OptionsVest

Short Covering Fizzles Out

Joe — Mon, 21 Jul 2008 02:59:37 +0000

OK, so we had a better follow through on Thursday than I expected, but Friday’s big fall in Technology stocks was probably enough to put an end to a two day short covering rally. While daily stock charts are starting to show signs of a turn around, we still have a long way to go on a weekly basis. We will soon see if the S&P 500 and the DJIA can build on the past week’s lows and establish support at 1200 and 11,000 respectively or if this was just a breather in the current bear market.

You Call That a Bounce?

Joe — Thu, 17 Jul 2008 03:40:55 +0000

It was a big day for the stock market with gains of more than 2% for the DJIA, SP 500, Nasdaq, and any other index they can come up with. OK, there was some good news, like a good oil inventory report that led to a $4.00 fall in the price of a barrel of oil, but what about the fact that consumer prices increased at the fastest pace since the early 80’s? That was back in the days when you could get a mortgage at 16 1/2 % and be happy you got it. (Yes, you read that correctly 16 1/2 % was what I was paying on my first mortgage). Like Uncle Ben and the FED boys said recently, maybe its time they started worrying about inflation a little.

Yes, that was a Bullish Engulfing candlestick pattern on the DJIA and the SP 500, in a down trend, near support, but there was one big problem - a lack of volume. Now I will not deny that it could be the start of a nice bounce, but it looked a lot more like short covering to me. Since the market is extremely oversold, even the staunchest bears were probably taking some profits. What makes this advance even more suspect is the fact that futures traders took the SP500 down further in the 15 minutes of after market trading, than they pushed it up in the last 15 minutes that the stock market was open.

Certainly does not make me optimistic that this market has turned around. Let’s see if we get any follow through.

The Great Shell Game

Bob — Mon, 14 Jul 2008 21:21:55 +0000

Which shell is the ball under? We all remember the shell game where the only goal is to deceive the bettor and take his money. That is what is going on in the financial sector today. What is the exact purpose of off-balance sheet entities other than to deceive? I have an idea. Lets give every bank 90 days to bring the off-balance sheet stuff on to the balance sheet.

Also, any CEO who states that their bank is well capitalized and goes belly-up within 90 days, should go directly to jail. Get ready for some overcrowding boys! Who should be in the hokey right now? Lets start with the tanned Countrywide guy and his spawned step son who ran Indymac. Who is on the short list for the ball and chain now? Vikram Pandit at C and whoever runs WM and BBX. C has a cool 1.1 trillion in off balance sheet issues. That’s trillion folks! WM and BXX are on the wires after hours saying they are well capitalized. If your stock is below 5 bucks, there is a problem somewhere that’s for sure! Or how about are friends at FRE and FNM? If you throw the off balance sheet stuff on FRE, they are only leveraged 68-1! This situation took years to build up to this and it will take years to unwind.

Back to 2006?

Joe — Sat, 12 Jul 2008 16:12:16 +0000

We can only hope that someone turned the clock back to 2006 as the S&P 500 touched its 2006 lows on Friday. If the second half of this year turns out half as good as that one, there will probably be a lot of relieved investors, since that should just about break us even for the year.

Unfortunately, there are several reasons to think the stock market has NOT finished its fall. On top of that list is the fact that the DJIA still has 250 points to go to reach its 2006 low. While Friday’s 11,000 low has provided some support in the past, the fact that the market did not bounce strongly off these levels would lead one to believe that its only taking a breather. No time to try to catch the falling knife, even if it looks like its losing momentum. It can keep doing this for a while.

CREDIT

Bob — Thu, 10 Jul 2008 15:30:32 +0000

What makes the world go around? The answer: Credit. Any business that relies on credit is getting destroyed. FNM and FRE are down big this morning(again). LEH rumors are flying again with PIMCO having to publicly state that they are still doing business with them. Maybe we all need another stimulus check so that we can go to WMT and by products made in China? For investors, 3 words of advice: defense, defense, defense. For traders, there should be a trade-able bounce in here somewhere but the trend is certainly lower.

Time for a Breather

Joe — Sat, 05 Jul 2008 16:09:31 +0000

Apparently everyone took my advice and took the week off from trading as the stock market drifted slightly lower as traders were anxiously awaiting a long 4th of July weekend. The DJIA and S&P 500 last 1.5% while the market leading (less lagging) Nasdaq doubled them up with a 3% loss. It looks like we may be in for a little consolidation phase for the financial markets as they try to digest recent losses. This will give traders some time to sit back a watch for some sign of a market recovery. We might as well do that too.

Are We There Yet?

