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S&P 500 Snapshot: Back in Rally Mode

Courtesy of Doug Short.

After a one-day pause, the S&P 500 returned to rally mode. The index opened at its 0.20% intraday low, vaulted upward and then drifted to its 1.81% mid-afternoon high. It closed ninety minutes later with a trimmed gain of 1.23%. The popular financial press touted strong pre-market earnings (most notably from Caterpillar and 3M) as the rally trigger and blamed the afternoon fade on renewed Ebola worries (a doctor being tested in NY).

Looking ahead … will Amazon’s post-close earnings disappointment trigger a market struggle at tomorrow’s open? Stay tuned!

The yield on the 10-year Note closed at 2.29%, up 4 bps from yesterday’s close. The weekly average for the 30-year fixed mortgage was announced today at 3.92%, the lowest rate since early June of last year.

Here is a 15-minute chart of the past five sessions.

Volume on today’s advance was relatively unremarkable — slightly lower than on yesterday’s advance.

A Perspective on Drawdowns

How close were we to an “official” correction, generally defined as a 10% drawdown from a high (based on daily closes)? The chart below incorporates a percent-off-high calculation to illustrate the drawdowns greater than 5% since the trough in 2009.

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For a longer-term perspective, here is a pair of charts based on daily closes starting with the all-time high prior to the Great Recession.

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Pullback on Hold

Courtesy of Declan.

A rapid bounce, a one-day sell off which looked like something more, then a return to buying. There were important breakouts, but shorts are not out of the game yet.

On the breakout front there was the S&P. Yesterday’s selling didn’t return below support and today put some distance on it. The 50-day MA may play as resistance tomorrow, but given it has flat-lined it may not play as big a role in this regard.


If the 50-day MA is going to play as resistance then the Nasdaq may be the index to do this. The Nasdaq nearly tagged the MA at the high today; tomorrow is another day.

In another spin, the Nasdaq 100 broke declining resistance with the 50-day MA to contend with too. While it’s a similar picture to the Nasdaq, it offers a more bullish outlook. Action around the 50-day MA will be key for both indices.

The Russell 2000 has returned to a former downward (weak) channel, although the proximity of declining resistance of this channel to its 50-day MA may be problematic for bulls. However, the response to the sell off has been good.

The Dow returned above its 200-day MA, and finished near its 20-day MA. There is still much ground to make up, but the short opportunity at former support turned resistance was negated by today’s buying.

While it seemed unlikely last week, a chance for a retest of prior highs now lies on tests of index 50-day MAs.  A bullish cross of these MAs tomorrow leaves little in the way of overhead resistance.  Last week’s high volume undercut of 200-day MAs suggests something more damaging than what ultimately happened, but with buyers willing to buy it’s hard to argue.  Those looking for long term positions should wait for entry opportunities as marked in the table below.

Accepting KIVA gift certificates to help support the work on this blog. All certificates gifted are converted into loans for those who need the help more.





A Long-Term Look at Inflation

Courtesy of Doug Short.

The Consumer Price Index for Urban Consumers (CPI-U) released this yesterday puts the September year-over-year inflation rate at 1.66%, off the May 19-month high of 2.13%. It is well below the 3.87% average since the end of the Second World War and 29 percent below its 10-year moving average.

For a comparison of headline inflation with core inflation, which is based on the CPI excluding food and energy, see this monthly feature.

For better understanding of how CPI is measured and how it impacts your household, see my Inside Look at CPI components.

For an even closer look at how the components are behaving, see this X-Ray View of the data for the past six months.

The Bureau of Labor Statistics (BLS) has compiled CPI data since 1913, and numbers are conveniently available from the FRED repository (here). My long-term inflation charts reach back to 1872 by adding Warren and Pearson’s price index for the earlier years. The spliced series is available at Yale Professor (and Nobel laureate) Robert Shiller’s website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline. Click here for additional perspectives on inflation and the shrinking value of the dollar.

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Alternate Inflation Data

The chart below (click here for a larger version) includes an alternate look at inflation *without* the calculation modifications the 1980s and 1990s (Data from www.shadowstats.com).

