from the Oct '12 high and 15% from the March '12 high and 13% from the Nov '11 high and 20% from the June '11 high.
We did not, however, pull back in Oct 2010 or Feb of this year…
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2,100 Tuesday – Goldman Gets Sheeple Ready for Slaughter
by phil - May 21st, 2013 8:10 am
S&P 2,100!
You heard it here first. Well, maybe 2nd as GS's Chief US Equity Strategist, David Kostin, says the U.S. economy will achieve above-trend real GDP growth in 2014, ending a six-year period of economic “stagnation.” And in developed economies, the final year of economic stagnation before GDP growth has been linked to price/earnings multiple expansions averaging 15%. They expect the S&P 500 p/e multiple will continue to rise, reaching 15 times at year-end 2013 and 16 times by the end of 2014.
“We are raising our S&P 500 dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 index will rise by 5% from the current level to 1,750 by year-end 2013, advance by 9% to 1,900 in 2,014, and climb by 10% to 2100 in 2015.”
Goldman's timing is, of course, BRILLIANT, as it is Tuesday and the market has been up 18 Tuesdays in a row, so why stop now? 2,100 at 16x earnings is $131.25 per share so, in general, to be on that trend – we need to see 10% annual earnings increases from here ($110) but, of course, we were at $111.30 in January and earnings estimates have DROPPED to $110.10 as 2 rounds of earnings reports have come in weaker than expected so far – so you need a good supply of fairy dust to get as high as David Kostin.
To be fair to GS, they did call S&P 1,675 and yesterday the S&P was at 1,666 (the mark of the Blankfein!) but, unfortunately, they made that call in Jan of 2008 and were, in fact, off by about 744 points on December 31st of that year – and not in a good way! To be fair, in May of that year, they adjusted to 1,380, so only off 439 but the S&P was at 1,380 in May and, as you can see from the May 2008 Bespoke chart on the left, NOBODY SAW IT COMING – even when "it" was already there.
Oddly enough, on Tuesday, May 20th of 2008, I had a moment that now gives me severe deja vu, saying:
I’ve been growling for quite some time now that I want to see a real breakout before we turn bullish and, unfortunately, we could be in for a textbook reversal as we do
…
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Monday Morning Musings
by phil - May 20th, 2013 8:21 am
Actually, I'm all talked out.
I wrote a very long Macro outlook this weekend so I don't have a lot to add this morning. We've been expecting a pullback and, so far, a pullback has not come. As you can see from Doug Short's chart on the right, the S&P has pulled off a spectacular recovery – getting to 109.2% of it's pre-crash levels in just 5 years, which is better than the Dow did 20 years after the 1929 collapse (despite FDR Stimulus and the Great War) and almost 70% better than the Nikkei has done in the past 23 years.
Adjusted for inflation, the S&P is still DOWN 19.6% from it's 2000 highs so the goal is 2,160 – for those of you who like an even playing field. That would be a very happy 35% over our "Must Hold" line of 1,600 on our Big Chart and that's just a tad shy of that big 38.2% that constitutes a Fibonacci Sequence but (and this is interesting) 23.6% below 2,160 is, TA DA, 1,650.
So here we are at 1,667 and we have our 5% rule telling us that the next significant resistance is 1,680 and Fibonacci has been telling us since 1250 (AD) that we should be looking for 1,650 – not bad for a dead mathematician! If we hold 1,650 and we get over 1,680, then we HAVE to be bullish. IFF the Russell hits 1,000 – we HAVE to be more bullish.
I put up some bullish plays in our weekend post – one is even being added to our new Short-Term Portfolio (CLF) but our first two plays (from Friday's post) were bearish (USO and GME) – as we're still expecting that pullback and those levels have NOT been crossed yet.
I already sent out an Alert to our Members this morning to look at short s on Oil (/CL) at $96 and the Nikkei (/NKD) at 15,400 as we're expecting a poor Chicago Fed report at 8:30 and, of course, the oil contracts are winding down in two days and they still have 50K contracts to get rid of with 331,000 already stuffed into July (331M barrels of fake orders). That puts the odds nicely in favor of shorting oil as nothing blew up over the weekend to support $96 a barrel.…
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Friday – Options Expire Today, Will the Rally Expire Too?
by phil - May 17th, 2013 8:38 am
Reality, reality, wherefore art thou reality?
