Trading Tip Stocks in Your Pocket or Purse: The Market Goes Mobile, Part 2 March 31, 2011
Posted by smarttradepro in Current Issues.Tags: a “next generation” app, a groundbreaking app, Chaikin Power Tools., stock market apps
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Last week, we took a stroll down memory lane and saw how market data availability for retail investors and traders has made huge leaps. Not so long ago, traders used pencil, paper, and day old prices. Today, we have real time data literally right at our fingertips wherever we are—in our pocket or purse on smart phones.
In the coming weeks, we will dig into the inner workings of half a dozen or more stock market apps that are available for the iPhone/iPad/iTouch. With a user base of over 100,000,000, the iPhone is the logical place to start our smart phone app review. We’ll cover the Android platform in a subsequent series of reviews.
Now that market data is generally available to everyone, everywhere, smart phone stock market apps have to raise the bar to grab our attention. It’s commonplace now for apps to provide market data for stocks, indexes and Exchanges Traded Funds (ETFs) and keep track of portfolios or a list of favorite stocks. Instead of merely finding new ways to present a stock’s current price and the relevant news on that stock, the next generation of apps will actually do something with the massive amounts of stock market data out there.
Over the next few weeks, we’ll look apps that offer a unique or useful twist to the standard quote list or portfolio tracking function. We’ll start our examination with a handful of apps that do much more than just keep stock quotes up to date.
Let’s jump right to what I believe is the first true breakthrough cell phone app: a “next generation” app that offers true professional-level analysis on a smart phone. Better than just raw data, this app actually provides a buy, sell or hold conclusion. And here’s the best part: since the app is brand new (it’s only been out 8 days), you can still get it for free, no strings attached.
Like Having a Hedge Fund in Your Pocket
Imagine having lunch with an old friend from school. She mentions that her broker recommended a stock (let’s say it was Amazon, symbol AMZN). You open an app on your phone and in literally less than 5 seconds, show her a 20-factor model rates that AMZN as “very bearish.” You say that it’s not the best time to get in. Then, you show her a visual gauge that quickly and easily shows the stock’s rating and the underlying reasons for the rating.
With a single tap you can drill down into each of the four rating areas shown above (Financial Metrics, Earnings Performance, Price/Volume Activity and Expert Opinion) and see the five sub-factors that drive the rating in each area.
Like all top-notch stock apps, you can instantly show your former classmate charts of the stock (which show Amazon underperforming the S&P 500, by the way) and relevant real-time news feeds. It also has a built in trading link—if you find an idea you’d like to act on, you can do so on the spot.
Clearly impressed, she asks where she can buy this app. You tell her that she can’t buy it, but she can download it for free from the iPhone App Store.
The App Revealed: Chaikin Power Tools
Essentially, all of the apps out there provide data: news feeds, price charts and snapshots of fundamentals. In researching this series, the biggest missing component on almost all of the apps that I looked at was any sort of analytical tools to complement raw data.
Standing alone as the positive exception to this paucity of analytics is a groundbreaking app called Chaikin Power Tools. In previous articles, I have written about Marc Chaikin whom I consider a genius in the field of technical analysis. He has developed well-known technical indicators like the Chaikin Money Flow and the Chaikin Oscillator.
What Marc and his team have done with this app is nothing short of remarkable. I’ve been gushing about this app. In the palm of your hand at any moment it provides a depth of real-time stock analysis that has been almost impossible to find at any price. This product is basically Marc’s magnum opus—his legacy from 40 years on Wall Street. The app uses a 20-factor model that Marc developed to provide real, actionable analysis for almost any individual stock. By actionable, I mean that the Chaikin Power Tools app rates almost any stock you enter on a five point scale:
- “Very Bearish” (lowest rating)
- “Bearish”
- “Neutral” (medium)
- “Bullish”
- “Very Bullish” (highest rating)
In a future article, we will research the 20-factor model. Studying this model is, in my opinion, the equivalent of taking a graduate level course in stock analysis. It is really that comprehensive. As I researched this article, it occurred to me that the Chaikin Power Tool app is like having a hedge fund in your pocket; the analytics are that strong.
