Archive for May, 2011

Sunday, May 29th, 2011

There will be no report on June 5 and June 12. We will be out of town.

The big stories that simply will not go away are: the PIIGS and their refusal to give any ground, the US Debt and their refusal to give any ground and US entitlement programs and….their refusal to give any ground. Now the Greeks refuse to cut back, please note that they are paid more (hourly pay), take more vacations and pay less tax than do other members of the European Union. Here in the USA, we have elected officials always on the campaign trail refusing to make difficult choices or not get re-elected. One problem that we have in the US is that our elected officials do not have the same problems that a baby boomer approaching retirement has. Medicare, the sacred cow, will cover the boomers. Take it away and we have an entire generation that will likely be without health care. So dear congressman and senator, live on our health care because you have no idea what private health care will cost. Perhaps you should lose your golden health care parachute and join your constituents. You were elected to represent us, not to fleece us. Speaking about being fleeced that is the way about 50% of the American tax payers feels, who are being panelized for working and paying taxes. What about the near 50% of the population that pays no tax and takes from the system. Atlas Shrugged is a timely film and should be watched by all especially those who are in elected office. WHERE IS JOHN GAULT! As an aside, I hear land is cheap and we could actually buy a vast amount of it and establish our own community, just as was done in Atlas Shrugged. We could refuse to work and pay taxes to support those who do not work or, we could just let the system implode. Actually, Dave Rosenberg had a wonderful piece this past week speaking about the difficult choices Canada made and how Canada got its fiscal house in order. A Special Report from Dave May 25, 2011: “The U.S. fiscal solution – follow Canada’s lead.”

Just in case you were wondering, all this bad weather that has destroyed many homes and business both here in the USA and abroad, will spur some activity. Yes, there will be a drain on the insurance industry as it pays out on these claims but the good news is that many will find jobs rebuilding the destroyed properties. Development of these areas will take root and something good, out of this misery, will occur. Jobs and entire towns will be rebuilt. Homes, furnishings, business will all receive a shot of stimulation via Mother Nature.

Fallen angel trade: What is a fallen angel you may ask? Simply put, it is a stock that has been destroyed by bad press. We like to find these victims of bored financial journalists and use these stocks to make some extra cash. How is that done? Just follow the bouncing ball! Let us take ICE (Intercontinental Exchange) as an example. Friday this stock fell 1% retreating 1.20 closing at 119.17. Step one, buy the stock, you now are long at 119.17. Step two sell the July 100 calls and collect 21 dollars, not done yet. Now sell the 110 puts and collect 1.25. Next you enter an order to sell the stock at 110 GTC. This is an order you will have to watch but it is a fun game. Let us say you do this with 100 shares, you will spend about 11,917. Now you will collect 2,100 from the call option and 1,250 for the put option. Your total cash in is 2,350 and your cash out is 11,917. This trade is now returning 20% to you for a holding period of a little less than two months. The footnote here is that should the stock drop below 110, because you will be flat (not long the stock because you sold it) but will have a liability on the short side (via the short put) you will have to buy a cheap call to protect your position. You will sleep at night and get a decent return on your money. This stock was randomly chosen from a list of stock which declined the most in the Friday session. There was no better reason to pick it other than we knew the stock and understood its value. We also reviewed the chart and feel that there will be good support for the stock at 112. Should the stock rally and take out the highs, you walk away with a 20% return on a short-term trade! Creative finance 101!

Technically, we see support for this stock at the 112 area although we do see a slight possibility of the stock trading down to 110. Further, we believe that although the stock did fall in the Friday session that there is further downside risk to 112. Should 112, fail to support this issue, we do see a possible risk to 100.76 and then 92.18.

Buy: 100 Shares 119.17
Sell: 1 July 100 call
Sell: 1 July 110 put
GTC order sell 100 ICE at 110, GTC, DNR (do not reduce)

What if the stock rallies into expiration? You make money and can put on the next trade. The stock will be called away from you and the put will expire worthless. Remember to remove you GTC sell order when closing out this position.

What if the stock declines into expiration? You will need to sell the stock should it drop below 110 because you will be long an additional 100 shares because of the short put. At this point, you sell short 100 shares and buy a call. What that does is to put a collar on the trade so that should the stock rise, you will not have the liability of being short the shares. The bottom line is that should the stock decline below 112 for more than 2 days, you will have a waterfall decline in that stock. Well we didn’t say it was that easy did we? It takes work but then everything in life takes work.