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On a personal note, I believe the current BLS method of calculating inflation is reasonably sound. As a first-wave Boomer who raised a family during the double-digit inflation years of the 1970s and early 1980s, I see nothing today that is remotely like the inflation we endured at that time. Moreover, government policy, the Federal Funds Rate, interest rates in general and decades of major business decisions have been fundamentally driven by the official BLS inflation data, not the alternate CPI. For this reason I view the alternate inflation data as an interesting but ultimately useless statistical series.

That said, I think…
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Two Measures of Inflation and Fed Policy

Courtesy of Doug Short.

Note from dshort: I’ve updated the accompanying charts with the yesterday’s Consumer Price Index data from the Bureau of Labor Statistics. The annualized rate of change is calculated to two decimal places for more precision in the side-by-side comparison with the PCE Price Index.


The BLS’s Consumer Price Index for September shows core inflation at 1.73%. The Core PCE price index at the end of the August (the most recent data), is lower at 1.47%. The Fed is on record as preferring the less familiar Core PCE as its inflation gauge.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances. [Source]  Note: Bolding added by me.

Elsewhere the Fed stresses the importance of longer-term inflation patterns, the likelihood of persistence and the importance of “core” inflation (less food and energy). Why the emphasis on core? Here is an excerpt from one of the Fed FAQs.

Finally, policymakers examine a variety of


continue reading





Time for the Pullback?

Courtesy of Declan.

Sellers were going to make an appearance at some point and today was the day they paid a visit. Whether a larger pullback emerges will depend on events over the coming days, but today’s selling did occur at some natural attack points for shorts.

The S&P finished with a ‘bearish cloud cover,’ but it did manage to hold declining resistance turned support. The 20-day MA has also entered the fray as an area for bears to work. But this wasn’t the most bearish of the indices, and today’s finish actually gives bulls a long play tomorrow (for a bounce off support).  Technicals also suggest a bounce.


While the S&P may give bulls something tomorrow, the Dow Jones Index is playing to bears. The rejection of the 200-day MA coincided with a failed test of former support turned resistance. An undercut of 16,350 would effectively confirm the retest of 15.855.

The Nasdaq 100 offers a more attractive entry level for shorts. There is a clear declining resistance level which was rebuffed on today’s action.  Technicals have sided with bulls, so shorts shouldn’t linger if such resistance is broken to the upside.

The Russell 2000 is in an odd position. It experienced the most bearish action on the day with its bearish engulfing pattern. This suggest further downside tomorrow, but given the strength of the October bounce it probably has the best support options, first of which will be the 20-day MA.  A weak finish on Thursday may offer a value play here.

Bulls should also watch the Semiconductor Index. I’m still liking the ‘Island Reversal’, but for it to stay true, Tuesday’s breakout gap can’t close. It will have the 200-day MA to help bulls tomorrow, although it may not be enough to protect in morning action.

For tomorrow, the Nasdaq 100 is perhaps the index to watch for shorts with the best risk:reward. Longs can look to the Russell 2000 if there a second day of selling, but if bulls come bursting out of the gates then the S&P might be the better long play.

Accepting KIVA gift certificates to help support the work on this blog. All certificates gifted are converted into loans for those who need the help more.





Understanding the CFNAI Components

Courtesy of Doug Short.

The Chicago Fed’s National Activity Index, which I reported on earlier today, is based on 85 economic indicators drawn from four broad categories of data:

  • Production and Income
  • Employment, Unemployment, and Hours
  • Personal Consumption and Housing
  • Sales, Orders, and Inventories

The complete list is available here in PDF format.

In today’s Chicago Fed update, we learned that three of the four broad categories of indicators that make up the index made positive contributions to the index in September, and three of the four categories increased from August. Personal Consumption and Housing continues to be the significantly underperforming category. Let’s now take a look at the historical context, focusing on the less volatile 3-month moving average of the components.

A chart overlay of the complete multi-decade span of all four categories, even if we use the three-month moving averages, is quite challenging for visual clarity:

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So here is a close-up view since 2000:

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But a snapshot of the 21st century contains only two recessions, so it’s unclear how the individual components have behaved in during the seven recessions since the 1967 starting point for this data series.

