POMO Thursday – Bernanke Serves Up Another Round
by Phil - August 19th, 2010 8:29 am
Today we get another round of Permanent Open Market Operations.
POMOs are the Fed’s way of creating additional bank reserves to finance asset purchases and loans for it’s Primary Dealers (the Gang of 12 or, as David Fry calls them, Da Boyz). GS and Co. then turn around and use this money to fuel their bots to buy equities and we believe we saw a little test run of those programs a couple of times this week as we had very irrational, sharp rallies for no particular reason and I had commented to Members, during chat, that it looked like some Bot testing.
Note that in David’s picture, Bernanke is still playing the role of the generous bartender he played in the hit video "Hayek vs. Keynes – An Economic Smackdown." Note this all ends badly for Keynes but WHAT A PARTY!
We made 3 aggressive upside spreads looking for a big finish for the week in yesterday morning’s Alert to Members on SSO, QLD and DDM. Fortunately our timing was good as my call to look for a run once we got past the 10:30 oil inventory report was on the money but then we were very disappointed by the size of the sell-off in the afternoon – even though we were short at that point (we can root for the bulls while betting against them). It’s all about jobs this morning and we need to see less the 450,000 pink slips handed out in the past week to get a little more aggressive.
My prediction in the morning was: "We should get our bottoms with the crude inventories at 10:30 so no hurry on bullish plays, most likely. Selling XOM $60 puts for $1 or more (now .47) on a dip today is a nice play into expirations as you can always roll them along." The XOM puts topped out at .63, so no luck there, but the action (see Davids chart) was right on the money for us:
We took a long play on USO at the bottom that did well (and we took money and ran) and we flipped back to bearish at 1:41 with put plays on IWM and DIA that did nicely into the close. As I had said in the morning post – blissful agnosticism!
8:30 Update: 500,000 jobs lost last week! Ouch!!! Looks like we should have held onto those puts because this is going…
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GDPhriday – Low Expectations Could Make for a Good Day
by Phil - July 30th, 2010 8:25 am
Everyone is down on the GDP all of a sudden.
As I related Wednesday - the GDP, like the Beige Book report (which we expected to be poor) is made up of many factors like Trade Balance (same), Government Spending (up due to census), Personal Consumption (earnings reports indicate up), Residential Investment (HD and LOW indicate up), Corporate Earnings (way up),etc. The biggest etcetera is Inventories and they are a major wildcard. As near as I can tell, April was a very enthusiastic month and we began May with the "flash crash" but that was shaken off so I have no reason to think orders didn’t continue to outpace inventory through mid-may at least.
We did, as we discussed, get the best Beige Book in 2 years in early June so I’ve gotta go with expecting two months of inventory builds that trail off sharply as merchandise went unsold in early June as the market collapsed and even the top 10% stopped shopping for a couple of days. Still, it seems to me that that was too late in the month to knock GDP below 2.7% and I think we still have an excellent shot at 3%.
We’ll find out shortly but Asia didn’t wait and had a pity party this morning with the Nikkei giving up all of the week’s gains, back at 9,537 so I’m still loving EWJ if we head higer but, if not, look for the Dow to begin filling that gap! The Hang Seng was choppy but held 21,000 and the Shanghai can afford to take a break at 2,637. India continues to be our top global concern as the Bombay Sensex continues to move to test the rising 50 dma as they fall to 17,868 and it looks like they’ll meet up next week in the 17,600s and that will be a very critical test.
Samsung knocked the ball out of the park with an 83% jump to record profits on amazingly strong memory chip sales. We can probably thank 64-Gig Smartphones and IPads for much of that gain but, holy cow! Net income climbed to 4,280,000,000,000 – too bad that was Won ($3.6Bn) but not bad considering our own chip giant, INTC, only hit $2.4Bn last Q. Despite lower chip prices, revenue was up 17% and I’ve already mentioned that Samsung has pledged $20Bn to become the World’s #1 solar power provider so you’ve gotta love these guys…
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Dark Horse Hedge 7/14/10
by ilene - July 14th, 2010 10:52 pm
Dark Horse Hedge 7/14/10
By Scott Brown of Sabrient and Ilene at PSW
Intel Corp (INTC) set the stage for what could have been a 7th consecutive bullish day for all 3 major indexes, but in the end the S&P closed just below the flat-line for the day, down 0.17 at 1095.2. There were two apparent reasons the market struggled in the face of such an upbeat report from INTC. The first was that financial stocks slumped all day, finishing down 0.9% as a group. STI, which we shorted in our last update, was down 2.75%. JPMorgan (JPM) announces its quarterly report tomorrow morning and that could be contributing to overall weakness in the financial sector. The second factor holding the market back today was the FOMC meeting minutes in which real GDP for 2010 was downgraded from 3.2-3.7% to 3.0-3.5%.
