Traders' Library

Bernanke uncertain about recovery

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July 21st, 2010

 

Is futures trading for you? Listen to Carley Garner's latest interview : http://www.moneyshow.com/video/video.asp?wid=5842&t=3&scode=019106

 

 

The markets have been nice and choppy.  For most this means there has been more money lost than made. 

 

Fed Chair Ben Bernanke spooked the market by verbally expressing his concern over an uncertain outlook.  Investors immediately hit the sell button and with massive sell stop orders working below, the indices had little chance of avoiding the slide.  Also, rumors circulating the CME floor suggest that once of the catalysts to the move was a standing 600 lot stop order in the large S&P futures pit that, once elected, triggered an impressive down-draft.

 

Specifically, Bernanke stated that the U.S. economy faces "unusually uncertain" prospects but mentioned that the Fed hadn't used all of its resources and would be ready to take further steps to bolster growth if needed.  Overall the testimony was less than optimistic but it was also less than surprising.  There weren't any startlingly new revelations. 

 

From a technical standpoint, the market is highly mixed.  We have been noting 1066ish as the pivot in the S&P (ie. the make or break area) but it has also been acting as a magnet and this makes it tough to pick a direction.  In yesterday's newsletter we mentioned that we couldn't be bullish 30 handles from the day's lows and that playing the other side would be a better play, but we didn't expect the fall-out that occurred.  Going into tomorrow, we are uncertain of the intermediate -term direction but seasonal tendencies suggest that the markets could go lower before moving higher and the S&P failed at its down-trend line.  That said, the session closed near the lows and this usually paves the way for back and fill trade overnight.  In other words, if you want to be a bear...don't chase the market lower; selling on rallies might be the play but a "normal" bounce could see prices as high as 1075ish in the S&P.

 

Investor Mistakes, Google Q2, & the iPad

Biggest Investor Mistakes (A Dash of Insight)

 

Volume Trends Are Obvious - NEGATIVE(BigTrends)

No double dip, says Fed (Buy the Rumor Sell the Fact)

Leveraged Retail ETFs: Just In Time For A 2nd Half Slowdown? (Greenfaucet)

Latest Hedge Fund Positioning: Exposure Monitor Report (marketfolly)

 

Goldman: And Here are the Losers in Ipad World (WSJ)

 

Intel's Monster Quarter: Does It Set the Stage for Google? (Seeking Alpha) 

 

Everything Evens Out (The Kirk Report)

12 Free Books & DVDs- Happy 4th of July

 
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From John boYER, GENERAL MANAGER

ETFs, Gold, BP, and more

Weighing the Week Ahead: How Full is the Glass? (a Dash of Insight)

 

Jobs Data Coming Up (BigTrends)

 

Lights, camera, no action ( Buy the Rumor Sell the Fact)

 

Charting the Current Bank Index and Regional Bank ETF (KRE) (Green Faucet)

 

Bears Retake the Tape, Bulls Wait for News (Green Faucet)

 

Retail Investors Diving into BP Shares (WSJ)

 

‘Fear Index’ Back Near Early June Levels (WSJ)

 

Big Gaps Down When SPY is Near Recent Lows (Quantifiable Edges)

 

The Long and Short of the Gold Market (Seeking Alpha)

Commodities, Unemployment and the World Cup

Understanding the Employment Issue (Dash of Insight)

 

SPY Option Strike Clusters for Friday Expiration (Afraid to Trade)

 

Investors Like BP Escrow Deal With Obama, But Stay Cautious(WSJ)

 

Swiss National Bank Likely Gets Kick out of Spain’s Soccer Loss (WSJ)

 

Bookkeeping: Closing ETFS Physical Palladium (PALL) (MrSwing)

 

Today in Commodities: Calm Before the Storm? (SeekingAlpha)

Yesterday's late sellers were today's early buyers

*All rights reserved.  Reproduction or distribution of this newsletter without prior consent is strictly prohibited.

