by phil - August 25th, 2015 8:18 am
We need 3% gains today.
That's right, after dropping 15% our 5% Rule™ says a weak bounce should be 20% of the drop and that's a 3% bounce off yesterday's close just to keep us a tiny bit bullish and, thanks to China's expected market save (more on that later), we're getting it pre-market. We already played for these bounces, of course – as I noted in yesterday's morning post, we wanted to go long in the Futures at:
- Dow 15,840 (/YM), now 16,320 - up $2,400 per contact
- S&P 1,850 (/ES), now 1,946 - up $4,800 per contract
- Nasdaq 4,000 (/NQ), now 4,200 - up $4,000 per contract
- Russell 1,080 (/TF), now 1,152 - up $7,200 per contract
That's $18,400 (per contract) in gains from our suggestions in yesterday's morning post. Whatever you do DO NOT SUBSCRIBE HERE or you will get useful information like that sent to you pre-market every day. Of course, those gains are nothing compared to the shorts we abandoned at the same levels from last week's Live Trading Webinar, where we featured a short on the Dow Futures at 17,477 which were up $8,185 per contract at our target low of 15,840.
I was the first person to hash-tag #BlackMonday (which trended), tweeting it out at 5:05 am, long before the Futures fell off a cliff. We expected the sell-off due to lack of China intervention and, by the time I was writing the 8:20 post, we did a very good job of calling the bottoms but, at 9:42, in our Live Member Chat Room, I said:
I think this is almost a flash-crash. Someone (thing) is selling with abandon. I think since we wanted to grab a long, we should and I nominate Dow at 15,600, which is more than 10% down for at least a bounce and the DIA Sept $155s at $6.75 were $13 on Friday and I like them for a gamble with the intention of selling the $159s for $6 on a bounce (now $5.20) so 20 of those for the 5% Portfolio with a stop at $6 or if the Dow can't hold 15,600.
by ilene - August 24th, 2015 8:01 pm
[The art of catching a falling knife should be practiced with a helmet and very thick gloves!]
Courtesy of Wade of Investing Caffeine
“In the middle of every difficulty lies an opportunity.” ~Albert Einstein
It was a painful week for bullish investors in the stock market as evidenced by the -1,018 point drop in the Dow Jones Industrial Average, equivalent to approximately a -6% decline. The S&P 500 index did not fare any better, and the loss for the tech-heavy NASDAQ index was down closer to -7% for the week.
The media is attributing much of the short-term weakness to a triple Chinese whammy of factors: 1) Currency devaluation of the Yuan; 2) Weaker Chinese manufacturing data registering in at the lowest level in over six years; and 3) A collapsing Chinese stock market.
As the second largest economy on the planet, developments in China should not be ignored, however these dynamics should be put in the proper context. With respect to China’s currency devaluation, Scott Grannis at Calafia Beach Pundit puts the foreign exchange developments in proper perspective. If you consider the devaluation of the Yuan by -4%, this change only reverses a small fraction of the Chinese currency appreciation that has taken place over the last decade (see chart below). Grannis rightfully points out the -25% collapse in the value of the euro relative to the U.S. dollar is much more significant than the minor move in the Yuan. Moreover, although the move by the People’s Bank of China (PBOC) makes America’s exports to China less cost competitive, this move by Chinese bankers is designed to address exactly what investors are majorly concern about – slowing growth in Asia.
Although the weak Chinese manufacturing data is disconcerting, this data is nothing new – the same manufacturing data has been very choppy over the last four years. On the last China issue relating to its stock market, investors should be reminded that despite the massive decline in the Shanghai Composite, the index is still up by more than +50% versus a year ago (see chart below)
Fear the Falling Knife?
Sector Detector: Finally, market capitulation gives bulls a real test of conviction, plus perhaps a buying opportunity
by Sabrient - August 24th, 2015 5:37 pm
Reminder: Sabrient is available to chat with Members, comments are found below each post.
Courtesy of Sabrient Systems and Gradient Analytics
The dark veil around China is creating a little too much uncertainty for investors, with the usual fear mongers piling on and sending the vast buy-the-dip crowd running for the sidelines until the smoke clears. Furthermore, Sabrient’s fundamentals-based SectorCast rankings have been flashing near-term defensive signals. The end result is a long overdue capitulation event that has left no market segment unscathed in its mass carnage. The historically long technical consolidation finally came to the point of having to break one way or the other, and it decided to break hard to the downside, actually testing the lows from last October! Many had predicted that the longer we go without a meaningful pullback, the harder and scarier it would be when it finally broke down. In addition, program trading kicked in to deleverage positions, with preset algorithms exacerbating the selling and volatility.
Actually, there are four main issues creating uncertainty for investors: China’s true growth outlook, commodity prices, the Federal Reserve’s plan for rate hikes, and the upcoming corporate earnings season. But all is not lost, and a capitulation event like this also provides a healthy cleansing, providing the opportunity for capital to transfer from weak to strong hands, and now there is suddenly a lot of room to the upside — if bulls can keep their composure and regain their conviction.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.
