Posts Tagged ‘SPY’
Four Stock Indexes and What They Track
Which stock index should you follow?
Whether it’s the Dow Jones industrial average, the Nasdaq stock market, Standard & Poor’s 500 index or the Russell 2000, investors use these popular indexes to get a sense of how the overall market is doing.
But these indexes aren’t created equally. The Dow Jones, Nasdaq and Russell 2000 will only give you a glimpse into certain areas of the stock market while the S&P will provide a broader snapshot of market, although it’s mainly for large- to medium-sized companies.
“The S&P 500 is the best barometer because it represents close to 80% of the market cap of all stocks publicly traded,” says Jerry Harris, president of Sterne Agee Asset Management in Birmingham, Ala.
Often, investors will assume a high-flying stock market translates into a booming economy, but that isn’t always the case. The stock market is typically driven by company news, economic data, and rumors and speculation. On the other hand, the economy is driven in part by the number of jobs and workers’ paychecks — not by whether Apple will come out with a new iPhone.
But what the different indexes can do is give investors a sense of certain industries, company sizes and the performance of that market grouping. Here’s a look at how each of the major indexes stack up as indicators of overall stock market performance.
4 stock indexes and their market clout
The Dow Jones industrial average is one of the oldest stock indexes, dating back to the late 1800s. It’s made up of 30 large U.S. companies that are publicly traded. Some of the companies included in the Dow Jones industrial average are American Express Co., Caterpillar Inc., Exxon Mobil Corp., General Electric Co. and Bank of America Corp.
While the stock index is comprised of large U.S. companies, the fact that it only encompasses 30 companies is one reason some analysts say it’s flawed.
“Can 30 companies give an accurate barometer?” says Jared Levy, a stock strategist at Chicago-based Zacks Investment Research. “The lack of diversity is probably the No. 1 reason the Dow is a flawed index.” Read more
Use Earnings Season to Play the S&P 500
Written by Jared A Levy, Editor, Options Strategies Weekly
It is a big week, with lots of stocks in play. Alcoa (AA:NYSE), JPMorgan (JPM:NYSE) and Google (GOOG:NASDAQ) are just a few of the companies that will kick off earnings season this week.
To the average investor, earnings may seem like the same march of financial reports that happens each quarter. But for the select few who can get ahead of Wall Street’s expectations and understand exactly what to look for, it is a time to profit.
Think about it like this…
The stock market is the ultimate leading indicator of corporate and economic health. Investors buy and sell stocks based on emotions, economic data, news and chart patterns. These movements are confirmed by the strength (or weakness) of earnings reports. It’s sort of like a race with checkpoints along the way.
Believe it or not, the S&P 500 is in a position now that might surprise you.
Stocks on Sale
There is no doubt that my colleagues and I have cast a fairly bearish tone over the equity markets for the past several months. Fortunately, our thesis has played out profitably. But it is time to consider a change, if only for a short while.
I know you may think I’m crazy, especially given the shakiness of Europe and the overall negative economic data emerging from the U.S. But there is a reason…
I found some interesting and compelling indicators, the first of which you can see in the chart below.
Weekly P/E Chart of the S&P 500 — Courtesy of Bloomberg
View larger chart
This chart tracks the total price, earnings and estimates of all the stocks in the S&P 500 (SPX) over the past 12 years. The white price line is often a motivator for investors, but this time it means very little.
Price is relative. Remember price is just a dollar amount — value is determined in other ways.
Amateurs might look at today’s S&P 500 and think that because the S&P 500 is at April 2009 levels it is a reason to buy. Of course if you were to look back, investors may have said the same thing in October 2008, when the S&P was trading at levels not seen since 2004.
We all know that buying in October 2008 was NOT a good decision. So why are things different now?
I want you to focus your attention on the red and green lines. Try not to get dizzy.
These lines represent the expected price-to-earnings ratio and the trailing or realized P/E ratio respectively. They have been dropping along with prices.
The P/E ratio is the most popular measurement of value for a stock. Generally speaking, it’s good to buy when P/E ratios are relatively low and sell when they are high. It’s not the end all be all, but I have more data that may quiet the P/E naysayers.
Over the past 12 years of data shown on this chart, you can see that the ONLY time the S&P 500 even came close to its current P/E level (green) was in the crisis of 2009 and it was only about two points lower. The expected P/E is also in a favorable buying range.