Marc tested the app’s analytical model for statistical significance in outperforming the market and it has passed all tests with flying colors. I’ll discuss this testing effort more when we review the 20-factor model in detail in a subsequent article.
Again, since it is brand new, the app doesn’t cost anything during the initial launch phase. Get it for free while you can! If you have an iPhone, an iPad or an iTouch, go to the Apple App Store and search for “Chaikin.” The app has only been available for eight days, so you’ll be one of the first to try it out. The app was featured in Barron’s “Electronic Investor” section this past weekend so the readers of Tharp’s Thoughts are, as usual, on the leading edge of the trading world.
I’m anxious to hear what you think about the app as an analysis tool. Knowing the quality of the researchers that read this newsletter, I’m sure you’ll be finding more ways to use this rich tool than I can imagine.
For all of the app reviews over the next few weeks, I’ll include a few comments about the apps’ business model because that affects what you see and how it’s paid for.
On Chaikin Power Tools, there are no banner ads or other advertisements, which make it clean visually. When you download the app and start it for the first time, it presents the option to sign up for “investment ideas, product updates and information on mobile trading.” However, this is completely optional and can be skipped. To this app’s credit, there are also no “nag screens” in the future. Secondly, the app has full trading functionality tied in as an option. Many people will find it very useful to be able to research a stock and trade it inside the same app. Currently the app integrates directly with one brokerage partner and others are sure to follow.
Disclosure
I’ve known Marc for over a decade and some time back, he asked me to look at an early prototype of the app. It simply blew me away. Even in preliminary testing, I was completely impressed with what it offered traders.
In full disclosure, I am an early and very minor investor in the project. To paraphrase famed Remington razor company owner Victor Kiam from his TV commercials, “I liked it so much I invested in the company.”
[Publishers Note: This tool has not been endorsed by Van Tharp or The Van Tharp Institute. The five point stock scale is unrelated to Van Tharp’s market types. Neither Van Tharp nor the Van Tharp Institute have any involvement, financial or otherwise, with Chaikin Power Tools or its publisher.]
I’d love to hear your thoughts and feedback on this article or about other stock market apps that you’ve found useful. Please email me at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
Stocks in Your Pocket or Purse: The Market Goes Mobile March 26, 2011
Posted by smarttradepro in Current Issues.Tags: Mobile Phone Stock Market Apps, retail stock market analysis, the state of mobile app world:
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n 1986, my love affair with the market took off. As a chemical engineer, I naturally gravitated toward technical analysis and charting. At that time, state of the art charting was a printed chart book.
A Brief History of Charting and Market Data
Every Saturday I would receive my weekly chart book. Back then I had a very different version of end-of-day data. Monday mornings I had “off” but every Tuesday morning, I would read the Wall Street Journal before heading off to work. I would pull out a ruler and my trusty black Flair pen and draw in, by hand, the daily open-high-low-close bar on each chart from Monday’s data. I would repeat this process every morning until the end of the week!
I was not tech averse. Quite the opposite was true. I was a superstar programmer as a college engineering student, programming thermodynamics algorithms on the earliest PCs—floppy drive for data storage, and all of 32kB RAM under the hood.
Instead, the problem was that there were no commercial computer charting packages available. In fact, home PCs were still a luxury item.
Within a short time, though, that began to change. In 1988 I bought charting package from Bruce Babcock to use on a computer from work that had been declared obsolete. Back then, I had to buy a set of historical end-of-day data and, once again, use a data entry program to update data every day by hand using data from the Wall Street Journal! I became as fast using a keyboard for data entry as any good bookkeeper.
In 1994, I finally bought my own PC ($5,023, including shipping). That’s $7,000 in today’s dollars! It still took a couple of more years before I was finally able to get end-of-day data through the Internet—on a dial-up modem, of course.
One of the last steps in getting data before the Internet made everything a piece of cake was my first real-time data feed. Since I had cable television, in 1997 I was able to get real-time intraday futures data through a special cable signal converter. That service cost hundreds of dollars per month.
