Monday, April 30, 2007

Red Right-20 Bingo Cross

Sometimes it is possible to learn all kinds of things from the most unexpected charts. Above is a chart of a great play used by the 49ers in Super Bowl XIX. This play was developed to exploit a weakness found in the Miami Dolphin's defense. The idea was that the Dolphin's inside linebackers couldn't cover Roger Craig when he broke out on that pattern. Well in that game Roger ended up scoring 3 touchdowns and having 77 yards receiving and 58 yards rushing. This was not a result of some play drawn up at the spur of the moment on the sideline. It wasn't created in the heat of battle. It was the result of preparation and extreme attention to detail. This play just wasn't one future hall of fame player running a pattern. As can be seen in the diagram, every player's action was choreographed in order to draw defenders away from the play. (Who can name the 11 players on the field in this play during super bowl XIX--think you can? Click the contact button on the upper left and give me your answer).

This example is a great way to illustrate what can happen when hard work is applied and attention to detail is never overlooked. In February when China made comments about attempts to slow their economy, every market around the globe took a hit the next day. Most people woke up and had that feeling of fear in their stomach and sold. It is hard to make rational decisions in the heat of battle when there is not a great deal of preparation with attention paid to details and plans made for "what if".

One "what if" plan involves always keeping an eye on commodities. The above chart compares the Goldman Sachs Natural Resources Index to the S&P 500 Index. In the lower pane is the spread between the two. Buying commodities on weakness has been a profitable strategy over the past 3 years, but a day when China's market is down 9% it can be hard to pull the trigger on buying stocks unless you have a plan in place before it happens. Knowing that commodities had been the best performing group over the past few years is a clue on where to look in developing a strategy.

What two countries have a strong supply of commodities and have this as a large percent of their GDP? Two that come to mind are Canada and Australia. This strong commodity base gives a strong underlying fundamentals to the currency of these two countries and make both attractive compared to countries that are just the consumers. Below are 3 charts, the first two are of the Australia ETF(EWA) and the Canadian ETF(EWC), the third is a comparison between those two and our S&P 500 index.

Even though these two Exchange Traded Funds(ETF) don't seem as exciting as the S&P 500 or the NASDAQ, the performance shows that they have outperformed greatly since China sneezed in February. The S&P has gained 8.43% over this time span. EWC(Canada)and EWA(Australia) have come close to doubling that performance! Now these two ETFs are not something you put all your money into in this situation, but allocating a portion of what you trade or invest to foreign markets makes sense. The trade initiated was a buy of EWC and EWA, along with the purchase of put options on the S&P 500. This buying of puts acts as a hedge against further downside and gives the ability to hold the long positions in that time of uncertainty. This trade could not have been thought up and executed two minutes after the market opened. It had to be in the play book before the opening kick-off.

This is a chart of the Australian Dollar Index. It shows the strength their currency has as of late.

Below is the Canadian Dollar Index.

Both of these currencies have made some very nice moves, as the US Dollar is making new lows. Looking at currencies from countries with little or no national debt and a strong commodity base should show some great trading ideas as the world economy continues to grow. It is important to now keep an eye on global growth and global inflation, and not get stuck just looking at the US domestic numbers. Think outside the fishbowl!

Some Canadian Stocks--



Royal Bank of Canada-RY

Some Australian Stocks--

BHP Billiton-BHP

Alumina Limited-AWC

National Australia Bank-NAB

More plays in the next post...


Friday, April 27, 2007

Fortune Telling with Broker Dealers..

This is the basic chart showing the NYSE Composite Index with the advance/decline moving average and money flow indicators. Both indicators show that the market is looking like it is in an overbought area and needs to consolidate. This doesn't necessarily mean it is going to reverse and sell off, it just means some time is needed to digest the gains of late.

One group to always keep an eye on is the Broker Dealer Index(XBD). Below is a weekly chart comparing the Broker Dealer Index to the S&P500. In the lower part of the chart is spread between the two indexes. When the red line is sloping upwards, the brokers are outperforming the market. One part of the spread is market with a blue line to compare the performance between the two. From the time of June 2005 until April of 2006, the XBD had a return of an 81% gain versus a 14% for the S&P 500. It pays to be in the right group, it can be the difference between a good year and a great year. This method of looking at spreads can be used with any group or stock against an index. Setting up a program that alerts when a slope starts to change from negative to positive can be a very valuable tool.

Looking at the current data in this spread between the XBD and the S&P500, it shows that as the market has recovered nicely from the February China event, the brokers as a group have not recovered the ground they lost. This could be a warning sign and something to keep an eye on. It also is setting up a couple possible pairs trades between different sets of stocks in the broker dealer index. In an earlier post a couple pairs trades were mentioned. The trade between Arch Coal and Massey Energy is a great example and one which presented itself again a couple weeks ago. Below are some broker dealer charts showing the February levels along with volumes.

