We seem to be two for two on significant companies beating earnings by a wide margin as the main part of earnings season kicks off. With GS posting 4.93 and record revenue, and INTC posting .17 cents and raising Q3 guidance, that is the type of thing that will send this market higher. The question now becomes is this the exception or the norm?
We finished right at the 905 level which in my opinion is still a possible head fake, however after Intel's results we saw S&P futures jump 10 points to 911 which should translate to a 915 cash market open if we hold overnight. That type of action definitely points to higher prices in the short term. If the financials can keep surprising to the upside this could very well take us back to 950 and beyond.
The more traditional bank results will likely hold the key. When I say more traditional I mean companies that are true bank holding companies like US Bank, Wellsfargo, not hedge funds in disguise like Goldman and Morgan. If the other major financial players can earn money without the help of proprietary algorithm program trading that essentially guarantees money to companies like GS, then I think this rally could continue.
My view on the fundamentals will not change, I still think unemployment will go higher and likely top out close to the 11% level (at least the way they measure it). This will definitely weigh on consumer spending and further depress housing prices. Once we get into a less favorable housing season I think it could get decently worse and commercial real estate may start to deteriorate further. The funny thing is that GS reported a fairly high write down related to commercial real estate yet the IYR was up today.
So if I am still not that optimistic on the economy how can I think we go up from here? Well for one the technicals are in favor of a move higher. The break back above 900 will be seen as bullish by traders and we get that self fulfilling prophecy. The other thing is that if companies report better than expected earnings, even if those expectations are low, the market psychology will likely once again want to buy stocks. There is somewhat a disconnect between some businesses and the actual real economy. The job losses we are seeing are coming from the very companies who are reporting. While it is definitely unfortunate for the workers who are laid off, this does reduce expenses making the companies operate in a more efficient(aka less expensive) manner.
So in the short term the pain in the real economy could help support corporate earnings surprises which are statistically responsible for a majority of stock price appreciation. Even though I do think poor economic fundamentals will eventually catch up to most companies, I am not opposed to the possibility of a near term rally. Sadly, only profits seem to matter and if that is what the market is looking for then we could be setting up for a decent move higher. I am not willing to take too many positions just yet though. I will likely do nothing for the rest of this week unless I need to cut losses, and then if things still seem good going into next week I may take on some new risk in good looking stocks.
Oil continues to frustrate but it looks like the make or break point could come with tomorrow inventories. In the recent past, it seems to be that if we sell off ahead of inventories we get a rally on their release and vice versa. So the recent price action could be setting up for a rally especially on bullish numbers but of course you never know. USO is obviously a fairly inferior trading vehicle as it hasn't even properly tracked oil this year which is why I do not plan to hold it for very long.
One of the definite lessons from this market is that you don't necessarily have to agree with what is happening but as long as you manage risk properly you may as well go along for the ride. Market psychology is emotion based which allows for the exploitation of inefficiencies for possibly better than average risk adjusted returns.
We'll see what unfolds in the days to come. I would actually be curious to go back and see if the majority of first week of earnings releases beat expectations, then do we generally rally regardless of the remaining releases?
Total Return for 2009: 151%
Tuesday, July 14, 2009
Monday, July 13, 2009
Placing Bets Ahead of GS
So apparently, after I had posted my entry this morning, I found out that Meredith Whitney had made call to buy Goldman Sachs ahead of earnings and put a fairly lofty price target on the stock. This is likely partially to blame for the move in futures pre-market as she made the call on CNBC's "squawk box". I obviously missed this as I generally try to avoid watching CNBC anymore unless it is on mute. ;-)
We have now re-tested the 900 level on the S&P a little quicker than I had previously thought. I thought we could have some run up today then a test tomorrow if GS had a good report. Now we seemed to be poised to break back to the upside if things seem positive. I assume the market is smart enough to realize this but GS and the rest of the financial landscape are not the same. Hence my call of possibly choosing relative strength and weakness candidates in the financial sector for a pairs trade.
I am definitely not a conspiracy theorist, however both times I have exited my short option positions that were ITM, they have reversed and subsequently would have become OTM and likely will finish worthless. This is fine with me as I have to properly manage risk and cutting the loss was the right thing to do but either way it is curious and frustrating.
I made a couple moves today, however it may have been a little premature. I exited my calls on UYM because they had a decent move and I did not want to be overly long over the remainder of the week through earnings season so I took my small profit. Also I am already long USO calls which should have at least some positive correlation to materials, although oddly did not today. Oil has held up twice now at the $60 dollar level which was my original reason for going long to try and capture a move back to $65. Ideally we will get some bullish inventory numbers this week as gas prices came back down and created a draw. My remaining calls are on MFE which has recently hit a new all-time high. If it can get above 42.50 it should run for a bit. Hitting an all-time high in this market is the perfect example of a relative strength candidate.
