Posts Tagged ‘volatility’

Gold Soars to Record High

June 20, 2010

For the second consecutive session, gold futures skyrocketed to a record, closing at a price of $1,258.30 an ounce after touching an all-time intraday high of $1263.70. For the week, gold advanced 2.3%, marking the commodity’s fourth straight week-over-week advance. Great timing for the issuance of Canada’s new one million dollar gold coin, the world’s biggest, purest and highest denomination coin (pictured above).”Gold is looking for any and every opportunity to go higher, and we all know the reasons why — the safe-haven factor, sovereign debt risks and so on,” said Peter Hillyard, head of metals sales at ANZ Investment Bank. Analysts are predicting gold prices between $2500 and $3000 over the next 18 months. “People are tired of their zero percent T-bills, afraid of the stock market, and afraid of the double-dip recession,” said James Cordier, a portfolio manager at OptionSellers.com. Reuters reports weaker U.S. economic data and a rise in unemployment benefits last week also drove anxious investors to return to gold as a safety play.

Equites have proven their resilience, however, as the Dow Jones Industrial Average pushing back above 10,400 to close Friday with its second consecutive weekly gain. Additionally, the S&P 500 closed above 1,100 for the first time since mid-May. The tech-rich NASDAQ index fared the best of the three, adding 3% for the week. All this, despite a downgrade of Greece’s debt to junk status, the steepest monthly drop in home construction in decades, another disappointing jobs report, sluggish manufacturing data, and another week excuses from BP plc (BP). The government reported single-family home construction fell 17% in May while applications for building permits dropped 5.9%. AP reported that the number of people filing new claims for jobless benefits jumped last week after three straight declines, another sign that the pace of layoffs has not slowed. Initial claims for jobless benefits rose by 12,000 to a seasonally adjusted 472,000. Meanwhile, consumer prices fell for the second straight month. Meanwhile, BP suspended its dividend and Government-sponsored mortgage purchasers Fannie Mae and Freddie Mac plan to delist their shares from the New York Stock Exchange.

Analyst Todd Salamone wrote “With the SPX coming into the week at 1,117.51 and above its 200-day trendline, the 1,120-1,125 area could be the next challenge from a technical perspective. For example, the 160-day moving average is sitting at 1,126.10 – note on the chart below that this moving average marked the February 2010 low. Therefore, the risk to the bulls is that this trendline becomes resistance on the rally. Moreover, the 1,120 area marked resistance in November and December 2009 during a narrow trading range.”

The CBOE Volatility Index (VIX) declined during the past week, from 28.79 to 23.95 by Friday’s close. With SPX 20-day historical volatility at 26.96, this would suggest volatility is still headed lower, a bullish sign for stocks. The risk is that if volatility is trending higher from a longer-term perspective, the current “pullback” in volatility could end here. If the VIX rises back above 25, the market rally could fizzle.

Wednesday’s Federal Open Market Committee’s interest rate decision will be the first big news in the coming week until Friday’s third-quarter GDP is released. The ongoing concern about the euro zone debt crisis will continue to be at issue. The low-expectation investing environment may reduce “headline risk” and give the bulls the edge over the next few sessions.

We taken the hedge off of our model portfolio which closed Friday at $1,694,454, while portfolio#2 finished at $1,747,721.

Happy Father’s Day,

Michael

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Rollercoasters Are For Kids

May 31, 2010

There was a time that I loved the anticipation, maybe the pure adrenaline, while sitting in the first car of the rollercoaster climbing that initial hill just before the big drop… click…click…click…click… The old wooden ones always had the soundtrack of clicks all the way to the top, then in an instant, we would be falling at what seemed like the speed of sound, with our arms in the air, screaming at the top of our lungs, winding around turns, climbing shorter hills and dropping again and again and it never lasted long enough. Come to think of it, I still love rollercoasters when I’m at an amusement park. I bet many of you feel the same way and may have even experienced it this past Memorial Day weekend. Those modern coasters are quite a different experience, much wilder than when I was a kid.