Goldman Sachs has recovered the full move down, but volume isn't great since doing so. That all could change with a good GDP number, but looking for pull backs seems safer than playing the breakout game right now.

Bear Stearns has not recovered well at all, exposure to the mortgage trading market could be the reason. The chart says there is something that is wrong. This could be the short trade if this markets rally starts to lose steam.

Lehman Brothers is similar to BSC.

Merrill Lynch has recovered a little bit better, but not as strong as Goldman Sachs and Morgan Stanley. Below is the Morgan Stanley chart.

A couple groups of these brokers could be matched up to create some pair trades that could work pretty well. This could also be done with options to limit the cost.

Below is a good looking chart and says a lot about what sector the focus should be in. Safety stocks that can weather a slowing economy;General Mills.

Thursday, April 26, 2007

Large Cap vs Small Cap

This chart shows the Russell 2000 Index(Small-Cap)versus the S&P100 Index(Large-Cap). The bottom pane shows the spread(Russell2000/S&P100)as a read line. Lately large cap stocks have been outperforming smaller cap stocks(far right blue line). This could be because small caps have had a run and now it is rotation time and the larger caps are a better value. It could also mean some other things. When investing in large cap stocks, the required time to gather research is quite easier, because so much more information is available. There dozens of analysts who cover just about every stock in the S&P 100. On the flip side, small cap stocks take more work in researching. They are smaller companies and are usually not as widely followed. They are often newer companies and not as established as the cap stocks.

Another point worth considering is what happens when a fund manager wants or needs to invest large amounts of capital in the market. With smaller capitalized issues, it is very hard to just click a button and buy 100k shares of some of these issues. It is far easier to put large amounts of money into large cap stocks. They have much greater liquidity. This also works on the other side of the coin. If a fund manager needs to raise capital, it is far easier to sell a 100k shares of GE than to work an order over a week to sell some smaller cap issues.

Is the large cap rally going on now a result of the expectations that interest rates are going to be going down later this year? If rates go down, it could create more liquidity and with investments in real estate not looking great right now, the expectations could be that this easy-to-get money will go into the stock market. It seems there is always some asset class that is getting inflated by sizable pools of capital that move around. The section of the chart above marked "A" marks the Asian crisis in the fall of 1998. This crisis was met with a Federal Reserve and other central banks adding huge liquidity to the global system to avoid a panic. What happened was that this easy to get money was plowed into large cap stocks. This continued on until after the phantom Y2k scare was over, when every computer was thought to be capable of shutting down. It was not until after 2000 that liquidity would start to be contracted. The Fed had to put some of its bullets back into the gun. Stocks got crushed and money rotated into the Real Estate market.

The section of the chart marked "B", is the sell off after the market top in 2000. Large cap stocks took the hit as redemptions in mutual funds and corporate corruption cases caused uncertainty and people were forced to sell where they could; large cap stocks.

The S&P 100 looks like it is going to try to make a move to its old high, if it can gain support at this 61.8% retracement level. It is an important area to watch.

Wednesday, April 25, 2007

Is 13000 A Lucky Number?

This is an updated chart of the S&P 500 with its advance/decline moving average. It is in a rising channel that looks like it could for a triangle. The advance/decline moving average shows that there has not been a lot of bullish steam underneath this rally. That could change after earnings season, but right now it questionable how strong this rally is. It is being carried by a few stocks have some really nice moves, rather than a broad market move. Below is a chart of Boeing, which is one of the leaders.

Boeing has had great volume as of late and has clearly broken above its previous resistance level. This stock should be looked at on any pull back. It has global exposure to the growing world economies. It is not totally insulated from the talked about economic weakness here in the U.S., but it is not a one trick pony. Along with its normal line are airplanes, it is also heavily involved in products for the defense sector. Below are some stocks that do business with Boeing and should be watched.

Allegheny Technologies Incorporated (ATI) is a diversified specialty metals producer. The Company operates in three segments: High Performance Metals, Flat-Rolled Products and Engineered Products. Markets include aerospace, defense, chemical process industry, oil and gas, electrical energy and medical.

Precision Castparts Corp. (PCC) manufactures complex metal components and products, investment castings, forgings and fasteners/fastener systems for aerospace and industrial gas turbine applications.

Kennametal Inc. (Kennametal) is a global supplier of tooling, engineered components and advanced materials consumed in production processes. It provides metal cutting tools and tooling systems. Kennametal specializes in developing and manufacturing metalworking tools and wear-resistant parts using a specialized type of powder metallurgy.

