Archive for the ‘Phil’s Favorites’ Category

The Fat Pitch: Weekly Market Summary

 

Weekly Market Summary

Courtesy of  

Summary: Waterfall events like the current one tend to most often reverberate into the weeks ahead. Indices will often jump 10% or more higher and also attempt to retest the lows.  Volatility will likely remain elevated for several months. But the fall in equity prices, which has knocked investor sentiment to its knees, opens up an attractive risk/reward opportunity for investors. Further weakness, which is quite possible, is an opportunity to accumulate with an eye toward year-end. However, a quick, uncorrected rally in the next week or two would likely fail.

* * *

Equities ended the week higher: SPY and DJIA rose 1% and NDX rose over 3%. Outside the US, Europe gained 1% and EEM gained 3%. The biggest mover was oil, which gained 12%.

The last two weeks have been remarkable. On August 17, SPY closed less than 1% from its all-time closing high. A week later it had lost 11%. And then three days later it had regained half of those loses, jumping 6%.

A drop that much, that quickly, is very rare. According to David Bianco, it has happened only 9 times in the more than 20,000 trading days in the past 80 years. All of these occurrences were precipitated by (perceived or real) political or economic crises.
 

That was the case now as well. Since the Chinese Yuan depreciation began through the low in equities on Monday, 92% of the fall in SPY occurred overnight. Cash hours were nearly flat. The fall in equities had very little to do with domestic earnings or economic reports. It was a reaction to events overseas.

Our view has been that the Yuan depreciation (just 3% to date) is unlikely to have a long lasting affect on the US stock market or its fundamentals. Exports to China account for less than 1% of US GDP. Only 2% of revenues for S&P companies is directly derived from China (data from Barrons).
 

Moreover, the current situation is nothing like the Asian financial crisis in 1997. We detailed this last week with the conclusion that even that…
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Cost of PUTs on Shanghai Index Hits Record vs. Calls; Sentiment vs. Valuation

Courtesy of Mish.

In spite of the recent plunge on the Shanghai index, as recently as August 24, CALL options on the index were more expensive than PUT options.

This Bloomberg headline “If the Options Market Is Right, China’s Stock Rescue Is Doomed” reads like something one would find in a tabloid, but the reverse is now true.

Options traders have never been so pessimistic on China’s stock market, betting the government’s renewed effort to prop up share prices is doomed to fail.

The cost of bearish contracts on the China 50 exchange-traded fund surged to the highest level versus bullish ones since they started trading in Shanghai six months ago. The so-called skew also climbed to a record for a similar ETF in the U.S., even as government buying drove China’s benchmark index to a 10 percent rally in the final two days of last week.

Puts that pay out on a 10 percent drop in the China 50 ETF cost 7 points more on Friday than calls betting on a 10 percent gain, according to implied volatility data on one-month contracts. As recently as Aug. 24, the bullish contracts were more expensive. For the U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the skew reached a record 38 points on Aug. 27 and closed the week at 28 points.

Puts that pay out on a 10 percent drop in the China 50 ETF cost 7 points more on Friday than calls betting on a 10 percent gain, according to implied volatility data on one-month contracts. As recently as Aug. 24, the bullish contracts were more expensive. For the U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the skew reached a record 38 points on Aug. 27 and closed the week at 28 points.

Equities on mainland bourses traded at a median of 53 times reported earnings last week. That’s the most among the 10 largest markets and more than twice the 19 multiple for the Standard & Poor’s 500 Index. Analysts have cut their 2015 profit estimates for Shanghai Composite companies by 8.8 percent this year, according to data compiled by Bloomberg.

Options Skew

click on chart for sharper image

Valuation Still Extreme

Fundamentally speaking, the Shanghai stock market is hugely overpriced. I concur


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Three Keys to the Week Ahead

 


Courtesy of Marc To Market

There are three things that will command investors' attention in the week ahead.  The first, and most important, is whether the global capital markets will continue to move toward stability after the huge drama over the past week or two. The instability appears to have shaken the confidence of some Fed officials and market participants that a September lift-off is the most likely scenario.  

