Balloons Away!!!   Earnings Season has begun!

Alcoa kicked off earnings season by reporting a $303M drop in net income on a 7% sales decline to $7.38Bn.  But who cares about that?!  What we should care about is what earnings season means for us and how we should play it.

In anticipation of much greater stock volatility among those stocks reporting and potentially the market itself, we decided to steer clear of the gambler’s gambit.  This is our affectionate name for earnings, which lures many traders to a land of losses by promising great returns on straddles and strangles in the event that big stock movements materialize.  Instead of succumbing to the temptation of risking hard-earned profits - and they have been hard-earned this past quarter as we look to boost our winning record to 87.5% on closed trades this April expiration for trades issued from January to March - on volatile stocks, we have switched course slightly and taken comfort by placing trades on iShares such as the FXI.  Last week’s issued trade is working out very well so far!

This week we had hoped to get filled on an EEM position, but the gap up today meant the credits we had searched for disappeared before we had an opportunity to get a fill so we’re going to hope for a pullback and see if we can’t get a fill on a trade this week as originally planned.  While a pullback is very possible in EEM over the next few weeks, we do believe the longer term outlook is very promising.  We’re not going to chase any trades until the EEM pulls back and offers us a more attractive entry point.

DD is one of the few stocks that…

The worst-quarter since 2002 and we’re batting 75% - with the potential for 100%!  More on that later!

Early last week, we highlighted the chart below with the members blog warning of a RED ALERT condition in the markets. 

Since then the market has served only to confirm the danger of the Red Alert condition.  Three of the last 4 trading days have been down.  And today, an up day, did nothing to indicate we should throw caution to the wind as the 5-day EMA and 20-day EMA both held as resistance levels.  This rejection is A BAD SIGN if you are a bull!  And Phil was all over the fact that today’s bullish action was not worth backing when he highlighted the ‘window-dressing’ possibility with this intra-day comment at 1.05PM

“PLEASE KEEP IN MIND THAT THIS IS THE LAST DAY OF THE QUARTER AND THIS WHOLE RALLY MIGHT BE BS!!!”

If you are not reading daily comments at PhilStockWorld, make a second quarter resolution to start now! 

At the end of last quarter we made our own resolution to members.  Having had a good year for the most part, we resolved to do the heavy lifting and dig into the algorithms we rely on to bring you top-class market analysis.  By combining fundamental research with technical due diligence and all the while incorporating the oft-forgotten sentimental analysis, we like to give you both education and example trades to show you how to do it!  Having worked diligently to improve our processes, how have we done so far this year? 

In one of the most challenging markets we have ever traded, we’re pleased to have closed most of our January and February positions for a profit.  We have had to employ a who…

Tasseography is defined as ‘a divination or fortune-telling method that interprets patterns in tea leaves, coffee grounds, or wine sediments”…..In the stock market Tasseography takes the form of analyzing derivatives contract volumes!

In this article last week, we wrote “Today huge call contract volumes opened on Bear Stearns strike 5 options for March so this rollercoaster may yet have another surprise in store if the stock again follows the heavy derivatives bets.”  The very next day the stock rose as high as $8.   Today the stock rose as high as $13.85 before closing up at $11.25, highlighting the nonsense that was the $2 stock price last Monday morning.  But more importantly, what do the options tell us today about the market itself?

If we look at the Russell (RUT) options, we can see where sentiment lies.  Put options 51 points below the RUT at 701 cost $6.70 yet call options 49 points above the RUT price cost just $3.50.  In percentage terms, an even greater disparity exists on options 60 points out of the money.  The 760 calls cost just $2.10 while the 640 puts cost $5.20, more than twice that amount!

The bottom line is somebody thinks this market may reverse very soon - we’ll come to that later in this wrap-up.  First of all, let’s review the market action for the day.  The Dow touched 12,600 and was rejected.  The gain of over 800 points from bottom to top in the last 5 days has been almost vertical, with the exception of last Wednesday’s near 300 point drop!  On Thursday, we wrote Wednesday’s move off to an options expiration anomaly. 

The S&P 500 gained over 100 points from bottom to top.  Like the Do…

What an ignominious end to a prominent investment bank founded in 1923 by Joseph Bear, Robert Stearns and Harold Mayer.  Bear Stearns was nothing short of Paddy-whacked on St. Patrick’s Day!  Evidence of the scandal is in the numbers.  At the close of business today, Bear Stearns was worth approximately $650M, a drop of over $3Bn from Friday’s close.  Meanwhile, JP Morgan Chase gained $12.5Bn!  Did the transfer to JP Morgan create a wealth multiplier of 4X?  Last week, Bear Chief Alan Schwartz suggested the book value of the company was $84 per share!  Joe Lewis, the billionaire British currency trader who is the main investor in the Tavistock Group and had a billion dollar stake in Bear Stearns, predicted shareholders would reject what he called ‘a derisory offer’.  Indeed speculation is building that shareholders will threaten an assault on the company’s takeover.  The forerunner to exaggerated stock movements in Bear Stearns and Lehman over the past week have originated from options trading activity.  Enormous put buying at strike prices way out-of-the-money have yielded massive returns.  Today huge call contract volumes opened on Bear Stearns strike 5 options for March so this rollercoaster may yet have another surprise in store if the stock again follows the heavy derivatives bets. As we reported throughout the night, volatility was reaching extreme levels with Asia, the dollar and the futures all down substantially.  If you were to glance at the end of day figures, you would have missed a colorful story throughout the day because the volatility translated into confusion.  The Dow dropped immediately to session lows of 11,756 before climbing back to breakeven by 11AM and t…