Finally, by 1999, the internet and its financial market data service providers were a part of the stock day trading explosion and real time data was finally becoming commonplace—even though I was still getting it through a dial-up modem at the time (56k…whoopee!).
Fast forward to today. An iPhone weighs 4.8 ounces. And, with 32GB of onboard storage, has one million times the storage space of that first IBM PC that I worked on in college, which, by the way, I could not put in my pocket.
In less than 25 years, retail stock market analysis has gone literally from pen and paper to a fully functional computer in your pocket. In the next few weeks we’re going to look at mobile phone apps designed for stock market analysis.
Mobile Phone Stock Market Apps: The Good, The Bad and the Ugly
For the next few weeks, I’d like to take you on a tour de force through the iPhone apps I’ve been reviewing. Why the iPhone? Three words: installed user base. Apple announced on March 2, 2011 that they have now sold 100,000,000 iPhones. In addition, iTouch and iPad devices can use iPhone apps, so this really is the biggest mobile market around. However, with the Android platform now growing faster (by many estimates) than even the iPhone, later this spring or summer, we’ll also take a look at apps available for Android phones.
After looking at more than a dozen stock market apps, here are a few general comments on the state of mobile app world:
- Almost all apps have a portfolio feature where you can track the movement of stock holdings. Profit and Loss tracking is clearly best done through an app that has a direct link to your broker or through an app that ties to a web site where buy and sell information can be entered. Therefore, portfolio management for a “general app” (as opposed to one linked to a brokerage) becomes a minimum requirement and not a distinguishing feature.
- Charting across the board is surprisingly readable. While you will not be doing your technical analysis on these charts, the high resolution screen does allow you to make sense of the charts. Almost all of the free apps that I’ve looked at are limited to line charts with volume indication. I will eventually look at a few of the paid apps that provide more charting options.
- Charting is also universally fast (at least it is with a Wi-Fi connection). The speed of chart drawing and switching on almost every app was one of the most surprising things I encountered in the preliminary screening.
- Many of the free apps had significant advertising banners. I don’t really count this against them (they are free, after all!), but it is a plus for the apps that don’t take up limited screen real estate with banner ads.
- A news feed is a key feature of many of the apps. Many have general market feeds plus specific chronological feeds for individual stocks.
I’ll be taking an in-depth look at a handful of the better apps over the next few weeks. Please send me the name of any apps that you have used with your comments on what you like and what could be improved, and whether I can use your name in upcoming articles.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
Preliminary Thoughts and Positioning on Japan’s Current Situation March 18, 2011
Posted by smarttradepro in Current Issues.Tags: A Few Economic Thoughts, Intraday traders, Long term traders and investors, Short Term Actions to Consider, swing traders would be wise
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In a natural disaster that dwarfs most others in recent memory, our thoughts and prayers go out to the courageous people of Japan. In the face of dire conditions, we see a brave nation coming together to begin what will certainly be a long road to recovery. Amazingly, with power, food, water and services in short supply or even non-existent, there has been essentially no looting. What a credit to the character of a nation.
Before we look at the financial side of the event, we have to be aware of how fluid the nuclear plant situation remains. Despite the many designed-in redundant defense systems at the Fukushima Daiichi nuclear power facility, the reactors are far from under control. This lack of control will continue to add to the uncertainty of the markets until the plant has been stabilized. Even as I was proofreading this article on Wednesday before lunch, the Dow plunged 155 points in about twenty minutes on what was thought to be new information from a European nuclear official. That new information, however, turned out to be an opinion based on old information. Any snippet of news over the next days and weeks could send the market into a tail spin or rocketing higher. Be on high volatility alert until the situation (especially on the highly emotional nuclear front) stabilizes.
Let’s turn our attention now to the economic aftermath of the tragedy; we have a number of factors to consider.