Some of these company's charts might look extended. It makes sense to use any market weakness to look for pull backs and buying points. Until fundamentals changes, watch for pull backs and support areas for entry points.


This is a chart of the Nasdaq 100 index, along with its advance/decline moving average. Yesterday this was a stronger market than the S&P and the Dow30. Volume was good also. After hours Amazon had nice earnings, so things should carry over into today. After the close today Apple reports along with AKAM,PMCS,FFIV, and some other technology names every one follows. This could be a good setup for tomorrow when Microsoft and Broadcom report earnings. If things go well and today Fed's beige goes to plan, this could carry the tech move into the weekend.

There are the tech names that everybody follows, but there are also some behind the scene companies that are worth watching. These companies make all the components and parts that go into the finished products. The make the printed circuit boards and internal parts that people don't see. Some clues as to how healthy the technology sector is can be seen in how these stocks perform Below is a sample of a few with brief descriptions.

Benchmark Electronics, Inc. (Benchmark) is in the business of manufacturing electronics and provides its services to original equipment manufacturers (OEMs) of computers and related products for business enterprises, medical devices, industrial control equipment, testing and instrumentation products, and telecommunication equipment.

Celestica Inc. (Celestica) provides a range of services and solutions to original equipment manufacturers (OEMs) in the communications, computing, industrial and consumer sectors. The Company operates a global manufacturing network with operations in Asia, the Americas and Europe.

Jabil Circuit, Inc. (Jabil) is a provider of worldwide electronic manufacturing services and solutions. The Company provides electronics design, production, product management and repair services to companies in the aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, storage and telecommunications industries.

KEMET Corporation (KEMET) manufacture tantalum capacitors, multilayer ceramic capacitors (MLCC) and solid aluminum capacitors. KEMET manufactures a line of capacitors, including tantalum, multilayer ceramic and solid aluminum.

Solectron Corporation provides electronics manufacturing and supply chain services to original equipment manufacturers (OEMs) worldwide. As a value-added contract manufacturing partner to OEMs, the Company's customers contract with it to build their products or to obtain services related to product design, manufacturing and post-manufacturing requirements. Solectron designs, builds, repairs and services products that carry the brand names of its customers.

Vishay Intertechnology, Inc. (Vishay) is an international manufacturer and supplier of semiconductors and passive electronic components. Semiconductors include diodes, transistors, rectifiers, power integrated circuits (ICs), infrared (IR) transceivers, IR sensors and optocouplers. Passive Components include resistors, capacitors, transducers and inductors.


Interesting article on home loans and the housing market.

Monday, April 23, 2007

Gaining Direction From The Opening Range

A simple way to deal with a market bias that is opposite of the price action or the short term trend of the market is to have a system and some rules to go by. If a trader feels that a market is overbought, it can be costly when the market stays in an overbought position for weeks. Having some rules that deal with the opening range of each day can keep this bias from costing a lot of money and ruining the healthy mental state needed for profitable trading.

This simple method deals with measuring the opening 15 minute range of what ever market that is in the cross hairs. This example will deal with the S&P futures from last Friday.

In this chart, the opening range is marked by the upper and lower black lines. The high was 1492.25 and the low was 1489. This 3.25 range is now an area of the day to watch. Regardless of what has happened yesterday or in the overnight market, this range will tell us the tone for the day. If we can break up out of this range it is a bullish day, regardless of the overall daily trend of the market. If we can not hold this opening range and turn it into a support area, then it becomes an area of resistance if we break down out of this range. In this example, we broke down out of the opening range. It is important to remember the width of the opening range. Today's area was 3.25. Once we broke down below the opening range, our first price target was the low of the range(1489)minus the width of the range(3.25). This target is marked in red, 1485.75. Very often when this first target is approached, the price will pause and either repeat this move down another 3.25pts or hold and start to try to build a base. Today when this area was reached, it held and there seemed to be strong buying/short covering move right back up to the bottom of the opening range. The bottom of the opening range is an important area. Once prices entered back into the opening range, the chances are great that the low of the day has been put in, and there is a chance that there will be a run at the high opening range. This happened Friday.

This is system can be made as simple or as complex as need be. It is important to watch the size of the opening range. The size will often determine what reasonably can be expected for the total range for the day. Through personal experience, there are two moves once out of the opening range. It is either 2 moves in the direction of the break, or there is a move one width with an attempt to get back to the range. Often as the day goes on, and the market spends more and more time out of the range, it will make an extreme move into the close to what ever side of the range it is on. It is very helpful to have a full understanding of some of the Fibonacci rules on measuring price moves. These will help to identify failed patterns and help gain an edge on the pending price reversal. It is also to know what the daily pivot number is, and what the advance/decline ratio is at the end of the first move out of the range. These will both help add confirmation or suspicion to the move. Again, keep this system simple and add to it as you start to feel comfortable in what you are seeing.


