OptionPundit

Tag: recession

  • “O-BenTi” Trio Might Finally be Winning

    Obama, Ben and Tim (O-BenTi, I just created this name to save writing space) might finally be winning the recession war (only time will tell whether or not it is sustainable or going to result in another bubble). Their “glimmer of hope” campaign seems to be working nicely; even the consumer sentiment index says so, offering a hint that the deepest part of the recession may be passing. According to Bloomerg :

    Reuters/University of Michigan’s consumer sentiment index rose solidly to 61.9 vs. 57.3 two weeks ago. Interestingly, one-year inflation expectations shot up 1 full percentage point to 3.0 percent. Gas prices are on the rise, as they typically are as the driving season begins, but the gain also hints that consumers expect economic conditions to normalize. There may also be a hint that some consumers could be anticipating monetary inflation, certainly a factor that has fed investment demand for gold and oil”.

    Did you notice the positive flow of news these days, almost every where in the media, be it newspaper, magazines, TVs, Internet, everywhere “glimmer of hope” is the buzzword. And I think turning sentiments positive was one of the biggest challenges for the O-BenTi trio, once sentiments improve a significant part of the puzzle is solved.

    I hope this is really the beginning of economic turnaround. However, I have my doubts if this is it would have turned so quickly? do you think the worst is over? It was hardly a month ago when sky was falling, dollar’s reserve currency status was (and probably still is) being challenged. Major banks are done with their earnings. I don’t know how much is “reality” behind these “reported” numbers and hence a reflection of true economy. We’ll know in a few weeks time when real representatives of American economy starts to pour earnings and share the outlook.

    Markets haven’t taken a breather in spite of all bad stream of news and have been rising on every “light at the end of the tunnel”.  I wonder if we are about to see a surprise reversal or we’ll never see these lows again.

    What are your thoughts?

    Profitable Trading, OP

  • As Bad As It Gets

    U.S. nonfarm payrolls plunged by over half million, a bad surprise of 533,000 job losses in November. This is the worst job loss in 34 years according to the Labor Department.

    Since the recession began 11 months ago, nearly 2 million jobs have been lost. As per marketwatch story, The unemployment rate rose from 6.5% in October to 6.7% in November, the highest jobless rate since October 1993. Although the market expected to hear bad news from the November employment report, no one expected news as bad as we got. Economists expected job losses of around 350,000 in November.

    Job losses in September and October were revised sharply lower by a total of 199,000. The October number was revised lower to -320,000 from an originally reported -240,000 while the September number was revised lower to -403,000 from -284,000. 

    All stock futures have turned lower.

    Profitable trading, OP

  • Where are the Markets Heading?

    Below charts and rough technical analysis is not to paint a grim picture but is rather an attempt to define a range for the downside. It’s better to develop trading plans with the worst case scenario in mind vs. developing plans on pure hopes and dreams. I don’t argue that equities are starting to show value and in fact I am already working to develop an OPN value portfolio design to double in next 5-6 years riding on the trends that are about to emerge in the new world post financial crisis clean-up. I think no one can time the market, certainly not me, and hence I shall also share how to fully hedge this portfolio so as to avoid any further losses should the market decline even further. More on that later.

    We are positive for Nov’08 income portfolio for OPNewsletter and already started opening Dec’08 income portfolios. If you would like to join, pls click here

    This is real long term picture of the Dow Jones industrial. For an ultimate bull market that started from the lows witnessed in the great depression. This monthly charts depicts a dow starting from 42.30 in 1930s to the high of 14,198 in the late 2007. My interpretation in an extremely simple way is that, assuming Oct intra day low is gone, 7,200 (+/- 200 points) is a very strong support. If that’s gone, we are talking all the way back to near 6,000 and followed by 5,400. And by that time, the DOW will be yielding roughly 6%. It is not a coincidence that 2002 low halted decline at around those levels. These points were another strong fib support points. Pls see the shaded region.

    MACD is in the most deeply oversold region, ever!! RSI is not too far either which is almost at the levels recorded in 1932s or late 74. Though, these indicators present a bullish scenario, be mindful that these can remain oversold longer than I, as an individual investor, can remain solvent and of course these can also clear oversold level within that bear market.

     Attached chart is for S&P500 Index. The picture is almost exact replica of the Dow industrial. 2002 lows were great fib support points and if translated into current market environment, it seems 790 will be a very strong support followed by 600. In past few weeks we have already seen that the moment S&P500 touches 800, it has bounce back very aggressively. Now that may be driven by program trading, but who knows. We might be heading for 604 that will yield almost 6% classic at which point equities are very attractive (oh some of those are already attractive selling at crazy prices!). From MACD and RSI standpoint is almost the same story as Dow.

    Nasdaq is in a different league and I can’t conclude with it’s charts except a few generic comments.

