Archived Blog

Technology bellwether, Apple

Posted May 22, 2009 at 4:11 AM

If you are a new reader, I strongly encourage you to listen to some recent postings where we projected in early May that the market would like encounter resistance by mid-May. In fact, we gave a 10-day horizon whereby we cautioned that trading bullish positions was not a high probability play. In short, the potential for reward was overshadowed by the risk of taking a long position.

At these times, only the greatest market timers should be playing aggressive positions. For most, prudence dictates taking a ‘wait-and-see’ approach. Nothing is lost by watching the market test a substantial resistance level to see if it is broken. Nothing is lost if the market fails at that resistance level. And nothing is lost even if resistance is broken and the market moves higher, other than an opportunity cost. Certainly, money could have been made. But the great traders don’t look merely at whether the markets could rise higher and whether they could make money on such a move.

Possibilities are for amateurs. If you want to join the elite ranks, you need to focus on probabilities too. If the probability of a move higher is low, entering a long position can be classified as either aggressive or just plain silly! In a recent video post, Gareth Feighery evaluated the probable outcomes for the market as May expiration approached. The most unlikely movement in the market, he stated, ahead of expiration was an aggressive move higher. (For more on the definitions of aggressive move higher, please click here). So, recognizing an out-of-the-money bear call could profit if the market stayed flat, rose slightly, or dropped, he favored a bear call on bellwether, Apple. And the analysis was spot on. From the moment the trade was placed, Apple started to pull back. Of course, such perfect timing requires a degree of fortune. But the analysis itself was no accident.

But that was the past. The pertinent question now is where are the markets headed? And for that we must move to the charts of the indexes.

It is obvious from the chart above of the S&P 500 that the 20-day moving average has been acting as support throughout this move upwards. So, while the commentary above pertained to a recent correction in the indexes, what can we infer now about the future direction of the market by looking at this chart? With the S&P 500 sitting on that same support level, we know the market is precariously perched and so alone we cannot with confidence infer that a further pullback will materialize or that the 20-day moving average will act as support. But that’s unhelpful! So, how can we gain greater insight? Q the NASDAQ

Evidence Everywhere

Posted May 21, 2009 at 7:42 PM

Gold on the run. Dollar weakness relative to euro. Markets drop. Sell signals given. SPX, NASDAQ, Dow...DOWN Gold, XAU, Euro UP Bear Calls/Puts are IN Bull Puts/Calls are OUT (except of course on gold etc)

Reflation Comtemplation

Posted May 20, 2009 at 7:39 PM

Jay Phillips sent me a note a few days ago that gold was marching higher and had signalled a buy based on our short-term trading system (members please see Module 7). Today, GLD jumped up $1.29 to $92.25 maintaining its uptrend. Climbing the Wall of Worry is classically bullish and Gold is typifying that behavior now. But will it continue and what does it signal? Should we expect reflation? An argument against reflation is found in Flour (FLR). Flour is a well-known proxy indicator for reflation and is struggling to really break higher. Until it does so, a cloud hangs over reflation. Of course, that does not detract from the possibililty of gold continuing its upward run. Until we see sell signals, there is no reason to do anything but take advantage of the trend with any number of trades, bull puts, ratio call calendars are feasible. For more aggressive traders, more aggressive strategies are possible including bull calls and long calls but the speed of the trend is not favoring the latter two for now. As for the market, it is showing weakness but remain somewhat bullish until moving averages are violated.

