Tastey Charts for Carnivores and Honey Lovers

I realized today that bulls are herbivores. You know, their favorite snack is grass and so they generally don't have good taste in food. Bears on the other hand love their meat and aren't afraid of fighting off a few bees for a pound of honey.





Interesting Option Activity.
VIX/SDS Ratio Indicator.

Disclosure: I own CAT puts.

The 100th Post

It is my pleasure to bring you the centesimal post on Stock Geometry! Since the first post here on May 24th 2006, the other contributors and I have been calling em like we see em with a high success rate (AHM, CCRT, DDS, COF, JASO, OMR, DECK, CREE, LEND, etc). We haven't been right on them all but its the mistakes that we learn the most from. While this site was originally started with purely chart interpretation in mind, it has developed into more of a hybrid of fundamental and technical analysis which I believe to be the most profitable method. In honor of the occasion, I wanted to fill you in on some of the technicals and fundamentals of the site its self, here's some data on the last 6 months:


As you can see, the readership is still quite small but has been increasing even during the typically slow summer months. Currently, the biggest days for the site are when there is a link posted on yahoo finance or other blogs. Thats when we get the most attention, so thanks for spreading the word. Theres a bunch of interesting info in the pictures above and below for the web 2.0 nerd types like me, just click on the pictures to zoom in (as usual). Below you can see the geographic distribution of the readership:


I've got it broken down by city and country there. A few notable cities are Urbana, IL (where I live), Santa Barbara (where I use to live and betweenthebars lives now) and Aachen, Germany (where indigo-alien lives). We also seem to have some frequent readers in New York City, Louisville, Pleasanton and Vancouver. Those of you who we have not met, please introduce yourselves!

I think the three of us contributors agree that we get just as much out of the process of writing on this blog as we do reading each other's work. The idea here is to share thoughts on the market in hopes that we can learn from each other. There is no ulterior profit motive here, note the lack of advertisements, and I hope it stays that way. Fortunately, google provides this great blogspot service for free along with the service I used to generate the above data called google analytics. So a big thanks to google. I also wanted to take a moment to thank the other contributors, Ian (indigo) and Vince (btb) for making this such a fun and educational project to be apart of.

Going forward we don't have any big plans at the moment. I am pretty happy with the ways things have evolved with one small complaint, it would be great to see more feedback in the comments. Even if it is just a short note about a chart, some news that was overlooked or even a missspelled word, it is greatly appreciated. I'd really like for this to be more of a two way process between the bloggers and the readers. Thanks to all of those that have commented and I'm sure the number of comments will grow with the traffic.

If you are interested in keeping up on non-market related activities that we have going on , Indigo and I both have other blogs which you can find the links to on the right hand side of the page.

Ok well, congrats Stock Geometry on 100 posts! Now for the next 100! Thoughts?

S&P 500 is more volatile than the Nasdaq?!

A new and unusual trend is developing with the nasdaq volatility index falling (VXN) below the S&P 500 volatility index (VIX) as seen in their ratio (see below) being less than one. Is this the beginning of a period in which we see more volatility in the larger cap industrials, I doubt it. More likely its just due to a recent repricing of risk in the financials which are a much larger component of the S&P. This is telling us that in general buying options on nasdaq stocks is cheaper and more attractive than on S&P stocks. Or conversely, selling options is more attractive on the S&P. Anyhow, this is a rare event historically and worth thinking about in my opinion.


Disclosure: I own QQQQ puts

Dollars looking for a home

I voted "No" in the recent StockGeometry poll on "the top of the market". As I wrote in this article, the markets are being force-fed money that has to be invested somewhere.

New proof of this can be seen in a Tuesday article published by Reuters. To quote the article;

"Experts are reassuring investors that U.S. money market mutual funds, which have gathered about $165 billion in new assets over an eight-week period..."

and,

"Money market mutual fund assets stood at a record $2.7 trillion on August 15..."