Tuesday: May Chicago PMI is released at 9:45.
Wednesday: April construction spending is released at 10:00, May ISM index is released at 10:00 and welcome to hurricane season!
Thursday: first quarter productivity is released at 8:30 and April factory orders are released at 10:00.
Friday May nonfarm payrolls and unemployment are released at 8:30.

The US Dollar Index gave up all the ground it had regained in the May 20 and 23rd trading sessions and closed the Friday session at 74.955. Although the US Dollar index did hit a high in the May 24th trading session it closed down on the day and left a very bearish looking candlestick on the chart. The troops tried to gather support in the session on the 25th but fail and that was the end of the rally attempts for the rest of the week. All of the indicators that we follow are issuing a continued sell-signal. The 5-day moving average is at 75.787. The top of the Bollinger band is at 76.935 and the lower edge is seen at 73.294. We are below the Ichimoku Clouds for all time-frames. The Market Profile chart shows that there should be support at 74.30-40 and if not, we will go to 73.20 and then 72.90. The picture is ugly. We do expect to see a bounce from oversold levels in the US Dollar Index this week. This does not change the direction of the trade and we continue to be cautious. There are too many bears in the boat and no bulls to be found. This tells us that although the market is in lousy shape it likely will bounce to force the weak shorts out of the trade.

The S&P 500 June futures contract traded right up to the downtrend line and failed. It always amazes us that the market actually knows where this downtrend line is and respects the line. All the indictors that we follow herein continue to issue a buy-signal with plenty of room to the upside. We are above the Ichimoku Clouds for all time-frames. The 5-day moving average is at 1320.35. The top of the Bollinger band is at 1359.63 and the lower edge is seen at 1310.34. We need to remind our readers that we will begin the roll within a week or two from the June expiry to the September expiry. Usually these rolls have an upside tilt as shorts roll their positions. The Market Profile chart tells us that until or unless we can clear above 1358.80 we will likely retreat back to the area we are now in and down to 1302.90 or so. There is an uptrend line at 1315.83 and so long as this medium term line holds, we should be safe. Should the market trade below 1290 or so, we will feel the pain of a steep retreat to the 1200 area and below.

The NASDAQ 100 rallied for three of the last five days closing the Friday session with a gain of 7.25. We are not impressed with that rally which seemed to be feeble. The 5-day moving average is at 2316.90. The top of the Bollinger band is at 2427.04 and the lower edge is seen at 2295.38. All the indicators that we follow herein continue to issue a buy-signal. We are above the Ichimoku Clouds for all time-frames. The downtrend channel lines are 2337.20 and 2265.59. So long as we are able to say above 2281, we likely will rally into the roll. Again we are entering roll season. The formal roll is the second week of the expiration month for these financial indices. Generally we see people move their positions as the expiration month begins. This ends with the expiration of the indices for June. In the beginning of the roll, the volume is light and causes the execution to be just that, an execution. As the trade moves to the second week volume comes in and clean and easy executions are doable.

The Russell 2000 closed above the downtrend line in the Friday session. The indicators that we follow continue to point higher but have less room to the upside than seen in the other financial indices. This index has out-performed the other indices, this action usually occurs in a bull market where the risk-on trade looks for movers to the upside. The 5-day moving average is at 821.64. The top of the Bollinger band is at 855.72 and the lower edge is seen at 808.06. We are above the Ichimoku Clouds for all time-frames. The Bollinger bands are beginning to contract which tells us that the volatility is diminishing. Again this index expires in June and we expect to see people roll out of June and into September. Until or unless we close above 839.10, we expect to see range-bound trading.

Crude oil seems to be the poster child for range-bound trading. We are inside the Ichimoku Clouds for the daily time-frame, but remain above the clouds for both the weekly and the monthly time-frames. The 5-day moving average is at 99.88. The top of the Bollinger band is at 110.42 and the lower edge is seen at 92.14. The Bollinger bands are contracting telling us that the volatility is subsiding. We also note that this market is forming a rectangle which, as you know indicates that the market is stuck in range-bound trading. We continue to like crude oil for the long run. So long as the market stays above 94, we will continue to like the trade. To break out on the upside, the market needs to close above 104.60 for at least two days.

Gold traded higher in the Friday session. The up trending channel lines are at 1542.90 and 1512.70. We are above the Ichimoku Clouds for all time-frames. We are overbought as measured by the stochastic indicator but the other indicators show that there is more room to the upside. We continue to like gold which trades more as a currency than an inflation hedge. The 5-day moving average is at 1524.96. The top of the Bollinger band is at 1546.98 and the lower edge is seen at 1473.19.