by phil - November 29th, 2012 7:40 am
Wow, what a move!
The Dow opened yesterday and quickly dropped to 12,760 but we finished the day at 12,984 as both John Boehner and President Obama made nice noises about the ongoing Fiscal Cliff talks. Since then, we've had another 100 points of follow-through in the Futures and, as I commented in Member Chat yesterday, this is all very, very brave action ahead of the 8:30 GDP report, which is expected to show Q3 growth of 2.8% but, based on yesterday's Beige Book (see our commentary here) may come in closer to 2.4%.
If we can avoid or get past that disappointment, THEN we can put a rally together on happy talk out of Washington. Other happy talk comes from John Hilsenrath, who claims the Fed is nearing a decision at the upcoming meeting to create an additional bond-buying program to replace Operation Twist with something in the $500Bn range – and we know how the makets love rumors of More Free Money!
As you can see from Dave Fry's intra-day SPY chart, the bears were severely punished yesterday and this morning we move back within striking distance of closing out November back where we started – at S&P 1,420 – and we'd have to call a flat month a huge victory for the bulls at this point but still a long way to go before we work our way back to the October highs (1,470).
8:30 Update: GDP was indeed a little lighter than 2.8% expected but 2.7% is not too bad and the Futures are only taking a small pause on that release. Inventory builds, which are considered a positive, were the main contributor to the bump and now the question is whether or not we actually sell that stuff in Q4. Private Business Inventories jumped $61.3Bn in Q3, adding 0.77% to the GDP while Real Final Sales of Domestic Products only increased 1.9% – leading to the pile-up in inventories.
Goldman Sachs is clearly trying to engineer a big finish to November, releasing a report detailing their 1,575 price target for the S&P next year. Expecting better growth than most, the firm likes cyclical over defensive sectors, and tech over staples, telecom, and health care. A "grand bargain" in D.C. along the lines of Simpson-Bowles "would spark a PE multiple expansion and a higher target."
by phil - November 28th, 2012 7:47 am
Time to worry about the cliff again!
We took a few days off from worrying but comments from Senators Harry Reid and Mitch McConnell yesterday both indicated that little progress was being made on the ongoing negotiations and that was all it took to panic people out of positions yesterday afternoon, as we gave back most of Friday's ill-gotten (low volume) gains.
In context, we're still making good, bullish progress but yesterday's action pretty much takes a "V"-shaped recovery off the table and now we'll have to fight and claw tooth and nail just to get back to our strong bounce lines by the week's end. Anything less than that will not be a bullish signal into the weekend. Our levels remain:
No serious damage yet but those paying attention to what's going on in China are becoming very concerned about the Shanghai Composite, which just spent it's 2nd day below the the very-critical 2,000 line – and that's down 16.66% since June.
So far, the Hang Seng has avoided the same fate – trading at 22,000 and that's up from 18,500 in January (18,9%) but it's going to matter a lot which one of these indexes breaks first to follow the other. So far, the drag is down, with the Shanghai finishing today down 0.9% at 1,973 and the Hang Seng dropping 0.62% to finish at 21,708. It's been a while since China has been a big concern but, if we finish out the month this way – expect it to be a big topic of conversation in December.
by phil - November 27th, 2012 8:18 am
How will we finish November?
With just 4 trading days left to the month and then just 19 more to close out the year – it's already been a wild ride but, as you can see from Doug Short's S&P chart, we're up a very solid 200 points for the year (16.66%) and not likely to give much of that back and, of course, 1,400 on the S&P represents a 100% recovery off those 2009 lows.
That's 25% a year folks! What are you complaining about? No, we didn't go up in a straight line but sticking with pretty much any stock over the past 4 years has been a winning strategy and that's been replenishing 401Ks and IRAs and Pension Funds and has allowed the investing class to recoup most of their losses from the crash and NOW the question is – what happens next?
Surely we can't grow the market 25% every year. This year we will struggle to get back to 20% (1,450) – if it happens at all and, realistically, we have to assume that closing high of 1,565 was not deserved at the time and, if we figure it was a 10% overshoot of the proper top – then 1,400 IS the right level for the S&P to be hanging out at.
Clearly we still have plenty of economic challenges to deal with and the World is not growing as fast as we thought it was in 2007 but it did grow and Corporate Profits are higher now than they were in 2007 and, if anything, tracking at the top of their 20-year trend so it makes sense that the S&P should be reflecting this – risk on or risk off.