Our assessment of the technical condition of the market is that the panic is over, some capitulation was seen, and equities, interest rates, and currencies took a big step toward returning to status quo ante in the second half of last week. We recognize the technical condition as a reflection of market psychology. It is as if Mr. Market was shaken out of its melodramatic response with an ostensibly refreshing slap.  While the precipitous drop of the magnitude we experienced was indeed scary on many levels, the system showed a comforting resilience, both operationally and psychologically.  

The markets had not reached the point of breakdown in which everyone was forced to be short-term traders.  Speculators capitulated (e.g., the gross short yen futures position were slashed by more than 37k contracts, which in percentage terms is the biggest short squeeze in three years).  Margin calls were made.  Yet there were medium and longer-term investors that recognized the exaggerated sell-off as a new opportunity.  The break of dramatic momentum was able to feed on itself.  Those short-term momentum traders then were forced to cover

The second is the ECB meeting.  The updated staff forecasts will likely point to slower growth and less price pressures than had been expected in the June forecasts.  Rather than end early as some had previously speculated, the ECB's asset purchases may be increased.  This could happen through increasing the monthly amount from the current 60 bln euros, or it could extend beyond September 2016.  

It seems unreasonable to expect any such announcement now.  ECB President Draghi is likely to emphasize the flexible nature of its asset purchases.   Draghi has often cautioned that the cyclical upswing would be contained by the lack of structural reforms.  Also,…
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Nicole Foss Talks Energy Industry Issues and Oil Price Collapse

Courtesy of The Automatic Earth.


Unknown California State Automobile Association signage 1925
 

Nicole Foss recently participated in a live Skype ‘forum’ discussion at the Doomstead Diner site that also included, among others, Gail Tverberg, Steve Ludlum, Norman Pagett and Ugo Bardi. Apologies for the fact that I haven’t watched the videos yet and I’m getting the details as I go, so my info may be a bit sketchy. And so is the order the episodes come in here. I understand episode 3 is not even available yet.

I’ll run this in episodes. Today’s post contains episode 1. Yesterday I posted episode 2, Nicole Foss Talks Economics At The End Of The Age Of Oil.

Part I- Energy Industry Issues

The Doomstead Diner site blurb:

Coal Industry Collapse-Carbon Sequestration

One of the biggest effects we see lately is a collapse in commodity prices, through all sectors. Most intriguing to me is the collapse in coal prices, since coal is used in so many places for the production of electricity. Several large coal mining companies have gone into bankruptcy. How will this affect electricity production as we move along here? Q2: Will the efforts for Carbon Sequestration, Carbon Credits and Taxation have any meaningful effect on this dynamic?

Oil Price Collapse

Many people thought the price collapse in Oil that came at the end of 2014 was unforseen and unknowable. In fact many people in the peak oil community believed for a long time the price of oil would spiral inexorably upward. Some of us here have argued otherwise, that credit constraints would drive the price downward. Steve did the best job of this, and actually pegged the price crash for oil to the month more than two years in advance with his infamous Triangle of Doom charts. Steve, can you tell us how you were able to pull off that stunt? Q: John Mauldin and other shills for the Oil industry assure us that better and cheaper drilling technology will bring up all the oil we need and keep the industry solvent. How realistic is this?

 





Phil’s Stock World Trading Webinar 8-25-15

This week's major topics: 5% Rule, Short-term and Butterfly Portfolios, Trade Ideas, MSFT, NASDAQ, SPX, S&P, AMZN, WMT, BBY, AAPL, China, and Global Implications

Subscribe to The Phil's Stock World YouTube Channel here.

  • 00:00 Disclosure
  • 2:40 Butterfly portfolio, review positions, MSFT, WMT trade ideas
  • 17:28 Hedges
  • 24:50 Short-term portfolio, review positions, hedging
  • 35:00 NASDAQ, AAPL, S&P, AMZN, WMT, McDonald's, Uber trade Ideas
  • 58:00 MSFT, IBM, HP, trade ideas
  • 1:09:20 Hedge SPX trade ideas, review positions
  • 1:21:15 BBY, AMZN, AAPL, trade ideas
  • 1:33:10 NASDAQ 15% drop, 5% rule
  • 1:43:58 China, global implications
  • 1:53:26 Richmond Fed, Home sales, S&P Home Price index, FHFA Housing index




Dumb Money Redux

 

Dumb Money Redux

Courtesy of Joshua Brown

engineer_syllogism

Cartoon by XKCD

Responses are pouring in from my post Computers are the new Dumb Money. A few of the quants I know told me the link was hitting their inboxes all day from friends and colleagues around the industry. A few desk traders I talk to had some anecdotes backing my assumptions up. One guy, a “data scientist”, was furiously angry, meaning he probably blew himself up this week or has some other deep-rooted insecurity about what he’s trying to do and needed to vent.