 

June 15th, 2010

 

Join us for a FREE webinar hosted by PFG Best on July 29th at 3:30 pm Central to discuss "Futures Market Slang" : http://pfgbest.com/webinar/eventSummary.asp?skey=337713234

 

Monday's horrendous close had the bulls nervous and the bears salivating, but despite a lack of positive news or obvious catalyst Tuesday belonged to the bulls. 

 

I recently read an internet blog that shared the same pessimistic reality that I have spoken about in this newsletter from time to time.  It stated that based on the open interest of calls and puts in the SPY (the ETFy version of the S&P 500 index) the S&P would need to be a little above 1100 at expiration to cause the most pain to the most speculators and this is what the blogger expects to happen.

 

Unfortunately, I agree; I believe the markets have a tendency to cause the most amount of pain to the most people.  Don't forget that beating the market is a tough game...greedy investors chased Madoff and his 12 to 13% annual track record straight into prison, so expecting "easy" money is unrealistic.  I am not saying that profitable and lucrative trading isn't possible, but it is my job to point out that as a trader it is important to be able to accept the good with the bad.  That said, although our conclusions were made via different analysis relative to this blogger, the outcome is the same. 

 

We have been looking for the S&P to trade into the 1120's and maybe as high as 1130.  Today's test of the 200-day moving average (near 1108) puts us well on our way.  However, President Obama will be addressing the country tonight and he has been called by some un-named CME floor traders "Mr. Sell Signal".  Therefore, if you have caught this up-move don't get greedy holding out for 1130...look to tighten stops and take some risk off of the table.  Assuming we break 1108, the next resistance will be 1117 and then again near 1127.  There are likely many buy stops above and this should translate into an extension of the rally but he bulls shouldn't get comfortable.

 

If you are trading the NASDAQ, resistance lies near 1905 and again near 1930. 

Resistance in the Russell continues to be 661 but we think that 675 will be seen sooner rather than later.

 

Major Markets, ETFs, and the new iPhone 4

Weighing the Week Ahead: Mounting Worries(A Dash of Insight)

 

Major Markets and Futures Returns Year to Date June(Afraid to Trade)

 

20 Most Oversold/Overbought ETFs(BigTrends)

Oscar Alert!(Daily Options Report) 

Deepwater Drillers: Analysts Cut Bait(WSJ)

Apple iPhone for Verizon: End of Year Launch?(WSJ)

The U.S. is Least Bad! The U.S. is Least Bad!(InfectiousGreed)

The World at a Glance(MrSwing)

Markets Continue to Slide Lower(Daily Market Action)

Who’s Actually Making Money in the ETF Industry?(Seeking Alpha)

What is your favorite trading method?

Online Surveys & Market Research

3 Ways To Play Sovereign Debt Crisis

3 Ways To Play Sovereign Debt Crisis

As the sovereign debt crisis continues to take its toll on Europe and fails to linger away, currencies continue to deteriorate, government bond yields continue to rise and stock markets remain volatile.  Depsite the fear that this crisis has brought on, there are four ways one can play it.

Japan

Many believe that the next country to be hit by the crisis is Japan.  Traditionally, the Japanese Yen and Japanese bonds have been a safe haven in times of uncertainty; however, this is no longer the case.   According to a study conducted by Moody’s, Japanese government debt is estimated to be more than 200 percent of the nation’s gross domestic product (GDP), which puts limitations on the government’s ability to spend and implement additional fiscal stimulus plans to stimulate a much battered economy. 

In regards to interest rates, the Bank of Japan needs to keep interest rates at or close to zero and continue its asset-purchase program to curb the effects of deflation and worsen the overall health of its economy.  To make things even more challenging in the Asian nation, Japan’s demographics are highly unfavorable.  The Japanese population is aging and shrinking, which eventually will result in the labor force retiring and cashing in on government bonds, which is likely to result in the Japanese government borrowing more at higher yields from more prospering countries.  