The stock market felt a lot like one of those new rollercoasters for the entire month of May. And what a ride it was. We had a “Flash Crash”, followed by a 400-point rally, more than a few highly volatile days, followed by another 300-point rally. Worries from the Euro-zone, sabre rattling by the Koreas, and the biggest oil spill in history each provided major curves in the track, making for one wild ride. We went an entire month without two straight up days. By the close of market on Friday the Dow was down another 122 points , had lost over 1000 points during the month and had turned in its worst May performance since 1940.  I’m sure many traders found the volatility exciting and profitable, while others felt that queezy feeling in their stomachs like they just got off the Big Dipper after eating half a pizza. When all was said and done, the Dow lost 7.9% for the month.

Though market technicals have lost some ground, there is some solace in that the Dow held above the emotional 10,000 level and some analysts see the potential for a bounce. The fact that the major indices held their February lows may be setting up a traditional double bottom. additionally, sentiment readings show the number of bears has risen to levels not seen since last November, just before the Dow climbed 1000 points. Though there are some encouraging signs, the fact remains that the S&P broke below its 160-Day Moving Average in May, which is a bearish signal. It would be wise hedge long positions and keep your eye on the VIX and the dollar for clues as to the what’s next for equities.

Our hedged account has outperformed, as is to be expected, closing May at $1,612,877 vs. $1,539,496 for the unhedged account.

Go to http://optionsprofitzone.com for your FREE report entitled “7 Secrets to Making Money in Bull or Bear Markets”.

Michael

Have We Seen This Movie Before?

May 23, 2010

My friends at Schaeffer Research always do a good job explaining the technical aspect of stock market performance and this week’s Monday Morning Outlook does an exceptional job, so I decided to use excerpts for this week’s blog. Please enjoy!

“The S&P 500 Index (SPX) closed at 1,072 last Thursday, translating to a drop of 12% from its closing high on April 23. Many commentators are making a big deal of this, because this is the market’s first 10% correction since the March 2009 bottom.”

“Last week brought about further deterioration in the technical backdrop of the market. The knee-jerk reaction might be, “Since the 1,100 level has been breached, should I sell everything?” Before doing so, it might be helpful to consider what may have inspired Thursday’s disastrous price action, which violently pushed the S&P 500 Index (SPX) below its 200-day moving average. Was it really worries about Europe that generated this selling activity? Perhaps, but one might cry “nonsense!” since the decline occurred within the context of a euro rally.”

“Another explanation could be directed toward options expiration. After the broad indexes fell below strikes with heavy put open interest, put sellers at these strikes may have been actively shorting futures to hedge their positions, a concept known as delta hedging. Without getting into the complex details of delta hedging, be assured that this activity can create a snowball effect, much like we saw in Thursday’s trading. In fact, it might be more than just coincidence that the intraday lows on Friday were similar to the “flash crash” lows of May 6. As long-time readers of Monday Morning Outlook know, while expiration week tends to be bullish, when we do have a decline, it is typically quite painful.”

“In another interesting development in Friday’s trading, the VIX finally hit a level that matched its highs during the 1997 “Asian Contagion” and the 1998 “Russian Ruble Crisis.” In addition, Friday’s peak matched the two VIX crests during the first bear market of the new millennium. If the “European Contagion” does not have the negative systemic risk brought on by the Lehman Brothers bankruptcy and our own credit crisis in late 2008 and early 2009, the bulls may find the VIX high on Friday as an extremely encouraging development.”

“Moreover, on Friday, the VIX’s peak was above the high of the previous day, and both its intraday low and weekly close were below Thursday’s low. To market technicians, this chart formation is known as a bearish “outside” day, which usually signals lower prices ahead. Or, in this instance, it could signal lower volatility in the days ahead, which would likely coincide with a rally in stocks.”

“Above being said, proceed with some caution, as the SPX did close below the key 1,100 level. Another concern is that the most recent American Association of Individual Investors’ survey, released on Thursday, showed increasing optimism among those surveyed. This is somewhat disturbing, since those polled have proven to be an outstanding contrarian indicator during the past several months. Throw in the fact that this increasing optimism is within the context of a pullback and it becomes even more disturbing.”

“Potential support for the SPX is Friday’s low around 1,055. If this level breaks, another important level would be 1,045, site of the lows in February. Resistance is in the 1,100-1,120 area. You already know the importance of 1,100, as described above. The 1,115 level, which marked the SPX’s level at the end of 2009, could also be significant. Finally, 1,120 is yet another potential resistance area, as it’s the site of the 160-day moving average and chart resistance in November and December 2009.”

