Testy Tuesday - Have the Markets Become Comfortably Numb?
by Phil - January 19th, 2010 8:08 am
"There is no pain you are receding
A distant ship’s smoke on the horizon.
You are only coming through in waves.
Your lips move but I can’t hear what you’re saying.
When I was a child
I caught a fleeting glimpse
Out of the corner of my eye.
I turned to look but it was gone
I cannot put my finger on it now
The child is grown,
The dream is gone.
but I have become comfortably numb." - Pink Floyd
I have a theory that the markets (and the American people in general) aren’t irrational, they are simply shell-shocked after suffering a very traumatic group financial experience…
To be shell-shocked is to be "mentally confused, upset, or exhausted as a result of excessive stress" and the most common symptoms are: Fatigue, slower reaction times, indecision, disconnection from one’s surroundings, and inability to prioritize - That certainly sounds like our Congress doesn’t it? Combat stress disorder was first diagnosed in WWI, when 10% of the troops were killed and 56% wounded - far worse than had been experienced in previous wars. Our current financial crisis has similarly affected more people than any previous crisis with almost everyone knowing someone who is bankrupt or lost their jobs or homes and almost no one escaped the carnage of the downturn without some financial damage.
Combat fatigue may go a long way to explaining the severe drop-off in volume that has plagued the markets since March, with participation now down to 25% of where we were last January and that leaves us open to the blatant sort of market manipulation that Karl Denninger caught last week as well as the usual nonsense we get daily from HFT programs that drive the market with such precision that we are able to tell how the day is going to go by simply checking our hourly volume targets. Here’s a clip from CNBC where a floor trader discusses market manipulation as a fact of trading (2 mins in).
As Nicholas Santiago points out on In The Money Stocks, "January is usually a very high volume month, yet it has started off the New Year even lighter than the last two months of 2009. Light volume markets are very difficult to short. Hence the old saying, ‘never short a dull market’." Not only is the market volume light, but over 60% of the trading volume is concentrated on 5 stocks: AIG, C, BAC, FNM and FRE!
We have often noted that high-volume (relatively) days almost always tend to be down days and PSW Members can tell you how the…
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Happy Martin Luther King Day!
by Phil - January 18th, 2010 6:41 am
It’s Martin Luther King day so the markets are closed.
I was just reading his "I Have a Dream" speech and it really is amazing when you think of the great social change in this nation that was set in motion by one man with a vision. Here’s a great video of the actual event.
It is a testament to the power and effectiveness of Dr. King’s movement that, even to those of us who were alive at the time, it seems like it must have been another world where a man had to speak out against such injustice as if it wasn’t obvious to the majority of people that segragation, whether by law or by practice, was an outrage.
Sadly, many of the lessons he taught us have already been forgotten, some great quotes:
- Nonviolence is a powerful and just weapon. which cuts without wounding and ennobles the man who wields it. It is a sword that heals.
- Nonviolence means avoiding not only external physical violence but also internal violence of spirit. You not only refuse to shoot a man, but you refuse to hate him.
- It is not enough to say we must not wage war. It is necessary to love peace and sacrifice for it.
- The hope of a secure and livable world lies with disciplined nonconformists who are dedicated to justice, peace and brotherhood.
- Human progress is neither automatic nor inevitable… Every step toward the goal of justice requires sacrifice, suffering, and struggle; the tireless exertions and passionate concern of dedicated individuals.
- Never forget that everything Hitler did in Germany was legal.
- We will remember not the words of our enemies, but the silence of our friends.
- The past is prophetic in that it asserts loudly that wars are poor chisels for carving out peaceful tomorrows.
- A nation or civilization that continues to produce soft-minded men purchases its own spiritual death on the installment plan.
- A nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual doom.
- One of the greatest casualties of the war in Vietnam is the Great Society… shot down on the battlefield of Vietnam.
- Our scientific power has outrun our spiritual power. We have guided missiles and misguided men.
- Rarely do we find men who willingly engage in hard, solid thinking. There is an almost universal quest for easy answers and half-baked solutions. Nothing pains some people more than having to think.
