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Thursday, August 18, 2022


Which Way Wednesday – Pattern Recognition Special

Head and shoulders, knees and toes.

Sorry, I can’t think head and shoulders without adding the second part thanks to the darned Wiggles, which my kids were raised on – better than Barney, at least…   The head and shoulders investors care about is the chart pattern (from the Chart Store) and, frankly, I could make a knees and toes case by extrapolating the left side of this disaster (which was actually a great bull run but would not be as much fun if we flip it). 

TA is all about symmetry and pattern recognition, two things that are hard-wired into the pleasure center of the animal brain to help us develop cognitive skills early in life.  Humans love finding patterns – it makes us happy.  In this particular case, the fact that stocks go up and down and then get overbought and then get oversold as they correct to the mean has been cleverly identified by one primate (and I hope he gets a copyright fee) as a "head and shoulders" pattern and all the other media primates gather around the great obelisk and they howl and shriek at you every day and they cast their bones and make proclamatiotion as to what it foretells

Unfortunately, Technical Analysis has so many devout followers that it often becomes a self-fulfilling prophesy.  Even worse (and certainly more significant) than the head and shoulders pattern is the coincident "death cross" or "dark cross" that is being formed on our indexes (see yesterday’s post) as the 50-day moving average falls below the 200-day moving average, as indicated on this chart from Barry Ritholtz:

Mary Ann Bartels, Chief Bone-Caster at BAC, made the follwing prediction about the pattern she was seeing:

June 23, 2010 marked the 1-year anniversary of last June’s bullish Golden Cross of the 50-day moving average above the 200-day moving average. This Golden Cross signal preceded a 12-month return of 22.4% on the S&P 500. The average 12-month return for the 42 Golden Crosses that have occurred since 1928 is 9.6%. More importantly, the June 23, 2009 signal occurred during the NBER recession that began in December 2007 and Golden Crosses associated with recessions show a much stronger average 12-month return of 19.5%. The average 12-month return for the S&P 500 over the same period is 7.2%…

The bearish counterpart of the Golden Cross is called a Dark Cross. This signal occurs when the 50-day moving average crosses below the 200-day moving average. For the S&P 500, Dark Crosses are not all that bearish. The 42 Dark Cross signals that have occurred since 1928 have generated an average 12-month return of 2.4% for the S&P 500 vs. the average S&P 12-month return of 7.2%….  The current trading range on the S&P 500, which began in 2000, has seen two of these more bearish signals – one in 2000 and the other in 2007.

So, not really that bad is it?  Yet you will hear the talking heads on the media tell you this is DOOMSDAY and all of the lower primates (yes, you Cramer!), who make their bananas by jumping up and down and acting like monkeys on television, are screeching to their followers that things are much worse than they seem.  Ignore that positive, scientific "data" that shows slow, steady improvement, they say, better we should follow the old ways and react out of frear and ignorance

In fact monkey-boy Cramer was so over the top with his doom and gloom yesterday that CNBC removed the clips of him saying (with the Dow Down 238 points already yesterday afternoon) that the market is "still overvalued" and "deserves to go down."  Cramer even went so far as to say (at 5:15 on this MSN video, which you can watch until it’s removed as well) at 2:50 yesterday that: "I don’t want to be there until 3:40, because we know the double X and triple X programs come in – they have to rebalance.  The SEC said they wouldn’t affect the market.  The SEC never saw a thin market like this.  All the research was done during the Bush years, when anything went.  So you know you have to keep your powder dry until 3:40, when they come in and jam the market down 200 to 300 points.  That’s what happens when we’re down 250 now, we’ll be down 500 at the end of the day.  I mean that’s the way these programs work… This market is too high."

That’s the message investors are getting on the #1 Financial Network.  Kind of hard for the market to get traction when the top monkey comes on TV an hour before the close and tells viewers that the day’s horrific drop will double up into the close because of forces only he (and not the blundering SEC) understands.  You can call it fear mongering, you can call it blatant market manipulation by a many who has said the market is heading lower for a month now and is anxious to make himself correct or you can just call it criminal but I call it just another day at CNBC, which has taken the art of market control to a high art form. 

The great manipulators know when to apply the pressure.  If you know there is about to be an earthquake or an eclipse, you can really impress the natives by banging your staff on the ground or making some gesture along with your prediction and, if it works out – you can then proclaim "behold my power" and the masses will worship you or, if your prediction doesn’t pan out, you can have GE/CNBC redact your statement from their web site and move on as if it never happened (and I challenge you to find this clip or mention of it anywhere on CNBC.com).  Better luck next time, I guess.  