If you haven’t read it yet, go here: Computers are the new Dumb Money (TRB)

One thing worth keeping in mind about algorithmic trading is that there will always be some strategies that are better executed than others and many that will thrive while their competitors are chopped to pieces. In this respect, they’re no different than any other traders or funds.

For example, the quant funds that were probably most injured this week were those who were in the business of selling volatility or gamma. If they’re short gamma, they end up having to dump a ton of stock when volatility breaks out and prices dive. This kind of action is what exacerbates declines and makes a down-2% day into a down-4% day – especially when everyone is doing the same thing (see ‘portfolio insurance, 1987’). If they’re short vol, then they could be running one of those fabled strategies that picks up nickels fairly consistently until the steamroller flattens them – taking in options premiums in small, yet reliable amounts, and then a crisis forces them to actually make good on all that insurance they’ve been writing.

This has happened before, it will happen again. It doesn’t mean that all quant or algorithmic trading is foolish. It just means that the alchemy still isn’t all it’s cracked up to be.

Sunrise, sunset. 

[Picture via Pixabay]





With New Data Showing Housing Sales Slowing Here’s Why You’ll Want To Be In Cash

Courtesy of Lee Adler of Wall Street Examiner 

NAR data on housing sales showed the largest July decline since 2011, cutting the annual sales volume growth rate by 47% since March. However, while the growth rate is slowing, total sales volume was the heaviest for July since the peak of the housing bubble in 2005. Heavy but declining volume is a warning sign that you should heed.

Using the monthly seasonal adjustment error annualized, the Wall Street Journal and other mainstream outlets reported a 0.5% rise in July sales. In fact, using actual, not seasonally adjusted data, July sales fell by 11.5%. Sales always decline from June to July, but this July posted the second worst July performance since the housing crash. That contributed to the annual growth rate dropping from +13.5% in March to +7.2% in July.

Housing Sales and Inventory

Housing Sales and Inventory

The fact that sales are slowing from bubble levels could be an early warning that the current version of the housing bubble is peaking. As house prices inflate and household incomes stagnate, affordability issues are beginning to have an impact in many markets. The market can ill afford any increase in mortgage rates. We saw evidence of that when the contract fallout rate spiked in April when rates briefly shot higher before settling back in ensuing months. Another rise in rates that sticks should be marked by another sharp increase in sales contracts that fail to go to closing.

Monthly Housing Sales and Closings

Monthly Housing Sales and Closings

Do you believe that liquidity moves markets? Then click here to learn how you can follow the money. 

 





News You Can Use From Phil’s Stock World

 

Financial Markets and Economy

Wall Street tradersAfter all that, the stock market finished the week higher (Business Insider)

The stock market had a wild ride this week. And it ultimately ended up even better than it started. 

This week we saw a 1,000 point drop in the Dow in minutes, another drop of around 600 points in an hour of trading, and another day that saw one of the largest single-day point gains for the Dow in history.

Worried about your investments? Here’s the best advice (Market Watch)

The market is on a volatility roller coaster again, and many average investors are caught somewhere between fear and panic. These are the days good, personal financial advice matters most.

No robo adviser will keep you from selling at the worst possible moment, but a good financial adviser absolutely will (and just might encourage you to buy more when securities are on sale). How much is having access to financial advice saving the American public every year?

Two traders at work on the floor of the New York Stock Exchange.Behold, this week’s market moves were not world-ending (Quartz)

The start of the week was a little scary. Investors didn’t know where to turn as chaos swepteastward from China, sending American and European markets into a panic.

But then things … moderated. Even though day-trading websites broke down left and right, the biggest indices, namely the S&P 500 in the US and STOXX 600 in Europe, barely changed this week. The former rose 0.9%, the latter 0.6%. The mood is still pretty dour in Asia, especially China. Indices there and in Japan ended the week in the red. Questions continue to swirl around whether the Chinese government can get its financial system under control—or if it’s trying too hard to do so.