The S&P 500 is trading right along the 50 day Moving Average. Our Dark Horse Hedge portfolio is tilted short, 2:1. That is, our positions are weighted 67% short and 33% long, so while DHH is largely hedged, it has a net short exposure. We would change to a balanced Short/Long ratio, 1:1, if our models supported such a move. So far, they have not, even though they’re close.
In determining when a shift in "tilt" is appropriate, we apply a "hysteretic" model. Hysteresis refers to systems that have memory, where the effects of the current input (or stimulus) to the system are experienced with a certain memory for the previous input and a certain delay in reaction time. Hysteresis is defined as "the phenomenon exhibited by a system in which the reaction of the system to changes is dependent upon its past reactions to change" and as "the lag in response exhibited by a body in reacting to changes in the forces." Using a hysteretic formula, we look for more confirmation of a breakout than just breaking across a Moving Average on a given day.
Quantitative analysis involves a graduate level economics course to thoroughly explain, but that isn’t necessary for our purposes. The important thing to understand is that we take into consideration the direction of the movement across a Moving Average, and the support from other indicators such as…
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Which Way Wednesday – Topping or Popping?
by Phil - July 14th, 2010 8:14 am
Wheee, what a ride!
We only had one trade idea for Members all day Monday and that was the DIA $103 calls for .52 from the 9:46 Alert. It is extremely rare that we only have one trade in a day but there really wasn’t anything for us to do as we had been BUYBUYBUYing all last week so there was nothing to do but watch. The calls finished yesterday at $1.12 for a nice 115% gain in 24 hours but we took the money and ran at 10:04 on a spike up to $1.25 because it’s too close to expirations to mess around. They actually topped out at $1.55 near the close but - better safe than sorry. Anyway, we replaced them with IWM calls later in the day and those doubled up and we were out at the close – again, it just doesn’t pay to be greedy.
It’s fun to day trade options on expiration weeks because the premiums go way down and we get fantastic leverage. Our longer-term trades turned mixed for the first time in 2 weeks (we had been 100% bullish) and we went from one to a dozen trade ideas a day as we used DXD for an overall hedge and took bullish positions on AAPL (2), GOOG (2), INTC, T, TZA (which is really a bearish position) and bearish positions on DIA (2) and MA. Of course ALL of our bullish plays were hedged already so the mix was a real indication of how exhausted the rally was starting to look.
Too much, too fast was the watchword for Tuesday as we were already up 5% for the week so we expected a gap fill back to the open (didn’t come yet) before we get serious about taking out our levels (Dow 10,290, S&P 1,102, Nas 2,257, NYSE 6,930 and RUT 651). We expected good news from INTC (we did a bullish ratio spread aimed at $22) and now we’ll see if it’s good enough to get the Nas up to 2,257 but it was the NYSE that worried us yesterday as they were close but no cigar at our 6,930 target.
Gap filling would be nice and normal and would take us back to test Dow 10,200, S&P 1,075, Nas 2,200, NYSE 6,800 and Russell 620. If we can show a little support there and consolidate for the next run, we’ll be in pretty good shape to continue this run but FIRST we have to test them WITHOUT everyone freaking out and…
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Testy Tuesday – Already?
by Phil - July 13th, 2010 8:19 am
Wheeeee, this is fun!
It’s only been a week since I called for "Turnaround Tuesday" and asked the question "Will CNBC Apologize to America" for their ridiculous, sickening parade of negativity that chased their poor viewers out of the market (now 600 points ago) by completely misrepresenting the economic outlook in order to protect the TERRIBLE advice given by Jim Cramer, the Fast Money Crew, their sponsors etc. etc. – it was all one national frenzy of media negativity designed to shove retail investors entirely out of the market while the cognoscenti went shopping.
It’s not just CNBC, of course, it’s a problem with the whole MSM but I ranted about corporate (top 0.01%) control of the media last week so let’s move on as we wave bye-bye to all the beautiful sheeple who were kind enough to sell us their stocks at the bottom, despite my warnings. Our 500% upside plays are now well on their way to making 500% for us and our "9 Fabulous Dow Plays Plus a Chip Shot" are also looking good already. Even the trade ideas I mentioned right in last Tuesday’s post are well on track as I said last week:
On Friday, I had said to Members right at 9:38, in the Morning Alert: "If we run up, then it will be prudent to get more neutral into the weekend but if we stay down and hold our levels, then saying a little bullish will be fine. Out of short-term short trades if you haven’t already. Keep in mind we have some great 500% upside plays you can still grab here if you think you are too short."