A Few Economic Thoughts
Morgan Stanley’s Steven Roach, a well-regarded thinker, points out that this earthquake/tsunami disaster comes on the tail of an economy in Japan that has been suffering for years. The population of Japan has been aging AND declining for some time now. The effects of that demographic profile have been compounded by a very strict immigration policy that has put extreme pressure on economic productivity in the country. After the short-term stimulus and aid package effects wear off, these background circumstances do not bode well for a speedy recovery in Japan.
Let’s look at a few other issues:
- Japan’s overall economy could be devastated. Power loss and disaster recovery have caused many industries essentially to shut down for the near term. In addition, a more valuable yen will continue to depress the Japanese export trade. Early indications are that the effect on Global economic growth will be at least 30 basis points, just in the short term.
- Repatriation of the yen to assist in the disaster recovery process has significantly strengthened the currency—too much so for the central bank. In the period of an hour on Monday, The Bank of Japan bought 186 BILLION dollars (selling the yen) to keep the yen from strengthening further. A hedge fund manager that I know calculated that without this intervention the yen could have jumped to 70 yen per dollar (instead of 81 or where it stopped on Monday). If the aftermath of the Kobe earthquake in 1995 is any indication, the yen has more appreciating to come.
- The Bank of Japan has very few bullets left to help the economy. A $500 billion stimulus package is already underway. This amount basically equals the US’s QE2 expenditures, but it enters an economy that is only one-third as large.
- The effects of the earthquake are actually quite bearish for crude oil. A global slowdown should depress oil prices. Current political tensions in the Arab League nations will continue to keep oil prices elevated and may offset any global slowdown. This tug-of-war between fundamental and geopolitical pressures will result in a very volatile energy market into the intermediate time frame.
- As an interesting aside, the Japan Exchange Traded Fund (Symbol: EWJ) had its highest volume trading day ever on Tuesday. SPY is the highest volume stock in the world, trading an average of 150 million shares a day. EWJ is a very active stock, trading 30 million shares a day on average. On Tuesday, EWJ traded more shares than SPY, with 396 million shares traded vs. 359 million, respectively. This is just another indication of the market’s news sensitivity.
- In the face of all the market negativity, we must remember that the Japanese people have shown themselves time and again to be an extremely resourceful, resilient and industrious group. A national tragedy like this will only strengthen their resolve and very likely mitigate many of these negative factors in the long run.
Short Term Actions to Consider
In the face of expanding volatility across almost all markets and with the market’s news sensitivity level at a 10+, swing traders would be wise to curtail activity, widen stops and reduce position size. Swing trading systems tend to get chopped up in extremely uncertain markets.
Long term traders and investors need to mind their stops and more sophisticated players may want to consider adjusting position size to take into account the extra market volatility.
Intraday traders can enjoy the ride! Be nimble to change directional expectations at a moment’s notice, with huge swings possible on news or even rumored news.
As a final note, you may want to check out the stunning before and after satellite images that show the devastating effect of the tsunami and give at least a modicum of appreciation for what the Japanese people are going through. The images can be found here. Moving your cursor across the pictures shows the scale of the devastation.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
Crude Oil: The End of the Rally Is Near March 10, 2011
Posted by smarttradepro in Current Issues.Tags: a short term top in crude is near, Technicals in Crude Are Ready for a Retrace
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A couple of weeks ago, we talked about the troubles with civil uprisings in the Arab League that are toppling dictatorships.
Fear of a major disruption in oil production, along with an actual loss of about one percent of the world’s oil supply, has caused crude oil prices to skyrocket. This significant rise in the cost of crude has impacted the price we pay for many things including a gallon of gas and the valuation of the stock market in general.
However, there are technical, fundamental and geopolitical reasons to believe that at least a short term top in crude is near. Let’s look at crude from both perspectives.
Fundamentals of Crude: Supply and Demand plus Geopolitics
The geopolitical angle of this game is fairly easy to see, for a change. The worries about disruption in oil supply due to the Arab League turmoil have largely been baked into prices already. Remember the old trader’s adage, “Buy the rumor, sell the news.” The Libyan civil war is largely at a standoff. So the news event that could reverse the meteoric rise in crude could come Friday in Saudi Arabia’s “Day of Rage.”