Joe — Mon, 30 Jun 2008 01:53:54 +0000

Every momentum indicator known to man is telling us that this market is oversold. The only problem with oversold markets is that they can stay that way for a long time. This could be one of those times. The DJIA went crashing though the 12,000 level like it was not even there. You might recall that this level managed to hold up in March 2008, January 2008, and March of 2007. We have not seen these levels since the middle of 2006.

Buy and Hold investors may actually be losing ground over the last two years. When you consider the drop in home values over the last couple of years, the economy certainly is not painting a pretty picture. Had you been reading our blog in 2008, you might have been inclined to take some of your equity investments off the table. If you do not like to babysit your retirement funds, a well diversified portfolio would have helped you weather the storm. One place for a good read on asset allocation is the Insightful Investing Newsletter.

We could certainly see a bounce here that active traders can use to take advantage of some new bearish option trades, but for most of us this might be a good week to enjoy the upcoming holiday. No junior, I do not think we are there yet. If your are good boy, we might stop for a minute and pick up an ice cream cone, and you’d better enjoy it while you can. We may still have a long way to go, like maybe another 500 points down for the DJIA. Let’s hope not, but it would not surprise me at all. Maybe we can get the stock market a GPS, after all, nothing else seems to be helping.

Nothing New From the Fed

Joe — Thu, 26 Jun 2008 00:20:36 +0000

The FED told us they were concerned with both the economy and inflation. Well guess what? So is everyone else. The reaction to these comments was subdued at the start. Option bid/ask spreads did not widen even close to the extent that they usually do after Uncle Ben speaks.

Eventually as the day finished out volatility increased in the stock market. The DJIA shot up over 100 points, but eventually settled in just about unchanged. The Nasdaq continued to distance itself from the rest of the pack by posting a gain of almost 1.5%. The problem from a contrarian point of view is that the volume was lower than the previous day.

There certainly has not been any news that would indicate that the economy is has started heading in the right direction. The Nasdaq is holding up better than the DJIA and the SP500 because it includes a lot of technology stocks, and no financial stocks. Besides that, money managers have to put their money somewhere and they, like me, want no part of the financials.

For those of you who like to hedge your bets, It turns out that one of the best plays for 2008 would have been to be long the QQQQ and short the DIA. Even better would have been to be long the XLE and short the XLF, but we’re not looking for perfection here. Option players could have put on a funky straddle with Calls on the QQQQ and Puts on the DIA. Of course this is easy to see in hindsight, so I for one would not take this approach. I preferred bearish spreads on the DJX. That proved to be worth the effort. The question now is will they continue to work?

So how would you play it if you agreed with me that there may not be a lot of downside left, yet you do not think this market is ready for a turn around. As we have said a few times already this year, the Bear Call Spread is your safest bet. An example of this would be to Sell the July DJX 123 call and buy the July DJX 125 to cover yourself. With resistance on the DJIA at 12,250 the probability of success is pretty good…and the DJIA does not have to drop another point for you to keep your credit.

Testing 1 - 2 - 5

Joe — Mon, 23 Jun 2008 01:01:06 +0000

The DJIA is only a day away from testing its March lows. The SP 500 is two or three days away. The NASDAQ, on the other hand, has held up well since March as the bulls think that Technology stocks are going to lead the way to the promised land. If the NASDAQ tests its lows in less than a week, we would have a sure sign of market capitulation. That could also be a good time to buy in anticipation of a bounce.

More likely though, it could take weeks for the NASDAQ to get that far, if it gets there at all. Its strong relative strength is a good indicator that Technology stocks will lead the way to recovery, but there is no need to hurry to get on that bandwagon. It appears that the financial stocks are not finished trying to drag the rest of the economy down with them.

As Bob has said many times stay defensive. Maybe it would be a good time to move to cash and take your kids on a summer vacation. That could be a lot less expensive that staying fully invested. If you want to be active, more bear call spreads may prove worthwhile for July, just as they did for the June expiration.

IT’S A MAD, MAD, MAD WORLD

Bob — Thu, 19 Jun 2008 01:56:52 +0000

The market continues to get pounded. There seems to be a new bomb everyday. A few days ago it was LEH. Today, MF and FITB dropped bombs. The CFC combo that was recommended last month should be bought in for a nice profit. The bond market is completely confused. One day they are pricing in rate rises, the next day they are taking them out. The truth is that the fiscal stimulus that consumers are getting right now is doing the trick. When this wears off, look out below! To top it all off, a respected analyst at RBS called for a major crash within the next 3 months. All of this is not conducive to putting more money to work. For the last 1000 points in the DOW, this site has been saying to stay defensive. So STAY DEFENSIVE!