With the future looking relatively gloomy for Japan, some possible plays include the ProShares UltraShort MSCI Japan (EWV), which aims to seek twice the inverse daily performance of the MSCI Japan index.  A second play includes the ProShares UltraShort Yen (YCS), which allows one to bet against the Japanese Yen.  EWV closed at $47.29 on Tuesday and YCS closed at $20.65 on Tuesday.

Europe, Bonds, and ETFs

Quick Check on the Daily CRB Index (Afraid to Trade)

Mind Those Gaps (BigTrends)

Was it those guys in Chicago? (Buy the rumor sell the fact)

Emerging Market ETFs: Reasons for Cautious Enthusiasm (GreenFaucet)

Ten Reasons To Buy Bonds (Market Folly)

Morgan Stanley Down on report: Citi Says Hold On (WSJ)

Fallout from The Crash: Euro (Planet Yelnick)

AT&T: Guidance is Trending Up (Seeking Alpha)

Happy Trading!

Corporate Bonds: A New Safe Haven

By Kevin Grewal, Editor at www.SmartStops.net

As companies continue to outperform Wall Street’s expectations, bonds issued by non-financial companies are the most expensive they have been since the start of credit debacle and investors are starting to shun away from Treasuries turning to corporate debt.

According to Bank of America Merrill Lynch Index data, Chevron Corp.(CVX) and Johnson & Johnson (JNJ) led a drop in U.S. industrial company debt yields to 130 basis points more than similar-maturity Treasuries.   Additionally, the overall U.S. corporate bond market is up 1.3% this month and is expected to post its fourth straight month of gains.  In comparison, U.S. Treasuries have returned a mere 0.4 percent for the month, after witnessing a decline of nearly 0.85 percent the month before. 

Another indicator that corporate bonds are gaining appeal is overall corporate credit risk appears to be declining.  The Markit CDX North America Investment Grade Index Series 14 continues to increase as it gained 1.2 basis points, reaching a level of 89.4 yesterday.  The index is known to be used as hedge against losses on corporate debt or a way to bet on corporate creditworthiness.  Increases in the index generally indicate deterioration in investor confidence and decreases in the index indicates improving investor confidence.  Overall, the consensus behind corporate debt is that it is likely to outperform credit-default swaps. 

Silver, Gold, and Goldman Sachs

ETF Update: The Risk and Reward for Gold (A Dash of Insight)

Key Prices to Watch on GLD and USO April 19 (Afraid to Trade)

Wall of Worry is Up High Now (BigTrends)

The Emperor’s New Clothes (Buy the rumor sell the fact) 

Volatility Going Forward (Daily Options Report)

Silver Still too Cheap Relative to Gold (GreenFaucet)

IBM Earning: Why are the Shares Down? Three Ideas. (WSJ)

Lewis Black on Wall Street Bonuses, the ipad, Sarah Palin, More (WSJ)

Mondays After Large Drops on Fridays (Quantifiable Edges) 

Does Risk Equal Expected Value? (Reading the Markets)

Four Reasons Google Is Attractive

By Kevin Grewal, Editor at ww.SmartStops.net

Despite the continued hype behind its competitor’s innovative products, and its withdrawal from China, Google (GOOG) may be worthy and for good reason.

The search engine giant’s emergence into the mobile device world through its Nexus One and Android software stack which includes an operating system has been a hit.  Recently, Google announced that 60,000 cell phones equipped with Android are shipping on a daily basis.  Additionally, advertising on the Android continues to increase.  According to advertising firm AdMob, U.S. ad impressions on Android devices have increased from 27% in November to 42% in February and worldwide ad impressions have increased by 2%.  What makes Google even more appealing on this front, is that it appears to be taking advertising share from Apple’s iPhone, which has seen declines of ad impressions from 55% to 44% during the same time frame.  Furthermore, Google’s mobile phone can be found on Verizon (VZ), Sprint (S), AT&T (T) and T-Mobile’s platforms.  