I always find Schaeffer’s report enlightening and I hope this week’s analysis helped you. I’ll see you again next week.

Michael

 

 

 

Markets Hit New 2010 High

March 28, 2010

Major U.S. market indexes climbed to new 2010 highs last week reaching levels not seen since before the financial collapse that started in the fall of 2008. Last week marked the fourth straight weekly gain for equities as we approach the end of the first quarter.

Boosted by the House of Representative’s passage of a highly controversial health care reform bill, the Dow Jones Industrial Average began the week with a 43 point advance. By the close on Friday the Dow had gained over 108 points, ending the session at 10,836.

Helping to sustain the positive tone were Thursday’s weekly jobless claims which fell for the fourth week in a row, and Fed Chairman Ben Bernanke reiteration of the need for an extended period of record-low interest rates. The Dow soared to 10,955 intraday, but gave back much of the gain in late trading, eeking out a meager increase of 5 points. Friday’s action was similar as traders, once again, pushed the Dow over 10,900 after a deal was announced to rescue Greece from its debt crisis, but could only muster a  5 point improvement by the close of business.

Short-term momentum favors a bullish stance but overhead resistence levels may prove to be difficult to break through. The week ahead could be boosted by institutional “window dressing” as money managers buy the best-performing stocks and sell the under-performers as they prepare for end of the quarter reporting. Coupled with the fact that April historically delivers the best monthly returns of the year and that bearish sentiment has recently overtaken the bulls (generally a bullish indicator), there is reason for near-term optimism.

Conversely, the historically high premium of the CBOE Volatility Index (VIX) relative to the S&P 500 (SPX) indicates there could be rough seas ahead. The late session pullback on Thursday and Friday are symptomatic of a market struggling to break through resistence. If a reversal were to develop, it would be not be expected until after Wednesday’s end of quarter close with potential support  at 10,750 for the Dow and 1,150 for the S&P 500. 

Our managed accounts continue to shine with the hedged portfolio climbing to $1,609,657 and the unhedged account advancing to $1,895,232.

Keep in mind, both of these accounts started with $1,000,000 less than one year ago. Visit us at http://optionsprofitzone.com to learn the secrets of professional traders that have helped us achieve these extraordinary returns.

Stay informed by following First Wealth, your financial education publication.
Michael

The Year of the Bull

March 14, 2010

Last week marked the one year anniversary of the cyclical bull market on Wall Street. It was March 9, 2009 that major stock market indices hit rock bottom, resulting in the destruction of capital not seen since the Great Depression of 1929.  The S&P 500 had dropped from its October of 2007 high of 1557 to a low of 676, a loss of 56 percent. The Dow Jones industrial Average fell from its high of 14,093 in October of 2007 to 6547, declining 53.5%. The NASDAQ peaked at 2810 in October of 2007, falling to 1268 by March 2009, a 54.8% decline.

With all of the well-followed indices having dropped in excess of 50%, the Bear Market appeared to be in full swing. Some say it began in 2000 and, based on historical data, a new bull market was not to be seen again until 2018. However, within these secular bearish periods, there are always cyclical Bull Markets that traders can take advantage of. Cyclical, in this case, means shorter trends within the longer secular periods.  Investors  can enjoy above average returns during these cyclical up-trends , which can last 1, 2 or more years in length, before the Bear raises its head again.

The question is… has the last year been the return of the secular Bull Market or just a cyclical bullish period within the secular Bear Market that began in 2000. There have been three secular Bear Markets and three secular Bull Markets since 1900. The shorter of the Bear Markets was 16 years, while the longest was 21 years. If history is our guide, it appears that we are in the midst of a secular Bear Market that may continue for several years, though the current cyclical Bull trend may still have some legs.

And what a cyclical bull it has been. The major U.S. indices have all gained over 70% in the last year, far more than even the most bullish analysts predicted.

