OptionPundit

Tag: S&P500

  • How to Play Next “Black Swan” Bear Leg

    Which side are you at? Bull or Bear? Based on the current market sentiments, general bullish bias, feeling of missing last up leg and given that every indicator is screaming buy buy buy, chances are that you are on the Bull’s side. If so, there is not much point reading this post any further.

    There are still a few perma-bears (and they have solid record to attach) are predicting about March lows being penetrated or touched again. This kept me thinking if I should listen to what they are saying given their past history.  So I worked out a low risk strategy that is explained later in the post. What if they (and hence my bet) is wrong, I’ll lose 100% of 1% trading capital that I have invested in this idea. But what if, even though it is only 4% probability, these guys are correct? First trade has potential to return over +2,800% with 4% delta based probability (by Dec’09 expiration) and another trade has potential to generate +700% with 24% probability (by Nov’09 expiration).

    (more…)

  • Futures are Pointing Higer Opening

    There are a lot of positive news in the market, for a change. Some of the companies have announced good results. FDIC starting a “bad bank” concept and FOMC meeting announcement at 2:15pm. There is nothing much fed is left with from the interest rates perspective, but Uncle Ben may have some more tricks.

    Y’day volume was thin, and internals were ok. I would consider action so far as bouncing from the oversold region. But I am ready for any “new development” as well. The markets need to clear upper edge of the minor resistance which appears to have formed over the last few days. For the DJIA, the upper edge of the resistance is near 8250, while the equivalent level is near 855 for the S&P 500 and 1515 for the NASDAQ. A move above these levels may be viewed as a breakout but volume is the key. So watch out for the volumes together with any move to avoid any bull traps.

    So far we have hatrick on earnings (2 shared as bonus trades in speculative section, 1 shared as Income portfolio) for OPNewsletter (AXP, BTU and GD). So far so good, we have invested nearly 20% of capital and have cash available for more opportunities.

    Trade carefully and as much possible, delay decision of going long at least by one day.

    Cheers and profitable Trading, OP

  • The Wall Street Bailout Plan- OP’s Perspective

    The $700billion market bail out plan is disclosed and is for review withCongress. The Target is to get it to President table by Friday, according to Forbes. As per the same article– Treasury Secretary Henry Paulson “is in effect becoming the dictator of the American financial system for a few months, subject to congressional oversight,” said Wall Street historian John Steele Gordon, author of a book about the national debt. They are seeking unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.

    I hope congress evaluates the plan going into deeper level of analysis so as to a) solve the crisis, b) Fix it for long term and c) consider the implication on average American. I hope they read the fine prints (If those were read earlier, the results wouldn’t have been so severe for the US economy). This massive bailout plan plus the past ones (~1 or more trillion dollars), almost of the size of entire Indian Economy (one of the pillars of BRIC) will be funded from the Taxpayer’s money primarily. So I sincerely hope that the guardians of world’s largest economy view this in all fairness to the small and medium and average American who had nothing to do with this mess but still need to pay for this clean-up (instead of letting these institution bear the sour fruits of their doings). US’s “Every Street” will now bailout “The Wall Street” ; and probably the guys who created the mess will still earn gazillions of $$$ in salary. If you would like to know more about this plan, read this straight forward explanation from New York Times. All eyes are upon US financial systems, how wizards solve this issue.

    Let’s come back to Markets-
    This was the largest two day rally since 1987 market crash. I think last week’s event provides a good story for a Hollywood movie that could be equally successful as “Wall street” if not better. On a bigger picture basis S&P 500 is almost flat as a week ago, as if nothing happened in a week that was full of pain, drama and a lot of emotional swings. So if we had such a huge rally, ideally I will be expecting huge volumes, IV crash especially for those financials. That should be the case. Really?

    • RVX, a measure of volatility on Russell 2000 index was in fact up in spite of a massive rally in the underlying.
    • VIX a measure of volatility on S&P500 was still above 30 and merely 3% down vs. a day ago.
    • Show me the volume- There wasn’t much of the volume in the financials in spite of huge surge (volume with respect to the down volumes we saw preceding few days). Goldman (GS), nearly half of the last two down days…AIG same; BAC, so so; Citibank (C), nearly 3/4; Morgan Stanley (MS), 1/3; Wachovia (WB), nearly 3/4; XLF, financial etf, half of the day before and lower than preceding 3 days; and IYF, DJ Financial Sector index, half of average of past few months and nearly 1/5th of the past few days.This is not what one would expect after such a massive “bail-out”….