- Take…
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Wild Weekly Wrap Up - Only Halfway Through January!
by Phil - January 16th, 2010 8:29 am
Wheee, what a ride!
The week can be neatly summed up by my 1:35 comment to Members in yesterday’s chat, summed the week up quite nicely as I said: "So funny, a whole week of gains I thought were ridiculous wiped out in 4 hours." Of course it’s easy to laugh when you play the market correctly - as I had said in the morning post, we had cashed out into Thursday’s run up and planned on going bearish through the weekend but it turned out we got our sell-off early, jumping the $100K Portfolio, for example, up 12% in one day - enough to send us back to cash rather than risk a weekend reversal.
We laid the groundwork for this little sell-off in last weekend’s posts as we put up an aggressive Buy List for Members but in my regular weekend post we emphasized the need to cover our buys with "Disaster Hedges" as we were heading to the tops I had predicted when I published the "Last Charts of the Decade," where I set resistance target of Dow 10,457, S&P 1,135, Nasdaq 2,314, NYSE 7,389 and Russell 638. As you can see, I pretty much hit them on the head, other than the Dow but that’s because our year-old 5% rule calculations did not account for the change in the Dow that replaced C and GM with TRV and CVX, who added about 100 Dow points since their inclusion so we started using 10,549 this month and we’ll make it 10,557 for today’s chart, which makes perfect sense looking at this group (I added the Transports as they are fell right off our 2,000 target, giving us the early warning that things were not right):
As you can see, the 5% Rule rules! I will apologize for being such a grump this week but the rally was really starting to annoy me as it was so blatantly forced up through our levels without a proper test that is was really getting me down about the markets. I don’t mind that the markets are manipulated, that’s been going on since markets were invented - it’s stupid and destructive manipulation that bothers me, the kind that, long term, destroys more investor confidence than it builds and squanders capital resources on the "wrong" companies (and now, ETFs!).
In this case, very precious investor capital is being steered into commodities, which is a very poor use of recessionary capital as is inflating the money supply to…
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Freaky Friday - Options Expirations Promise a Wild Ride!
by Phil - January 15th, 2010 8:40 am
As Jesse notes over at Cafe Americain, it’s shenanigans central today.
We are mostly watching the action with a detached interest. As I said to Members in yesterday’s morning Alert: "Tomorrow we have CPI, Business Inventories, Industrial Production, Empire Manufacturing (which was awful last month) and Michigan Sentiment and then the 3-day weekend so cash will be comforting until Tuesday at least!" Yesterday was an excellent day to take the money and run on our bullish positions, even though we did finally make our levels, my final word in that Alert was: "Be very careful today, I still feel like this whole thing can snap on one bad news story."
We did take earnings spreads on JPM and INTC, both of which seem right on target at 7:30 (see this morning’s Alert for adjustments) with INTC giving us the strong numbers we expected and JPM doing well, but not well enough to live up to the hype.
Earnings season is like party time for options traders, especially on expiration week where we can take advantage of low premiums on the things we buy while still selling high, earnings-inflated premiums on the things we want to sell. The INTC trade was taking the Feb $22/23 bull call spread for .27 (a cheap way to make $1) and reducing our basis by selling 1/2 that number of Jan $22.50 calls for .12 (a ridiculous price for a call that was $1.20 out of the money when we made the trade in the morning but we only sold half, just in case!) and also selling the Feb $19 puts for .17. Those we sold the full amount of as we REALLY don’t mind having Intel put to us at net $19.04 as .17 and 1/2 of .12 = .23 off our net .27 purchase of the bull spread so we’re in for a grand net total of .04 with the upside potential of making $1 if INTC makes it to $23 by Feb expirations. Even if we only cash out our Feb spread for .12 (less than half of what we bought it for), that’s still a 200% profit on the net spread! This is why we LOVE earnings season!
Our Trade Idea for JPM was in that same 10:47 Post and in that one I said to Members: "JPM - Great Expectations so I like the $44 puts for .55, selling the Feb $41 puts for .52 on the premise…
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Thursday Thrust - DB says “Ignore the Unemployed Men Behind the Curtain”
by Phil - January 14th, 2010 8:26 am
Great news kids!
