Saturday, May 30, 2009

Saturday Rock Blog: Like a Rock (in water)


Monday will see the end of an American icon in the stock market. The General Motors name and business will live on but the stock will go to zero. It just goes to show that the truth is that most stocks do not go up in the long run. A few stocks go up a ton to balance out all the losers like GM. Those winners combined with the rebalancing of indexes like the dow jones and S&P create the illusion that stocks are a winning investment vehicle on average. Buy and hold is a scam sold by wall street to the American public in my opinion. Buy low, but don't forget to sell when you are high!

I have to say though, the public and the stock market sure are taking the bankruptcy of GM and Crystler disturbingly well. How is it that the broad market can rally as the biggest US corporations fold under stress? Do investors not see that wave corporate defaults moving from industry to industry? First it was home builders, then we had the financial sector essentially go bankrupt (subsidies mostly prevented actual chapter 11 filings(but I didn't forget Bear Stearns, Lehman, Wamu and IndyMac!!)), now its spread to the car industry, only Ford was saved. I can imagine next we'll see a wave of retailer bankruptcies, Circuit City already went under. I'm no expert but maybe Dillards and Sears will be among the dead. Then I suspect the airlines will file for Chapter 11 again after rising fuel costs combine with less frequent travel and horrible customer service. Eventually it will hit the technology sector as unemployment takes its toll on business and consumer spending. Is it really that hard to figure out, is the stock market so naive? Investors should be looking at GM and wondering which shoe will drop next, not assuming gleefully that this *must* be it, finally. Sometimes I just have to laugh at this market because it really seems like a big joke to me. Its supposed to be funny, right?

Here's GM since 1970:

And by the way, vehicle sales are about where they were when GM went public. Where did all that money go I wonder? Hmmmm! Vehicle sales over roughly the same period as the stock chart from Calculated Risk:

As a side note, it looks like the taxpayer gets shafted yet again on the GM situation. Silly taxpayers. How did we so rapidly go to a system where the feds have to throw money at anything that moves? And as they run out of taxpayer money, they print cash as a underhanded tax. This can not end well.

Thursday, May 28, 2009

Commodities have entered a bull market

Yeah, the head and shoulders reversal in DBC technically hasn't completed as it hasn't closed above $22.89, but I'm gonna go ahead and call this. If you look at pretty much any individual commodity besides natural gas (UNG) you'll see a clear uptrend over the past three to six months. Oil, agriculture, gold, etc, are making higher highs on increasing volume. The H&S pattern on DBC targets about $28, but this could take some time to play out. Natural gas is the one area where prices haven't been uptrending but after today's surge it looks to me like UNG has formed a double bottom. Time will tell but I feel comfortable in saying that a new bull market in commodities has begun.

Disclosure: I have a large time and strike spread in UNG calls.

Tuesday, May 26, 2009

Compressed BB's suggest a big move is coming...

The market leading Russell 2000 small cap index is being lifted from below by a rising 50 dma (intermediate term trend) and rejected from above by the falling 200 dma (long term trend) whilst the Bollinger Bands squeeze prices even tighter. This compression of volatility can also be seen in the collapsing volatility index ($VIX) and often suggests a big move or "volatile" behavior may be approaching. I would use $46 below and $52 above on IWM to signal a breakout. Should IWM move out of this range the price targets would be imense. On the upside I get $51 + $17 = $68 (which is reasonable because its near the previous neckline) where $17 is the 2009 highs minus the 2009 lows. Below I'd target the lows at $34. If IWM closes outside this range (46-52), I will look for volume to break its downtrend as confirmation.

Disclosure: I have a small IWM put position.

Saturday, May 23, 2009

Saturday Rock Blog: Matchbox


Words can't really add to this. Three heroes rocking out on stage together.. simply amazing. It takes the pain off quick, huh? Download this and other songs from an episode of Johnny Cash's show here.

Thursday, May 21, 2009

"Happy days are here again," Inflation!

Whats gotten into Macke?



From the video description: "Financial Talking Heads Explode, Jeff Macke rants on CNBC.

Watch this meltdown as it happened live on tv, I think most of the people watching CNBC were probably confused as hell......

I was at first, but I caught on quick, the bottom line is everything you see happening around you is an illusion, kind of like everything you learned in school...no value except in this crooked system which is now breaking down. "

I think that's probably not too far from the truth. Whatever the case, something has gotten under Macke's skin and he's a pretty sharp and solid guy. He would be the last guy I'd expect to lose his cool on cnbc like that. Prepare for things to get crazy again.

