Archive for August, 2011
Is Gold the New VIX?
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| Written by Jared Levy, Editor, Option Strategies Weekly | |||||
| Tuesday, 30 August 2011 09:58 | |||||
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I use statistics to predicted major movements in the market. Some signals are bullish, like this one I wrote about in Smart Investing Daily on June 7th. Just recently I found an abnormality in the way that options were being priced and traded. Back on July 22nd, the signals I saw were pointing to move sharply lower in the Nasdaq and S&P 500. Sure enough, these indexes dropped 18% almost immediately. I find these early warning signals in charts, trade volume, options, news stories, and in abnormal trading activity. I also find signals in correlations between securities. (This is one of my favorite signals.) But correlations can hard to spot. Correlations in the MarketBelieve it or not, just about every investor has come across a correlation in their analysis. For example, many investors look at something called beta. A stock’s beta tells us how volatile it is compared to the market. If a stock has a beta of 1 it should be moving at about the same rate as the index it belongs to. For example, Google (GOOG:NASDAQ) has a beta of 1.13, which means that if the market is up 1%, Google is going to be up about 1.13% on average. Stocks can have negative betas as well. The company China Green Agriculture Inc. (CGA:NYSE) has a beta of -5.52, which means if the market is up 1%, chances are this stock is going to be DOWN 5.52% on average. Most stocks, commodities and metals have natural relationships with one another. When these correlations become “disconnected,” it can be a sign that something is wrong. Major disconnections can be a Read more |
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Those of you who know me know that I love statistics and that I’m always looking for ANYTHING that gives me an “edge” or “early warning signal.”Insider’s View: The Future of Apple
Friday, 26 August 2011
Wednesday evening, I was going over my trades, getting prepared for the days ahead. I use one of the best news services out there. It gives me headlines the second they are released around the world…
Up on the screen popped one of the few headlines that disturb me:
17:28 AAPL Trading Halted: News pending (376.18, +2.58, 0.69%)
When trading is halted, something big is happening. Most of the time, it’s not good. My first thought was something terrible happened to Steve Jobs.
Six minutes later this headline was released by Apple:
17:34 AAPL *STEVE JOBS RESIGNS AS CEO, NAMED CHAIRMAN; TIM COOK NAMED NEW CEO
In the back of my mind I was relieved that Mr. Jobs was alive, but I knew this day was coming. Steve Jobs has been skirting his health issues and trying to remain strong. Much of the market knew he would step down eventually, but didn’t think it would be right now.
After Apple started trading again 15 minutes later at $356, I immediately thought that apple stock was a buy at that level, at least for now. With the stock back up at $374, the real question is whether you should still be buying Apple here or if this is the beginning of the end for the tech giant.
Steve Jobs Versus Tim Cook
Apple is Steve’s baby; no one will run Apple as he has. This is a man who started Apple out of his garage in 1976 along with Steve Wozniak and Ronald Wayne. It is impossible to replicate that passion.
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| The Apple Lisa cir. 1983 |
Believe it or not, in the early days Steve was known an aggressive taskmaster who was extremely difficult to deal with. Even so, his forceful, erratic and wild demeanor helped transform the way humans interacted with computers in a big way. He popularized the Graphic User Interface (GUI), the mouse and the desktop set of icons that are still popular today.
More importantly, Jobs remade Apple into the largest company in the world by market capitalization.
Here’s why Steve Jobs is Read more
Is America Dead?
Tuesday, 23 August 2011
My father and I had a long conversation the other day about his fears for the future of his pension, home and standard of living.
He has spent almost 30 years working for the City of Philadelphia, climbing his way up. He’s finally nearing retirement. These years should be the best for him. He should be looking forward to the freedoms that come with the hard work he has put in, a time for him to enjoy his family and his hobbies and maybe even spoil himself with some of the money he has saved for this day.
But he can’t.
Fixed-Income Hardship
Like most of us, he has serious doubts about the future. He sees costs of all his necessities rising, and is forced to watch the value of his home continue to drop. It’s lost almost 40% of its value in the past two years and is still not stabilizing. The value of his conservative IRA has also dropped.
All this and he is NOT making any more money this year than last. Unfortunately, this is the case for most folks. The chart below shows the quarterly change in wages from 2009-today. This is not the sort of chart you want to see your income — or EKG — look like.
This kind of stagnant income can’t keep up with rising costs. The cost of everything — from food and fuel to insurance and clothing — is up and climbing in a big way. Compare the Consumer Price Index (CPI) chart below to the flat income chart and you can see why things don’t add up for most of us.
Home Sale Prices Are Still Hurting
Last month, Case-Shiller reported home sale prices are barely at Read more
Death Cross Signals Bear Market… And Buying Opportunity
Jared Levy, Editor, Option Strategies Weekly
Friday, 19 August 2011
Economies around the globe are grinding to a halt. The eurozone is coming apart at the seams and the American consumer is losing confidence and strength. But just when you thought things couldn’t get any worse, a serious warning signal showed up in the S&P 500 and may have helped spark this sell-off.