And given that billions more dollars have been injected to to the worldwide banking system, you just have to think that some sectors of the stock market will respond positively.

Hey, Budweiser still makes a lot of money brewing beer, and they don't seem to be having any difficulty raising funds by way of a bond offering. In fact, the size of that deal was raised from 350 million to 500 million, and I don't see where any other terms were changed. And all the usual suspects were lead brokers on the deal.

Rio Tinto recently posted quarterly earnings in the billion dollar range, and I'm sure they'll keep doing so. The company is always looking for acquisitions and in April they completed a deal on an Australian coal miner. The usual suspects are no doubt "standing on the sidelines" waiting for their next deal (now if the company would do something about their website).

And just to round things out, Johnson and Johnson still makes just about every product you really need in your bathroom and they make a profit doing it.

No, these are not sexy stocks. And it could be argued that many Blue Chips have been dead money for the last couple of years, but if you're looking to own quality, with no exposure to the sub-prime problem, I would argue that you could find many, many examples just like Johnson and Johnson.

Another German Bank is involved

I've known about this investigation for about week. The Spiegal.de (spiegal = mirror) website made a solid reference to this situation on the 13th of August.

I have no idea how this will affect trading tomorrow.

To be honest, I suspect that this bit of information will be ignored, in the midst of the ongoing information storm.

I'm not bearish on all stocks... [REDUX]

I didn't expect that move today, but then again if the market were that easy we'd all make money. And we all can't make money because who would we make it from? Anyways, the stocks I was buying today:


And JASO, I think it just needs to recover 30$ tomorrow after a breakdown/shakeout today. Frankly that stock was strong as hell today even as hedge funds dumped it. It was down as much as 9.1% but repeatedly returning to positive territory and was even up a few % at one point. Here's an updated chart:

Simple ABC Correction?

Well that was one hell of a day, what an awesome move for options expiration! So does that complete a simple ABC correction? All major indexes have pulled back >10% and there was a huge bullish reversal today on record high volume, note the hammer candlestick. I have included Fibonacci values for the moves in SPY and DIA as possible areas of resistance/support. My personal feeling is that this is the bulls last stand but we'll have to see what they can muster up. I'll be very surprised if they can turn this thing around and will be looking to re-enter shorts at the top of the B move or lower if necessary. Perhaps the 38.2% pullback on this move. For now however, I am long JASO and ICE. And if that was a simple ABC correction, then we are now supposed to resume the bull market and make new highs. I think this is more likely the 1,2 & 3 of a 5 impulse Elliot wave (since I think we just started a bear market based on fundamentals). Any thoughts?

I'm not bearish on all stocks...

The two sectors that make the most sense to me fundamentally are international growth areas like China and energy related issues (which are international typically). Combine these two sectors together and what do you get? JA Solar (ticker: JASO), a Chinese solar cell company that did an IPO about 7 months ago. This is a stock that I highlighted back at the beginning of the summer when it was 24, that was before it doubled and has now pulled back. Well I still like it, and it is still in a strong uptrend. Furthermore, earnings were great and an analyst upgraded the stock last week following the numbers.

Disclosure: I own JASO calls

Stock Geometry Readers Call THE Top

Tonight the poll ended with 44% of voters choosing that yes, the bull market is over. The exact results are below with the second most popular choice being that this is a short term top, 10% correction. I have to say that now, after all that has transpired in the last few weeks, it isn't surprising that most people call "a top" since we did get a big decline. But in fairness, the results have only changed marginally since the poll began three weeks ago.


I should note however, only 25 people voted in the poll which was a pretty small sample space. I checked on google analytics, a neat free service that tracks all the traffic at the site (yeah I just said "neat"), and it showed 300 unique visitors during the three week poll with 588 total visits and 972 pageviews. In other words, less than 10% of the readers voted. Well now we have something to improve upon, this was the first poll after all.

Anyways, I just wanted to get it on record that you had predicted THE top in the stock market. We won't know that this is a bear market until after we are knee deep in it, but where is the fun in calling it then? Only time will tell, and we'll be watching.