Recent history, however, provides evidence that breakouts above strong resistence, though technically bullish, have been short-lived and corrections of 7% to 10% have followed. Friday’s close of 1149.99 is right at the 1150 level considered strong resistence for the S&P 500.  An upside breakout will likely be seen in the week ahead, driven by short covering by those who believe that 1150 will now form support, but new investors could be coming late to the party. In the days and weeks to come, it will be important to keep an eye on the CBOE Volatility Index (VIX) for signs of a reversal to the upside, a signal that the market may begin to correct. I’ll keep you posted on any apparent warning signs. All you have to do is watch for my new blog posts.

I am happy to report that our model portfolio’s continue to display powerful performance with our hedged portfolio closing Friday at $1,566,908 and our basic portfolio climbing to $1,801,968.

 

Learn how we do it at http://optionsprofitzone.com.

Good Trading,
Michael

Stocks Set to Test Resistance

March 7, 2010

U.S. stocks made significant strides last week with all major indices closing substantially above short-term support levels. Responding enthusiastically to increased consumer borrowing and better than expected unemployment numbers the Dow Jones Industrial Average added 122 points on Friday, pushing through 10,500 for the first time since January 20. The S&P 500 added 15 points to close at 1,138, solidly above its 1,100 resistance, and the NASDAQ gained 34 points ,ending just below its 52-week high of 2327.

Accordingly, the week saw the S&P 500 Volatility Index plunge. The VIX has dropped from 20.02 on February 20 to its current reading of 17.69, near its January low of 17. Analysts at Schaeffer Research state “The plunge in volatility has come, of course, on a rally in the SPX, setting up a potential retest of the January highs in the 1,150-1,160 region. The 1,150 level marked highs in early 2002 and 2004, while 1,160 is the site of the SPX’s 160-month moving average, which marked the bear market lows in 2002-2003. Should the SPX rally above 1,150-1,160, the 1,200 century mark would be the next major level for the SPX to overcome, as this is the site of the 80-month moving average and a major support level in July 2008. The 80-month moving average acted as a support after the terrorist attacks in September 2001, and a close below this trendline in May 2002 was a major sell signal.”

They go on to say that with “the VIX declining in 17 of the past 18 days, and SPX chart resistance overhead, there is good reason, from a mean-reversion perspective, for the market to take a breather. But, keep in mind that if you are playing the mean-reversion game, there are periods when the market’s momentum can run the shorts over. This can be powerful for the bulls, as a combination of short covering and investors eventually jumping off the sidelines can provide a powerful one-two punch in keeping the momentum intact.”

They conclude that the current environment continues to favor the bulls, noting that the current rally has come without an increase in bullish sentiment, which “represents potential future buying power, a necessary ingredient to push the market above the chart resistance that lingers just above.”

The performance of our managed portfolios reflects the enthusiasm of the market with our hedged account closing at $1,579,912 and the unhedged account continues to shine, ending at 1,797,588.

 

As usual, you can get more information about our trading strategy at http://optionsprofitzone.com.

Good Trading to All,
Michael

Historic Moment Despite Lagging Economy

February 28, 2010

The U.S. Hockey team relinquished gold to Canada today but its silver medal, the 37th medal of the Vancouver Games for the United States, made history by breaking the record for total medals won by one nation at the winter games. This is also the first Winter Olympics in 78 years in which the United States earned more medals than any other participant.

The performance also boosted funding expectations for the U.S. Olympic Commitee who had been facing continued fallout from the lagging U.S. economy. With a minimum of 10 years until another U.S. hosted Olympics, the implications of this year’s surprising medal windfall are significant. The USOC announced the signing of a new sponsor deal during the Games with the global energy company BP, while current sponsors including Visa launched campaigns in response to various athletes’ successes.

The optimism seemed to spill over into the U.S. stock markets as, contrary to historical trends, January’s dismal performance was followed by gold medal execution in February. Considering the backdrop of unsettling economic news including European debt worries, interest rate concerns and discouraging growth indicators, the Dow Jones Industrial’s 307 point gain displayed the resilience of an Olympic champion.

With the Olympic fever behind us, the bulls could certainly use some favorable economic headlines to give traders reason to buy. Though there could be increased volatility in the days to come as the major markets bump against upward resistence levels, the technical indicators suggest more reward than risk at this point. Additionally, historical data reveals that the month of March favors the bulls, producing the third-highest returns in the past five years and the second-highest returns in the last ten years.