Gang of 12 member, DB says "The U.S. economy may grow as much as 6 percent this year, helped by sales of consumer durables and increases in inventories." This forecast is up 50% since last month and double the 2.60 median forecast of the Bloomberg survey. You have to forgive Deutsche Bank, they are not that stupid, it was just their turn to make a moronic bullish statement just like fellow Gang of 12 member, MS made the outrageous forecast that "Metals may gain 32% in 2010" yesterday - these are the kind of things that "THEY" must do to goose the markets over critical levles.
It is an interesting quirk of GDP that inventory builds are counted as a positive, based on the assumption that businesses aren’t stupid and they are only building inventory to satifsy coming demand trends. This is how all this G12 cheerleading can become a self-fulfilling prophesy as business owners are convinced to stock up for demand that never actually materializes. We already know that China has stockpiled an entire year’s consumption of copper and investors and ETFs are stockpiling more copper, as well as gold and platinum at record levels, all in anticipation of the RETURN of demand and now DB tells us that the US will grow almost as fast as China this year (and we all know that China is the Holy Grail of growth).
Of course a 6% jump in the $14Tn US GDP would be $840Bn while China’s projected 9% growth of their $5Tn GDP is "only" $450Bn so IN YOUR FACE CHINA - Deutsche Bank says we’re going to grow out economy at 17% of your puny economy - and don’t even get me started on India, we could have a sale at Sears that would top their GDP!
Of course the holy grail of foolish inventory building is our petroleum industry and we added a whopping 8.85 Million barrels to our already record stockpiles yesterday as demand for crude - just like the actual demand for everything else - fell off a cliff (a huge win for the USO puts I’ve been advocating for a week, by the way). Of course, like many things about this economy, it is worse - far worse, than "THEY" would have you believe. A reading of the actual EIA Weekly Petroleum Status Report shows us that refineries are still operating below their post Katrina/Rita levels (85%) at 81.3% of capacity, Nonetheless, despite producing the…
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Which Way Wednesday - Beige Book Boogie
by Phil - January 13th, 2010 8:07 am
The futures were boogying "all night long."
THIS is why we love being born-again bulls. China’s Hang Seng down 578 points on the Hangs Seng (2.5%) - It doesn’t matter! Shanghai down 3.1% - It doesn’t matter! Europe down half a point - It doesn’t matter! Germany’s economy contracted 5% in 2009, the worst decline since WWII (the big one) - It doesn’t matter! ABC Consumer Comfort Poll drops 11% with just 9% of Americans rating the economy postively - IT JUST DOESN’T MATTER - because WE are those 9% of Americans, right! OUR economy is just fine and we don’t know what that 91% contingent of babies is whining about do we?
Yes, it’s been a while since I dubbed us in a Meatball Market. The last market I labled as such was November 30th, 2006, when the Dow broke through 12,000 on the way to 14,000. Our bullish picks that day included BA, CAT, COF, DOW, GE, HD, JWN, QQQQ, TIE, TIF, XLE and XOM. Those were all, of course, fantastic picks but what I want you to do is read the October 2nd, 2007 article, where I began to turn cynical on the "Meatball Market" and I made the following statement:
Up, up and away - it’s Super Market! It’s bugdet proof, oil proof, terror (threat) proof, housing proof, inflation proof and pullback proof - 3 weeks in a row!
This is truly a Market of Steel (and the recent movement of X underscores that) and looking at the movement of the past week we really do have to believe it can fly… Is the US consumer (driver of 2/3 of the economy) really impervious to harm? What, if anything, is our stock market Kryptonite?
Unstable currency, runaway commodity prices, spiraling inflation, low savings rates, hedge fund collapses, declining home values, banks writing down their portfolios, hundreds of thousands of layoffs, millions of foreclosures — it simply does not matter as long as they are LOCAL problems for the US as we are a smaller and smaller cog in the great global economy, one day we may even be granted emerging market status by our Chinese masters!