Jump into the Mortgage Companies for Op Ex?

Ok, ok, so I must be looking a little bipolar talking about going long mortgage companies after my rant about how bad housing is and that its going to get worse earlier today. And before I continue let me first say that I am in no way attempting to give financial advice here, just talking about a few thoughts I had about the markets. Buying mortgage companies for the long term is financial suicide and even buying them for a few day trade is EXTREMELY RISKY. These guys are dropping like flies and at any point one could file for Chapter 11 and the stock gaps down 90% like AHM did.


That being said, this is a trade that I made back in March and have been looking forward to for weeks. The timing is crucial and you better have a tight stop if you are going to attempt anything like this. But I wouldn't be surprised to see 100%+ upside moves in stocks like NFI, LEND, LUM, RDN, IMH, etc, etc. Comment on this post and I will mention a whole slew of other candidates.

Heres the idea. It has been impossible to get shorts on these stocks for months, and in some cases like NFI, for years. But alot of people have been making money on the downside, in fact gobs of it, how? They bought puts. Now they are sitting on massive profits over the last month as these stocks have been in free fall. Furthermore, much of the profit has come in the spike in implied volatility that shows up in the premium the options have based on time till expiration. In some cases the puts on these stocks have the highest implied volatilities I have ever heard of, ridiculous numbers like 200%+ on NFI options (see plot above). That compares with 20% ish on the QQQQ (nasdaq 100 etf).


When someone buys or sells an option it has more or less the same effect on stock price as trading the stock it's self. Buy a ton of calls and a stock will go up as the option market makers buys stock to hedge himself and lock in the profits from the sold premium. Sell the call back and the market maker has no reason to hold the stock anymore, hence selling the stock. The same goes for puts and I expect a ton of puts to be sold next week as traders lock in profits before their puts expire with no time premium left. You might be thinking, well how can the market maker short the stock (when someone buys a put) when everyone else is unable to borrow shares. Well there is a neat trick they have called naked short selling. Thats where they sell stock that is not borrowed. It is illegal for most market participants to engage in the practice of naked short selling, but there is an exception for option market makers on the basis that it is only temporary (since the options expire). Neat huh, kinda makes you want to be an option market maker.


So as puts are being sold hand over fist next week on stocks like NFI, LEND (which was down 50% in the after market on news you can read if you care to) and others the option market makers that sold them will cover the stock they are short. You see, option market makers are not in the business of speculating. All they want are those big fat juicy premiums they get by selling options, so they will not want to be short these stocks as people sell back the puts.

I've posted a few charts here of stocks showing how they reacted to options expiration back in March after a similar down fall occurred in these share prices. Some never recovered and went bankrupt, like New Century Financial. But others showed ridiculous intra day moves to the upside. LEND went from 3.77$ to $13.75 in three days, for example. So just take a look at these charts and notice what happened in March. I'm thinking NFI and LEND will be the big movers this week, but we'll just have to see.


As a cautionary note, buying calls on these stocks is expensive and risky especially this close to expiration. You have to watch the implied volatility in real time because the volatility is so volatile. In other words the stock could go up 20% and the calls go down because you bought at the wrong moment. This is a very tricky situation to be trying to trade options on and if you were going to do it, I would think the ideal play would be to short the puts (which is also very risky). Long story short, if these stocks make the types of moves I am expecting this week you will be able to get plenty out of the stock movement. Although, some LEND calls I bought back in March showed me 1,000's% profits in a few days. Yeah.

So I hope you don't mind a little Sunday rock blogging, a phrase I got from a new favorite blog of mine: Calculated Risk. Hoping for a big jump in the mortgage lenders next week after a nasty start so I can get into some positions. Would Running with the Devil be more appropriate? Maybe later this week.


Also, the poll (top right) will be closing at midnight tomorrow (Monday) so if you have not, please take a moment to vote. So far the readers are predicting a bear market and I want to be able to say you called it, if thats what transpires. Good luck, and be safe.