Here is a set of charts showing each of the four components since 1967. Because of the highly volatile nature of the data, the charts are based on three-month moving averages, a smoothing strategy favored by the Chicago Fed economists. I’ve also highlighted the values for the months that the NBER subsequently identified as recession starts.

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There’s a lot to digest in the individual charts. Clearly the first two (Production and Income and…
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Conference Board Leading Economic Index Increased in September

Courtesy of Doug Short.

The Latest Conference Board Leading Economic Index (LEI) for September is now available. The index rose 0.8 percent to 104.4. August was revised downward to 103.6 percent (2004 = 100). The latest number came in above the 0.6 percent forecast by Investing.com.

Here is an overview from the LEI technical notes:

The Conference Board LEI for the U.S. increased in September after no change in August. The financial components, along with initial claims for unemployment insurance and ISM® new orders, made the largest positive contributions this month. In the six-month period ending September 2014, the leading economic index increased 3.5 percent (about a 7.1 percent annual rate), faster than the growth of 2.7 percent (about a 5.6 percent annual rate) during the previous six months. Also, the strengths among the components became more widespread than weaknesses in the past six months. [Full notes in PDF]

Here is a chart of the LEI series with documented recessions as identified by the NBER.

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And here is a closer look at this indicator since 2000. We can more readily see that the recovery from the 2000 trough weakened in 2012 but began trending higher in the latter part of the year.

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For a more details on the latest data, here is an excerpt from the press release:

“The LEI picked up in September, after no change in August, and the strengths among its components have been very widespread over the past six months,” said Ataman Ozyildirim, Economist at The Conference Board. “The outlook for improving employment and further income growth are expected to support the moderate expansion in the U.S economy for the remainder of the year.”

“The financial markets are reflecting turmoil and unease, but the data on the leading indicators continue to suggest moderate growth in the short-term,” said Ken Goldstein, Economist at The Conference Board. “Meanwhile, the weak advances in the housing market remain a bigger risk to the outlook than short-term financial gyrations.”

For a better understanding of the…
continue reading





New Jobless Claims: Lowest 4-Week Average Since May 2000

Courtesy of Doug Short.

Here is the opening statement from the Department of Labor:

In the week ending October 18, the advance figure for seasonally adjusted initial claims was 283,000, an increase of 17,000 from the previous week’s revised level. The previous week’s level was revised up by 2,000 from 264,000 to 266,000. The 4-week moving average was 281,000, a decrease of 3,000 from the previous week’s revised average. This is the lowest level for this average since May 6, 2000 when it was 279,250. The previous week’s average was revised up by 500 from 283,500 to 284,000.

There were no special factors impacting this week’s initial claims. [See full report]

Today’s seasonally adjusted number at 283K was very close to the Investing.com forecast of 282K.

Here is a close look at the data over the past few years (with a callout for the past year), which gives a clearer sense of the overall trend in relation to the last recession and the volatility in recent months.

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As we can see, there’s a good bit of volatility in this indicator, which is why the 4-week moving average (the highlighted number) is a more useful number than the weekly data. Here is the complete data series.

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Occasionally I see articles critical of seasonal adjustment, especially when the non-adjusted number better suits the author’s bias. But a comparison of these two charts clearly shows extreme volatility of the non-adjusted data, and the 4-week MA gives an indication of the recurring pattern of seasonal change in the second chart (note, for example, those regular January spikes).

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Because of the extreme volatility of the non-adjusted weekly data, a 52-week moving average gives a better sense of the secular trends. I’ve added a linear regression through the data. We can see that this metric continued to fall below the long-term trend stretching back to 1968.


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Chicago Fed: Economic Growth Picked Up in September

Courtesy of Doug Short.

“Index shows economic growth picked up in September”: This is the headline for today’s release of the Chicago Fed’s National Activity Index, and here are the opening paragraphs from the report:

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.47 in September from –0.25 in August. Three of the four broad categories of indicators that make up the index made positive con- tributions to the index in September, and three of the four categories increased from August.