A big storm is coming, and it’s going to be rough…
I’ll show you how to navigate the storm, identify and clarify this indicator, and help you make the decision to buy or sell.
Analyze This Death Cross!
Traders generally fall into one of two analytical disciplines: fundamental or technical. Either they research the fundamental aspects of a company to make their buy and sell decisions, or they examine the price charts of stocks to find support, resistance, formations and trends.
But even the most die-hard fundamentalists will use some sort of a moving average or basic indicator to confirm their ideas.
Two of the more common indicators that longer-term investors use are the 200- and 50-day moving averages. Basically, a moving average is the average price of the stock over a period of time. So a 200-day moving average tracks the average price of the stock over the past 200 days. Investors use these indicators to gauge a trend’s strength.
But they can also tell investors when to buy or sell.
For example, when the 50-day moving average crosses above the 200-day and the stock price is above both of them, this is considered a buy signal. As long as the 50-day stays above the 200-day average, investors will generally hold a position.
Sometimes moving averages signal big changes in trends.
The “Death Cross” or “Iron Cross” as some call it occurs when the 50-day average crosses below the 200 and the stock is below both averages. When this happens the bull market has ended and it’s time to sell. Sometimes this selling gets violent.
On Wednesday, after the close, a Death Cross was formed in the S&P 500 (SPX). When we combine this formation with inflation pressures and unemployment claims, we have a perfect storm for a mini-crash.
That’s what happened yesterday.
You can see the Death Cross in the chart below as the orange line (50-day) crossed below the red line (200-day).
The markets finished down almost 5% yesterday and the selling may be Read more
World Debut: The Microsoft of the New Millennium
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| Written by Jared Levy, Editor, Option Strategies Weekly | |||||
| Tuesday, 16 August 2011 08:52 | |||||
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Google is now a hardware manufacturer. Never in the history of the company has it produced a product that consumers can actually hold in their hand. At $12.5 billion, the purchase of Motorola Mobility (MMI:NYSE) is a drop in Google’s big cash bucket. Motorola produces high-quality phones and has a clean reputation with most consumers in the smartphone industry (not like RIMM). This will be a major leap for Google and a catalyst to propel it higher in the coming years. MMI lacked a marketing catalyst and its brand was lost in the shuffle. That made it a prime candidate for Google to snap it up. That, and this: Motorola Mobility’s 17,000 patents. They are a sort of immunity to the lawsuits that happen so frequently in the smartphone industry. With the patents in its pocket, Google can focus on creating a “super phone” that integrates all the best features of its Android system with a sleek, functional, high-quality piece of hardware. Apple is the only other company that does this. But unlike Apple, Google will still license its operating system to other phone manufacturers. That means increased partnerships with demand for new apps and functions. This could hurt Apple. Apple doesn’t share well. It must have missed that lesson in kindergarten. The company lost a similar battle to Microsoft in the ’80s. Apple only offered its operating system on its own computers, while Bill Gates let anyone buy a copy. This sent Apple into a 12-year hole and made Microsoft one of the most profitable companies in history. It may not be that bad this time around, but Apple has a serious, more powerful contender in Read more |
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Yesterday was an epic, game-changing day for Google (Guess Who Is Manipulating the Markets
Friday, 12 August 2011
When we think of market manipulators, names like Bernie Madoff and Mike Milken come to mind. Or perhaps it’s Michael Douglas’ character Gordon Gekko from the 1987 classic Wall Street.
These guys profited from exploiting investors, causing major losses in the process.
All three of these men went to jail for their crimes, even the fictional Gordon Gekko. But there is blatant market manipulation taking place right now that is sure to go unpunished. The worst part is that it is happening in plain sight.
What Is Market Manipulation?
Market manipulation can come in many forms.
Inside information, one of the more common forms, can be used to get an edge over investors and take advantage of their elation or panic once the information becomes public.
Insiders can be corporate executives, their close friends and family, or anyone who obtains non-public information before it’s available to the public.
An example would be an employee of the National Agricultural Statistics Service (NASS) who gains knowledge of a crop report for oranges that shows far fewer were harvested this past season. If there were fewer oranges produced, prices would be sure to rise. If that person buys thousands of OJ futures ahead of the report, he is almost sure to profit. This is a form of insider trading, punishable by law.
Another form of market manipulation is the exploitation of technology.
Take the Small Order Execution System, aka the SOES. Whenever investors use the SOES to exploit traders or manipulate prices, they may or may not be breaking the law. It is a fine line that has been walked for many years. The “SOES Bandits” gained popularity back in the late ’80s and ’90s when firms like Datek Securities allowed active traders to take advantage of a weakness in the SOES.
Some call High Frequency Trading (HFT) traders the SOES Bandits of the new millennium. While we can’t blame extreme volatility on all HFT traders, I know there are some who are taking advantage of the system and causing investors to get undesirable results in their trades.
No… the real manipulators are different animals entirely.