China's minister defends intervention: 'We must take action' (CNN)

If there is "systemic risk to the financial system, we must take action," China's Vice Finance Minister Zhu Guangyao told CNN in an exclusive interview Friday.

Zhu's comments came


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Still “Too Early” to Decide on Rate Hikes: Let the Market be Your Guide

Courtesy of Mish.

Still “Too Early”

After all the hemming and hawing by nearly every Fed governor, and despite the fact the Fed has to do something in just over two weeks, the Fed still does not know what to do.

Speaking in Jackson Hole Fed governor Stanley Fisher Keeps September Rate Hike Option on the Table.

With market turbulence casting a cloud over the outlook for US monetary policy, a senior Federal Reserve official strove on Friday to keep the option of an interest rate rise alive at September’s key meeting.

Stanley Fischer, the vice-chair of the Fed’s Board of Governors, said at talks in Jackson Hole, Wyoming, that it was too early to say how the recent market tumult had affected the argument for a move next month, and that no decision had yet been made.

“The change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds, so I wouldn’t want to go ahead and decide right now what the case is — more compelling, less compelling etc,” he told CNBC business news.

“We’ve got a little over two weeks before we make the decision,” he said. “And we’ve got time to wait and see the incoming data, and see what is going on now in the economy.”

Fisher Not Certain

Here’s the funniest line by Fisher in the interview: “The economy is returning to normal. We’re not certain we are there yet.”

I am certain the economy is nowhere near normal, and the Fed is the primary reason why.

My speech was all prepared for Jackson Hole, but somehow I was not on the invite list. It was a severe oversight by someone.

Where They Stand

Meanwhile, let’s take a look at where all the Fed governors stand.



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The Dollar: Now What?

The US dollar has been on a roller coaster ride. Many have lost confidence in the underlying trend.  An important prop for the dollar, namely the prospects for the Fed's lift-off has been pushed out again, this time ostensibly due to the heightened volatility of the financial markets, apparently sparked by events in China.
 
The September Fed funds futures have nearly fully priced out the risk of a hike next month. The effective Fed funds have traded 14-15 bp this month, and the September Fed funds contract implies an average effective rate of 17.5 bp next month.
 
We continue to believe that the main driver of this third significant dollar rally since the end of Bretton Woods is the divergence of the trajectory of monetary policy between the US (and UK) and nearly all the other high income countries, and many emerging markets, including China.  There are a number of cross-currents, and other considerations, including market positioning, use of euro and yen for funding purposes, and hedging flows that at times may obscure or even reverse (technical correction) the underlying trend.
 
Nevertheless,  we expect the divergence theme to gain more traction over time.  The Federal Reserve will raise rates at some juncture and not only will the ECB and BOJ continue to ease for at least the next 12 months, but there is risk that the central bank balance sheet exercise lasts even longer.  The ECB's staff, which will update its forecasts in the week ahead, is likely to shave both its growth and inflation forecasts at the September 3 central bank meeting.
 
The Dollar Index was slammed to its lowest level since January in the market panic at the start of last week.  It overshot the minimum objective of the double top pattern we noted (~94.30).   It rebounded and on Thursday had retraced nearly 61.8% of the decline since the August 7 (~98.33).  The trend line drawn off that high and the August 19 high (~97.08) comes in near 95.80 on Monday and falls to about 95.15 by the end of the week.


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Zero Hedge

Black(er) Monday Looms: Dow Futures Down 220 After J-Hole Speeches & China Fold

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It appears a combination of Stan Fischer's 'September is still on the table' hawkishness (among others at Jackson Hole) and the "promise" once again that China will not intervene in the stock market anymore has taken all the exuberance out of last week's epic short squeeze in US stocks. Dow futures have given all of Friday's manipulation back and are trading ...



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Phil's Favorites

The Fat Pitch: Weekly Market Summary

 

Weekly Market Summary

Courtesy of  

Summary: Waterfall events like the current one tend to most often reverberate into the weeks ahead. Indices will often jump 10% or more higher and also attempt to retest the lows.  Volatility will likely remain elevated for several months. But the fall in equity prices, which has knocked investor sentiment to its knees, opens up an attractive risk/reward opportunity for investors. Further weakness, which is quite possible, is an opportunity to accumulate with an eye toward year-end. However, a quick, uncorrected rally in the next week or two would likely fail.