The index’s three-month moving average, CFNAI-MA3, increased to +0.25 in September from +0.16 in August, marking its seventh consecutive reading above zero. September’s CFNAI-MA3 suggests that growth in national economic activity was somewhat above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index, which is also a three-month moving average, increased to +0.24 in September from +0.18 in August. Fifty-eight of the 85 individual indicators made positive contributions to the CFNAI in September, while 27 made negative contributions. Fifty-six indicators improved from August to September, while 29 indicators deteriorated. Of the indi- cators that improved, 12 made negative contributions. [Download PDF News Release]

Investing.com was looking for a headline reading of -0.01.

Background on the CFNAI

The Chicago Fed’s National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed’s website. The index is constructed so a zero value for the index indicates that the national economy is expanding at its historical trend rate of growth. Negative values indicate below-average growth, and positive values indicate above-average growth.

The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity. I’ve added a high-low channel for the MA3 data since 2010. After hitting the top of the channel in April, it has slipped to the upper mid-range.


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Time for the Pullback?

Courtesy of Declan.

Sellers were going to make an appearance at some point and today was the day they paid a visit. Whether a larger pullback emerges will depend on events over the coming days, but today’s selling did emerge at some natural attack points for shorts.

The S&P finished with a ‘bearish cloud cover,’ but it did manage to hold declining resistance turned support, and the 20-day MA has entered the fray as an area for bears to work. But this wasn’t the most bearish of the indices, and today’s finish actually gives bulls a long play tomorrow (for a bounce off support).  Technicals also suggest a bounce.


While the S&P may give bulls something tomorrow, the Dow Jones Index is playing to bears. The rejection of the 200-day MA coincided with a failed test of former support turned resistance. An undercut of 16,350 would effectively confirm the retest of 15.855.

The Nasdaq 100 offers a more attractive entry level for shorts. There is a clear declining resistance level which was rebuffed on today’s action.  Technicals have sided with bulls, so shorts shouldn’t linger if such resistance is broken to the upside.

The Russell 2000 is in an odd position. It experienced the most bearish action on the day with its bearish engulfing pattern. This suggest further downside tomorrow, but given the strength of the October bounce, it probably has the best support options, first of which will be the 20-day MA.  A weak finish on Thursday may offer a value play here.

Bulls should also watch the Semiconductor Index. I’m still liking the ‘Island Reversal’, but for it to stay true, Tuesday’s breakout gap can’t close. It will have the 200-day MA to help bulls tomorrow, although it may not be enough to protect in morning action.

For tomorrow, the Nasdaq 100 is perhaps the index to watch for shorts with the best risk:reward. Longs can look to the Russell 2000 if there a second day of selling, but if bulls come bursting out of the gates then the S&P might be the better long play.

Accepting KIVA gift certificates to help support the work on this blog. All certificates gifted are converted into loans for those who need the help more.





 

Help One Of Our Own PSW Members

"Hello PSW Members –

This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at jennifersurovy@yahoo.com with any questions.

Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743

Thank you for you time!

 
 

Zero Hedge

Overnight Futures Fail To Ramp As Algos Focus On New York's First Ever Ebola Case

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

And just like that, the Ebola panic is back front and center, because after one week of the west African pandemic gradually disappearing from front page coverage and dropping out of sight and out of mind, suddenly Ebola has struck at global ground zero. While the consequences are unpredictable at this point, and a "follow through" infection will only set the fear level back to orange, we applaud whichever central bank has been buying futures (and the USDJPY) because they clearly are betting that despite the first ever case of Ebola in New York, that this will not result in a surge in Ebola scare stories, which as we showed a few days ago, may well have been the primary catalyst for the...



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Phil's Favorites

The Death of the Blue Chip

The Death of the Blue Chip

Courtesy of 

My title above is only half-kidding. Because everytime Wall Street pronounces “The Death Of” anything, that’s pretty much when it starts working again. But there is an important point being made in a new article at the Wall Street Journal about the current state of some of our biggest stalwart stocks and their underlying businesses, a point I made two days ago here

Here’s the Journal:

A third of the companies in the Dow Jones Industrial Average have posted shrinking or flat revenue over the past 12 m...