I like to put up this chart of the Macro Indicators (this one from Zero Hedge) every once in awhile, just to keep us grounded as we play the market at these nose-bleed levels. And yes, I know I sound like a grumpy old bear, the same way I was accused of being a perma-bull 8 months ago, when the S&P had crashed 10%, back to 1,343 and I wrote articles like:
- "Thankless Thursday – Still Waiting for that Stimulus to Kick In" (11/1/12)
- "Two Term Tuesday – Obama Victory Allows 4-year Rally to Continue" (11/6)
- "Fed Up Thursday – WMT and the Fed Fail to Boost the Market" (11/15)
- "Testy Tuesday – Can We Hold Our Weak Bounce Levels?" (11/20)
- "Dividend Investing – Giving Yourself an Automatic Edge" (11/25)
- "Cyber Monday – Record Retail Sales Trump Cliff Concerns, for Now" (11/26)
- "GDPhursday – Fiscal Cliff Progress Good for 200 Points Ahead of GDP" (11/29)
After that, we were off to the races and people finally stopped making fun of me for being so bullish in such an "obviously" declining market. Yes, I was early – that's the problem with reading too much and looking at the Fundamentals – sometimes you see things that seem "obvious" to you but it does take the crowd a while to catch up and, for better or worse, it's the crowd that does the buying and selling.
So now I'm worried and, although I was clear (I thought) at the beginning of the month that we may keep going up until Options Expiration Day (today), or even to the end of May, into the holiday weekend – I've still been branded a perma-bear by readers (not our Members, who know me better) who seem angry that I dare question the market.
Well, I have to dare – it's my job. And I'd love to be a sell-out as bullish market newsletters make more money so we attract less new people when we go bearish but I kind of think it's my job to tell you what I think is going to happen – not just what you want to hear.
As noted yesterday, my plan for the weekend is to do some soul-searching and try to figure out if MORE FREE MONEY will continue to trump the underlying weakness in the Global Economy.…
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Thursday Thoughts – Fed Speak Moves the Markets
by phil - May 16th, 2013 8:45 am
Plosser, Rosengren, Fisher, Raskin & Williams.
All are scheduled to bat today in the Stock Market's Home Run Derby. As I noted on Monday (we like to be prepared at PSW), it's hawk, dove, hawk, dove, dove and Plosser already had his swings this morning, calling for a "wind down" of the Fed's Balance Sheet (which is updated after the markets close today). While inflation may be tame for the time being, Plosser says an acceleration in the velocity of money could change the calculus quickly and leave monetary policy struggling to keep pace. That is, of course, exactly what I said on Sunday morning at our Atlantic City Investor Conference, just a few weeks ago.
While I don't remember Plosser in the audience, I have to compliment the guy on his incisive views, if not his conclusions. Unlike Plosser, I don't think the runaway inflation is undesirable – more like it's inevitable as we not only NEED to inflate our way out of debt but we need to inflate our homeowners into a reasonable retirement and, in order to do that, we need China-like housing inflation of over 100% in 5 years in order to give 110M US homeowners some spending money.
The average American has $40,000 saved for retirement and that is NOT net of debts. 41% of our Labor Force (57M workers) are now 55 or older and, technically, 10 years or less from retirement. If we assume an even spread, then close to 6M people a year are turning 65 and begin qualifying for Social Security and, CLEARLY, they are NOT being replaced at a rate of 500,000 a month by younger workers.
This should not be news to anyone – we've been hearing about "boomers" since they were born in the 50s but now the bulk of the boom, people born between 1954 and 1964 are moving into retirement and the chart below, from the last census report, shows you how dramatic this wave is (and the circled group from this chart is already 49 to 69):
These trends aren't hard to play from a market standpoint. Back in my 2010 Market Outlook (12/27/09) we discussed this exact trend as the easiest macro to bet on for the decade and we discussed IHI at $53 (now $80 – up 51%), ISRG at $300 (now $500, up 66%), MDT at $44…
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One Way Wednesday – Super Market Ignores All Negatives
by phil - May 15th, 2013 7:52 am
OK, now this is getting silly!
