OptionPundit

Tag: US Market

  • This Time is Different?

    In order to share current market conditions, I borrowed this title from an excellent book “This Time Is Different: Eight Centuries of Financial Folly by Kenneth Rogoff and Carmen M Reinhart”. If you haven’t read it, I shall suggest that you get a copy and read it.

    Let’s get to the business. If by June 30th, Dow can’t close above 10,130 this will be the 2nd consecutive month of downward move by Dow for the first time since March’09 bottom. Well, so what?

    Before recent pullback begun, I drew a chart on NDX (Nasdaq-100). In this chart I drew a “potential” head & shoulder top pattern expecting NDX to move upto 1929 and then start to retrace (If right shoulder were to develop) and potentially touch Feb low before or by July 2010. I also shared a modified version of this chart with OPNewsletter subscriber on June 22. Well, so far NDX has retraced almost 100 points and one of our speculative trade (NDX Jul 1700/1750/1800 Put butterfly has yielded roughly +100%). The chart below was drawn after June 16th close.

    The point is not about blowing my own trumpet to say our trade worked out fine, but to share with you about a potential dangerous situation that might be developing in the markets.

    There was a head & shoulder pattern in May-Jul last year spanning across 2.5 months covering about 600 Dow points. The support level was around 8,240 for Dow. It broke the floor but it turned out to be a “fake” H&S breakout (hindsight bias). We have another H&S pattern developing now. You may argue, so what, the current one may turn out to be the same?

    Let’s compare the two-

    • Current H&S pattern spans across almost 6 months (all marked on the chart below) and covers a massive range of almost 1500 points from the peak to the lowest point!!

    • The comparison falls pale when compared with extreme action days (90% volume days either up or down). In last two months alone, I have observed 16 extreme days that include 10 up and 6 downs days (including 2 recent 90% down days on June 22 and June 24th), the most in past 3 years.

    • Monthly stochastic is in the overbought region, and falling and about to cross to trigger a sell signal, as opposed to rising from the oversold region during the last pattern. MACD is showing pretty much the same picture.
    • On the economic front, last year we were expecting positive news 6-9months later as opposed to double dip/Euro crisis currently and every light at the end of tunnel seems to be another locomotive.
    • Last May-Jul, China was not in a bear market zone [If you didn’t know, China is already grappling with Bear (as defined by 20% or more decline from peak) and is below the level seen last July]

    I don’t think there is anything else to forecast or write about except that we need to be careful. You might have noticed my cautionary tone beginning Mid April when I started saying that market requires caution and Little Johnny’s are coming to the market who are usually late comers to the party.

    Neither I am not a doom’s day forecaster nor a euphoric optimistic. No hard rain is coming until unless all major indices fall and close below Feb lows. I am glad that I have suggested OPN subscribers to be out of stocks when Dow dropped below 10.3 for first time (or check my twitter streams).

    Bottomline –It’s your money. Take care and trade carefully. There is no need to take unnecessary risk. When bear attacks, panic reigns, screen freezes, decision making chokes. Financial freedom is not about being invested all the time or just buy and hold (at least I don’t think that way). Cash has it own wonderful returns that allows to buy when things are cheap. Check here what does financial freedom means. Let Mr Market do the talking and show the way. I am still watching the Feb lows before concluding anything else.

  • 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

  • Fasten Your Seat Belts, Again

    What a day and certainly going to be registred in the history book as one of the bad days for markets around the world. Wel, this year there have been many. The US stock futures doesn’t look bright. As of this writing, Dow futures were down by nearly 200 points, S&P nearly 30points. Japanese Yen is below 100 mark. Asian stocks were hammered almost to the north of 5% decline and multi year low. Dollar at two-year high versus euro.

    Here are some notable quotes – 

    We are far from the end of the road back to stability, but the plan to recapitalise our banking system, both here and abroad, will, I believe, come to be seen as the moment in the banking crisis of the past year when we turned the corner.” -BoE governor Mervyn King

    The likelihood of a global catastrophe has in fact declined over the past couple of weeks.” – Glenn Stevens, Australia’s central bank governor.

    The coming quarters will be very challenging … Our hope is that (the U.S. economy) will turn upward towards the end of 2009. – U.S. Treasury Undersecretary David McCormick.