• “Reduced dependence on oil”
• “Less dependence on Middle Eastern countries”
• “Going Green”
• “Home Grown Energy”

All good reasons to convert to ethanol from oil.  All enticing sales pitches lauded by politicians to boost ethanol production in the homeland.  Policy changes and policy requirements were instituted.  But soon the anecdotal evidence started to display the effect of these changes.  A local pizza store would hike prices from $9.99 to $16.99 over two years.  A gallon of milk would increase 20% and the price of eggs would follow suit.  But how is the price of milk or eggs or pizza connected to ethanol?

To answer that, let’s talk about oil.  No not not the heavy or sweet crude kind but Sunflower, Safflower, Soybean and yes, Corn!  Pre-ethanol, sunflower, soybean, corn and others were all simply commodities. If demand in one was high, purchasers could switch to the “other” less expensive grain.  If a drought occurred in the Dakotas, the price of Sunflower seeds could easily spiral 10-20% in a year.  Users of sunflower seeds or oil would switch to soybeans or corn oils.   This ’switching’ process occurred for decades and was considered normal business practice in order to maintain stability in prices of grains, and hence breads, cookies and so forth.

When requirements by law mandated high demand for corn, the days of playing the ’switching’ game were numbered.  As an example, a prominent retailer on the East Coast reported to us that just a couple of years ago, a 25lb bag of sunflower seeds would retail for $6.99.  These bags were simply intended for ornithologists and bird enthusiasts.  Today, that same bag of seeds costs al…

Ahead of Monday’s trading, the Hang Seng had dropped 3% and the Nikkei had dropped 4.5%.  Based on exaggerated movements in Asia over recent months, what should we have expected from our markets today?  Exactly what we got - confusion and volatility!  Asia dropped in sympathy with the movement down in the US markets last Friday.  Often the US markets then parallel Asia in a feedback loop that appears increasingly unstable.  Indeed the Dow dropped right at the open before bulls stepped in for a short period of time but were soon scared out by a similar downtrend to that which occurred at the open.  Between 10AM and 11AM, the Dow had completed a full 200 point round trip.  By the end of the day the Dow had risen back to breakeven, fallen to new lows and recovered once again!

Phew!…..Not so fast! 

A recovery in the Dow back near breakeven does nothing to negate last Friday’s drop.  Some like to think that a reversal at the end of the day bodes well for the markets.  While in most markets this would indeed be the case, we must view the context of last Friday’s movement.  With that background, today’s move simply reinforces our skepticism of holding any unhedged positions in this market.

Like so many times of late, the NASDAQ failed to recover as well as the Dow.  You can see from the chart below how the NASDAQ fell short of a near-breakeven recovery.  The one constant from both indexes today was the total confusion among bulls and bears.  Neither has any idea which way the market is going in the short-term.  One little trading secret to remember:  Confusion usually occurs in bear markets!

In comments from a CNBC interview, Warren Buffett mentioned that the costs of trading are often the most overlooked aspect of trading.  The extrem…

A 200-point round trip by lunch followed by a 200 point rise after lunch.  We’re getting so used to these crazy days that we hardly seem surprised any more.  The huge intra-day spike shown in the chart below was due to Standard & Poor’s affirming its ratings for Ambac Financial Group and MBIA. 

The news came just in time for the bulls.  In last Thursday’s blog we mentioned that many had called for a bearish breakdown of the pennant formation that day, but only a close below would signal to us a resumption of the bearish trend.  That looked highly likely for most of Friday until Charlie Gasparino noted on CNBC that Ambac and MBIA might be saved after all.  That suspicion and Standard & Poor’s affirmation today catalyzed a rally of almost 500 points in just two trading sessions! 

As if that wasn’t enough, the market managed to tease us with its close today.  The pennants were broken to the upside but the key 12,600 level remained firm on the Dow and the 1,380 level was not tested on the S&P 500.  Incredibly, in the space of just two trading days we must now be on the lookout for a bullish reversal rather than a resumption of the bearish trend. 

We maintain that it will be very hard for the major indexes to stage a strong bullish rally if technology leaders fail to participate.  And today Google acted like a dog on a leash that refused to budge despite intense coaxing and tugs by the general market.  It was a dismal day for Google, down a huge 4.21% or 21 points.  You can see from the chart below that the volume in the last fifteen minutes was astonishingly high.  A quick glance indicates that almost $250M worth of stock w…