Wednesday, May 20, 2009

Fraud is everywhere these days...

Fraud is rampant in the markets these days and its not hard to spot. I think with the government obviously unequipped to enforce regulations, coupled with a sense of chaos in the markets (think Madoff and all the other ponzis the SEC missed), white collar criminals feel like they can get away with anything. Its one sad but expected consequence of the dark path that we turned down staring about a year ago with the Bear Stearns $2 takeover by the feds. Capitalism is dead, what will replace it? How can the government enforce any laws when they themselves are conducting obviously fraudulent behavior? Meanwhile our prisons fill with stoned hippies who got caught selling a joint. I don't know where this is all going but I have a hard time having hope for a brighter future. I hate to be so damn pessimistic on this blog all the time, but how can one be optimistic in the face of such madness:

Where are the damn cops? (BAC)
FBI probes insider trading by SEC lawyers
Letter from a dodge dealer (robbed by feds)
Insurance companies up vigorously before getting TARP money



Haha, yeah, that pesky insider trading.. But on the bright side, the U.S. may strip the SEC of its powers. Wait is that a good thing or a bad thing? I'll quietly just sigh...

Sunday, May 17, 2009

The IWM Wedge

The measured rule for a rising wedge is to target the bottom of the pattern. However, I think we should start conservative and see how things go. I would look for support at the rising 50 dma first (currently $44.69), then if that breaks watch $42.72 which represents the Jan low and a 50% retrace of this move. If that level breaks I think that a test of the lows will be all but guaranteed. Look for volume to increase as IWM rolls over as a confirmation of the pattern. Good luck.

Wednesday, May 13, 2009

BIDU and AZO

Two quick charts tonight. First BIDU, its still got that beautiful up trending channel and now sports a golden cross to boot. I think this is a low risk place to go long BIDU at the lower end of the channel, if BIDU drops further, lets say below $230 (which is max pain btw), then I would expect it to swiftly drop to $200. And as I mentioned previously, a break of $200 puts BIDU in hardcore bear mode.

AZO, on the other hand, looks like a building rug pull. A bearish delight, if you will. After making a new all time high at $169.99 two weeks ago on no volume, it reversed and has been selling on increasing volume since. It broke it's 50 dma, retraced and failed to retake it. I think this one heads down to fill that gap at $140 rather swiftly. After that, we'll see. That 200 dma looks pretty flat to me.

Disclosure: I bought some BIDU hail mary calls today at the close, and I own some further out AZO puts

Why are people so bullish on BAC? AnJAILo Mozilo

Its been obvious for well over a year now that Bank of America is the dumbest too big to fail bank in the history of banks that are too big to fail. They bought out insolvent Countrywide, they bought out insolvent MER, they performed the worst of all the banks in the stress test sham. Come on people, they are gonna be nationalized, duh.

I only bring it up because I look at the max pain chart for BAC and I see that the open interest in BAC calls this month is massive. What idiots loaded up on BAC May $20 calls? There are 20,000 of them outstanding. By the way, for those of you unfamiliar with how stocks behave at op ex, watch BAC on Friday. This thing will pin to $10 like a $1 bill to a stripper's thong.

And remember Angelo Mozilo, founder and ceo of Countrywide? He's that white collar criminal that sold all his CFC stock just as the housing market collapsed (see mugshot below). Mozilo was good buddies with Ken Lewis (BAC ceo) and got Bank of America to buyout CFC, somehow... Well, he's about to be brought up on all sorts of charges by the SEC. Its about friggin time.

"The SEC staff sent a Wells notice to Mozilo a few weeks ago informing him of possible charges, The Wall Street Journal reported online, citing unnamed people familiar with the investigation. The report said the charges include illegal insider trading and failing to disclose significant information to Countrywide shareholders."

Report: SEC may charge Angelo Mozilo with fraud

Tuesday, May 12, 2009

Maximum pain for option buyers

May options expire Friday and today I was looking around for a new max pain site to replace the old one I had been using which seems to have been shut down. I thought I'd share this great new max pain website that uses yahoo option data to create nice colorful open interest plots.