Even though I was just on TV yesterday with bullish bets and saying that we may be in the early stages of a mega-rally, this morning I woke up and saw NEGATIVE GDP numbers in France and a 0.1% gain in Germany (vs 0.3% expected) with a revision to their Q4 to -0.7% (from -0.6%) on the heels of their ZEW Investor Confidence Index coming in at just 36.4 (with 40 expected) and JPM and BAC cut their forecast for China's GDP and HBC is cutting 14,000 jobs and IDC cut their IT spending forecast by 10% and Mortgage Applications fell 7.3% and lumber prices are falling along with rebar and rubber and oil.
So, silly me, I concluded it would be a good idea to short the Dow Futures at 15,175 and I put out an early morning Alert to Members at 4:26am and I tweeted it out in case anyone missed it. Well, the Dow did fall – all the way to 15,150 and, while we're not upset about a $125 gain per contract – that was it (but we do have a chance to short them again on the bounce at least). 25 points out of 15,175 is 0.16% – that's how much of a pullback all that bad news hit us for in the Futures after the Dow has popped 500 points in the first 14 days of May (see Dave Fry's NYSE summation chart for overbought status).
This is ridiculous folks! There's obviously no point in watching the news, other than to see which Central Banker is taking a bow. Today it's outgoing BOE Governor Mervyn King, who declared that a U.K. recovery is now “in sight” as he presented his final forecasts with an improved outlook for U.K. economic growth.
“Of most significance today is that there is a welcome change in the economic outlook,” King said as he presented his 89th press conference at the central bank in London. “This hasn’t been a typical recession, and it won’t be a typical recovery.”
Not typical to say the least. Europe is literally in flames, with riots in the streets and 50% youth unemployment likely to…
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To the Moon Tuesday – Driven by Tesla!
by phil - May 14th, 2013 8:34 am
Tesla $300 a share!
Well, not yet, but they are at $93 and up another 6.2% for the day in pre-market trading as Morgan Stanley puts out a note calling them "A Short Seller's Nightmare," which they are, up 177% for the year and up 57% in the last 3 sessions, during which 100% of the float turned over so, in other words, every single person who owned TSLA last Tuesday has had the opportunity to get out at record highs since then. If this is giving you flashbacks to the dot com days – welcome to the club. I picked TSLA as one of my 3 favorite stocks of 2013 but we certainly weren't prepared for this.
In fact, just yesterday, we took a short play on TSLA's rally, buying 5 of the 2015 $85/115 bull call spreads for just $7 in our virtual $25,000 Portfolio and selling 5 of the June $85 calls for $8.60 for a net credit of $1.60. Our logic was that $85 was ridiculous and unsustainable yet up another $10 this morning (yes, it gained $2 more while I'm writing this) means we may need to add more longs already. And what fun it is when you can buy a $30 spread for $7 on a Monday afternoon and, by Tuesday morning, you're already $10 in the money! These are the kind of market-distorting profits I was complaining that we shouldn't be able to make on Friday but, if they keep giving them to us, we'll keep taking them.
We also shorted Elon Musk's other company, SCTY, in our $25,000 Portfolios, as they had also had a ridiculous run-up, probably assuming the TSLA magic would rub off. It didn't, they missed. On that one we took 10 of the tighter October $30/35 bull call spreads for $2.50 and sold 5 of the June $40 calls for $5 for a free play and, as expected, SCTY is down 6% pre-market, mirroring TSLA's up move as they missed, losing more money per share (.41) than expected.
At least that one makes sense and our trade works because the short calls expire worthless and we keep the remaining value on the long spread (maybe $1) for a $1,000(ish) profit. Not too bad. The TSLA trade, on the other hand, becomes problematic if TSLA goes over $115 and, ridiculous…
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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
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