A second factor that is likely to support Google’s strength is its upgrade to its online package of word processing and spreadsheet programs, Google Docs.  The changes, which were introduced on Monday, include several editing tools for word processing and quicker ways to fill cells in spreadsheets, which will enable it to directly compete with Microsoft (MSFT) Office.  The beauty behind Google Docs is that all of its applications are hosted over the Internet, whereas Microsoft’s software is typically installed on individual’s computers or workspaces.

Another factor likely to bolster Google’s attractiveness is the recent talks about developing a tablet device based on its Android operating system software.  The New York Times recently reported that Google has been working with numerous hardware makers to construct the perfect tablet device to compete against Apple’s iPad and the Amazon (AMZN) kindle. 

3 Reasons Gold Is Worthy

By Kevin Grewal, Editor at www.SmartStops.net

Recently, gold had a technical breakout surpassing $1,150/ounce and history suggests that a pullback is likely to follow. Despite this, there are three reasons to consider adding the precious metal to a portfolio.

First, gold is a traditional hedge against inflation and the U.S. dollar.  A combination of massive stimulus spending and excess printing of dollars by the government is ultimately going to lead to inflation and a weak dollar.  With the inverse relationship between gold and the dollar, gold is likely to reap the benefits of the inevitable.

Second, the precious metal offers a good method of asset diversification.  Gold, as with most other commodities, is uncorrelated to equities and bonds, meaning that gold generally reaps the benefits when traditional equities and bonds are falling.  The primary reason behind this lack of correlation is because gold prices are not driven by the same factors that drive the performance of other assets. 

Gold is a nonearning asset whose demand is far more diverse than that of many other assets.  Additionally, the demand for gold is driven by discretionary spending from the jewelry sector, investment demand and industrial demand; whereas demand for most commodities is primarily driven by industrial, non-discretionary demand.

Crude Oil Likely To Gain Ground

By Kevin Grewal, Editor at www.SmartStops.net

Bigger than forecasted inventory gains caused crude oil to drop two days in a row, however, there are plenty of reasons to suggest that the highly sought after commodity is likely to appreciate and potentially hit the century mark.

Over the past six months, black gold has been oscillating back and forth in the $70-$85 range and according to an analyst at Lind-Waldock, the commodity is at the uppermost point of its range.  To take it a step further, crude’s pattern suggests that it will break away from its high point and could potentially add an additional $15 per barrel.

On the supply side, the recent increases in crude stockpiles will likely dissipate in the coming months.  The driving force behind this is relatively flat production.  When the global financial meltdown put a damper on demand for crude, OPEC cut production levels to reach an economic equilibrium point.  Now that both developing and developed nations have emerged from the Great Recession and expected growth in global GDP is set to reach 4.5%, the demand for crude will likely be bolstered, resulting in a supply and demand imbalance which will slowly eat away at excess inventories. 

ETFs For Currency Debasement

By Kevin Grewal, Editor at www.SmartStops.net

As developing nations around the world have turned to government funded stimulus packages to ignite their economies, a nation’s debt and currency debasement should be of much concern. 

Most recently, a study indicated that the U.S. national debt has ballooned nearly 12 fold over the last 30 years.  Additionally, over this same time span the ratio of debt to GDP has gone from nearly one-third to 85%.  During this time of exploded debt, GDP has only expanded 5.3 times, indicating that debt is growing at twice as fast as the U.S. economy.  Similar trends have been seen in Europe, in particularly Greece, Spain and Portugal.

Some concerns of this exponential growth in debt include hyperinflation, as a result of printing more currency, a decline in the value of a nation’s currency, better known as currency debasement, and increased costs of borrowing, which make it difficult to chip away at deficits.

Some experts suggest that this trend in the developing world, in particularly the United States, is likely to continue as nations have become accustomed to borrowing extraordinary amounts of money and printing extra currency to stay afloat.  If this is the case, than inflation will be inevitable and currency values will diminish. 