The average P/E multiple for the S&P 500 over this time frame is about 19; a reading of 12 means value. As long as companies can at least meet their Read more
The Most Unpredictable Market Event
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| Written by Jared Levy, Editor, Option Strategies Weekly | |||||
| Friday, 16 September 2011 09:05 | |||||
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This theory, developed by Nassim Nicolas Taleb, describes a Black Swan event as one of three things:
In essence, a Black Swan event is something that has such a small chance of happening that it’s not accounted for in the models that the quants (quantitative analysts) use to predict risk. These quants use statistics to figure out just how probable a trade is going to be. Being a bit of a math junky myself, I use these same calculations. But being a trader, which many quants are not, I know there is a human element that NO model can predict. What most of us don’t realize is that Black Swans happen much more often than we think. In fact, we could be on the precipice of another… Usually the worst Black Swan events in the market occur when people are off guard or beginning to feel like a major problem has been solved. When markets are emerging from what appears to be a bottom and major catastrophe seems to be averted, our defenses are down. Black Swan events occur just when everyone is feeling comfortable, not vulnerable. This was exactly what happened at the end of 2008, right around the time the world’s investment guru Warren Buffett injected Read more |
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The Black Swan Theory describes unpredictable events of extraordinary magnitude. The meltdown of 2008/2009 would be a perfect example of a major Finding Value and Sanity in an Insane Market
Jared Levy, Editor, Option Strategies Weekly
Tuesday, 06 September 2011
I was so excited to finally publish Your Options Handbook earlier this year. It was the culmination of 17 years of listening and learning from both professional and retail investors distilled into 460 pages of some of the most important investing advice.
I found that the common threads in every successful investor were adaptability and a consistent, actionable plan.
The most successful investors also had access to accurate information, opinions and different trading ideas. Sometimes they acted, sometimes not.
After a conversation with one of my clients last Friday, I realized just how scared and confused people are.
Taipan can help clarify the noise out there and guide you in the right direction when all seems chaotic. Right now, guidance, strategy and explanations are needed the most.
Recently, I put together a FREE webinar detailing ways that you can reduce risk and capture solid returns in this chaotic marketplace. You can register here.
I wanted to take some time today to offer a little explanation on “value” in the markets. Hope you enjoy.
What Is a Fair Price?
First, when you look at a stock quote, you are viewing the “best price” at that moment in time. The guy who was willing to sell for the least and the guy who was willing to pay the most meet and determine price. This happens in a millisecond.
And then the price changes.
Let’s assume you like a company or its products and you want to buy its stock. How do you know where or when to buy? Everyone has heard “buy low, sell high,” but that is certainly easier said than done and is completely relative.
This is where your “time horizon” comes into play. A time horizon is how long you are willing to dedicate to an investment. You MUST know it before selecting a stock!
You also need to have a reason for buying (or selling) this stock, which is something that only YOU can decide. Reasons can be a report you read or your own research. Just make sure it’s sound and you know the source.
The question of “fair price” has plagued investors forever, whether they are analyzing stocks, mutual funds or even the latest fashion craze. The wide span of investor opinions and motivations is what creates fair value for the current trading price of a stock.
All of those different rationales coupled with varying opinions toward risk and timing create the free marketplace.
Here’s the thing, Read more
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.”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
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
Are SPX Options Signaling a Market Rally?
| Written by Jared Levy, Editor, Smart Investing Daily | |
| Tuesday, 07 June 2011 11:18 | |
 Options give an experienced trader the ability to make money in any market — no matter which way it’s headed. But did you know they can also act as a warning signal or a buy signal? Options can tell you when the market is about to go haywire, and they can also tell you when the market (or a stock) is ready for a rally.
