Archive for June, 2011

Sunday, June 26th, 2011

With the budget deficit growing why does Washington subsidize farmer? Why are farmers paid not to grow crops? Why does Washington subsidize crop insurance? It seems that the USA’s one thriving industry is farming. Do the farmers need help? Probably not since farm land is and continues to be the one real-estate asset that has and continues to appreciate. Something is really off here.

The S&P 500 September futures contract has been in retreat for a number of weeks making lower lows for five of the six past weeks. This week, we managed to make the first higher low. We are concerned that should market remove 1252.25 and then1241.25 we could see a real problem for this market. The clear winner this past week was the Russell 2000, which looks to be forming a bottom. What is really strange about this market is that the NASDAQ 100 and the Russell 2000 are behaving better than the S&P 500. Although the media screams that the risk trade if off, the indices tell us a different story indicating that the risk trade is alive and doing very well. What we do see is that on Friday’s the market sells off, taking some of the risk off the table and then on Monday, a sigh of relief and the risk is put back on. We understand that behavior after all, the markets are closed and not tradable until Sunday evening when they open.

Here is a question that you should think about: Is the commodity market down because the US Dollar is strong or is it down on concerns of economic weakness. Is the US Dollar up because of concerns with the PIIGS or because the FOMC has stated that Q2 is all the market is getting or is the US Dollar strong because the Euro is being sold. Is the US trying to force the prices of crude down to stimulate the US economy or is it to help supply crude because of possible shortfalls due to chaotic Middle Eastern discord? Is the US government giving the citizens a tax break via crude oil? Lots of questions not clear answers.

We believe that the markets will have support because people are yield starved and looking for some returns on their money. We have seen defensive stocks rally and options activities increase. Investors are buying yield and pre-selling their stocks via options in an effort to create income.

Our fallen angel stock trade of the week is in the energy sector. Schlumberger dropped 2.59% in the Friday trading session closing the session at 80.92. Technically, this stock looks as though it is trying to find some support and managed to stay above the Thursday low of 80.25 in the Friday session. The stochastic indicator and the RSI both are pointing lower, however; the rate of change is slowing down. It is possible that this stock could trade lower but we believe that there is money to be made with the options on this security. We do not own these shares personally or in any accounts that we manage. Here is the trade:

Buy SLB, probably at 80.92
Sell the August 72.50 puts for 1.45 (this action will make you long should the stock drop to 72.50)
Sell the august 82.50 call for 3.25 (The stock will be called away from you should it be above 82.50 on the third Friday in August. The Trade will settle on Saturday and appear in your account on that following Monday). You will make 6% on that trade from the purchase to the expiration. Should the stock be called away from you, you will make an additional 150 dollars increasing your return to 8%.

BUY 100 shares SLB = $8100
SELL 1 August 72.50 put = $145
SELL 1 August 82.50 call = $325
Cost $8100 Credits $470 = $7630

The above trade does not include the profit you will have should the stock trade higher at the expiration date. Technically, this stock should have support at the put strike.

Monday: May personal income and consumption are released at 8:30.
Tuesday: June consumer confidence is released at 10:00, S&P/Case-Shiller home prices for April are released at 9:00, Dallas Fed President Fisher speaks and a general strike is scheduled for Greece.
Thursday: June Chicago PMI is released at 9:45 and Fed president Bullard and Hoenig speak.
Friday: June Michigan Sentiment is released at 9:45-10:00, May construction spending is released at 10:00, June ISM Index is released at 10:00, and June vehicle sales are released.

The US Dollar index rallied in the Friday session but was unable to rally above the high seen on June 11, 2011. We are above the Ichimoku Clouds for the daily time-frame but remain below the clouds for the weekly and the monthly time-frames. The stochastic indicator is overbought and pointing higher. The RSI is approaching overbought and pointing higher as is our own indicator. The Thomas DeMark Expert indicator is pointing higher as well and has plenty of room to the upside. Remember, that we can stay overbought for a long time. Overbought does not mean that we have to go down immediately. The US Dollar index is one of the favorite short plays and as such has plenty of buyers on the sidelines waiting for the opportunity to cover. Should the June 11 high be removed, you can bet the shorts will become very uncomfortable. The 5-day moving average is at 75.546. The top of the Bollinger band is at 76.47 and the lower edge is seen at 73.318. The uptrend line is at 75.48 and the downtrend line is at76.247. We will have a point of inflection on Friday at 76.116. Naturally, should the market remove either the up or downtrend lines, the point of inflection will be off. There is further resistance on the upside at76.505.

The S&P 500 September futures contract looks as though it is trying to consolidate at these levels. So long as we do not remove 1252.25 and then 1241.25 we will be okay. The indicators are not oversold and still have plenty of room to the downside. We are below the Ichimoku Clouds for the daily time-frame but are above the clouds for the weekly and the monthly time-frames. The 5-day moving average is at 1276.50. The top of the Bollinger band is at 1329.93 and the lower edge is seen at 1245.73. The market seems to be in a trading range with 1252.25 at the bottom and 1293.75 at the top. Any movement either above the top or below the bottom should move the trade out of this trading range.

Although the NASDAQ 100 lots a great deal of its value in the Friday session, this index managed to print another higher low and a higher high for the day’s trading session. We did close near the bottom of the range for the day but the chart looks better than the numbers would lead you to believe. The stochastic indicator, our own indicator and the RSI all continue to point lower and are not at oversold levels. We seem to be losing momentum to the downside. We are below the Ichimoku Clouds for the daily time-frame but are above the clouds for both the weekly and the monthly time-frames. The 5-day moving average is at 2223.75. The top of the Bollinger band is at 2351.844 and the lower edge is seen at 2161.556.

The Russell 2000 was the winner in the Friday session. This index only lost 3.80 on the day. We are seeing higher lows and higher highs in this index. To scare the shorts, we need to see a close above 807.10. The 5-day moving average is at 794.66. The top of the Bollinger band is at 835.74 and the lower edge is seen at 762.16. We are below the Ichimoku Clouds for the daily time-frame but remain above the clouds for the weekly time-frame. So long as we stay above 768.40, we will resume movements to the upside. This shortened week will be an important week for the Russell 2000.

Crude oil has been under pressure for a while. Friday’s session showed the result of the US decision to release oil from storage. Although it did have a downward push on this market, it was less that might have been expected and left an inside day candle on the chart. The 5-day moving average is at 92.85. The top of the Bollinger band is at 104.53 and the lower edge is seen at 90.23. We are below the Ichimoku Clouds for the daily time-frame, but remain above the clouds for the weekly and the monthly time-frames. Crude oil is in an area of some initial support. There is good support at 83.85 as well.

Gold fell in the Friday session but did not do any real damage to the chart. So long as it stays above 1471.11 and 1462.50 we will continue to believe that this is a mere correction of an overbought condition. We are in the Ichimoku Clouds for the daily time-frame but are above the clouds for both the weekly and the monthly time-frame. The 5-day moving average is at 1532.56 and the lower edge is seen at 1512.031. We closed below the lower Bollinger band and we can either expect to see volatility pick up or the market to return inside the bands. We continue to like gold and only buy it on retreats.