Our managed accounts continue to produce gold medal returns with our hedged portfolio closing Friday at $1,526,383 and the unhedged account closing at $1,702,821.

Again, we’d like to congratulate the entire U.S. Olympic team for a record-setting performance and a job well done.

Michael
http://optionsprofitzone.com

Standing at the Crossroads

January 31, 2010

The major stock U.S. stock markets may have reached a crossroads after the Dow Jones Industrial Average posted another 1% decline last week, following its 4.1% downturn the previous week. The 3.5% loss for the month of January was the worst performance for the blue-chip index since February 2009 resulting in downside penetration of its 20-week moving average. My friends at Schaffer’s Investment Research revealed that the technical backdrop has weakened considerably noting that the S&P 500 Index has broken below its 80-day moving average for the first time since the March 2009 bottom. Additionally, “the SPX was pushed back violently after a few attempts to overcome its important 160-month moving average, which is situated in the 1,150 area and acted as support at the 2002-2003 market bottom. At present, the SPX has retreated about 6.5% from the peak highs observed a couple weeks ago. ”

Good news including Ford’s announcement of its first full-year profit since 2005, higher consumer confidence, and Apple’s new Ipad was not enough to offset higher than expected unemployment numbers, concern about slower growth in China and economic woes in Greece. January’s poor showing may not bode well for the rest of the year. Historical data seems to indicate that January sets the tone for the next 12 months. It will be interesting to see if the Dow can hold above the emotional 10,000 support level. If not, we could soon test the primary support at 9,000.

Marc Faber, famed contrarian investment analyst known as Dr. Doom, has recommended pulling your money out of stocks right now, predicting that the S&P 500 could fall as much as 20% to 920. He believes that stocks are expensive due to the absence of a meaningful economic recovery. ” With unemployment staying at a relatively high level and with the revenue being weak, I don’t think corporate profits will be that great in 2010,” Faber said. “Basically, the profits have been boosted by aggressive cost-cutting. The revenue side of corporations is weak.” Faber advised investors to buy U.S. stocks on March 9, 2009 when the S&P reached its lowest level since 1996.

The coming week’s calendar is busy right out of the gate starting with Monday’s economic data, which will include December’s personal income and spending, December’s construction spending and the January Institute for Supply Management manufacturing index. The day will also see earnings releases from Exxon (XOM). January’s auto sales and December’s pending home sales are due on Tuesday, along with earnings from BP plc (BP), United Parcel Services (UPS), Whirlpool (WHR), and News Corp (NWS). Wednesday will bring the January ADP employment report, the ISM services index, and weekly crude inventories. It will also be a big day for earnings with Comcast Corp. (CMCSA), Pfizer Inc. (PFE), Time Warner Inc. (TWX), Broadcom Corp. (BRCM), Cisco Systems Inc. (CSCO), Visa Inc. (V), and YUM! Brands Inc. (YUM) reporting. The fourth-quarter productivity report, and December’s factory orders are scheduled for Thursday with earnings reports from  Burger King Holdings Inc. (BKC), The Clorox Co. (CLX), Kellogg Co. (K), MasterCard Inc. (MA), and Sony Corp. (SNE). We’ll end the week with more corporate earnings and January’s unemployment rate, nonfarm payrolls, and December’s consumer credit report due on Friday.

The numbers for our managed portfolios are still being calculated, though I’m sure in light of the market’s performance we will have lost some ground. I expect that our hedged portfolio fared the best, as it should in the environment we are experiencing. I’ll post them when they are available. In the meantime, keep your eye on the volatility index (VIX) for clues as to the market’s conviction.

To quote Cream’s 1970’s rock standard…”I’m standing at the crossroads, believe I’m sinking down.”