Home Prices Plunge 50% in Florida Home Auction

We all knew the housing market was in big trouble but -50% in months, good grief! What is happening is that the housing market topped to end a 10 year bull market in real estate (stating the obvious here). At some point a fundamental limit must have been reached as way too many homes were being built and sold to people who simply couldn't afford them. Foreclosures began to spike in the last 6 months as three year adjustable rate mortgages from the later stages of the boom began to reset to higher rates (see chart below). So now all of these homes that were starting construction in the peak of the boom are on the market while banks try and dump foreclosed homes at the same time. In that story in the video above, it sounds like brand new homes were being auctioned off as fast as possible by the builders/developers who panicked to get rid of their inventory of unsold homes. The already weak market is getting whacked by liquidation of foreclosed homes also, as seen in this news clip about CA foreclosures:


For many homeowners who purchased in the last few years this has led to a state called upside down, where people have negative equity on their home. I don't see how this can be good for the consumer who accounts for 2/3 of our economy, recall the wealth effect. The worst part about it is that we are only in the early stages of a multi year process of mortgage interest rates reseting higher (see below). Ignore the collapse in real estate at your own peril or if you want some upside on the crash CFC puts should do well. When you have time, take a chance to watch Bill Moyer's look at the current crisis hitting the financial markets and how it all started with the housing bubble. Bill Moyers Part 1 , Part 2. We are just in the early stages of this thing people.

Many things are on my mind this weekend, I'll post some ideas on individual stocks later tonight.

And in all fairness...

These headlines will provide a great reason to worry about the health of the global market, today. But only today. tomorrow, it will be something else.

BNP freezes $2.2 bln of funds over subprime

Futures slide, subprime woe rattles markets

BNP trouble hits stocks; ECB helps money mkts

Goldman Denies Global Alpha Liquidation Rumors

and finally, David Lee Roth to tour again with Van Halen

David Lee Roth couldn't get a loan either, so he has to go back to work!

It's not all about the housing and credit markets

Just a selection of headlines from the overnight market showing that it's not all doom and gloom out there.

Cisco quarterly profit, outlook top expectations

Adidas Q2 net income rises, shares indicated up

Carlsberg soars on higher profit

ING profit climbs 27%, sees no credit-market impact

Swisscom profit climbs on mobile stake, FastWeb buy

Australian shares soar after interest-rate hike

CAT Puts Are a Better Way to Short the Dow Jones

From a purely technical standpoint, the broad market and many individual stocks are headed decisively lower. As you can see in this Dow Jones Industrial Average weekly chart below, the index has broken and closed below previously strong support in the 13,250 area. Using a Fibonacci 61.8% pullback one gets a target of 12,735, the 40 week (200 day) moving average lies at 12,817 and the prior high in February was 12,796. So I'm going to average these targets an round up to suggest the Dow is headed for 12,800.


Now the federal reserve is meeting early next week with their statement at 2:15PM Tuesday but there is no economic data to be released Monday. I'm thinking the momentum we saw Friday will continue Monday and some may be trying to pressure the fed (via a broad market decline) into a rate cute or at least towards a change in bias towards a cut later this year. Of course this is speculation, but with Cramer begging on TV for a rate cut there are clearly those who are desperate to get one. However, if the fed raises rates or talks about sympathizing with the bond speculators who are loosing their ass right now, we may see a powerful short covering rally Tuesday. For this reason I suggest you keep tight stops on all shorts.

There are a few ways to play this decline, but my favorite is to buy puts on CAT. I mentioned CAT a few weeks ago as a short which worked out great. After a dead cat bounce (pardon my pun) the stock was able to briefly regain it's 50 dma before closing below it once again on Friday.