Eight Recessions

Posted May 19, 2009 at 8:00 PM

Looking at current readings of economic indicators compared to the averages of those in the past eight recessions, some striking data appears. A comparison of Real Personal Income shows current readings below prior readings, which came in at -1.5%. Current readings for Non-Farm Payrolls, which is effectively an employment reading, show substantial declines below the -1.2% average of prior recessions. Industrial Production looks no better. In fact, the average of past recessions is a figure of -3.8% but again current readings are below that figure. And the same can be said for Real Manufacturing & Trade Sales, where the average of past recessions is -3.3% but again current readings are below this number. As a means of stimulating the economy, the Federal Reserve has expanded its balance sheet very substantially, from $886 billion in October 2007 to $2.18 Trillion in April of 2009. The desperate measures employed have been an attempt at supporting the falling drop in US consumer sentiment and US Small Business Optimism Index readings, the latter of which is very substantially below its 20 year low, sitting at 81.0. The efforts so far have not impacted the Initial Unemployment Claims which have risen to a 4-week average that eclipses those of the tech bubble. And the US is joined in its suffering by companies like Spain, Greece, Ireland and Italy. The 10yr government yield spreads in Ireland and Greece are approaching 250 basis points, while those in Italy are still under the 200 marker and Spain is showing a slight decline from a February peak. The data is indicative of the past and the markets are forward looking so we must pay special attention to the markets. But ignoring such severe readings could lead to market complacency whereas a strong understanding of the fundamentals will lead to skepticism of even the most powerful bear market rallies.

Market Rally

Posted May 18, 2009 at 12:31 PM

Stocks are rallying intra-day, bouncing off the support levels we highlighted in our most recent post. The 20-day has acted as very key support throughout the rally and a move upward today on the Dow and S&P 500 was crucial for a continuation given the more extended correction in the NASDAQ. While opportunities are available particularly for day traders, more patient traders may wish to evaluate market strength at key resistance levels overhead. We're taking a cautious-cautious approach to the market, and are leaning towards bear calls. Why? Because even if the market moves higher, the bear calls profit once underlying stocks are below the short call strike prices. And bear calls essentially are statements against aggressive rises in the markets. After a market has risen substantially, and a very substantial further rise is unexpected, a bear call can profit in a slight uptrend (provided the bear call is out-of-the-money), a flat trend or indeed a bearish trend!

Precariously Perched

Posted May 18, 2009 at 6:49 AM

The futures are pointing to a moderately higher open Monday morning. The NASDAQ has already closed below the 'sell' line and the DAX followed. The S&P 500 and Dow Jones are precariously perched now. For intra-day traders, opportunities will still present. But for traders who look out slightly longer term and prefer holding positions for days or weeks at a time, the current position of the indexes demands extreme caution. In uptrends, we can confidently consider bullish strategies when support levels are successfully tested and in downtrends, we can confidently look to bearish strategies when resistances hold firm. But when a trend has been in place for a relatively long time and the indexes start conflicting with each other, uncertainty is high, and additional hedging or patience is warranted.

Pinpoint Accuracy & Profits

Posted May 17, 2009 at 8:40 AM

Technology bellwether, Apple, leads the NASDAQ lower while the rest of the market clings to support. Our bear call on Apple right at the peak was timed to pinpoint perfection again. But which way is the market headed next? If you are a new reader, I strongly encourage you to listen to some recent postings where we projected in early May that the market would like encounter resistance by mid-May. In fact, we gave a 10-day horizon whereby we cautioned that trading bullish positions was not a high probability play. In short, the potential for reward was overshadowed by the risk of taking a long position. At these times, only the greatest market timers should be playing aggressive positions. For most, prudence dictates taking a 'wait-and-see' approach. Nothing is lost by watching the market test a substantial resistance level to see if it is broken. Nothing is lost if the market fails at that resistance level. And nothing is lost even if resistance is broken and the market moves higher, other than an opportunity cost. Certainly, money could have been made. But the great traders don't look merely at whether the markets could rise higher and whether they could make money on such a move. Possibilities are for amateurs. If you want to join the elite ranks, you need to focus on probabilities too. If the probability of a move higher is low, entering a long position can be classified as either aggressive or just plain silly! In a recent video post, Gareth Feighery evaluated the probable outcomes for the market as May expiration approached. The most unlikely movement in the market, he stated, ahead of expiration was an aggressive move higher. So, recognizing an out-of-the-money bear call could profit if the market stayed flat, rose slightly, or dropped, he favored a bear call on bellwether, Apple. And the analysis was spot on. From the moment the trade was placed, Apple started to pull back. Of course, such perfect timing requires a degree of fortune. But the analysis itself was no accident. But that was the past. The pertinent question now is where are the markets headed? The 20-day moving average has been acting as support on the S&P 500 throughout this move upwards. So, while the commentary above pertained to a recent correction in the indexes, what can we infer now about the future direction of the market by looking at this chart? With the S&P 500 sitting on that same support level, we know the market is precariously perched and so alone we cannot with confidence infer that a further pullback will materialize or that the 20-day moving average will act as support. But that's unhelpful! So, how can we gain greater insight? Q the NASDAQ! The NASDAQ provides greater insight because we know that the technology-laden index has already crossed below its 20-day moving average. This is an ominous overtone for the immediate future and would lead us to be on high alert for a corrective move down in the S&P 500 and the Dow. The one caveat is that this decline has been on declining volume. Like the S&P 500, the Dow is barely clinging onto support at its 20-day moving average. And it may well hold on. But deploying capital to a bullish position with this chart as a backdrop would be akin to gambling on a 3-legged horse. Sure, there is a chance that it will hop home a winner. But do you really want to bet that it will? If we revert back to our probability argument again, the answer would be immediately clear. Let the market prove itself first. If it can use this 20-day as support then with greater confidence we could trade bullish. But with all the clouds looming, the safer choice is to simply show a little patience, and scan for opportunities so no matter which way the market is headed we can capitalize.