Michael

Santa Comes Early for Tech Investors

December 20, 2009

Thanks to positive earnings announcements from Oracle (ORCL) and Research in Motion (RIMM), tech stocks including Intel and Microsoft were broadly higher on Friday helping the Dow Jones Industrial Average to erase the red ink it had displayed for much of the day, closing with a gain of 20 points. Earlier news from Boeing (BA) regarding the loss of a 200 aircraft order form Irish airline Ryanair had led the Blue Chips to a 45 point deficit before Santa brought the good news to tech investors. With only a few days left before Christmas, investors may not find much more under the tree, however, most are celebrating a 22 percent gain for 2009, after facing one of the steepest first quarter market declines in many years. Markets often experience a Santa Claus rally in the final days of December, but the 63 percent gain from the March lows experienced by the S&P 500 may be considered by most the ultimate gift of the season. The Dow’s resistence at 10,500 has proven to be a difficult ceiling to break through, as does the 1120 level for the S&P.

The dollar, however, continued its rally bringing cheer to investors holding hope for a strong economic recovery.  This has been a key factor holding equities to a narrow trading range and below technical resistence levels. Despite the dollars strength, gold moved higher on Friday after a sharp pullback on Thursday ending the week with a 0.01 percent gain. Crude oil moved higher on Friday in response to geopolitical tension between Iraq and Iran, after Iranian forces crossed in to Iraq to seize control of a disputed oilfield. Though Iraq sent troops to the area, a diplomatic solution is the likely outcome. I get the sense that this will end peacefully next week.

As holiday shopping draws to a close, light volume and year-end window dressing will probably cause volatility to rise through the end of the year. Portfolio managers will be selling weak holdings in favor of its stronger positions, in order to close out the year on a joyous note. This could lift stocks that have done well this year to even higher levels at the expense of the year’s under-performers.

Reuter’s reports that this week’s major economic indicators will include consumer sentiment, personal spending and the latest weekly claims. On Tuesday, the gross domestic product report is expected to show the U.S. economy expanded at an annual rate of 2.8 percent in the third quarter, in line with the previous reading. Existing home sales for November also will be released on Tuesday, with economists forecasting sales will rise to a seasonally adjusted annual pace of 6.25 million units from 6.10 million in October. On Wednesday, new home sales for November are expected to edge up to a seasonally adjusted annual rate of 440,000 units from 430,000 in October.On Thursday, the New York Stock Exchange trading floor will close early in observance of Christmas Eve.

The gifts continue to pile up under the tree for our managed portfolios with the hedged account closing Friday at $1,445,260 and the newer unhedged account coming in at $1,572,460.

For your free gift video, go to http://optionsprofitzone.com.

Happy Holidays to all, and to all a good-night,
Michael

Dow Revisits 10,000

November 8, 2009

Bull ImageThe bulls reclaimed territory last week amid a flurry of corporate earnings and economic data propelling the Dow to the first weekly close above 10,000 since October 2008. The week began with positive forecast from Ford and a better-than-expected manufacturing index. The mood continued on Wednesday with the Fed reporting “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” But Thursday’s 200 point rally was the kicker after an upbeat report from Cisco and a jobless number that was encouraging to some.

The S&P 500 closed higher for five consecutive days as the dollar resumed its weakness and the volatility index began to decline after peaking around 31. The VIX found resistence just below its 200-day average and moved back below its 80-day and 160-day moving averages, confirming a resumption of its downtrend. Assuming the patterns in the dollar and the VIX continue, the markets should resume its climb. The S&P could see a rally above 1100 by the end of the month. A break above 10,100 on the Dow would indicate that the correction has ended and another run at the 10,500 resistence level would be likely. A breakthrough of 10,500 would probably lead the Dow to 12,000 before encountering another level of resistence. The NASDAQ may be the weaker of the primary indices as buyers of technology shares seem to be waning. Failure of support at 1650 would confirm a correction, while a breakout above 1780 would indicate an advance toward 1900.

Historically, the November-December period has been bullish for stocks, and has sometimes been called a Santa Claus rally. It is also well-known that a World Series win by the Yankees generally precedes a market advance. Between Santa and the Yankees, the outlook appears to be good for the market, in general. Keep your eye on the VIX and the dollar for more technical indications of continued strength.

Last week was also beneficial for our managed portfolios, both seeing tremendous gains in the weak of the rising markets. Our hedged portfolio closed Friday at $1,336,272 while our newer account is still the reigning champion with a close at $1,353,343.

OPZ Running Total copy

Don’t forget to visit http://optionsprofitzone.com for your free video and DVD.

Good Trading,
Michael