To offset my call positions I got into some IYR puts as I had been waiting on a rally to get a better entry point. My entry was likely still a bit premature, I would have preferred 32.50 but did not want to be completely exposed to the downside and I still feel like it could see some decent movement down.
It will be very interesting to see how the market acts tomorrow after Goldman's earnings. It has yet to be seen if GS is simply the exception to the rule or a precursor to the next move up that is assisted by the financials. I am contemplating getting into some more defensive positions for the short term such as WMT or a health care play to see how earnings play out. From a technical standpoint if we have a decent close above 900 we are headed higher. However I really don't see how the fundamentals support that. I guess the point is not necessarily to agree with what is happening but just to accept what the market psychology is at the moment, no matter how irrational it is, it can still be profitable as long as risk is managed.
Total Return for 2009: 150%
We have now re-tested the 900 level on the S&P a little quicker than I had previously thought. I thought we could have some run up today then a test tomorrow if GS had a good report. Now we seemed to be poised to break back to the upside if things seem positive. I assume the market is smart enough to realize this but GS and the rest of the financial landscape are not the same. Hence my call of possibly choosing relative strength and weakness candidates in the financial sector for a pairs trade.
I am definitely not a conspiracy theorist, however both times I have exited my short option positions that were ITM, they have reversed and subsequently would have become OTM and likely will finish worthless. This is fine with me as I have to properly manage risk and cutting the loss was the right thing to do but either way it is curious and frustrating.
I made a couple moves today, however it may have been a little premature. I exited my calls on UYM because they had a decent move and I did not want to be overly long over the remainder of the week through earnings season so I took my small profit. Also I am already long USO calls which should have at least some positive correlation to materials, although oddly did not today. Oil has held up twice now at the $60 dollar level which was my original reason for going long to try and capture a move back to $65. Ideally we will get some bullish inventory numbers this week as gas prices came back down and created a draw. My remaining calls are on MFE which has recently hit a new all-time high. If it can get above 42.50 it should run for a bit. Hitting an all-time high in this market is the perfect example of a relative strength candidate.
To offset my call positions I got into some IYR puts as I had been waiting on a rally to get a better entry point. My entry was likely still a bit premature, I would have preferred 32.50 but did not want to be completely exposed to the downside and I still feel like it could see some decent movement down.
It will be very interesting to see how the market acts tomorrow after Goldman's earnings. It has yet to be seen if GS is simply the exception to the rule or a precursor to the next move up that is assisted by the financials. I am contemplating getting into some more defensive positions for the short term such as WMT or a health care play to see how earnings play out. From a technical standpoint if we have a decent close above 900 we are headed higher. However I really don't see how the fundamentals support that. I guess the point is not necessarily to agree with what is happening but just to accept what the market psychology is at the moment, no matter how irrational it is, it can still be profitable as long as risk is managed.
Total Return for 2009: 150%
Moment of Truth
This week we see a kick off of earnings season in a more significant way. Larger financial firms will be reporting such as Goldman Sachs which will most likely beat estimates as they always do with their unmatched ability to dominate trading activity. Financials will likely set the tone for the remainder of the summer in my opinion. If outlooks remain bleak and there is talk of a lot more write downs as has been speculated, then we could be headed back towards the 800 level in short order and possibly lower.
It will be interesting to see how realistic they are on their future projections since back in 2008 even the companies themselves didn't see it coming so it is humorous to think they will do any better this time. For better or worse we have a tendency to be optimistic so that is likely what we will hear. It could be a good time to start pairs trades on financials, possibly going long those who raise guidance(if they will) and short those that don't. The usual players seem to be considered "safe" GS, MS, JPM on top of their trading revenues they seemed to participate in the largest amount of underwriting and normal M&A activity(the small amount that occurred).
These fundamentals will likely determine the technicals because we have so far held the neckline of the head and shoulders pattern on the S&P but it has so far tested it a couple times. The more the line is the tested the more buying gets exhausted and we likely breakdown(which likely coincides with poor earnings releases).