The latter was a reference to our 500% upside plays. We also went with EEM July $38 calls at .99, and a QLD $50/53 bull call spread for $1.30 (selling puts as well for more profits) as well as long plays on RIMM, AA, HOV, VLO and TASR. My optimism was based on the considered TA analysis I shared with Members at 2:39:
After completing last month’s "Omega III" market pattern on the Trade Bots, it’s now time to spring the bear trap and run the "Apha II" into options expiration on July 16th. Maybe there will be as little logic to the rise as there was to the fall – who really cares – it’s just our jobs to try to
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Appetite for Options on YUM! Brands, Inc. Grows Ahead of Earnings
by Andrew Wilkinson - July 12th, 2010 4:44 pm
Today’s tickers: YUM, INTC, CBRL, CASY, RMD, PG & STEC
YUM – YUM! Brands, Inc. – Traders are placing bullish and bearish bets on the operator of KFC, Pizza Hut and Taco Bell ahead of the firm’s second-quarter earnings report slated for release after the closing bell on Tuesday afternoon. YUM’s shares are up 0.97% to stand at $40.66 with 35 minutes remaining in the trading day. The overall reading of options implied volatility jumped 21.8% to 33.38% this afternoon as investors anxiously await the firm’s earnings for the second quarter. Some investors are preparing for a rally following earnings and ahead of July expiration. These optimistic individuals picked up at least 1,300 now in-the-money calls at the July $40 strike for an average premium of $1.13 apiece. Investors long the calls make money if YUM’s shares increase 1.15% to trade above the effective breakeven price of $41.13 by expiration on Friday. Bullish sentiment spread to the higher July $41 strike where 1,000 calls were purchased at an average premium of $0.57 a-pop. Traders long the higher-strike call options stand ready to accrue profits should YUM! Brands’ shares rally 2.2% to surpass the average breakeven price of $41.57 by expiration day. In contrast to the bullish behavior observed, pessimistic players purchased put options on the stock to position for disappointing second-quarter earnings from the firm. Bears bought approximately 4,900 puts at the July $40 strike for an average premium of $0.95 per contract. Put buyers make money if YUM’s shares decline 3.95% from the current price of $40.66 to breach the average breakeven point to the downside at $39.05 by July expiration.
INTC – Intel Corp. – Options investors are hard at work populating the chip maker with various trading strategies ahead of Intel’s second-quarter earnings report scheduled for release after the closing bell tomorrow. Thus far in the session more than 144,700 option contracts have changed hands on INTC with investors exchanging 2 call options on the stock for each single put option in play today. The semiconductor manufacturer’s shares are currently up 1.40% to stand at $20.53 as of 3:10 pm (ET). One options trader expecting Intel’s shares to remain range-bound through expiration in January 2012 opted to sell a strangle in the first half of the trading session. It looks like the investor sold 5,000 calls at the January 2012 $25 strike for a premium of $1.54…
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9 Fabulous Dow Plays Plus A Chip Shot (Members Only)
by Phil - July 7th, 2010 7:24 am
We were discussing what to invest in in a terrible market this morning in Member Chat.
I thought it would be handy to add this post to our Buy List because 9 of my 10 picks below are Dow components and there are very easy ways to hedge our Dow purchases against disaster so it will be a good opportunity to construct a self-contained portfolio filled with dividend-paying stocks that are suitable for a long-term retirement account that we can buy using our discount strategy.
Let’s say we allocate $5,000 to each of these positions and we intend to buy $2,500 in the first round and hold $2,500 on the side in cash, in case the Dow does fall more than 20% and the majority of our stocks are put to us in a second round. In the below list, XOM and WMT are more expensive but others are less so you can buy 100 of the big boys (price-wise) and see what’s left or allocate a double helping for those two, so you’d be buying 100 shares for about $4,000 a block (after our discount) and hold back $4,000 on those two.
This is acceptable because we do have $50K in cash sitting around and A) We don’t really believe the Dow is falling below 8,000 B) When the stock is put to us our margin requirement will only be about $25K (assuming 50% margin for stocks held) as our short puts will be gone C) We will have a disaster hedge. On all of these plays, the upside is at least 25% so that’s also our built-in cushion, all the way to Dow 7,307 so we really only need our protection to kick in below 8,000.