As most of you probably already know, the point of "maximum pain" is defined as the price where the option buyers have the least equity at expiration. Said another way, the max pain price is the price at which the option writers (typically market makers) make the most profit. Traders like to keep their eyes on this sort of thing because there is often a driving force in the market to push stock prices in this direction up to expiration. The idea is that the option sellers have massive capital to maximize their profit. Further, most option buyers don't really want to hold an option to expiration. As profits are taken the average pressure would be to move the stock towards maximum pain. Its often the case that a stock will "pin" to a round number at expiration. Generating these plots requires a simple calculation, you just figure out what the net value would be of all options in a given month if the stock closed at said price. All you need is the open interest for each strike. The total value will have a minimum at some price which is the max pain point.

Take IWM for example, the max pain for May lies just a few dollars below where we are now but the curvature of the minimum is such that the option equity wouldn't change significantly from strike to strike near $48. If you mouse over these plots it gives the total value of the options if the stock were to close at a given price and the options expired today. In this plot I highlighted $68 and the toal came out to $1B and was dominated by call options. If IWM closed at the max pain point the total value would be split more evenly between calls and puts and the total would be about $150M, significantly less.


I've got a few more of these plots to demonstrate how different the max pain curve can look from stock to stock (or month to month). DNDN has seen some action this month and shows that the open interest can be spread out over a wide range of strikes. It also shows a big barrier near $30.


In GS you can see that there are a lot more May puts out there than May calls, this might provide support for the stock if it tried to fall. Max pain for GS is $125 which is 10$ below current prices.


UNG is a natural gas etf that has seen some increasingly bullish sentiment as it rallied from all time lows. For one thing you can see that there are a lot less strikes on UNG. You can also see that in May most of the outstanding options are calls and a good chunk of them are in the money. Max pain is about 20% below here.


In contrast, the SPG May options are dominated by puts. Option sellers must have made a fortune selling puts on SPG for this month's strike. I think its interesting how rapidly the call value would rise if SPG did try and move up from here. Basically, it looks like SPG won't budge an inch this week. Its right on the money already.


Just as a quick disclaimer, I'm not advocating trading front month options or even trading options in general. Trading front month is a very easy way to go broke. They can go up 100%'s in a day but they can easily drop 90% in a day too, especially this close to op ex. Also, these max pain prices can and will change with market activity. Since the out of the money options are so increasingly cheap near expiration, the volume surges and can throw the open interest induced max pain price. Further, some stocks have much heavier options activity and a much bigger amount of market equity in those options. The stakes are higher in those cases for max pain to work out (or not). I wouldn't think UNG is driven by option activity, its driven more by natural gas commodity prices and those are driven by a number of different factors. You'd also want to take into account futures and futures options open interest for commodities like natural gas. SPG or GS, on the other hand, might be more effected by options expiration.

Good luck this week!

Disclosure: I own GS puts.

Why do we, as a country, sit back and let the Federal Reserve destroy our currency to pay off bank executives? We make it so easy for them! wtf

Meredith : "These stocks are grossly overvalued"

Saturday, May 09, 2009

Saturday Rock Blog: The Financial Sector is High



Washington smoked out wall street, now they are all stoned. The financial sector ETF, ticker XLF, is up 124% since all time low at $5.82 made in March. Yes, thats a 124% gain for the sector in two months, and it isn't a leveraged ETF!!! We all know about the free money that the feds have been throwing at banks, and we've heard about how well the banks all performed in the "stress" tests. Things have been going so well for the banks that times couldn't be better, yeah? If you bought this rally, congrats, nice trade, way to go. If you got squeezed on this rally, sucks, life's a bitch sometimes. If you are still buying this rally then you must be smoking some really good stuff. Hit and pass man, hit and pass.


The long term picture looks like a textbook correction. The XLF performed a 31.8% (Fibonacci) retrace back up to it's 200 dma. From a technical standpoint this rally has set up a low risk, longer term short entry on the financial sector. It seems pretty clear that the secotor will pullback here, the question is, will it hold the 50 dma and if not, will it make new all time lows. Time will tell.

I could see this spiking up above that 200 dma to form a hammer reversal day, but frankly, I'm happy with these prices. I initiated a put position in XLF last Wednesday then added to it heavy at the close Friday. If it does spike up to $13.70 or so, I'll add one more time but any higher than $14 and I'll stop out.

And in related news:

Banks Successfully Lobbied Fed to Make 'Stress Tests' Less Stressful

Insider selling is at record highs
Big US Banks May Be Headed For Extinction—And Soon
Fannie Mae (taxpayer owned) lost $23B last quarter
WFC and MS rape investors for another $17B by selling stock (lol)
Big bank profits are bogus, a massive public deception