Many informed pundits predict that the pre-planned protests in Saudi Arabia will be a non-event. The Saudi government is much more mature and stable than those of Tunisia, Egypt or Libya. And the National Guard there is very loyal to the royal family. Lastly, Saudi’s great wealth has been spread around fairly well, giving less cause for true economic outrage.
On the supply and demand front, there has been no news that could contribute to the 22%+ rise in crude oil prices. In fact, a glut from Canada has caused the U.S. reserves to be filled to the brim. And even though the Arab League problems have caused a 1% disruption in daily oil flow, the Saudis have stated publicly that they stand ready to increase supplies to cover this shortfall if needed. The US has also hinted that it could dip into the strategic reserve.
The Technicals in Crude Are Ready for a Retrace
A quick look at a crude oil price chart will show that this big run-up in crude oil has overstretched price to the upside.
As we can see in this chart, the RSI reading has only topped 70 (the traditional level for an oversold reading on this indicator) for crude oil twice in the last 15 months (before the current run). Both instances were met with pullbacks. Obviously, this run-up was more severe than the other two, which only had one day each above the 70 level; the current run has spent 6 days above that level.
The RSI reading alone doesn’t mean that a crude pullback is eminent, but if the Saudi rallies on Friday are uneventful, that could relieve some of the political tension that is holding crude prices high in the face of plentiful supply. A pullback to the 50% retracement of this run-up would then be very likely.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
When Market’s Get Rattled: The Flight to Quality February 25, 2011
Posted by smarttradepro in Current Issues.Tags: and sell when everyone else celebrates, buy at the start of a conflict, continued flight to asset quality.
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What began as a localized uprising in the small North African country of Tunisia has spread throughout the Middle East. The Economist magazine notes that Egypt has long been a political bellwether for the Arab world. If that’s so, then Mubarak’s exit signals that other Arab regimes may be in jeopardy. Decades old dictatorships have now fallen in two countries now and a third fall seems imminent already as rebels appear to control the eastern part of Libya.
What does this political unrest mean for traders and investors? One thing for sure: it means more volatility. If the negative news from this region continues, it will drive equity prices down and oil prices up. We saw big jumps in volatility (stocks down, oil up) on 1/28 (Egypt’s significant news day), and on 2/22 (when the Libyan air force killed hundreds of protestors). We should probably be prepared for similar conditions, and we can also benefit from another phenomenon that occurs when volatility picks up.
Flight to Quality
Until the unrest stops spreading, we should expect a continued flight to asset quality. We saw that yesterday (2/22) as bonds and gold rallied. In the equities markets, there is also a shift to quality. In times of turmoil we see people leaving riskier sectors (like small caps) and heading into large cap stocks. The chart below shows the ratio of the S&P 500 (large caps) versus the Russell 2000 (small caps).
During the biggest scares of the real estate and credit crisis during the fall of 2008 and spring of 2009, the S&P 500 was at its highest valuation versus the Russell 2000. Recently, however, the markets have been more complacent and moving up so people value the Russell more highly. Investors have felt safe enough to chase bigger returns. You can see that trend in ratio indicator (the blue line) in late 2010. Now, the ratio indicates that S&P valuations just started to pick up a bit.
The US equities markets have been stretched to the upside for some time. With the current political turmoil, the markets may finally find a reason to relieve its overbought condition.
Canons and Trumpets
This is probably a good time to remember Lord Rothschild’s famous epigram to “’Buy to the sound of cannons and sell to the sound of trumpets.” In other words, buy at the start of a conflict (when things look bleakest) and sell when everyone else celebrates the end of it. In our case, remember that negative geopolitical news will drive equity prices down and oil prices up, but they will likely rebound after the impact of the news wears off.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
Sector Action Since the March 2009 Bottom February 18, 2011
Posted by smarttradepro in Current Issues.Tags: how sectors have fared, The Geographic View, The Sector View
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While lovers celebrated each other on Valentine’s Day on Monday, the S&P 500 made a new post-real-estate-bubble high. The cash index hit 1332.96—less than a point from a doubling of the March 6, 2009 low of 666.79.