Last week finished up decently for me. This week will be significant as my short options will expire this week. This month has definitely been one where I have been short options more than I have been long(or been both at the same time). I have cut positions that were questionable or ITM going into this week so I should have limited exposure there, it will just depend on how volatile the market wants to be this week. All of my short strikes are decently far away and would require some significant short term moves to become ITM but you never know what will happen, especially with earnings. The downside of having the short positions is that it requires a lot more capital to be held in reserve so that is an opportunity cost taking away other long positions. I am trying to make that steady grind back to my old high returns as the market figures out it's direction. If things go extremely well all my short positions will expire worthless and hopefully longs gain some ground as well or at least stay flat.
Futures just recently took off so we'll see what happens today. Hopefully good things, especially with my interview :-)
Total Return for 2009: 147%
It will be interesting to see how realistic they are on their future projections since back in 2008 even the companies themselves didn't see it coming so it is humorous to think they will do any better this time. For better or worse we have a tendency to be optimistic so that is likely what we will hear. It could be a good time to start pairs trades on financials, possibly going long those who raise guidance(if they will) and short those that don't. The usual players seem to be considered "safe" GS, MS, JPM on top of their trading revenues they seemed to participate in the largest amount of underwriting and normal M&A activity(the small amount that occurred).
These fundamentals will likely determine the technicals because we have so far held the neckline of the head and shoulders pattern on the S&P but it has so far tested it a couple times. The more the line is the tested the more buying gets exhausted and we likely breakdown(which likely coincides with poor earnings releases).
Last week finished up decently for me. This week will be significant as my short options will expire this week. This month has definitely been one where I have been short options more than I have been long(or been both at the same time). I have cut positions that were questionable or ITM going into this week so I should have limited exposure there, it will just depend on how volatile the market wants to be this week. All of my short strikes are decently far away and would require some significant short term moves to become ITM but you never know what will happen, especially with earnings. The downside of having the short positions is that it requires a lot more capital to be held in reserve so that is an opportunity cost taking away other long positions. I am trying to make that steady grind back to my old high returns as the market figures out it's direction. If things go extremely well all my short positions will expire worthless and hopefully longs gain some ground as well or at least stay flat.
Futures just recently took off so we'll see what happens today. Hopefully good things, especially with my interview :-)
Total Return for 2009: 147%
Tuesday, July 7, 2009
Attempting To Recover
My lack of posting recently has been due to a lack of decent internet access and action until today. I had bought some MSFT puts last week and closed them before the weekend and took my 50% profit in case we had a bounce and to avoid time decay. The odd thing that happened was that I literally did not get filled until the closing bell which made me say "well I bet we go down on monday because they wanted them back." So far monday and tuesday we have continued to break down.
Many stocks are confirming Head and Shoulder or Double Top patterns. Materials are definitely struggling and facing some headwinds however many of their individual stocks are right at their neckline support and have yet to break. Until they break down obviously the long attempt is the way to go if you want to take the risk. I am taking the risk thinking we could get a little bounce before we really break down. Because a majority of the material sector has not broken yet, I decided to get some exposure via the UYM. This position will likely be made or broken by the results Alcoa reports and the reaction the stock has. I have hedged the UYM position with a short OTM call position on AA. Since AA is a significant portion of the UYM if we get positive news out of AA I should see a decent pop in the etf and benefit from the volatility decay because right now IV is 109% and the next month is 75%. If we assume a collapse down to at least 75% that is nearly a .35 cushion against an unexpected upside surprise.
We shall see what happens, if we break down I should benefit from my short option positions. If we have a bounce back rally I should benefit from my long option positions so I would consider myself decently hedged.
Total Return for 2009: 140%
Many stocks are confirming Head and Shoulder or Double Top patterns. Materials are definitely struggling and facing some headwinds however many of their individual stocks are right at their neckline support and have yet to break. Until they break down obviously the long attempt is the way to go if you want to take the risk. I am taking the risk thinking we could get a little bounce before we really break down. Because a majority of the material sector has not broken yet, I decided to get some exposure via the UYM. This position will likely be made or broken by the results Alcoa reports and the reaction the stock has. I have hedged the UYM position with a short OTM call position on AA. Since AA is a significant portion of the UYM if we get positive news out of AA I should see a decent pop in the etf and benefit from the volatility decay because right now IV is 109% and the next month is 75%. If we assume a collapse down to at least 75% that is nearly a .35 cushion against an unexpected upside surprise.
We shall see what happens, if we break down I should benefit from my short option positions. If we have a bounce back rally I should benefit from my long option positions so I would consider myself decently hedged.
Total Return for 2009: 140%
Tuesday, June 30, 2009
Fisted By PALM
Even with the contraction of IV on the short palm position(20% contraction day after earnings) my closest strike of 15 ended up significantly in the money. This was an extremely frustrating day, the stock pulled back which I waited for and expected and I entered my order at 14.90, which was the exact low for the day. I was apparently 20 seconds too late as I never got filled on my limit and the stock basically rebounded and went up all day long. In hindsight, the best thing to do would have been to sell a strangle choosing a decent range I think the stock will stay between so I can have more of a hedge in case of an extreme move.