Notice, by the way, that's $1.6 TRILLION Dollars in annual Corporate Profits and that's AFTER deducting the net of losses from some Corporations to offset the profits of others. How much tax do these Corporations pay on $1.6Tn in profits? Last year – it was just $192Bn – 12%. If Corporations paid 35% like their fellow citizens, that would drop another $368Bn into the US Treasury – THOSE are the rich people we need to chase down and force to pay their fair share! Why is this not discussed more?
by phil - November 26th, 2012 7:03 am
We shopped 'till we dropped this weekend.
Consumer spending over the four-day Thanksgiving weekend climbed 13% to $59.1B, although the growth was slower than the 16% last year. Average spending per customer rose 6.3% to $423. Online sales on Black Friday jumped 26% and topped $1B for the first time, says ComScore, which forecasts that Internet sales over the holiday season will grow 17% to a record $43.4B. Movie tickets also hit a record $290M for the weekend.
Congress returns to work this week and seems to have made no actual progress on a deal to avoid the Fiscal Cliff – just 5 weeks away from triggering now. Over in Europe, there's the imminent Greek Cliff, with the Troika making their 3rd attempt today to come up with an agreement to reduce Greece's debt burden so that Government can get a round of bailout money that must be on hand on Friday.
Over in Spain, pro-independence parties won Catalonia's elections as that country makes another step towards revolution and Egypt's markets fell 9.6% as President Morsi takes that country another step towards Dictatorship by granting himself "sweeping powers and judicial immunity." Who does that guy think he is – Hank Paulson?
While all this geo-political nonsense may not bother the mighty US Consumer – investors sure are nervous about massive and sudden cuts like the cuts to Defense Spending illustrated in the chart on the left.
As you can see, realistically, we've had military spending cuts before and survived – it's more the immediate and indiscriminate nature of forced sequestration that has market participants spooked.
Friday's low-volume rally already gave us crosses on our strong bounce lines (see Friday's post) at Dow 12,950, S&P 1,400, NYSE 8,100 and Russell 805 as we wait for the Nasdaq to confirm the move by taking out 3,000. Hopefully, the Nasdaq will get a little help from AAPL this week, thank's to C, who initiated them at a buy this morning with a target of $675. Also, Gene Munster's crew was at Mall of America for 2 hours on Friday: Shoppers bought 17.2 items/hour at the Apple store, 3.5/hour at Microsoft (mostly XBoxes). 22 iPads were sold. Zero Surfaces. If that's a trend – it's a very good one for AAPL!
UBS also came out for AAPL this weekend and set a $780 target…
by phil - November 25th, 2012 3:42 pm
In uncertain markets, dividends can give you a critical investing edge.
As you can see from the chart on the left, just mindlessly investing in dividend-paying stocks can give you more than a 2:1 annual advantage in your investments and that adds up to quite a difference over time.
Of course, here at PSW, we teach the art of selling options premiums – something that turns virtually any stock into a "dividend" payer. For example, MSFT is only a small, 3.3% dividend-payer but a fairly solid cash-machine of a stock that we don't feel is likely to go bankrupt overnight so it makes for a nice safe staple in a long-term virtual portfolio. But MSFT is also a very poorly-run company that hasn't grown in 20 years but we can make it a much more interesting stock by simply selling covered calls.
For example, we buy MSFT for $27.70 and we sell the Jan $27 calls for $1.28. This lowers our effective basis to $26.42 and selling the call puts us in no special danger – we are simply agreeing to sell MSFT for $27 on expiration day in January (the 18th). Should the stock be called away from us, we make a .56 profit or 2.1% of our net $26.42 cash investment in just 54 days. That works out to a 14.2% annualized ROI and, even if we get called away, we can simply buy the stock again and again and sell calls every month. Of course, you can optimize all this with timing and we favor stocks that are on sale – this is just a very simple example of how our most basic options strategy can drastically boost your annual returns on any stock in your portfolio.
Let's say you don't want to mess around with MSFT every month. You can simply sell the 2015 $28s for $3.35 that drops your net entry from $27.70 to $24.35 and getting called away at $28 would be a profit of 14.9% over 26 months PLUS you would be getting your .92 annual dividend so let's call it $1.84 more for a total profit (if MSFT holds $28) of $5.49 or 22.5% – 1% a month certainly beats what the banks are offering these days! Not as sexy as the 17.5% annual ROI you make by working the trade every month (with the dividend), but you do get a built-in cushion that…
by phil - November 23rd, 2012 8:29 am
Are we going to have a "V"?