    Further more, even though it was a huge up day, for NYSE- Up volume was still less than 90% (my gauge for trend strength) and on Nasdaq it was close to 80%. Technically, all the key indices Dow, S&500 and Nasdaq all closed below respective 50 days moving averages. A lot is going on in financial markets. Not an easy pill to swallow. Even if you are right, you are now not sure which rule will be changed next and you’ll lose your shirts in spite of being correct. A baffled market that it is.

    Trade extra carefully, Profitable trading, OP

  • Fed, Gold and Markets

    Fed decided to keep interest rates flat, what’s the big deal? Markets staged a huge rally, Dow over 300 points; was that big deal? Gold dropped almost closed to support point $85 and Oil, metal and commodities were crushed, was that a big deal? These are not easy questions to answer but if we are invested, we need to draw hypothesis, find supporting data and move ahead for if everyone knows the answer, that is not the answer to invest in.

    Commodities and metals all together have been hurt badly over the past few days, Oil is nearly 20% down. Has the demand changed that dramatically? Not so much. What’s changed? Bernanke gave his testimony in early July and indicated (that’s my take away) tough actions. It was clear he will come after oil and commodities (as well as traders aka speculators). Recession or deflation is his biggest nightmare. He can’t afford to increase rates due to fragile state of economy but that will lead to inflationary pressure. It’s a complex yet simple situation, he needs to contain inflation without increasing rates. I, at least, so far have not found any other major insight that convinces me of such a sudden correction across the board. I however, shared my bearishness on commodities on Jun 21st, just a few days before the correction started. These are oversold now and we may see short term bounce.

    Attached a chart that relates FOMC announcements, Gold Prices and S&P500 movements. You’ll notice that except in one instance gold prices rose almost after every FOMC announcement and markets fell in a few days time post FOMC decision to either cut rates or keep it steady. Read my post on gold dating back in Oct’07, just before its current trend began. It is still to be seen whether or not this will happen again now as fed is done with it’s rates decision. The only other factor that may influence is earnings. So what’s my take on gold? Unless we break down to 83 or lower, or break-out to $102, gold is trading in a range no matter what the experts say.

    For Markets, before you read into rallies and huge optimism, pls note we are in times when short interests are record high. The rally wasn’t an impressive one. These rallies simply can be short covering for their positions.The big names who are beating estimates, they are doing so to beat their already lowered guidances. Almost every industry bellwethers is lowering guidance for next few quarters. For more on earnings, check this out. I haven’t seen any major convincing data or trends that support a higher markets, at least for now. Agreed that we are seeing metal, commodities and oil correcting, transport refusing to break lower but here is the big picture-

    • Inflation jumping at decades high levels
    • Wages stagnating & unemployment rising
    • GDP flat or negative (Ignore stimulus checks)
    • Housing and credit crisis accelerating
    • Consumer credit card defaults are rising (AXP, MA, etc)
    • Global economy are showing sign for slowing down

    AIG just reported huge losses, in fact they have lost nearly $11billions in last 3 quarter. The company said it is doing an evaluation of all of its businesses and will report its findings in September. Freddie reports losses and cut dividend and more to come.

    And btw, i don’t find good reasons for strong dollar as well (at least for the moment)? Commodities exports are doing good, but a strong dollar will hurt them and so it will for the US corporations that are drawing signicant earnings from outside of US and massive spending is needed, interest rates can’t go higher for the moment. So how a strong $$ will be supported?

    Now you connect the dots I mentioned above, hopefully you get the picture and can draw your own hypothesis. These are just a few points to kick start thinking and create hypothesis before you go long on equity or any other asset class.

    Oh by the way, the stocks list I shared for earnings, most so far had huge movement. Congratulations to those who played for large moves and IV crash.

    Trade carefully, Trade profitably, OP

  • Where Are We Heading Now?

    Tough Markets, the worst June for Dow since the great depression of early 30s. The Dow is down nearly 9.5%, S&P500 nearly 8%, RUT nearly 5.5% and Nasdaq nearly 7.5% for the month of June so far and we still have one more trading day left. Dow Jones industrial average is down nearly 20% since it’s all time of 14,198 in Mid Oct’07. Clearly we are, at least, in the short term bear markets.

    Goldman Sachs said “Conviction Sell” for Citibank. The most brilliant bankers on the street are saying this “now” when Citibank has already lost 2/3 of its market value since the peak just about a year ago, impressive! Isn’t it? is that what you expect from the top notch professionals to realize this so late, the same guys who were betting against the subprime and made fortunes. I still have a long way to go to learn what goes on the Wallstreet. Even yours truly, on this site, as early as November had openly mentioned his bearish stand on Citibank and to the extent that he doesn’t want to keep much cash there. I talked about CFC, FRE, and FNM when those were still high fliers.

