Testy Tuesday - Have the Markets Become Comfortably Numb?

by Phil - January 19th, 2010 8:08 am

"There is no pain you are receding
A distant ship’s smoke on the horizon.
You are only coming through in waves.
Your lips move but I can’t hear what you’re saying.
When I was a child
I caught a fleeting glimpse
Out of the corner of my eye.
I turned to look but it was gone
I cannot put my finger on it now
The child is grown,
The dream is gone.
but I have become comfortably numb." - Pink Floyd
 

I have a theory that the markets (and the American people in general) aren’t irrational, they are simply shell-shocked after suffering a very traumatic group financial experience… 

To be shell-shocked is to be "mentally confused, upset, or exhausted as a result of excessive stress" and the most common symptoms are: Fatigue, slower reaction times, indecision, disconnection from one’s surroundings, and inability to prioritize - That certainly sounds like our Congress doesn’t it?  Combat stress disorder was first diagnosed in WWI, when 10% of the troops were killed and 56% wounded - far worse than had been experienced in previous wars.  Our current financial crisis has similarly affected more people than any previous crisis with almost everyone knowing someone who is bankrupt or lost their jobs or homes and almost no one escaped the carnage of the downturn without some financial damage. 

Combat fatigue may go a long way to explaining the severe drop-off in volume that has plagued the markets since March, with participation now down to 25% of where we were last January and that leaves us open to the blatant sort of market manipulation that Karl Denninger caught last week as well as the usual nonsense we get daily from HFT programs that drive the market with such precision that we are able to tell how the day is going to go by simply checking our hourly volume targets.  Here’s a clip from CNBC where a floor trader discusses market manipulation as a fact of trading (2 mins in).  

As Nicholas Santiago points out on In The Money Stocks,   "January is usually a very high volume month, yet it has started off the New Year even lighter than the last two months of 2009.  Light volume markets are very difficult to short. Hence the old saying, ‘never short a dull market’."  Not only is the market volume light, but over 60% of the trading volume is concentrated on 5 stocks:  AIG, C, BAC, FNM and FRE!

We have often noted that high-volume (relatively) days almost always tend to be down days and PSW Members can tell you how the…

Tags: ADTRN, AMTD, BAC, C, COH, CREE, CSX, EAT, EBAY, EDU, FAST, FFIV, FHN, FRX, FULT, HBHC, HCBK, IBM, IIVI, KMP, LOGI, MMR, MS, MTB, NTRS, OHB, PETS, PGR, PH, PNFP, RJF, SBUX, SLM, STT, STX, USB, WFC, WIT, XLNX

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Option Traders Remain Skeptical Over Real Estate Shares

by Andrew Wilkinson - August 18th, 2009 4:07 pm

Today’s tickers: IYR, CIEN, FXI, MTB, TGT, MTW & HURN

IYRBearish option traders honed in on puts in the January 2010 contract of the U.S. real estate ETF. Such positioning indicates that the current 1.5% rally in shares to $38.17 today will not last. Pessimists picked up 10,000 puts at the in-the-money January 40 strike price for 6.23 apiece and spread the purchase against the sale of 20,000 puts at the lower January 25 strike for an average premium of 86 cents each. The net cost of the ratio put spread amounts to 4.51 and yields maximum potential profits of 10.49 per contract if the IYR plummets 35% to $25.00 by expiration in January. Shares must decline 7% from the current price before profits begin to accumulate beneath the breakeven price of $35.49. – iShares Dow Jones U.S. Real Estate Index –

CIENBullish action on the maker of transmission and switching systems for fiber-optic communication networks pushed Ciena onto our ‘hot by options volume’ market scanner this afternoon. Demand for near-term call options has surged amid a more than 7% rally in shares to $12.58. More than 16,000 calls were coveted at the August 12.5 strike price for an average premium of 19 cents apiece. We note that investors who paid 19 cents just before 1 pm EDT were rewarded for beating the crowd. Traders currently (2 pm EDT) looking to get long the same calls must now shell out 45 cents per contract. Those individuals who paid an average of 19 cents will begin to bank profits if shares surpass the breakeven point at $12.69 by expiration on Friday. Option implied volatility on CIEN is currently slightly higher to stand at 73% from an intra-day low of 69%. – Ciena Corp. –

FXILong-term downside protection was scooped up by traders bracing for potential declines in the China exchange-traded fund by expiration in February 2010. Shares of the FXI are currently enjoying a more than 2% rally to $40.02. Approximately 15,000 puts were picked up at the February 38 strike price for an average premium of 4.20 per contract. Downside protection on a long position in the underlying, or profits on a short position, will kick in if the fund declines 15.5% from the current price to breach the breakeven point at $33.80 by expiration. – iShares FTSE/Xinhua China 25 Index Fund –

MTBShares of the bank holding company have enjoyed a 0.5% increase today to…

Tags: CIEN, FXI, HURN, IYR, MTB, MTW, TGT

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Monday Meltdown - Seismic Sentiment Shift?

by Phil - July 6th, 2009 8:01 am

What a difference a week makes!

Just a week ago, I was apologetic for being so bearish on the markets.  People were complaining that the writers at PSW were "too negative" and that we were out of step with the MSM, who saw nothing but "green shoots" under every economic rock.  On June 28th, I wrote an article comparing the US consumer to the NY Yankees as a way of explaining how the analysts can be so wrong in their expectations for a recovery.  I pointed out that, although they are the winningest team in baseball history, I can still remember a 10-year dry spell from 1965-1975, saying: "Like the US consumer, you come to EXPECT the Yankees to be in contention and you may make your bets that way out of habit, but that storied history of performance is NOT going to stop you from hitting a 10-year losing streak is it?" 

Like the Yankees, the media EXPECTS the US consumer to win.  After so many consecutive years of stuffing our faces and shopping until we drop, the global media simply refuses to believe that the US consumer can do anything more than stumble slightly before getting right back on the horse and refinancing or whatever it takes to get out there and start charging once again.  As the US consumer makes up 70% of our economy, it’s no wonder all the sentiment polls think prosperity is just around the corner because everyone believes the US consumer is simply resting.  The homebuilders telll us things will rebound, the manufacturers tell us things will rebound and the companies reporting earnings, who are "beating" expectations by only doing 35% worse than last year, are all giving us sunny outlooks as well because the US consumer is coming to save us all.  

Isn’t it amazing how, just 7 days later, the media has suddenly gotten on a totally different bandwagon?  Just as a crowd turns on a star ballplayer who strikes out in a clutch situation, the MSM has turned sour on the US economy and has changed their outlook on the US consumer from "resilient" to "dead" overnight.  While extremism grabs a lot of headlines, sometimes the truth can be found in the very dull places between the labels.  I have long pointed out (some may say ranted) that commodity prices were unjustifiably high and were jeopardizing the recovery by pulling money out of the pockets of already-nervous consumers…

Tags: AA, Commodities, DIA, GS, India, INTC, JNM, MTB, Oil, YUM

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