To understand how, we need to take a step back for a second and look at exactly what an option is and what its price represents. An option is a contract that gives an investor the right to buy or sell a stock at a certain price (called a “strike price”) by a certain date. These investments give traders a lot of flexibility that stock investors don’t have. Most investors who buy stocks can only make money if share prices climb. Options investors can make money if the stock moves in either direction by investing in the right kind of option. Traders buy “call” options when they think the underlying stock is going to rise in price. If you think Exxon Mobil’s (XOM:NYSE) share price is going to climb from $80 to $85, you might want to buy call options. Call options increase in value when a stock’s share price climbs. Traders buy “put” options when they think the underlying stock is going to fall in price. If you think Exxon Mobil’s share price is going to fall from $80 to $75, you might want to buy put options. Put options increase in value when a stock’s share price falls. This last bit is how options traders make money when the market is falling. Now that we have a basic understanding of what options are, let’s talk about how options are priced. The Five Components That Influence an Option’s PriceStock Price — Obviously the price of the underlying asset (stock, index, ETF, etc.) will have an effect on the price of an option. Time Till Expiration – All options have an expiration date. The longer an option has until its expiration, the more expensive it is. You’re basically paying for more time for the underlying stock to move. The amount of time until an option expires will have a direct effect on the price. Dividends – Believe it or not, dividends also influence option value. Dividends lower the price of calls and raise the price of puts. (When you buy an option, all the dividend math is already figured in.) Interest — Interest rates have a fairly minor effect on most options, but they do influence option prices. Higher interest rates will increase call values and lower put values. Volatility — If there is a high demand for an option or if a stock is extremely erratic, “implied” volatility will be higher and the option more expensive and vice versa. Here’s what that means:
When the Natural Order Is DisturbedThe fact is that most of the investment community and media know little or nothing about options. They say the Volatility Index (VIX) is telling us whether the market is overbought or oversold or if investors are scared or confident. The truth is that the VIX alone can’t even come close to predicting these things without considering other factors. There is an innate balance and relationship between a stock and its options as well as the puts and calls themselves. What I am about to show you is what we professionals use to spot impending danger or safe opportunities. When there is a severe disparity between different options volatility, professional traders can use it to their advantage. One of the simplest uses is to gauge real market sentiment. (Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Sara Nunnally simplify the stock market for you with our easy-to-understand investment articles.) Meet “SKEW”Without turning this into a math lesson or boring you all to death, I’ll keep this simple and straight forward. Look at the chart below. This is an options chain, or a list of all the different options you can buy on a specific stock or ETF. This options chain is for the S&P 500 Index. You will see two options highlighted. One is a put (highlighted in red) and the other is a Read more |
Smart Investing Daily – Which Signals Tell You That the Market Is About to Drop?
Jared Levy, Editor, Smart Investing Daily
Tuesday, 08 March 2011
One thing that has made Smart Investing Daily the fastest-growing e-letter in our history is you, our readers. We appreciate your attention, referrals to our letter and, most importantly, your questions! Keep them coming!
A couple days ago, I received an e-mail from Smart Investing Daily Reader F.R., who wrote:
I’ve been following your newsletters for a few months now and I must say they are very insightful. I read an article today and it quoted a guy from Agora Financial saying that since retail investors have piled a lot of money into mutual funds, coupled with the S+P rising by 100 percent and the spike in oil prices, all these are indicators that the market is due for a major pullback. So I guess the best strategy now is to probably identify possible shorts (Netflix anybody?) or put options? The question is… when should I be considering that the market will go down?
I would really appreciate some feedback on this. Wonderful job you guys are doing. Keep it up! — F.R.
F.R. asks a couple loaded questions that I thought would make for an excellent article. Let me address each separately and hopefully shed some light on these topics for you.
Retail Investors
The first statement refers to “retail investors” piling into stocks and mutual funds recently.
Retail investors, home gamers and self-directed investors all refer to anyone who is not an investment professional and generally doing their own research and buying and selling stocks and mutual funds on their own behalf, usually through a discount broker.
The unfortunate retail investor usually gets a bad rap and most times it’s for good reason. By the time data and market sentiment reach Read more
Smart Investing Daily – Could Disaster Be Brewing Inside These Popular ETFs?
I feel it’s our duty here at Smart Investing Daily not only to help you discover new and unique investment opportunities and tactics, but also to warn you of impending potential disasters.
Looking at the financial markets on the surface, many experts are saying that it seems a little “overbought.” There is no doubt I am in that camp, but now I am gaining more conviction. Experts use things like price/earnings multiples and technical formations to make these determinations. They also look at the past to make future forecasts.
When determining an “overbought” or “oversold” financial market, I examine several indicators, like the ones mentioned above and several others, to confirm my thinking. But there are a couple of signals that are not being talked about and one that I think can not only give us insight into the real strength of the financial market, but also explain its odd behavior and seemingly unstoppable bullish run. These signals are coming from three index Exchange Traded Funds (ETFs) that are some of the most heavily traded and most popular in the world.
A Growing Problem?
These three ETFs – Dow Jones Diamonds (DIA:NYSE), S&P 500 (SPY:NYSE) and Nasdaq 100 Index (QQQQ:NASDAQ) – represent the bulk of the most heavily traded, largest companies here in the U.S. and abroad. Combined, they represent over 600 stocks and the majority of the trading volume here in the U.S. What no one seems to be talking about are the large changes we are seeing in something called “short interest” and the “short interest ratio.”
Short interest is the measurement of how many shares are in short positions. When you want to short a stock, you must “borrow” Read more