This the current chart of the S&P 500 with the adv/decl moving average. This week's earnings should determine what happens. Earnings have been good so far, but there is bound to be some disappointments this week.

This chart shows the S&P 500 on a weekly basis. It seems like the goal is to get up to that old high from 2000. The Dow Industrials are there, and the New York Stock Exchange composite is above that level also. Below are two charts comparing the S&P500 to the Wilshire 5000, and the Nasdaq to the Wilshire 5000.

If anyone is interested in other specifics related to that opening range idea, click the contact link above and ask a question. I will share other rules I use with it.

Thursday, April 19, 2007

Interest Rates and China

China announces that their economy is growing at a faster rate than expected. This has raised the concern that China is going to raise rates. They also announced that they expect to consume 10% more copper in the coming year. This also should mean a greater consumption of Nickel, which is used in stainless steel. Another commodity previously talked about is Lead. This consumption should grow also.

The news today has brought the focus back again to currencies and interest rates. Below is a chart of the Dow Jones Industrial Average with a comparison to the 30yr interest rate.

Do rates have to go lower for a rally to continue? Are rates going lower a good thing? Are rates actually going to go lower like people think? A case can be made for either point of view, but it seems that in our leveraged economy, consumers and the government are addicted to low interest rates, they are also addicted to the idea that rates will be lower in the future. For over a year during the last interest rate raising cycle there was an industry of pundits saying when the Federal Reserve would stop raising rates. Experts kept saying 4.25%, then 4.5%, and then... The fact remains that interest rates are important, but how low do they have to be for a company or a consumer to function in a profitable and prudent manner? If rates do go higher, it is because of growth and inflation. This means that commodities as well as products,and possibly services, are being consumed. It might not all be consumed here in the United States, but if U.S. growth slows it doesn't necessarily mean global growth is slowing.

This is a similar chart, except the interest rate in the bottom section is of the 5year treasury rate. The chart of this shorter term rate seems to be at a cross roads of both a longer term down trend line and a shorter term uptrend line. The economic data over the next few weeks should push rates one way or the other to give a greater idea of where things are going. How shocking would it be if rates went higher? Inflation is real, and slower growth is one thing, but slower growth with higher inflation is one of the Federal Reserve's greatest fears.

This chart shows the U.S. Dollar Index, with the 5yr interest rate in the lower pane. The Dollar Index is approaching some levels that will keep the world's attention. As it approaches there levels, watch for any change in the velocity of its move.

This chart shows the S&P 500. 1461.57 is a level to watch. The futures are currently down 7.70, so the market is above that level, but watch for some test of that number. Today's pivot is 1471.83, and we are already below that now. The other number to watch is the 3day rolling pivot, 1467.30. These numbers look like they will act as resistance today at this point. It is early however and this could turn around. Earnings this morning from some key financial companies will be over shadowed by the comments from China. Even with the sell off in February, the market has still not had what many consider a correction. The next ten days should be very key in determining direction.

The next post will go over how to approach the open and determine what direction a day should have. Some days are for offense, others it is best to play defense and look for better opportunities to show themselves.


Update for option expiration.

Volume should be decent today because of option expiration. Once today is past, next week things should move a little more freely. The chart above shows the pivot numbers for today, which are right around where we closed yesterday.

Wednesday, April 18, 2007

General Overview

This is a chart of the S&P 500. After a mixed day it is good to review where the market has come from. It is also helpful to attempt to take the point of view opposite your bias. If you are extremely bullish right now, try to think like a trader that is looking to short this market and look for ideas that might give you caution. Lately this rally has been on declining volume, but this underlying factor could continue as the market goes higher and higher. As long as the market stays above 1461.57 it is going to be risky to be short. Another no volume short squeeze would be a painful experience and could bring new money into the market. In this chart this 1461 level is marked, as well as the channel we are in(white lines) and divergences with the advance/decline moving average(blue and green).

This is the corresponding chart for the NASDAQ Composite.

The next two charts are of the dollar index and a comparison of the 30yr interest rate versus the 5yr interest rate. The rate of the US Dollar receives some attention from a couple of financial news outlets, but with earning's season it won't hold any headlines too long. It is something to keep an eye on, and to look at from the standpoint of both the domestic benefit and its drawbacks. There is a major incentive to keep this sell off very orderly and not let it get too much velocity. We will see what happens.

Have short term rates reached their peak?