You can get more on my own take on predictions here, from my 2007 outlook.  My 2010 outlook is still in play but, so far, so accurate as we close out the first half of the year with the rich getting richer and the poor still getting poorer. 

Today we got a very disappointing ADP report, the kind that should make Cramer seem like a genius but we’re already down at what I expect to be a firm bottom and this week’s weak data will surely test it.  We have Unemployment tomorrow with the usual 450,000 jobs lost and some terrible Construction Spending numbers (-1%) and a weak ISM Index (59) and awful Pending Home Sales (-12%) and probably weak Auto Sales too (barely 9M units) as gas prices shot up and trucks still outsell cars 5:4 in this insane country. 

Friday is the Big Kahuna – Non-Farm Payrolls and those are now whispered to be off by 145,000 at a 9.8% unemployment week with flat hourly earnings and a flat workweek – all rotten signs and then we get Factory Orders at 10am tomorrow and those are probably off a point!  So our goal for the week is to survive – if we can pull that off, then the tale will be told by earnings, right after the holdiday weekend but, meanwhile, we’re buying what the Cramerites are selling



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  Thanks for the that  Phil. Your  understanding of the market, & world, is amazing.

 Hi Phil,
Starting to make my early Christmas stock shopping list here.  For the financial sector, I had C and BAC but decided to drop BAC today for reasons I feel they have too much in common with C.  So I wanted to go a different route and look at investment mgmt/IB firms.  Of course GS is the name off the top of my head.  BUT too much headline risk for now.  
So I look at what’s been beaten down, has good fundamentals, great potential for growth and no additional headline or legislative risk vs. peers.  
Here are my choices in order of preferred:
-BLK: can’t go wrong with Bonds & ETFs right?  Plus I think Fink (along with Dimon) is one of the better CEOs out there. 
-DB/CS: I think they have a foothold on Asia
-UBS: Same reasoning as DB/CS but more headline risk
-MS: Really beaten down here. But if I like MS, why just not go with GS?
-I know you don’t like ADRs but I’ve got to include Nomura Holdings (NMR).
Thoughts on these or any other name?

Hi Phil sorry for late comment — I am not good with TA — but what is your feeling about head and shoulder S&P that most investor is talking about– I was away all day not able to watch the market.  Just now have a chance to read your market recap.  Now that 1040 is broken…. what should I prepare this week — add much more disaster hedge and rolled my short put of my stock like GOOG and AAPL to next month, currently I have Goog August 470 short put and AAPL August 250 short put, not sure how to adjust Jan 11 TNA 40 Short put have 46 contract from 2.5x rolling — sell more short call at this point???? TIA — thx for your help

My glass is definitely NOT 1/2 empty !! So far this year, it’s overflowing. I simply wanted to point out that the future will not likely look like the past, whichever course you think it will take. So I advocate making hay while the sun shines, doing my part for the society as a whole, and living in an easily defended home with a nice view,good neighbors, and adequate storage of food and ammunition.

Phil/XOM- thanks, I got it. It’s basically another type of buy/write, just changing the order around. Very trickey.

Hi Gucci,
The strikes you have are fine for now.  Don’t forget to sell some short calls as that’s part of the strangle.  I bet it’s hard to see your margin and balance goes south in the past few days.  With SPX 875 short put, I would actually increase those shorts if SPX drops another 5%.  We can either sell more at 875 or rolling 2X to 850 for a reasonable size credit.  After it continues to drop, we can start flipping some to short calls.  Same for the RUT.  Good luck!

Thanks Phil

  gel1: I think for the near term, aside from the current money supply, what the Fed is watching is the velocity of money. P=MV where P =nominal GDP (non inflation adjusted), M=money supply and V=Velocity of Money
It’s a known fact (researching the Fed and/or BEA or even googling "velocity of money data") will show the dramatic drop of V.  Now, the equation tells you that for every x% drop in V, an x% increase in M is needed just to keep P static. But all this doesn’t even assume any pop’n and/or productivity growth and target inflation of the Fed.  Hence, M must increase so much more.  By how much does it need to increase and for how long?  Well, it depends on which economist you ask.
I tried to simplify my explanation but there are a lot more equations and crazy formulas that can help describe what I just typed above. 
The Fed is not worried about inflation or hyperinflation….just yet esp when you have core CPI inching downwards.  They are currently worried about DEFLATION.  With unemployment this high and banks hoarding money, deflation is the problem at hand.  And the Fed has less tools to counter deflation problems vs. inflation problems
The biggest problem is that when to know the exact moment that velocity has gotten to a point where money supply needs to be reduced to prevent the pendulum to swing too far on the opposite side. 