I was asked why I would have taken any position at all ahead of such a significant announcement. The reason is because I have the IV contraction on my side helping limit a loss and I essentially have a 75% of making money. There are 5 scenarios that can essentially can take place after earnings. Palm goes up a little, goes down a little, does nothing, goes down a lot or goes up a lot. On 4/5 of those scenarios I should lose very little and likely make money. Unfortunately for me this time it did what hurt the most; go up a lot. Selling a strangle would have been better because I have IV contraction working in my favor on both positions and money lost in one direction would be more offset by the money gained from the opposing short position. The interesting thing to note is that I used to go long options ahead of earnings, which now seems fairly stupid to me because you essentially only have that 1/5 chance of making money because as a long you have so much working against you.
Palm sold back off a bit yesterday so I took the opportunity to close my ITM position at a loss, which was better than two days ago but not as good as if I had been filled when I wanted to originally. Oh well, I have learned something new and must move on and be glad I am out of my loss. I am holding my further OTM short call positions since they still have a decent chance of finishing for a profit and it will help make up the loss, I'll essentially break even. If it continues to strengthen I'll look to close those as well. This was another scenario where I took too large of a loss, which is exactly what I don't want to do and can't do if I want to keep going. I have been on kind of a bad streak lately so I am trying to be patient but it is also making me a little timid in taking more risk. I am over 30% off my highs which I don't like, I'd rather keep my drawdown to a minimum.
Total Return for 2009: 134%
I was asked why I would have taken any position at all ahead of such a significant announcement. The reason is because I have the IV contraction on my side helping limit a loss and I essentially have a 75% of making money. There are 5 scenarios that can essentially can take place after earnings. Palm goes up a little, goes down a little, does nothing, goes down a lot or goes up a lot. On 4/5 of those scenarios I should lose very little and likely make money. Unfortunately for me this time it did what hurt the most; go up a lot. Selling a strangle would have been better because I have IV contraction working in my favor on both positions and money lost in one direction would be more offset by the money gained from the opposing short position. The interesting thing to note is that I used to go long options ahead of earnings, which now seems fairly stupid to me because you essentially only have that 1/5 chance of making money because as a long you have so much working against you.
Palm sold back off a bit yesterday so I took the opportunity to close my ITM position at a loss, which was better than two days ago but not as good as if I had been filled when I wanted to originally. Oh well, I have learned something new and must move on and be glad I am out of my loss. I am holding my further OTM short call positions since they still have a decent chance of finishing for a profit and it will help make up the loss, I'll essentially break even. If it continues to strengthen I'll look to close those as well. This was another scenario where I took too large of a loss, which is exactly what I don't want to do and can't do if I want to keep going. I have been on kind of a bad streak lately so I am trying to be patient but it is also making me a little timid in taking more risk. I am over 30% off my highs which I don't like, I'd rather keep my drawdown to a minimum.
Total Return for 2009: 134%
Thursday, June 25, 2009
This Will Hurt
An overall confusing day, jobless numbers are worse than expected yet we rally? PALM issues no guidance besides a break even cash flow mid 2010, no sales figures and the stock rallies 15% afterhours?
The overall markte move was likely due to year end positioning. The palm dilemma is more concerning, it was a better than expected quarter but the company is by no means profitable or even doing that well. Apparently the market is discounting a profit for 2011... Either way one of my OTM positions will now be ITM and I will be suffering a nice loss depending on how much volatility contracts tomorrow. This will also signal an all time high for the year and I think for the past two years. I will attempt to exit at an opportune time tomorrow on a pull back. If for some reason it pulls back significantly below 15 I may let the day unfold and see where it goes but for right now a pull back to 15 would be a welcome event. Up 300% and still people are piling in, that is fairly strong and hard to argue with. My other OTM positions will be held unless I feel they are in danger as well. Too bad I didn't go with my original idea of selling a strangle, oh well. Always next time.
Total Return for 2009: 147%
The overall markte move was likely due to year end positioning. The palm dilemma is more concerning, it was a better than expected quarter but the company is by no means profitable or even doing that well. Apparently the market is discounting a profit for 2011... Either way one of my OTM positions will now be ITM and I will be suffering a nice loss depending on how much volatility contracts tomorrow. This will also signal an all time high for the year and I think for the past two years. I will attempt to exit at an opportune time tomorrow on a pull back. If for some reason it pulls back significantly below 15 I may let the day unfold and see where it goes but for right now a pull back to 15 would be a welcome event. Up 300% and still people are piling in, that is fairly strong and hard to argue with. My other OTM positions will be held unless I feel they are in danger as well. Too bad I didn't go with my original idea of selling a strangle, oh well. Always next time.