Aside from our weekend 500% DXD disaster hedge, which is perfect to cover this group, we can do a very simple, margin-free hedge like the DIA 2012 $95/80 bear call spread for $5.50, which pays $15 if the Dow is below 8,000 in Jan 2012. So $5,500 put into this play returns $15,000, offering us an additional 20% downside protection, now down to Dow 5,845. If that seems silly to you (it does to me) then a $2,500 hedge that gives us an additional 10% downside protection would seem to be plenty.
Once we have that hedge in place, we can aim to make it free by selling puts. To make up $2,500 over 18…
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Advanced Pattern Recognition: Omega III Weekly Wrap-Up
by Phil - June 19th, 2010 6:46 am
What a fine and predictable week it was!
How can you not have fun when the market does exactly what you expect it to do every day? Why it’s almost as if we stole Goldman Sach’s evil playbook (and the Russell once again is at 666) so we too can make profits EVERY SINGLE TRADING DAY – just like they do! This is a real testament to my famous saying:
We don’t care IF the game is rigged, as long as we know HOW it is rigged so we can place our bets accordingly.
Remember it was last summer that Goldman’s secret trading program was stolen. At the time, Goldman Sachs asserted that: "There is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways." I believe this was a misquote and what GS meant to say was that there was a danger someone ELSE could use it to manipulate the markets in unfair ways. Was it just a coincidence that the indictment of computer thief Sergey Aleynikov on Feb 11th coincided with the beginning of this year’s massive rally or was that the day GS regained sole control of their pet program?
Does this sound conspiratorial? Well perhaps then you haven’t read Tim Lavin’s "Monsters in the Markets," where he points out: "Algorithms now trigger 70 percent of all trades in U.S. equities. The speed and volume of everyday trading have propelled the market into a new and esoteric dimension, and rendered traders in the pits largely obsolete… At least a few high-frequency traders have learned to make a killing by detecting the more simplistic algo strategies deployed by basic pension funds and mutual funds, buying the next stock the funds plan to buy, and then selling it to them at a higher price. This may not be illegal, but it’s almost certainly unfair to the funds’ investors. “It is increasingly clear that there are quite a number of high-frequency bandits in the high- frequency-trading community who pump up volume statistics, front-run investor orders, increase transaction costs, and hurt real liquidity,” according to former NASDAQ vice-chairman David Weild."
We certainly know better than to trust our money to fund managers! Last Friday ("Pattern Recognition 101"), we determined that the TradeBots were following the rally pattern we now call Omega III and that meant we expected the day to finish…
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The Worst-Case Scenario: Getting Real With Global GDP!
by Phil - June 6th, 2010 8:27 am
$10,500.
That is the per capita average GDP for the 6Bn ape-like creatures on this planet who have pockets and purses. Of the still hairy and pocketless apes, there are only about 1M left and they are mainly prisoners so we won’t be worrying about them but it would be nice to consider the plight of our ancestors once in a while… Anyway, so 6Bn of us fill in those last 3 images in the planetary labor pool with the vast majority of us STILL FARMING and, of course, a select group of us are still hunting and gathering and contributing very little to the GDP.
None of our problems are new – as noted in this 2005 cartoon:
The United States of America with it’s highly evolved population of shopoholics has a per capita GDP of $46,381 – VERY IMPRESSIVE but we rank 6th! Brunei does a little better than we do and Singapore is up at $50,523 (so let’s hear it for corporal punishment) and Norway (one of my top choices of countries to flee to when it all hits the fan) is at $52,561 but Luxembourgh ($78,395 – banking) and Qatar ($83,841 – oil) simply trounce us in earnings power per person. For those of you who like to think Capitalism is all about keeping score – they must be better than you because they make more money, right?
Below the US, per capita GDP drops off fairly quickly. Rounding out the top 10 are Switzerland ($43,007 – watches and more bankers), Hong Kong ($42,748 – don’t tell China!), Netherlands ($39,938 – legal drugs!), Ireland ($39,468 – free beer when on wellfare!) and Australia ($38,911 – beer comes in oil cans plus gigantic bouncing rats). 20th on the list is Germany at $34,212, Greece is 25th at $29,882 (but not for long), 30th is South Korea at $27,978, 40th is Slovakia at $21,245. Lithuania comes in at 50 with $16,542 (1 ahead of Russia) and it steadies out there with emerging market star Brazil in 75th place with $10,514 and, keep in mind – that is where you FINALLY get to the average leverl of economic activity for the world.
Another BRIC in the global wall is mighty China, with a per capita GDP of $6,567 for each of their 1.2Bn persons and India’s Billion people average out at less than half of that, at $2,941, ranking 128th and still ahead of 53…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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