    So moving forward, how to interpret this. I may very well be wrong, but I think we are not yet done with the selling. The only positive point so far I have seen is that lows have been on decresing volumes vs preceeding low (in past 6wks). A high volume up day was soon wiped-out by major down days. So first level seems Oct 10 intrday day, followed by 2002s lows and finally the points I mentioned above. However, if there is upside from here onwards, supported by strong volumes and improvement in breadth etc, I might consider reversal but till then, I am not covinced with any rallies.

    Many are calling it is a bottom. I’ll prefer to be naive and just be guided by the market action while keeping the big picture in mind. 

    We have started opening Dec income portfolios for OPNewsletter. If you would like to join, pls click here.

    Trade Carefully, Trade Profitably, OP

  • Panic Before Everyone Else Does

    Market forecasting is one thing and profiting from it is altogether another thing. OPNewsletter subscribers know how accurate so far my warnings had been and I did panic before everyone else did but did I benefit by opening pure bearish trades? In the hindsight, I could have made a killing but did I? No! Sure it did help me in unloading my bullish positions though.

    In spite of having such an accurate forecast I couldn’t reap extra ordinary benefits from it. I thought through this and here is the part of my trading decision making. Bear markets tend to have quick and sharp rallies often ruining short sellers. Though I knew that a sell signal was triggered and I shared with OPN subscribers, I was conservative in relation to not entering the market with full fledged bearish positions. I have been thinking that any good news can move markets violently so not sure “when” will it crash. So I chose to be hedged with slightly bearish positions in stead of trading alongside bears. Results were mediocre at best in such a fast moving market, great for an option trader. Will I do better? I don’t think so for I don’t think I shall again take any large bet in such markets when rally/crash can happen in a jiffy so rather be safe than sorry.

    This brings me to an important point about trader’s psychology. A trader, not all, tends to compare the performance with respect to decision not taken in hindsight. If only I had picked up during intraday low of Oct 10th, or I knew markets are oversold and will reverse, etc and I could have made so much. And that’s a dangerous thought. Test yourself in the present moment, see what decision will you make in the current conditions, note it down and refer to it later no matter if you put real money for it or not.

    Moving to markets- Times Online reports as much as $100 bln was wiped off the value of hedge fund assets last month as investors rushed to withdraw their capital and the worst markets in living memory blew a giant hole in performance. Investors redeemed about $60 bln of funds in October, while see-sawing market conditions accounted for the remaining $40 bln fall, according to EurekaHedge, the Singapore based industry research firm.

    The news is getting gloomier day by day. China’s industrial output grew at a slower pace than any economist forecast in October, stoking concern that the biggest contributor to global growth is running out of steam. Germany is officially in recession. The O.E.C.D. forecast that gross domestic product for its 30 member countries would decline 0.3 percent in 2009 from 2008, before recovering slightly to grow by 1.5 percent in 2010.

    The Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers. It is the worst possible scenario to have a “bad strategy” and an “excellent execution” and hence it’s fine to change strtaegy. But what kind of signals are we sending to the world? Are these assets so toxic? I guess it’s about the priorities for limited resources. I haven’t yet analyzed the magnitude of announcement, but Mr Market already spoke what it thinks of it (Don’t forget Mr Market is an emotional person). And see what’s happening now? It seems like everyone wants a pie of this bail-out money. Just show them grim picture, compare with great depression and consequences of not saving them, etc. You got what I mean. Confusion is reigning. TED spread rose yesterday, and so is the LIBOR spread.

    I shall repeat my latest reading of markets, I think, most likely, markets may NOT hold Oct lows. It might test the 2002 lows and oh BTW, I know even if my forecast is correct, I am not going to reap extraordinary profits from it. That’s my psychology. What’s yours?

    Profitable Trading, OP

  • Get Real or Go Home

    It took almost 5 years of Bull markets for Auzzie $ to reach its peak against US$ and just 5months to give it all back. The picture is not so much different for British Pound as well. The once mighty US$ is back with full force, against all convetional wisdom and doomsday forecasts, and almost all currencies have given-up vs. US$ except JPY. The 2nd largest economy’s currency is standing tall against US$. It has appreciated to 95 a U$, a level not seen in the last decade. Billions, if not trillions, have been made or lost in the Forex markets in past couple of weeks. It’s going to be ugly for the Corporate America who has been posting wonderful results supported by rising demand particularly in Asia, together with depreciating dollar. Strength in dollar is going to hurt profits, hurt exports, as the mix is changing and it’s changing dramatically.

    The financial landscape is becoming more and more fearful and interesting. Gold is oversold, and down to fresh yearly low in spite of the fact that there will be massive money supply into the markets and rates are headed down. Don’t be surprised if you see fed rates going below 1% (I know this is foolish forecast) but hey, we are not talking normal times. Great devleraging is taking place. Read this to get a broader perspective of how deep and wide will be the pain of de-leveraging. 