This level was a key “hidden” resistance level identified by W.D. Gann. It will be very interesting to see if this resistance level can hold the bull market that has been steaming ahead.
To commemorate the S&P doubling off the bottom, I thought it would be intriguing to take a quick look at how sectors have fared since the gloom and doom of March 2009.
The Sector View
Below is a busy little chart from one of my favorite sites: stockcharts.com. This performance chart shows percentage moves from a specific period and includes the S&P 500 sector SPDRs commonly refer to as “spiders.”
You may have trouble reading the color key for the lines so here’s the order for the sectors from top to bottom: financials, consumer discretionary, industrials, consumer discretionary, materials, technology, energy, healthcare, and utilities.
It should come as no surprise that all of the sectors are up for this period. With the financial sector taking the biggest losses heading into the March 2009 lows, it’s also logical that they would rebound the most on a percentage basis (the financial sector is the top brown line).
Conversely, one would expect the sectors that weathered the big crash the best to rebound less gingerly—this, indeed, was the case. Utilities, health care and consumer staples have had the most tepid responses and are represented by the three sectors clumped around the 50% line.
Most surprising to me, the tech sector has basically mirrored the broader S&P 500 with a gain of about 100% off the lows.
The Geographic View
Worldwide, emerging economies have not fared as well as the established rank and file. Let’s look at another comparative performance chart to see the percent gains of some regions and countries on a more recent timeframe—since the November 5th, 2010 swing high in the markets.
Here is the order from top to bottom: Japan, US S&P, and EAFE are above the zero line, while Latin America, Emerging Markets, China, and India are all below the zero line.
Since November 5th, only Japan, the US (SPY) and EAFE (first world regions) made new highs. Latin America, China and especially India have swooned since then. It will be very hard for the bull market in the first world regions to keep charging ahead if the rest of the world maintains its downward slide.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
Being Passionate About Trading February 11, 2011
Posted by smarttradepro in Current Issues.Tags: exercising first thing in the morning, follow that passion., this great game of trading
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Every Monday, Wednesday and Friday, about a dozen guys make their way to the Western YMCA in Newark, Delaware to play basketball. The first game starts at 5:45—that’s a.m.
Why in the world would level-headed people forsake the comfort of their Tempur-pedic mattress and drive to the gym in 12°F (-11°C) weather to run up and down a court? The answer is simple: an undeniable passion for the game of basketball.
There’s something almost therapeutic about playing basketball, especially pick-up games at the local gym or playground. (A pick-up game has no formal teams or referees. People just show-up, choose sides and play.) The game offers camaraderie, competition, and a psychological release. On top of all that, it’s great exercise, too. Finding a good bunch of guys for a regular game is tough, so when you find such a group, you stick with them.
This morning I was struck by the true passion these guys have. Never are there any fights or long arguments; every shot is contested and every foul is called. There are no easy baskets. These people love to play; this shows not only in the high level of ball that we play, but more importantly, in their enjoyment of this early morning ritual.
I believe that it is much tougher to learn a complex skill, like basketball or trading if you don’t have passion for the sport—or the markets. Competence makes no requirement for passion, although passion offers the shortest and most enjoyable path in the pursuit of excellence.
The Shortest Path to Success: Align With Your Passion
If you have a passion for something, spending the time required to master that subject will come more easily because it is so enjoyable.
Let me say a word about the concept of passion. The type of passion I’m referring to is an enjoyment to the point of absorption. I don’t believe that we are born with this type of passion. I believe that it grows in us as we become involved in an area and start to receive enjoyment from the experience. This type of passion shows up in all walks of life. I know passionate cooks, guitar players, gardeners, engineers, doctors, programmers and performers. And I don’t believe that any of them were necessarily born with that passion.
I have met traders and investors who I wouldn’t consider passionate. Some were proficient, others competent, and a few were even successful. When they spoke about the markets or trading, however, they lacked any spark for the topic. Most likely they will not reach the top tiers of their field.