Some possible ways to protect against currency debasement and increases in inflation include the following: 

Japan Could Pose An Opportunity

By Kevin Grewal, Editor at www.SmartStops.net

The world’s second largest economy has been struggling to get back on its feet and emerge from its worst recession since World War II. However, recent data suggests that Japan’s economic recovery efforts are finally starting to reach households and its economy could finally be starting to stabilize paving the road to opportunity. 

According to Japan’s Ministry of Economy, Trade and Industry, consumer demand and spending has been on the rise.  Higher demand for automobiles, energy and machinery has pushed retail sales up in February, marking the second straight month of increases, and nearly 4.2%. 

In fact, despite negative publicity and suspension of U.S. production for five days, the world’s largest automaker, Toyota Motor Corporation (TYM), boasted an increase in production in nearly all of its regions.  In fact, Toyota boosted output 83% from a year earlier and February was the seventh straight month the automaker has witnessed jumps in production.

This trend has further trickled down to automakers Honda Motor Company (HMC) and Nissan Motors.  Honda is boasting production increases of nearly 49% from a year earlier and Nissan’s production is up nearly 72%. 

Position Sizing To Maximize Returns

In a time when market volatility and equity preservation is of utmost importance, determining the correct number of shares to buy, or “position sizing”, is key to maximizing returns and minimizing risk.

 

The common investor generally doesn’t spend much time thinking about how many shares to buy or how significant of a position to take.  Instead, most investors use a common methodology of trading the same number of shares each time, which usually translates to a specific dollar amount.  Other, more sophisticated investors, opt to allocate a certain percentage of their portfolio value to a specific position. Following this train of thought, a new position in a portfolio of $100,000 would transcribe either a $10,000, or 10%, investment or a usual position of 50 shares.

 

Although these methods may work for some, using the volatility of a specific portfolio is likely to be the most effective decision tool.  Measuring a portfolio’s overall volatility enables an investor to decide on what percentage of that portfolio he is willing to risk losing on the new position.  This methodology is better explained through the following example.

Pharma ETFs Likely Winner Of Health Law

By Kevin Grewal, Editor at www.SmartStops.net

Now that the historic Health Care Bill has been signed into law by President Obama, drug makers are likely to reap all the benefits and for good reason.

The overhaul of the healthcare system will likely add to the revenues of Big Pharma companies.  From a mere quantity perspective, the reform is expected to provide insurance coverage to more individuals, hence giving more people the ability to pay for prescription medication and pushing sales volumes up significantly. 

From a competition perspective, it appears that the pharmaceutical sector has won nearly a decade of protection against generic-like competition for biotech drugs.  Additionally, the law does not contain any measure which bars the sector from paying generic drug makers to delay the launch of less-expensive alternatives; in essence, cash heavy pharmaceutical firms have the ability to pay off more cost effective competitors who manufacture “knock-off” alternatives and control the prescription drug market.

Retail Remains Questionable

By Kevin Grewal, Editor at www.SmartStops.net

As the economy starts to recover and consumers start to come out of their shells, retailers have reaped the benefits of extra spending.  Some are even taking on additional efforts to retain these customers and their spending habits; however, the likelihood that these trends are sustainable is unclear.

According to the most recent report issued by the Commerce Department, a range of retailers boasted month over month gains, enabling the sector as a whole to show seasonally adjusted increases of 0.3% in February over the prior month.  Additionally, a Thomson Reuters index of 28 retailers suggests that sales at stores open at least one year, rose 4% in February compared with a year ago.  

Of all the retail sub-sectors, electronics and appliances saw the largest gains followed by groceries.  Despite wary consumer sentiment over the health of the economy, illustrated by the recent decline in the University of Michigan/Reuters consumer-sentiment index, which registered at 72.5, some retail experts suggest that consumers see the light at the end of the tunnel and are starting to upgrade their appliances and adding additional items to their shopping baskets at the checkout line.