Doesn’t sound like much has changed in 2 years does it? Unfortunately, that also happened to be the day that Alan Greenspan (now working for PimpCo) decided to call China, with the Hang Seng then at 28,199, (gasp!) a bubble. "If you ever wanted to get a definition of a bubble in the works, this is it." he said, at the…
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Day Trading Expiration Week at Philstockworld
by Phil - January 13th, 2010 1:14 am
I don’t want new Members to get the wrong idea…
We don’t day trade a lot at PSW, EXCEPT during option expiration weeks so call it 12 times a year we turn into day-traders as the front-month premiums get low enough to make the trades interesting. The rest of the time, my usual motto is "I’m not a day trader but I’m certainly not adverse to taking profits in a day." Our goal with any option trade is to make a 20% profit and we put up at least 20 trade ideas almost every week so that’s over 1,000 opportunities a year to make 20% - that means when we do make it - getting back to cash and moving on is a wise strategy as there will certainly be something else to trade tomorrow.
During expiration weeks, we have a unique (if 12 times a year is considered unique) opportunity to gain tremendous leverage on trades that have good risk/reward ratios to hopefully give us a series of small, quick wins so our focus shifts away from the longer trades (and we are often waiting out the week before rolling our longer positions anyway) to zone in on these wonderful opportunities.
This is covered under our Strategy Section so I won’t rehash it here but I thought I’d use my new chart tools to try to illustrate what we’re doing by going over a few of today’s trades. As we do discuss in the strategy section, allocation of assets is key and no single trade should ever be more than 5% of your portfolio and day trades should be more like 2% so, in a $100K portfolio, these quick trades should be opened in blocks of $1,000 or $2,000 entries. Ideally, we want to be comfortable doubling down if the trade goes against us right off the bat (and we still believe in it).
Our first trade of the morning was a short on USO. At 9:42 I made a comment to Members: "Jan USO puts have little premium left (the $41 puts are $1.06 - .19 premium) and can be played as a mo trade but I’m in the Feb $39 puts, now $1.01, patiently waiting to make .50."
The January trade was, of course, the riskier trade but these plays aren’t taken in a vacuum. We had been discussing oil as overpriced for days and we were watching the global market, the oil futures and the news out of China and I had mentioned in the…
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Testy Tuesday - AA Disappoints Ahead of Beige Book
by Phil - January 12th, 2010 8:26 am
We got AA’s earnings (or lack thereof) yesterday.
They were a disappointment at just a penny a share, less than the 5 cents officially expected and far less than expected by the endless stream of buyers who took AA from $13 in early December all the way to $17.50 yesterday (where we shorted them in Member Chat!). Alcoa’s earnings were, in part, impacted by higher energy prices and unfavorable exchange rates - things that are likely to affect many of our industrial corporations this quarter.
Which brings us to the Beige Book - The last Beige Book was released on Dec 2nd and we thought it sucked. The one before that was October 21st and that one sucked too. As usual, on BBook days, I sent out an afternoon Alert to Members analyzing the report and it’s about 6 pages long so I won’t reprint it here but these are some of the highlights from the my last report (my comments are in bold):
You have to read into this report as it’s anecdotal and the Fed is very free to spin the report to get what they want. The key words are the couching language like "SOME pickup in activity OR improvement" as well as "GENERALLY improved MODESTLY" - is some, or, generally, modestly a good reason to pay 20% more for stocks than we did at the last BBook. Markets don’t go up 20% in 2 years in the real world so for 20% in 2 months I expect to hear words like TOTALLY, INCREDIBLY IMPROVED IN ALL DISTRICTS.
Most Districts reported some pickup in home sales, though prices were generally said to be flat or declining modestly; residential construction was characterized as weak, but some Districts did note some pickup in activity. Commercial real estate markets and construction activity were depicted as very weak and, in many cases, deteriorating. - OK, it’s official. Steve Leesman is a moron! (CNBC was touting this as a "very bullish" Beige Book by 2:02 pm, 2 minutes after the release)
While some Districts reported upward pressure on commodity prices, they saw little or no indication of upward wage pressures or of any significant increase in prices of finished goods. - Rising commodity prices cannot be passed on. That means profits are impacted.