The Real Market Manipulators
Believe it or not, the HFT traders don’t Read more
How to Make Money in This Mess
| How to Make Money in This Mess | |
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| Written by Jared Levy, Editor, Option Strategies Weekly | |||||
| Tuesday, 09 August 2011 09:10 | |||||
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Savvy investors can use volatility to make lots money in a bear market. There is a secret about the Volatility Index (VIX) that can potentially make you thousands of dollars. What Does the VIX Really Symbolize?Think of the VIX as a “fear” indicator. Most investors — and even some experts — don’t know how to actually use it. You may hear things like “if the VIX is high, it’s time to buy” or that when the VIX is high, people are scared. But the real question is, how does it affect my financial investments? Let’s first take a look at how the Volatility Index tends to react with the markets. Below you see a chart of the S&P 500 (SPY in green) compared to the VIX (in black). The two generally have an inverse relationship. When the market is rallying, the VIX is dropping and vice versa. To put it simply, the Volatility Index has a direct relationship with options prices. As people buy options and the VIX goes higher, options get more expensive. When people sell options and the VIX drops, options get cheaper. So here’s the thing… What if you bought a call option, had the stock rise, and either lost money or didn’t make as much as you thought you would? Did you ever think that a falling VIX was eating away at your profits? If so, then you have discovered part of the secret. If you’re loving this article, sign up for Smart Investing Daily to receive all of Jared Levy and Sara Nunnally’s investment commentary.
Here Is How It WorksWhile you might think that Wall Street is manipulating Read more |
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Investors are scrambling to figure out which way is up and what the market’s next move will be. The one thing that we can bet on in the near term is more volatility.
Bear Market: The Strategy to Avoid the Pain
Friday, 05 August 2011
I often say the stock market is always looking three to six months ahead with tunnel vision.
But from time to time, the market stops to take a look around. When the blinders were removed last week, the market realized it was no longer in Kansas. A swirling tornado of debt, economic and consumer weakness, and near frozen credit conditions across Europe brought a rude awakening to what has been a careless stroll for equities.
Some traders are calling for the markets to retest their 2009 lows. I have my own theories on that, which I will share with you shortly.
The next question is, will the tornado unwind, or will this swirling mess spin faster? You would be surprised at what some of my friends on Wall Street are doing.
When Margin Calls…
In just two weeks’ time, the Dow Jones has lost over 1,200 points. More importantly all three major indexes not only have gone negative on the year, but have all broken below their 200-day moving averages. This is an extremely bearish sign and usually means a bull market is coming to end.
In seven of the past nine days, selling seemed to pick up just before the markets closed. At the same time, volume increased. In my experience in the pit, when investors are selling into the close on a down day, we are entering a bearish market.
This selling snowballs when traders who bought on margin have to sell their shares to cover margin costs. Typically a trader will wait until the very last minute to execute this trade: The calls come at 3:30 p.m. ET.
Look at the 15-minute chart below. I placed the volume Read more
The Truth Behind Jobs Report Numbers
Tuesday, 02 August 2011
If you are a long-time reader of Smart Investing Daily, you know my predictions on the monthly Bureau of Labor Statistics (BLS) jobs report are pretty accurate.
The Bureau of Labor Statistics jobs report is released on the first Friday of every month, and sets the benchmark for employment here in the US.
It is the most important piece of monthly economic data, and this Friday we’ll get a good look at where we stand.
ADP, the largest payroll provider in the U.S., releases its report two days before the Bureau of Labor Statistics. Investors watch this report for a “sneak peek” at what the jobs report will look like on Friday.
Last month, ADP’s employment report surprised a lot of analysts, including me: 157,000 new positions were created. This was tremendous job growth. The report sent the markets skyrocketing and tens of thousands of investors bought into the rally.
The S&P made a two-month high that day…
But the Bureau of Labor Statistics’ jobs number was a rude awakening… the worst job growth in eight months. The ADP number was completely wrong! After the report, the S&P 500 lost 5% of its value.
How could ADP be so far off?
One of my mentors taught me a lesson about data models a long time ago. He said, “Bad data in, bad data out.” The biggest problem that investors face is bad data.
You’d be surprised at how much data is actually collected and how much is merely estimated.
The Bureau of Labor Statistics
The Bureau of Labor Statistics’ survey sample includes about 140,000 businesses and government agencies that cover 440,000 worksites. In all, the Bureau of Labor Statistics samples roughly 9.0 million Unemployment Insurance tax accounts.
This figure only equals one-third of all nonfarm payroll employees. The Bureau of Labor Statistics uses those results to estimate total unemployment.
The figure is incomplete in lots of ways.
It only counts people who got paid through the 12th day of the month. If your pay period doesn’t include the 12th, you’re not counted!
Also, the Bureau of Labor Statistics does NOT include proprietors, the un-incorporated self-employed, volunteer or family workers, farm workers, domestic workers, or members of the military. Non-civilian government workers are also excluded.
ADP
The ADP started reporting in 2001. After years of getting a bad rap, ADP Read more