    Coming back to Markets, I am looking at the big picture for both Dow and S&P500 and there are are a few things that I would like to share with you.

    Attached is a 20Year, Monthly chart of Dow. I generally, not necessarily always, look at 12month, 60months and 120month moving average to develop one of the big pictures. As you will notice, Dow briefly touched the 60 months MA @11,300 and is sitting almost there. The previous significant bottom was around 2003 (Just before the Iraq War) and the peak was Oct’07. If we use these two as data points, you will notice that Dow has fallen below 61.8% fib retracement, not a good sign. Another support area, that I consider to be a major support is 50% retracement i.e. 10,697 which is almost in the same vicinity as 120months moving average a very solid support area that has been touched only once in last 20years. Another worrisome part is that MACD monthly histograms have not yet completed it’s cycle and RSI is not in the oversold area. Though on daily charts basis, it’s in the oversold reason and we may see dead cat bounce, but I will be very cautious as markets may still have way to go before finding any meaningful bottom. 11,300, followed by 11,000 and finally 10,700 are the area I would be watching closely.

    The story is almost similar on S&P500 but it has some other twists its story. S&P 500’s 61.8% retracement since Mar’03 bottoms is 1270 and that’s where it bounced back on Friday. It is sitting right there AND it is also sitting on 60months moving average that I mentioned above for Dow. But what’s keeping me awake on S&P500 is the VIX. There hasn’t been any panic reflected by high VIX so far. I am attaching a chart for SPX vis-à-vis VIX and you’ll find VIX is nowhere near the last highs when markets sold off. S&P500 is also in the same territory as far as MACD and RSI is concerned. So, same story, on daily basis, it is oversold, but on long term basis, it is not. I shall be careful of 1270, 1225 and finally 1172.

    There are a lot of other things going on in the equities market. India is down, China is down, people have lost lot of money in these markets as many of the “investors” are for first time experiencing bear markets in their recent “prosperous” life time , Japan is down, Hong Kong is down, Europe is down and heading for worst 1st half in last 20 years, Dollar is down, Oil is up, short-selling interest is amongst the highest level, banks are most down, Baltic dry index is slowing, new lows on NYSE is increasing, commodities are rising leaving less money for spending and in fact in some parts of the world it is triggering riots, and many more things to come.

    No one can manage your money better than yourself, and hence preserve the capital as much as possible. Cash will return much better returns than being fully invested, how? Because you will be able to buy things at much lower prices if markets were to fall further. There is no harm in missing an “opportunity” as one can always participate in bull rallies but panic selling doesn’t give time to get out. Panic selling doesn’t let one think straight and therefore may result in decisions that may be even worst.

    And I wonder if “The day” is still ahead. Let me remind you of the old saying, In the bear markets, the winner is the one who loses the least. Choose your asset classes right, if you were to still remain invested.

    For OPNewsletter, we are 65% in cash for the month and we shall take advantage of the upcoming bounce that we may see.

    Stay cautious, stay profitable

  • Is Your Parachute Ready?

    Are you ready for 300 points fall of S&P 500 in the next 3months? or more? At least that is what Bob Janjuah of Royal Bak of scotland thinks. According to him –

    “A very nasty period is soon to be upon us – be prepared”. He further stresses that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

    And as the outlook is grim, and so is the timing. It created shockwave amongst the “learned” ones and it’s “hot of the press” news in almost every financial portal. Bob became a star after his grim warnings last year about the credit crisis proved all too accurate.

    Let me remind you this famous quote-

    “Ignore the past and you will lose an eye. Live in the past and you will lose both of them.” -Friedrich Nietzsche

    There was another bearish outlook by Morgan Stanley some days ago. I think his timing couldn’t have been better. It’s after the rights issue of RBS and oh yeah, haven’t we been seeing marketing falling apart by nearly 1,000 points or so in past few weeks. Every now and then, we’ll hear some prominent or not so prominent analyst will come with bullish or bearing predictions and someone gotta be right and “that one” will be star. Be prepared, ah that’s the best message anyone can give. But how as an individual you can prepare? Stay on sidelines and remain in cash. Not bad either.

    Keep your parachute ready? are you ready for a fall? I am not. I am not ready for a sudden fall that might happen overnight and if I don’t have time to react by the time market opens the next morning. I am ready for a slow and steady fall, even though there are “dead cat bounce” along the way.

    I shall share my thoughts soon, meanwhile why not share your thoughts how do you want to protect against the fall, if any,

    Profitable trading, OP