With signs of slowing growth reducing demand from China, coupled with further devaluation of the yuan, other exporting nations are racing to debase their currencies in order to stay competitive. But as I discussed last week, the devaluation of the yuan (which is pegged to the dollar and thus must manually adjust the valuation) pales in…
by phil - August 24th, 2015 8:20 am
People are starting to FREAK OUT!
It's been so long since we've had a good old-fashioned market correction that many "investors" think the World is ending and are selling everything that isn't nailed down. Of course, in some cases they are right – especially if they are the kind of momentum chasers who piled into Netflix (NFLX) at over 250 times earnings or Tesla (TSLA) about the same or Amazon (AMZN) at 100 time earnings as they looked to carnival barkers like Cramer and Co. to hit the noisemakers and tell them how wise they were for following all the lemmings off a cliff.
Skip to the last four minutes of this interview from last Wednesday Morning, where I explain why Netflix was our top choice for a short, now 25% ago and I also called for a 10% market correction, now (including the morning's futures) 8% ago. That morning, we were also shorting the Dow Futures (/YM), which were at 17,000, Russell Futures (/TF) at 1,205 and Nasdaq Futures (/TF) at 4,525 using the strategies we had discussed at the end of July in: "Using Stock Futures to Hedge Against Market Corrections."
Aside from the Dow contracts now up $5,500 at 15,900, Russell contracts gaining $8,500 at 1,120 and Nasdaq Futures gaining $10,500 at 4,000, we also suggested bullish play on gold that has already jumped 30% in two weeks. Even in this downturn, I was able to point out to our Members early this morning that there was a good entry on Gasoline Futures at $1.33 on the /RBV5 contracts (Sept) and we're already back at $1.345 for a $650 per contract gain.
As noted in "Using Futures..", there are ALWAYS opportunities to pick up nice gains in the Futures market, no matter which way things are going. I also sent out an alert to our Members with Technical Analysis of the current market conditions and you can see it on Twitter (our 5:05 am tweet) if you'd like – as I won't rehash it here other than to say our expected 10% correction is right on track.
by ilene - August 23rd, 2015 6:38 pm
On Friday, ahead of the closing stock rout, we forecast that the biggest risk for anyone staying long over the weekend was a disappointment out of China, where the sellside had gotten so excited that a 50-100bps RRR cut was imminent, that the lack of one would surely send futures sliding.
As noted earlier, everyone is expecting a 50-100 bps RRR cut this weekend. The risk is there isn't one http://t.co/oU5t45ERWw
— zerohedge (@zerohedge) August 21, 2015
Sure enough, as we noted earlier today, much to everyone's surprise and disappointment, the PBOC did nothing (for reasons we speculated upon earlier).
Which bring us to this evening's S&P futures, which opened for trading minutes ago, and as expected gapped by over 0.6% after the Chinese disappointment, down 19 points to 1952 and looking quite heavy as several key support level as in the crosshairs.
The key carry driver for all US equity action, the USDJPY, is not looking too healthy either and just hit its lowest level since July 8 as the Yen is soaring on carry trade unwinds:
To be sure, the real action in tonight's illiquid market will not be in US futures, at least not until Europe opens, but in China, where it will be up to the "National Team" to prevent a massive rout now that the PBOC has told stocks they are on their own for the time being..
Also keep an eye on crude: after an initial gap lower the black gold is trying to stabilize the drop. Perhaps it is waiting for Gartman to confirm he is still long before crashing below $40.
So what happens next? It's clearly anyone's guess so here courtesy of Bloomberg is a selection of quite a few guesses and what some pundits, many of whom predicted smooth sailing unttil year end, are suddenly and very dramatically changing their tune.
- “It’s going to be pretty deep. … We’re in the camp that this is not yet a big move. It’s scary, and those last two day trends look
by ilene - August 23rd, 2015 6:24 pm
Courtesy of Lee Adler
The NAR reported that the median US existing home sale price for sales that settled in July was $234,000, which puts the annual inflation rate for house prices at 5.6%. That’s softer than the June closed sale price inflation rate of 6.5% but still way above what the BLS is recognizing for the housing inflation component of CPI, which they are now plugging at 3% for a 41% weighting in Core CPI.
The NAR data represents sales that settled and were recorded by county governments in July, but generally took place in May on average. At the same time, Redfin has released data collected from MLS services in the 55 largest US metropolitan area for current contract prices in July. Unlike the lagging NAR data, this is real time market data released within a few weeks of the end of the month. Their data showed July contract prices rising by 5.1% year over year to a median sale price of $278,653. This was stronger than the 4% year to year gain seen in June contracts.