Total Return for 2009: 147%
Wednesday, June 24, 2009
What's Next?
So after my last post, that Friday I took a position for a snap back rally as a day trade buying calls on the SPY. I was looking for a move up to about 92.30. I sat in the position as it flucuated between a gain and loss for a while. It moved up looking to break out but got rejected at the 91.70 level all the way back down to 91.50 fairly hard. This once again moved me from a profit to a loss and it looked like it was breaking down, so I exited not wanting to take more losses after yesterday's loss. Of course, literally 2 mins later it reverses higher and breaks out just like I was expecting and runs the entire move I wanted in probably 10 mins. I would have made up my entire days loss yesterday with that trade. After that happened I decided to not look at my computer anymore because I would have broken it. That is the most frustrating thing, It was good to not take a loss but my emotion from losing yesterday made me cut the loss too fast and not allow it time to work out.
Moving on to this week, I avoided the large down day on Monday being flat. Many stocks broke their trends on monday and we finished below 900 on the S&P. Only a couple finished at their support levels but I was not brave enough to go long as it seems like this could be a turning point in the markets with some further downside. I don't think we retest the lows by any means, but I can't say for sure obviously. I think We likely get to 875 and possibly 850, hopefully stabilize and then move higher from there. Many stocks have already taken 30% haircuts from their highs so they have to look decently attractive to the Bulls.
I only have one position and it is short OTM calls on PALM. Not that I dislike palm, I just feel that there is an edge to selling calls ahead of earnings vs. owning them or doing nothing. The expected volatility was 119% 2 days ago, now it is 110%. I am currently break even on the position. The stock has run from 3 dollars to 15 dollars at it's high. Obviously people can stay irrational longer than I can hold a loss but that seems excessive and I feel favors a sell the news type event. Analysts are still expecting a loss of .74 next year which is good in terms of growth being less negative but still not a "healthy" company. We will see what happens after they report on the 25th, I chose my positions so that if they become in the money it will signal a new high which would point to more upside and an exit for me. Again, after such a huge run another 20-40% move is possible but seems less likely especially if sentiment is turning.
Durable goods just came in better than expected by quite a bit which has sent futures up to the 900 level. I think this is a time where shorting could be difficult because of the constant expectation of recovery at some point and we may not get consistent bearish data enough to really knock the market down. I would prefer a pull back to 850 then get long for an intermediate term basis. The only thing that may help bring things back to reasonable levels is if earnings are not as good as expected so people won't pay as high of mulitples as before. We shall see though.
Total Return for 2009: 148%
Moving on to this week, I avoided the large down day on Monday being flat. Many stocks broke their trends on monday and we finished below 900 on the S&P. Only a couple finished at their support levels but I was not brave enough to go long as it seems like this could be a turning point in the markets with some further downside. I don't think we retest the lows by any means, but I can't say for sure obviously. I think We likely get to 875 and possibly 850, hopefully stabilize and then move higher from there. Many stocks have already taken 30% haircuts from their highs so they have to look decently attractive to the Bulls.
I only have one position and it is short OTM calls on PALM. Not that I dislike palm, I just feel that there is an edge to selling calls ahead of earnings vs. owning them or doing nothing. The expected volatility was 119% 2 days ago, now it is 110%. I am currently break even on the position. The stock has run from 3 dollars to 15 dollars at it's high. Obviously people can stay irrational longer than I can hold a loss but that seems excessive and I feel favors a sell the news type event. Analysts are still expecting a loss of .74 next year which is good in terms of growth being less negative but still not a "healthy" company. We will see what happens after they report on the 25th, I chose my positions so that if they become in the money it will signal a new high which would point to more upside and an exit for me. Again, after such a huge run another 20-40% move is possible but seems less likely especially if sentiment is turning.
Durable goods just came in better than expected by quite a bit which has sent futures up to the 900 level. I think this is a time where shorting could be difficult because of the constant expectation of recovery at some point and we may not get consistent bearish data enough to really knock the market down. I would prefer a pull back to 850 then get long for an intermediate term basis. The only thing that may help bring things back to reasonable levels is if earnings are not as good as expected so people won't pay as high of mulitples as before. We shall see though.
Total Return for 2009: 148%
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