Trust Yourself

Posted March 16, 2009 at 4:09 PM

At the beginning of each trading year, a marketing blast begins among major financial news networks, business publications and stock tip services which has the overarching theme of "Top Stocks for the Year". The marketing strategy leads to a surge in sales as hopeful investors deploy hard earned capital into hot stocks. But when the dust settles who is left holding the bag if and when the stocks don't perform as expected? You! To succeed in the stock market, you need to realize that investing is a game of predators and prey. The business channels are motivated by higher ratings to boost advertising revenues. And when will viewer figures be higher, when stocks are rising or falling? Rising of course! People feel good, they are making money, and they have more money to make more money so they want new ideas. Business publications need readers and benefit also from advertising revenues. Asset managers benefit from a percentage of fees under management. Brokers benefit from transaction fees. So if you know the motivations of the interested parties, you have an advantage in the game because you know what each wants. You also know that the predators view you as prey! They want your money and they will come after you! So, how do you win in the game if you are not an insider? After you have become aware of the motivations of each player in the game, it is time to get sophisticated. This means recognizing that when you're watching a business channel or reading a business publication, the biases of the media are likely to be conveyed, even if subtly. And when trading you want to find the broker with best execution and lowest fees so you don't fall victim to account diminution through excess account and transaction charges. And most importantly, it means mastering the knowledge that will empower you to take control of your own finances, so you are not dependent on a fund manager to take 2% of your assets each and every year! In short, trust yourself! You have worked long and hard for your money so don't make the mistake of handing it over to someone too easily. You can succeed all by yourself but unless you are really a lucky person you will need the knowledge that puts you ahead of most insiders. You will need to learn how to protect your capital when things go poorly and mitigate risk during uncertain times. That's what we're here for. We know your money has been earned through toil and sweat so we don't want you risking it unnecessarily in the stock market or paying exorbitant fees to undeserving managers. The way to thrive is to master a system that has held up in all markets, bull and bear. In booms and busts you need a system that adapts to the market and that's what we provide. An investment in knowledge is an investment that lasts a lifetime. Take control today.