Catching up on the day’s posts and wondered what  the buy write on DBA that you have been doing? Thanks.

Re: yourearlier comment on AAPL
Buy 10%AAPL at $155 and 20% AAPL at $85?
10% and  20% of the company shares, I presume? and not 10%  and 20% of one’s portfolio? Correct?
I am inclined to sell some Oct or Aug $240 0r $230 Puts. What do you advise?
As a novice, reading all the posts on your site, I guess the close was not predicted by anyone, was it?
So, your premise of 2012 puts and calls make more sense now.
Another Q: Per you post of two or three days ago on RIMM, I sold the July 52.5 puts for $2.80. Now what?Roll them to lower?Hold on and wait to see what  happens?

jdub…. I agree, as all studies I have been exposed to regarding the principal driver behind inflation, is for the most part velocity. Monitary reserves sitting in the banks, in order to keep their ratios healthy, will never be inflationary. as the velocity of money does not apply. I believe we are in need of some inflation, in order to encourage debt formation in the private sector. This can only be acomplished through the release of the funds the banks are hoarding by buying treasuries instead of making loans, that might carry greater risk. The banks are profitable without the traditional risk that is expected for loan creation. The Fed can change this situation by adjusting the rate at the discount window.  Until this takes place, the banks will take the line of least risk, and deploy their resources into risk-free treasuries. Banks have to make profits, and the banks will make loans at a rate that is profitable, to the private sector, if their free candy is taken away.

gel1/velocity: now the real thinking begins…under my assumption (and some others i think), the banks are actually keeping yields on the treasuries low and manageable as they are the ones buying during the gov’t auctions. so they borrow "interest free" money, invest in risk-free treasuries which the gov’t needs to fund projects including providing interest free loans to banks. hmmmm….sounds to me like one big ponzi scheme….which if not unwound at the right time, will lead to Prechter’s predictions.  
What I don’t know is if the powers that be are just trying to buy time, volunteering to be the cash cows of large financial institutions or just stupid. increasing rate on the discount window would theoretically decrease money supply.  if velocity stays low, P in the equation shrinks.  so Fed can’t do that and risk any growth momentum there is.  i take it they’re hoping real jobs start to pour in which help increase velocity so Fed can safely reduce M without adverse effects on P.  but if small and med. sized businesses aren’t lent to, they can’t expand and hire people if demand for their products/services are there.  so it’s a catch 22.
Well maybe fiscal policy can help.  Real stimulus for small businesses–maybe. But there is a cloud of uncertainty with regards to future regulation and taxes.  So businesses can have access to funds but uncertainty breeds lack of commitment to invest in human capital not knowing the marginal cost brought about by hiring 1 person.  So like the stimulus checks of 2008, businesses might be inclined to find loopholes wherein they use the money to pay down their debt.  
So kind of in a tight spot here.  It can be taken care of but those in charge will need very steady hands to maneuver around these obstacles.

TASR down 10% on lowered guidance, reversing yesterday’s bounce. Good time to double down? Or could it head lower? The 52 week range is $3.18 to $7.88.

Forgot to say $3.50 currently, so 6% above 52 week low.

FWIW–(JRW i’m using accronyms now!!) ARMS index went to 13 just days before the 9800 to 10200 ascent, went to 10 on 6/29 some type of rebound ahead??  let’s hope. 

Phil–clarifying my understanding–on selling a put with stock price decending–if hold position, the value of put sale decreases, but if buyer of put exercises, then I must buy the stock at the put strike price, but my basis would be strike price less the premium I get.  The value of the put sale can lose more than 100%, which is reflected in the stock value once the put is exercised.  Or the put can expire in which case, I keep the premium money.  Is this correct?  Also, if "rolling" to another put sale position, (which in these case are put sales, I think means to actually buy-to-close, the put already sold, and then sell-to-open the next put to be sold. is this correct?) does this usually end up making a position cost more, kind of like DD a stock position?

Phil, if you hold newly in-the-money puts you dont want to come home to roost, would you be rolling them out now, or waiting?

Couldn’t get the $6 TNA Calls, now down to 4.4 still worth it? or wait it out??? 

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