    Banks have started crediting sectors again. But we still need two or three weeks for the situation to start improving.” -Russia’s First Deputy Prime Minister Igor Shuvalov, quoted in the Financial Times.

    As the credit crunch has worsened, wholesale business inventories have risen, causing an alarming rise in inventories in Asia and emerging markets at a time when seasonally these are usually being drawn down.” – Sean Darby, Nomura.

    “The gold and forex reserves have fallen by $50 billion. We need to be careful when we use this stabilising influence.” – Russian Finance Minister Alexei Kudrin.

    I wonder what’s in the store. We see weak but strong rallies and then fall(s). It appears to me that the desire to sell is still not over and may be we are about to witness 2001/2002 lows of near 7K area. Still a long way to go though. But these are the times that requires extra attention. So be careful.

    Profitable trading, OP

  • What’s next for US Markets and OPNewsletter (Jul +4.0%)

    US markets suffered big losses last week. The DOW was down 3.3%, S&P 500 was down nearly 2.5%, Nasdaq was down nearly 1.5 %. This was OPNewsletter’s first week since we opened our July’08 portfolio and including commissions OPN’s is up+4% and x-commission it is up +5.8% for the July expiration cycle. We opened 5 mini-portfolios and all are positive in spite of major market falls in the week that just passed. And guess what, we haven’t made any adjustments so far to any portfolio. Excluding normal income trades, I also shared directional bonus trades like GLD (+68% my returns, OPN subscribers have multiple points), POT (+50% mine), RTN (+25%) and GS (which was closed for -30% intraday). If you would like to subscribe to OPNewsletter, pls sign-up for the waitlist here.

    Dow was down nearly 3.8% for the week and it closed below 12K, a key psychological support point from a chartist perspective. It is not very far from the March Low. All the 30 Dow Components closed in red yesterday. And to add more pain, the downward move cam on above average volume. Earlier it had touched 200Days moving average but since then it has follows a pattern one week up, next down, another up, next down and that has been the case for the past 7weeks. Where is it headed, it tough to make that call. It may see a bounce next week. RSI is just about to touch the oversold level from daily perspective. However, if you take a weekly perspective, the story is different. RSI is not even close to oversold area, simply saying that there is room for further fall and 11,670 may work as an interim support while DOW work out it’s oversold region.

    Other things that you may want to check out is that “Number of new lows” on NYSE are rising (though slowly), Number of stocks above 50days moving average or 200Days moving average are also declining slowly. These are not good signs and one needs to be really careful while interpreting these.

    I think we are about to see a correction in commodities (x-oil, as Oil is now determined by several factors) and it may be possible that once June is out, we’ll see a retracement in Energy sector as a whole. I may be wrong here but the sense that I am getting for these sectors is of “Top Heavy”.  I am positioned for DBA and DBC bearish strategies. But I am quite flexible in cutting losses the moment I see a further surge in the commodities. And other contrary thought is that we are probably just a few months away in seeing turn around in financial as well as Banking sector as a whole. May be, November. There is amazing resilience in the Transports, specially Rails. Energy (Oil, Oil Services), Coal and Mining has been trending up and up.

    International markets are also falling apart. Since the start of the year, India is down significantly, China is down nearly 50%, Japan’s Nikkei is down and so is London’s FTSE. RBS just warned for a 300 points drop in S&P500 in next 3months.

    So here we are, at the crossroads again. What to do next? Attached is a “sector rotation” chart from “StockCharts“. They have pretty good charts that you may want to check out. I think value is slowly emerging in Banks and Financial sectors, Commodities may offer short term pull back opportunity, Inflation is riding high so I’ll hide in gold, trains and shipping industry are doing good but if goods are not going to move then why will they run so watch out for world trading activities via Baltic Dry Index and consumer spending. If corporate earnings are not going to go high, I don’t see a reason for Tech to win either. No matter who is the next US president, govt spending needs to take place and therefore defense may offer another stable opportunity. Home and construction-they need to fix their foundation first before we can think of any castle above that.

    Whatever you choose, be careful and be protected as much as possible. I can’t think of any suggestion if a black swan event happens, but yeah, try protecting your hard money in case markets move in either direction by a combination of calls and puts and/or by having a right assett allocation mix so one’s effect nullifies the other. Oh by the way, you may also choose to join OPNewsletter if you are looking for just 5-7% per month.

    Profitable trading, OP