* * *

Eq...



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Chart School

Rally Stalls Out

Courtesy of Declan.

After all the volatility during the week, Friday's action was a little reprieve. Markets sit a point where shorts will fancy their chances, although further upside should not be viewed as surprising given the level of volatility markets experienced last week. If there is an indication bears are going to come back with a vengeance, it's that buying volume has been well down on prior selling.

The Nasdaq finished on former trading range support, turned resistance. Watch for a short squeeze from this level, up to the 200-day MA.


The Nasdaq 100 may have given an indication of what to expect on Monday as it started to edge more into t...

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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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Market News

News You Can Use From Phil's Stock World

 

Financial Markets and Economy

After all that, the stock market finished the week higher (Business Insider)

The stock market had a wild ride this week. And it ultimately ended up even better than it started. 

This week we saw a 1,000 point drop in the Dow in minutes, another drop of around 600 points in an hour of trading, and another day that saw one of the largest single-day point gains for the Dow in history.

Worried about your investments? Here’s the best advice (Market Watch)

The market is on a ...



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Kimble Charting Solutions

Dangerous Place for a kiss of resistance, says Joe

Courtesy of Chris Kimble.

Anyone noticed its been a wild week? Has anything been proven with all the volatility the past 5-days?

What happens at (1) below, could tell us a good deal about what type of damage did or didn’t take place this week!

CLICK ON CHART TO ENLARGE

The large decline on Monday cause the S&P 500 to break support of this rising channel.

The mid-week rally pushed the S&P higher and as of this morning it is kissing the underside of old support as resistance now, near the 50% retracement level of the large decline over the past few weeks.

Why could th...



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Sabrient

Sector Detector: Finally, market capitulation gives bulls a real test of conviction, plus perhaps a buying opportunity

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 ...



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OpTrader

Swing trading portfolio - week of August 24th, 2015

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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ValueWalk

Some Hedge Funds "Hedged" During Stock Market Sell Off, Others Not As Risk Focused

By Mark Melin. Originally published at ValueWalk.

With the VIX index jumping 120 percent on a weekly basis, the most in its history, and with the index measuring volatility or "fear" up near 47 percent on the day, one might think professional investors might be concerned. While the sell off did surprise some, certain hedge fund managers have started to dip their toes in the water to buy stocks they have on their accumulation list, while other algorithmic strategies are actually prospering in this volatile but generally consistently trending market.

Stock market sell off surprises some while others were prepared and are hedged prospering

While so...



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Digital Currencies

Bitcoin Battered After "Governance Coup"

Courtesy of ZeroHedge. View original post here.

Naysyers are warning that the recent plunge in Bitcoin prices - from almost $318 at its peak during the Greek crisis, to $221 yesterday - is due to growing power struggle over the future of the cryptocurrency that is dividing its lead developers. On Saturday, a rival version of the current software was released by two bitcoin big guns. As Reuters reports, Bitcoin XT would increase the block size to 8 megabytes enabling more transactions to be processed every second. Those who oppose Bitcoin XT say the bigger block size jeopardizes the vision of a decentralized payments system that bitcoin is built on with some believing ...



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Pharmboy

Baxter's Spinoff

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

Baxter Int. (BAX) is splitting off its BioSciences division into a new company called Baxalta. Shares of Baxalta will be given as a tax-free dividend, in the ratio of one to one, to BAX holders on record on June 17, 2015. That means, if you want to receive the Baxalta dividend, you need to buy the stock this week (on or before June 12).

The Baxalta Spinoff

By Ilene with Trevor of Lowenthal Capital Partners and Paul Price

In its recent filing with the SEC, Baxter provides:

“This information statement is being ...



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Mapping The Market

An update on oil proxies

Courtesy of Jean-Luc Saillard

Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself. 

Since...



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Promotions

Watch the Phil Davis Special on Money Talk on BNN TV!

Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene

 

The replay is now available on BNN's website. For the three part series, click on the links below. 

Part 1 is here (discussing the macro outlook for the markets) Part 2 is here. (discussing our main trading strategies) Part 3 is here. (reviewing our pick of th...

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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!




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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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About Ilene:

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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