The NAR data next month will reflect the MLS June contract price data. July contract prices will show up in the NAR’s October release. The widely reported Case Shiller Index to be released next week, will only show average contract prices for March. July contract data won’t be reflected in Case Shiller until December. In addition, its smoothing methodology and the inclusion of repeat sales only further suppresses and slows the Case Shiller Index. Its methodology often leads to dangerously misleading conclusions. It is why Robert Shiller was nearly two years late in recognizing that the housing price crash had bottomed in 2011.
While Big Media focuses on Case Shiller it ignores the far more sensitive and timely sources of information that are available. Most astounding is the fact that even the Wall Street Journal, which is the PR organ of the Rupert Murdoch owned Realtor.com, emphasizes the Case Shiller data while refusing to report the accurate current real time house price data to which they have total access.
by phil - August 22nd, 2015 8:34 am
That's how much our Short-Term Portfolio gained on Friday during the market drop. During the session, we cashed out some of our winning hedges and added a few more conservative positions into the weekend – just in case China comes through with stimulus and pops the market.
That brought our cash position up from $255,000, at noted in the morning post, to $318,000. In other words, we cashed out $62,975 worth of winning positions – WHILE THEY WERE WINNING – this is something I work very hard to teach our Members, the forgotten skill of taking profits off the table!
As we calculated in Member Chat, we still had $45,000 of in-the-money protection after we cashed out the naked portions of our SDS, SQQQ and TZA hedges at 11:15. Then, later in the day, we didn't like the way the market looked so we added bull call spreads on SDS and SQQQ after noting that the S&P and the Nasdaq still had a lot further to fall if this is a proper correction.
What's the most important take-away here? WE CHANGED OUR MIND! We followed our Rule #1 and ALWAYS sold into the initial excitement because we got a good drop in the morning and we didn't want it to reverse on us. Then, once the bounces were weak and we began breaking down again – we simply bought another SDS position and more SQQQs.
A lot of traders are "embarrassed" to make a decision and then, even if they feel it was a mistake, to go back and re-buy the position – especially when they have to call a broker and "admit" they changed their mind. That's a huge problem because even the best traders are wrong 40% of the time and sticking to wrong decisions does not make you a better trader (trust me, I've tried!).
We take pokes at Futures entries all the time and rarely with conviction because we're only guessing where support will be and, if it fails – the quicker we CHANGE our minds the better! Again, this is one of the reasons that learning to trade the Futures can make you a much better trader…
by ilene - August 22nd, 2015 3:01 am
Courtesy of Joshua M. Brown
My friend Jim Chanos was on-set for the entire hour for today’s show. It was great timing, today was definitely a day that we wanted to hear some perspective from one of the greatest living legends in the biz and a natural born skeptic.
Chanos weighed in on China, Hewlett-Packard, Caterpillar, his new short position in Solar City and more. I found it really interesting that his shop doesn’t really have a view on the Federal Reserve. Anyway, check out the clips below:
by ilene - August 21st, 2015 4:54 pm
Courtesy of Joshua M. Brown
You’ll read all the superlatives this weekend.
Biggest one-day drop since _____.
Ninth largest ____ ever.
Greatest spike in the Vix since ____.
4 out of every 5 ____ have now fallen ____ percent.
On and on. It’s a parlor game. Maybe this kind of thing is helpful for context. Maybe it’s just rubbernecking. Whatever.
What’s really important is to remember that days like today are why we call themrisk assets.
The S&P 500 historically provides you with a 7% average annual real return over the long term. That’s doubling your money roughly every 10 years.
But 7% average annual returns are not the same as 7% annual returns.
The word “average” appears in that statement. How are averages formed? By pinging violently back and forth between extremely varied numbers, such as +30% and -16% and +9% and -22% etc. In fact, you almost never get the long-run 7% on the nose in any given calendar year.
The asset class that has historically doubled your money every ten years is equally capable of making you feel like shit on the way there. Fortunately, never for very long.
Have a good weekend and pat yourself on the back. The pain of today is where the rewards of tomorrow originate from.
by ilene - August 21st, 2015 2:13 pm
Is the bull market, which started after the lows of early 2009, coming to an end? Let's have a look at some data, as well as the arguments pro and con, to see if we can find any insight. In particular, I want to look at the latest economic, corporate and market issues to see what we might learn.
First, the U.S. economy. As we have observed, it has been a long slog out of the depths of the financial crisis. Gross domestic product growth has never really taken off; wage growth is weak; and retail sales, except where cheap credit flows freely, have disappointed. Many people have little or negative equity in their homes. I have explained — or if you prefer, rationalized — that this is typical of other post-credit-crisis recoveries.
The primary upside to the U.S. economy has been job creation, housing and demand for capital.
Start with the recovery in the labor market. Unemployment now is 5.3 percent, almost half of what it was in the aftermath of the crisis; 11 million jobs have been created since the Great Recession ended. Job openings continue to increase, and there are signs that wages may finally begin to move higher. This is significantly better than it has been at any time since 2007.
[Picture via Pixabay.]