Commercial real estate conditions were widely characterized as weak and, in many cases, deteriorating further. Market conditions were reported to have weakened in virtually all Districts, with rising vacancy rates, downward pressure on rents, and little, if…
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Monday Market Momentum - Can We Keep It Up?
by Phil - January 11th, 2010 8:29 am
Since 3:30 on Friday the Dow futures are up 100 points!
Isn’t that fantastic? As we are forced to do in the face of positive market movement, we will try to find a story to justify, to "fit" the move, because human beings like for things to make sense - even when they don’t. Casting our market bones and reading the news entrails (as we did extensively in this Weekend’s Ramblings) I’d have to credit rumors of additional job stimulus as well as Surging Chinese Imports (quick, he said CHINA - BUYBUYBUY!), which were up 57% in December for giving us this Monday’s boost.
I mean, we’re back to paying $3 for gas this weekend and oil is up to $84 a barrel as Rent-A-Rebel attacked another Nigerian pipeline where they couldn’t afford $5 a day for a Nigerian Security guard to protect 100,000 barrels a day of $80 oil ($8M). Of course, if they stop the rebels from attacking the pipeline then oil would be $82 or less today (where it closed on Friday) and not $84 and CVX and RDS.A would make $200,000 less selling that oil today, not to mention what they make on the other 8.5M barrels those two companies alone sell around the globe (OK, I’ll mention it, it’s $17M a day) as a bonus for NOT securing their pipelines.
As we discussed in Member Chat this weekend, the system is designed to make it not just economically foolish but downright dangerous for the Officers and Directors of an oil company to insure a safe, reliable and inexpensive supply of oil to the public THERE’S NO PROFIT IN THAT and, as a shareholder, you should be outraged at the very suggestion that they put an end to these Nigerian Rebel Attacks, which are a reliable 2.5% boost to the price of global…
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Weekend Ramblings - Looking for Those Green Shoots
by Phil - January 10th, 2010 8:29 am
What a crazy week!
I’ve been very busy updating the Buy List for Members so now let’s turn to what, if anything, justifies this bullish posture now that we are finally over our breakout levels. I am DETERMINED to find good news to report so we’ll see what I can dig up. Of course, our buying premise is based on my 2010 outlook that determined we don’t really care about the Economy, not the one that affects the little people, the only ECONOMY the stock market cares about is the one that affects those of us in the top 10% of society as we are the only ones still playing the market anyway.
We hit the targets I laid out for this run back when I ran the "Last Charts of the Decade" back on Dec 30th. Those charts had the Fibonacci levels there so let’s keep an eye on the next set of levels, assuming we get some follow-through next week (still uncertain) to confirm the breakout. Until we get that confirmation, let’s augment our Buy List with the same hedges we used to protect our old bullish positions as I updated in our last hedging article:
- DXD Apr $26/33 bull call spread was net $2.40, now $2.20, down 8%. I still like this one as it’s $2.31 in the money and that last 200-point run only cost us .20 so I think that’s an acceptable loss against our long gains with the 300% potential upside return if the Dow does fall (about 10% should do it).
- FAZ July $20/35 bull call spread at $2.60, now $1.60, down 38% - these got murdered but XLF was one of our key long plays and they flew for us this month. When you get a spread that drops like this you can roll both ends lower and here we can drop to the July $15 puts for + $1.60, which puts us $1.80 in the money and is excellent protection against aggressive upside bets on the financials.
- FAZ July $15 puts sold for $2.10, now $2.45, down 16%. This is why we prefer selling premium for coverage - so much less damage on the same FAZ ETF in the same month. The only difference is one side we bought premium and one side we sold it. If FAZ breaks below $16, I think we can assume the financials aren’t likely to run back down and this play becomes less desirable.
- SDS March $34/44 bull call spread $2, now $1.40 - down 30% - This…
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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
(