We haven't had a good V bounce-pattern in a while – one where the entire drop is entirely reversed on the other side – as if it were some mistake that's correcting itself as quickly as possible. According to ThePatternSite:
"Price at the bottom of the V will form a one-day reversal, island reversal, or tail, usually on heavy volume, perhaps gapping upward. Price trends up, usually at the mirror angle of the downtrend. If price dropped by 30 degrees, price will rise following a similar angle. The price trend tends to be a straight-line run with few or no pauses, often fitting inside a channel."
Of course, we don't have a V yet, we just have a bounce off a hard floor that we expected – it's the next 7 days that will be critical but so far, so good on our bottom call. The NYSE is already over our strong bounce line (8,100) and we wait for the rest of the indexes to confirm a recovery at Dow 12,950, S&P 1,400, Nasdaq 3,000 and Russell 805 with less than a 1% move between our indices and their goals – other than the Nasdaq, which needs 2.5% and has been dragging along.
We'd better be up this morning as the Dollar is way down at 80.59 as the Euro climbs back over $1.29 with the Pound at $1.59 and the Yen as weak as it's been in ages at 82.20 to the Dollar. That has been thrilling the Nikkei, which touched 9,450 overnight, up almost 10% from the 8,600 line we liked for a long just 8 sessions ago! While the US doesn't tend to get as excited about a weak Dollar as Japan does about a weak Yen – failing that 80.50 line today should be a fairly bullish indicator for US Equities.
We had some good manufacturing reports from Europe and Asia with Chinese PMI at 50.4, the first growth in 13 months and Manufacturing Output rising to 51.3 in November from 48.2. "The economic recovery continues to gain momentum," says HSBC's Qu Hongbin. "However, it is still the early stage of recovery and global economic growth remains fragile."
Eurozone Manufacturing PMI also ran up to an 8-month high of 46.2 from 45.4 in October with Manufacturing output at 45.9, up from 45 but Services…
by phil - November 21st, 2012 8:05 am
Nice and bouncy!
Check out our Big Chart. Check our our bounce levels, which I posted on Monday and still are:
Just two days later we're right in the zone and – most importantly, our weak bounce lines held on yesterday's dip – that's a very good sign.
The best thing about re-establishing trading ranges is that it lets us take advantage of channel bets like yesterday's USO trade from the morning post, where we caught a nice 50% gain for the day and we took that money and ran as oil tested the $86 line – just $1 off our target without all that tedious waiting… Of course the Futures bet on /CL was well-timed and a $3 move in the Futures pays $3,000 per contract so thanks to the oil crooks for being so predictable. We got our cease-fire rumor in the Gaza and that was all it took to knock oil back 3% but it was a rumor only – which is why we quickly got out and now, maybe, we'll be able to do it all again on a new set-up (oil currently back at $87.50).
Unfortunately, the HPQ Jan $12 puts we also talked about in the morning post only made it to $1.17 at the open but, as expected, they have already fallen back to .90 for a 23% gain on the day. Trades like that simply follow PSW's Rule #1 (and there are only 2): "ALWAYS sell into the initial excitement." Our job is to sell premium – so…
by phil - November 20th, 2012 8:35 am
That was nice!
In one day, we erased all of last week's losses and cleared the 200 dma before it had a chance to bend lower but, as you can see from Doug Short's chart, the 50 dma is already in decline and we have to do MUCH better than this to get back over that line and turn that frowning average upside down before we are able to say we're back on a long-term bullish path.
What we have so far is a 30-point, 2-day bounce on the S&P after a 16-day 105-point drop or, we could look at the post election day dip of 80 points over the previous 7 sessions and then 30 points back up is almost exactly that magical 40% retraces we'd be looking for and the short time-frame makes more sense that way.
Overall, we're looking for follow-through on this move, hopefully back to at least 1,400, which will take another 50% of yesterday's move to complete. As we noted yesterday, we were looking to make weak bounces to Dow 12,720, S&P 1,375, Nasdaq 2,900, NYSE 8,000 and Russell 790 and we made all of those targets so now we just need to hold them as we attack our strong bounce levels at Dow 12,950, S&P 1,400, Nasdaq 3,000, NYSE 8,100 and Russell 805. If we can't do that – it's not a real rally.