    The fear reigns. To borrow words from old time market veteran respected Richard Russell of Dow theory-

    I’ve been watching the stock market on a daily basis since the late-1940s, and to tell you the truth, I’ve never seen anything like this market. I did a double take when I checked the VIX after the close of yesterday’s session — it was up 16.54 on the day to close at the ridiculous high of 69.66. Even the traders don’t know what to make of this monster bear market. The daily action has become unreal. Three to five hundred point changes in the Dow have become commonplace. The wrath of God seems to have descended on the NYSE. Where have we gone wrong? In my mind I ask, “Is this the heavens telling us that massive borrowing is wrong, that mind-bending debt is wrong, that Federal Reserve Notes — fiat money, is wrong? Is this a curse of our Founding Fathers, warning us from their graves that we have strayed too far from the great Constitution that they gave their very blood and lives for?”

    Moving on to stock markets, I have been hearing all talk about the market bottom. A few days ago, I wrote on InvesCafe

    B careful of data u read, rarely u see devil’s argument in presenter’s data, e.g a bull advocate will hardly say why it maybe bear as well. I am worried. There is so much optimism that Friday was bottom. It will be nasty surprise to many if it wasn’t.

    The support and resistance levels are guides only for random distribution of market activity on a sheet that’s called chart. These become investing methodology called technical charting and analysis as many people, including me, start to follow these actions. Why do you think it’s a bottom? based on past data or so. Why can’t it decline below so and so level? because of this blah blah reason. Get this clear, fear knows no support, nor it knows fundamentals else there will be no Warren Buffett. Even on a bell curve, we have something called “Outliers”. Why can’t this be an outlier? Why do you discount that possibility?  

    Ladies and Gentlemen, this is your money. This is your capital. You can make money if you preserve this capital. Don’t fool yourself calling a “bottom fisherman” as no one knows where is the bottom. Yes, there are great bargains and insane stock prices (3 times cash on hand vs. current stock price, almost 1/3rd of the Net Asset current Value; plants and fixed assets are for free, yes, yes, yes I know and purchased some of these!!!). You may choose to play in the market like Buffett does, but make sure you have steel guts (oh even steel is oversold as well) and you can sleep (eat and live as well) if the markets were shut for 6-12 months.

    As of this writing Nikkei, the barometer of the 2nd largest economy in the world, Japan, is at lowest levels seen in a quarter of a century!!!. Well they are Japanese, we, the US, are different? 

    This is not a doomsday forecaster, I am like one of you my readers who want to preserve his capital. Get real or go home, for if you are real you can make real plans for real you.

    Take extreme care and profitable trading, OP

  • OPNewsletter : Oct’08 (+9%)

    What a tubulent week! For the week ending Oct 17, here is the market tally. Dow closed at +4.7%, S&P500 almost similar +4.7%, NDX: +3.3%, Nasdaq (COMPQ) +3.6% and Russell 2000 almost flat at +0.75%.

    For OPNewsletter, it was rather an unusual month. We opened one mini-portfolio consisting of options in Russell 2000, that was officially closed for +9% gains including commissions. Thereafter sensing market collapse I stayed away from investing for OPNewsletter we were in cash throughout the past 4weeks. Cash surely outperformed the market during which Dow lost almost 3,000 points. The results doesn’t include my trade alerts for speculative trades (mostly bearish). Well in this bearish market there was a bullish call too :

    Watch out for bullish BTU, but only if it crosses > $30.25, you may choose either Bull Put Spread, or straight call (but straight call lose due to IV loss) or any other way…you may choose covered call as well…keep very tight stop loss, kinda $28 or so..

    Also Since Sept 29th, we have already started preparing for the upcopming bull market (not investing yet, it’s only preparation to find quality stocks). On Monday, I also shared a list of 80 stocks that are making to my value screen and some of those are now below my price targets. In fact I shared one value stock that is hammered so badly in the past few weeks that it’s share prices is almost half of it’s book value. It’s levered but leverage ratio is still below the S&P500 (these are only one of few valuation indicators). I shared how I played it so that my effective cost was almost 15% lower than market price.

    I also published a special report (for OPN members only) sharing my view of what to expect and what to do about the broader conditions in the market. No, this doesn’t have a stock idea but it deals with the market psychology.

    I am in the process of selecting portfolio and trades for Nov’08. You may want to sign-up for OPNewsletter as to benefit from the a) fresh portfolios, b) my special/directional picks, c) my list of potential value stocks, d) general almost daily market comments and e) member’s sharing on the forum.

    Stay cautious, Stay profitable, OP