The reason why I like shorting CAT as a way to play an industrial decline is threefold. First, they reported earnings a few weeks ago that disappointed wall street with an unexpected 21% earnings per share decline. CAT is somewhat levered to residential construction in the US, which is part of the reason why earnings were so bad. Second, CAT is one of the 30 DJIA stocks and was until recently the second biggest gainer in the group for 2007. So it trades very closely with the index which I believe to be headed lower. Finally, the options on CAT are highly liquid and have a relatively low implied volatility (they are cheap). Volumes are typically in excess of 1000 on near the money contracts and spreads are frequently less than .05. You can get in and out of those options quickly without having to pay a spread penalty.

From the weekly chart above you can see how CAT has broken it's 10 week (50 day) moving average after a sustained rally a few times in the last two years (I've circled those breaks in blue). In each case this break was followed by a test of its 40 week (200 day) moving average in 2-3 weeks. The indicators and candlesticks looked similar in those situations to how CAT looks right now and based on the CAT chart alone I would say it 's headed to at least $70. However, since CAT trades so closely with the DJIA, I would sell those puts when the DJIA hits 12,800. Although, its worth noting that my target on the dow is it's 200 dma and my target on CAT is it's 200 dma, so why shouldn't these events occur simultaneously? If they both reach their targets CAT will have fallen substantially further on a percentage basis, hence CAT is a better way to play the drop in the dow.


As a side note, the glorious momentum stock DECK has lost it's momentum and fallen completely off the IBD 100 after being number #6 just two weeks ago. This stock is still above 100, a miracle of miracles for the longs who own it, and I think it is about to get slammed big time. Especially with the growing concerns that consumers are going to feel the pinch with all thats going wrong with credit and housing, investors may be seeking to take profits on this low floater. Tough decision: Pay mortgage or buy a new pair of UGG sheepskin booties...

Any thoughts on the new logo? Comments on the poll? If you haven't yet, please take a moment to vote in poll on the right. There are many more people stopping by than have voted. Happy trading next week.

Disclosure: I own DECK and CAT puts.

CRAMER nlod (new low of the day)

Jim Cramer was in panic mode Friday on CNBC as the market continued its dramatic downtrend in the late afternoon. He said things like "we have Armageddon" and "Bernake has no idea what its like out there." He seemed to contradict himself more than a few times and was clearly not thinking clearly. Certainly Cramer is frustrated with the market, or rather, frustrated with how poor his calls have been about the market (see NYX, his growth stock of the year). So this latest episode may not be such a surprise in that context. It makes one wonder how much longer he will remain on the air. If you don't know what Cramer is talking about in this clip, then you might want to take a look at this article he wrote Friday morning. We've all known that Cramer was a clown, but this is a new low for him.

The Sub-Prime Problem is not just an American Problem

I read an article the other day that quoted Hank Paulson as saying that the sub-prime problem was largely contained. And while I agree with him that the repricing of risk and sub-prime credit is only a small part of the overall world economy, I wouldn't necessarily describe the problem as "contained", certainly not just to America.

Unlike most people I actually live overseas and I speak a couple of other languages. I go to the gym everyday and I get a complimentary copy of the Frankfurter Allgemeine Zeitung (Frankfurt General Newspaper, or FAZ) from them.

All week the FAZ has been running a series of articles on the IKB, a middle sized bank for industrial customers here in Germany. I'm not going to translate those articles, but suffice it to say that they are hyper-critical of management, calling for at least the removal of the Board of Advisors.

Current estimates of the losses at the IKB are running to upwards of 3.5 Billion Euros. So after a massive bail-out and other credit guarantees by the state run KfW, the criticisms are warranted. Most of these Board of Advisors positions are nothing but cushy political appointments for party apparatchiks, and the ivory tower types who hand out the doctoral degrees in this country.

And no, I'm not going to expand on IKB, or KfW. They are both something like 17 syllable words that nobody would fully understand. A lot of German words are like that. It's something you get used, eventually. As for the term "contained", I would suggest a look at the chart of IKB.DE, or its American Depository Receipt stock IKBDF.PK.


This article has been cross-posted to the authors personal blog www.indigo-alien.blogspot.com