Dave Fry's Dollar chart shows how close the inverse relationship between stocks and the Dollar has been this Summer and Fall and we finally got the Dollar back below the 81 line yesterday, so of course we are rallying. It's not about the one-day rally but about what sticks once the variables calm down – and that remains to be seen.
Shorting oil off the $89 line (/CL) is working well this morning and we never quite got to $90 yesterday, which was a good sign for our bearish bets. The constant parade of "experts" on CNBC who say oil will fly back over $100 because Israel and Gaza are shooting at each other makes it hard to hold conviction on these bets but the bottom line is there is an insane amount of product in storage and very little demand – until and unless the supply is somehow actually disrupted (and this little skirmish simply won't do it) – our premise for…
by phil - November 19th, 2012 8:43 am
As I noted Friday, we were due for at least a bounce:
It doesn't really matter why but, as of this morning, the Global consensus is that our fiscal cliff issue may not come to pass and that's cheering up the Global Markets and weakening the Dollar (now 81.08) to give us a little follow-through on Friday's bouncy action. So much so that we should open on the way to our weak bounce lines and, hopefully, get past those and test our strong bounce lines this week. I sent a detailed study to Members earlier this morning but the quick summary of our bounce zones is:
- Dow 12,720 weak, 12,950 strong.
- S&P 1,375 weak, 1,400 strong.
- Nasdaq 2,900 weak, 3,000 strong.
- NYSE 8,000 weak, 8,100 strong.
- Russell 790 weak, 805 strong.
Certainly there is nothing at all to be impressed about with anything less than capturing and holding our weak bounce levels today and moving on to our strong bounce levels by Wednesday. ANY failure of our lows (Dow 12,500, S&P 1,350, Nas 2,825, NYSE 7,900 and Russell 770) is a sign to flip even more bearish but we'll want to see all 5 weak bounces hold and then 3 of 5 strong bounces in order to not go into the holiday weekend with strong hedges (see last Wednesday's post for our Disaster Hedge updates).
Along with discussing our 5% Rule levels, we also had new trade ideas for AAPL and ABX in early morning Member Chat, so make sure you check that out as they are a couple of fantastic trades! We've been doing plenty of bottom-fishing lately and now we're testing that bottom to make sure our fishing hole isn't deeper than we think. That's why our most likely move into the bounce is not to add more long positions, which we'd have to chase off the bottom but to make sure we are properly hedged – in case those bounces disappoint us.
We're bouncing because we over-reacted to the Fiscal Cliff but before there was a fiscal cliff, there were terrible 3rd quarter earnings reports and, with 460 of the S&P now reporting, it is safe to say this was the worst quarter in 3 years with total earnings down 2.2% and total revenues down 3.6%.
by phil - November 16th, 2012 8:32 am
Falling, falling, falling.
That's all the markets have been doing lately. As you can see from our Big Chart – it's been a pretty orderly sell-off according to our 5% rule with roughly a 4-5% drop during October with some consolidation, followed by a much steeper 4-5% drop after the election.
We're back to the point where we expect resistance at an 8% total drop as well as some bounce action where once again we'll be measuring for strong or weak bounces to determine whether or not we can get a turn again (our indicators kept us bearish last time). Regarding the current action, I said to our Members yesterday in Chat:
I think there is a lot of selling as people take capital gains while they can. I think that it's very possible that it's going to be very difficult to get a proper rally into the end of the year because there are plenty of people waiting for a rally to take their gains, whether through timing or position. The problem with this state of not knowing is it becomes prudent for people to hedge for the worst and, if someone had a 20% gain for the year and now it's 15% and they can take it off now and keep 12.75% (after 15% tax) vs possibly hitting another 5% drop and running down to 8.5% this year or possibly 7% (at 30%) if they wait until next year and there's no recovery (and the more the cliff looms the less likely recovery seems) then it almost doesn't make sense not to take the 12.75% and run. So that's very possibly the selling pressure we see and it may continue to be relentless into the end of the year unless there is some sort of resolution or delay to the cliff.
While we don't think the Fiscal Cliff will end up being a big deal – that doesn't stop others from panicking. This week we've been scooping up positions they have been running away from but, if we're going to have another leg down – we'll be needing those disaster hedges (see Wednesday's post) to keep us out of trouble. It doesn't take much to profit from a downturn, fortunately, when we use good hedges. On Wednesday I suggested the TZA April $17/24 bull call spread for $1.40, selling the $14…