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Chart School

S&P 500 Snapshot: Back in Rally Mode

Courtesy of Doug Short.

After a one-day pause, the S&P 500 returned to rally mode. The index opened at its 0.20% intraday low, vaulted upward and then drifted to its 1.81% mid-afternoon high. It closed ninety minutes later with a trimmed gain of 1.23%. The popular financial press touted strong pre-market earnings (most notably from Caterpillar and 3M) as the rally trigger and blamed the afternoon fade on renewed Ebola worries (a doctor being tested in NY).

Looking ahead ... will Amazon's post-close earnings disappointment trigger a market struggle at tomorrow's open? Stay tuned!

The yield on the 10-year Note closed at 2.29%, up 4 bps from yesterday's close. The weekly average for the 30-year fixed mortgage was announced today at 3.92%, the lowest rate since early June of last year.

Here is a 15-minute chart of the past five sessions.

...

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All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Option Review

LUV Options Active Ahead Of Earnings

There is lots of action in Southwest Airlines Co. November expiry call options today ahead of the air carrier’s third-quarter earnings report prior to the opening bell on Thursday. Among the large block trades initiated throughout the trading session, there appears to be at least one options market participant establishing a call spread in far out of the money options. It looks like the trader purchased a 4,000-lot Nov 37/39 call spread at a net premium of $0.40 apiece. The trade makes money if shares in Southwest rally 9.0% over the current price of $34.32 to exceed the effective breakeven point at $37.40, with maximum potential profits of $1.60 per contract available in the event that shares jump more than 13% to $39.00 by expiration. In September, the stock tou...



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Sabrient

Sector Detector: Sharp selloff in stocks sets up long-awaiting buying opportunity

Courtesy of Sabrient Systems and Gradient Analytics

Last week brought even more stock market weakness and volatility as the selloff became self-perpetuating, with nobody mid-day on Wednesday wanting to be the last guy left holding equities. Hedge funds and other weak holders exacerbated the situation. But the extreme volatility and panic selling finally led some bulls (along with many corporate insiders) to summon a little backbone and buy into weakness, and the market finished the week on a high note, with continued momentum likely into the first part of this week.

Despite concerns about global economic growth and a persistent lack of inflation, especially given all the global quantitative easing, fundamentals for U.S. stocks still look good, and I believe this overdue correction ultimately will shape up to be a great buying opportunity -- i.e., th...



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Digital Currencies

Goodbye War On Drugs, Hello Libertarian Utopia. Dominic Frisby's Bitcoin: The Future of Money?

Courtesy of John Rubino.

Now that bitcoin has subsided from speculative bubble to functioning currency (see the price chart below), it’s safe for non-speculators to explore the whole “cryptocurrency” thing. So…is bitcoin or one of its growing list of competitors a useful addition to the average person’s array of bank accounts and credit cards — or is it a replacement for most of those things? And how does one make this transition?

With his usual excellent timing, London-based financial writer/actor/stand-up comic Dominic Frisby has just released Bitcoin: The Future of Money? in which he explains all this in terms most readers will have no tr...



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OpTrader

Swing trading portfolio - week of October 20th, 2014

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

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. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Market Shadows

Falling Energy Prices: Sober Look takes a Sober Look

Falling Energy Prices: Sober Look takes a Sober Look

What do falling energy prices mean for the US consumer? Sober Look writes a brief yet thorough overview of the consequences of the correction in the price of crude oil. There are good aspects, particularly for the consumer, bad aspects, and out-right ugly possibilities. For more on this subject, read James Hamilton's How will Saudi Arabia respond to lower oil prices?  In previous eras, Saudi Arabia would tighten the supply to help increase prices, but in this "game of chicken," the rules m...



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Stock World Weekly

Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's this week's Stock World Weekly. Just sign in with your PSW user name and password. (Or take a free trial.)

#457319216 / gettyimages.com

 

...

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Pharmboy

Biotechs & Bubbles

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

Well PSW Subscribers....I am still here, barely.  From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.

First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices.  Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment.  Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer.  For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...



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About Phil:

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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Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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