Trading Safely

Posted March 16, 2009 at 4:09 PM

Subsequent to the market collapse in 2009, Warren Buffett stated that "the system only works when people have confidence in it". He explained that precipitous declines in the market were a symptom of fear among investors and when people fear they will lose a substantial portion of their wealth they often panic. On closer examination it is clear that people panic because they perceive they have just two choices in the market: hold existing positions and hope for a rebound or sell existing positions and eliminate fear of further losses. Investment decisions predicated on hope and fear are fragile in the best of times. In these turbulent times, terms such as credit default swaps, derivatives, convertible debentures, and exotic financial instruments can blind investors to the simplicity of a strategy that provides retail traders, hedge fund managers, institutional portfolio managers and others a means of minimizing risk while maintaining profit potential. The collar trade may be employed by traders wishing to eliminate fear and greed of holding stock positions for a period of time. The first step in constructing a collar trade is to purchase insurance in the form of a put option on the underlying stock. The put option limits risk in a trade to a pre-defined amount for a certain period of time. So, a trader who is uncertain about where a stock may be in 6 months could purchase a put option for that timeframe. Fear of substantial loss is eliminated because risk is limited to the premium of the option plus any differential between the stock price and the strike price of the out-of-the-money put option. Absence of such insurance is considered irresponsible in other asset classes. For example, who would deem it responsible to own a home in an earthquake zone without purchasing insurance in case of disaster? Few may anticipate disaster striking but most will purchase insurance "just in case". So why is insurance deemed a necessity when purchasing a home or an auto but not when owning a stock or collection of stocks? An explanation offered by options cognoscenti is that volatility levels now are high now and so put option premiums are very expensive. As a result, regular purchases of put options would erode portfolio value due to the impact of time-decay, even if stocks remained stagnant. But this argument is easily countered by sophisticated traders who know that it is possible to get paid to purchase put insurance. Unlike home or auto insurance wherein no refunds are given if the insurance is not warranted, put insurance on stocks can largely be offset by the simultaneous sale of short call options. So, while high implied volatility penalizes put option purchasers, it benefits short call sellers. However, the short call option has its own limitations. For example, it limits profit potential on the underlying stock because associated with the short call is an obligation to sell the stock at the short call strike price. While a greedy pessimist may shun the trade by focusing on the limited profit potential, we favor a more objective view which recognizes that not only is risk in the trade diminished relative to holding just a put option in conjunction with a stock position, but greed is eliminated also because a maximum reward level is pre-defined prior to trade entry. And in this market what is the value of holding positions that have defined risk and reward levels which eliminate fear and greed and therefore emotional, panicked trading? As the folks at MasterCard might say. . . Priceless!

Trade for a Living

Posted March 16, 2009 at 4:07 PM

Is it really possible to trade for a living? During the tech bubble, stories were common of traders quitting jobs to trade for a living. Unfortunately, many of these traders were fooled by randomness as Nassim Taleb might suggest. They saw the stock market rise and figured how hard could it be? Everyone was making money so easily! But like the turkey that wakes up each morning and gets fatter thinking life is great until Thanksgiving comes, so too did these hopeful traders think life was great until the implosion of the tech bubble. But was their strategy really flawed? Although many who attempted to trade for a living did not approach the task as they should (more on that in a moment), they were onto something! Successfully trading for a living is perhaps the best job security in the world. In uncertain times, trading for a living means controlling how many hours you work, having weekends free, and having no boss! It's the dream job that we all wish to have and it's possible but to invest successfully, it is first necessary to invest in the knowledge necessary to succeed. For most who wish to trade for a living this is the insurmountable hurdle that cannot be passed. It is not hard to know why. Where do you begin? Buy-and-hold has been brought into question with the collapse of the stock market in 2008. What about futures, forex, options, bonds, combinations of the aforementioned? For each category, a quick trip to the library will lead to information overload. Isn't there a system that simply works no matter which way the market moves? Yes! But it's not what you think. Most people think a successful way of trading means picking something that works and will always work. They hope to trade for a living by finding a 'static' system that doesn't change as the market changes. But the market does change. It cycles through bull markets and bear markets, recessions, depressions, booms and busts. To succeed in the stock market, it is imperative that you have a system that adapts to the market, a system that is dynamic and changes to the vagaries of the market. That's exactly the system which we advocate. A series of strategies that may be integrated into a system that can be adapted and modified as necessary to meet the demands of the market. It is a system that allows traders to adjust positions to current market trends and to turn losing trades into winning trades. If you really want to trade for a living, discover how to master bull and bear markets by learning how to adjust your trades with a group of traders that have succeeded. We're here to help!

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