I have also met passionate people who eat, breathe and live the markets. Most of them do it with some balance in their lives, but they love the markets. They love the research. They love to talk about what they’re doing in their trading and investing. Many of these folks are at the top or headed in that direction.
My best friend and trading and business partner will not go to bed without reading the Wall Street Journal. He hasn’t missed a weekly Barron’s in 30 years. He reads scores of market commentary emails every day. He is a walking market encyclopedia. When he talks about the markets, you can’t miss the gleam in his eye and the energy in his voice. He has passion and is in the top tier of his field.
You don’t have to have a passion for the markets to enjoy trading and investing or even to get good at it. But if you find a part of the market experience where you really enjoy your time there—where you get lost in the moment—pay attention to that feeling! It might be researching individual companies, system building, fundamental analysis of commodities or technical analysis of charts. Find what you like about this great game of trading and investing and follow that passion. That’s the quickest way to get good at something.
And as an aside, if you haven’t tried exercising first thing in the morning, I highly recommend it for several reasons. It’s a great way to get your day going! If you are doing any mental activity (like trading or investing for example), the extra flow of blood to the brain through exercise has proven to raise performance in mental exercises. And this doesn’t have to be a long run or playing full court basketball. A good walk at a brisk pace will do the trick. Get your blood moving and shift your mind to higher gear.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
Interesting Markets: Short Term versus Intermediate Term February 4, 2011
Posted by smarttradepro in Current Issues.Tags: a cautious tone t, Technically, The market is a bull, we will need a pullback
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“May you live in interesting times.”
—- Attributed Chinese Proverb / Curse
Yes, I have used the quote above in earlier articles. It always seems to pop into my mind when thoughts of “two-handed economists” come along. Two-handed economists give both sides of the analysis and say, “On the one hand…but then on the other hand…” without ever reaching a conclusion or providing a recommendation. This must be an everlasting occupational hazard since this notion was immortalized by George Bernard Shaw in the early twentieth century when he said, “If all economists were laid end to end, they would not reach a conclusion.” But I digress.
The current market is a prime “two-handed” example for market observers. On the one hand, almost all of the technical analysis community is looking for an overdue technical pullback. On the other hand, every down move in this market has been met by more buying.
For the fundamental crowd, it’s a two-handed market as well. On the one hand, many economic metrics continue to improve, albeit from monstrously horrid numbers in the spring of 2009. On the other hand, inflation is heating up and unemployment numbers have not significantly improved over the last 18 months.
Which “Hand” Is It?
When faced with conflicting viewpoints, it’s useful to see if narrowing down information to an applicable time frame offers some clarity. Luckily in this case, I believe it does.
For the short-term viewpoint, the market has spoken. Despite being technically overbought (by some measures, severely overbought), and in the face of significant political turmoil in the world’s most volatile region, the market shook off Friday’s big drop and in two days hit new 52-week highs.
When the market shakes off bad news (specifically the massive protests in Egypt) and heads the other way, we cannot ignore the signal it provides. The market is a bull until price action tells us otherwise.
In the intermediate time frame, the data may tell a different story. Technically, we will need a pullback to relieve the intermediate term overbought condition in the market. The inflationary pressures of rising commodities prices are starting to affect corporate earnings. Hershey blamed rising cocoa and sugar prices for their earnings miss and Whirlpool cited the rising cost of plastics (think petroleum) for theirs.
The threat of inflation is meaningful. By now, we all know that quantitative easing really means “printing more money.” Even my third grade economics students know that when there is more money chasing the same amount of goods and services, prices go up. So all things denominated in dollars have been going up.
A Revealing Chart
The most interesting inflation graphic that I have seen in awhile came from Barclay Leib’s newsletter. The “Food and Fiber Index” depicts a commodity-based index to its 200-day moving average. The index tracks cocoa, coffee, sugar and orange juice (the foods) and lumber plus cotton (the fibers).
Again, this chart shows how far the food and fiber index has moved away from its 200-day moving average. The two times in the past where it rose more than 40 points away from the 200-day MA in the past 15 years were followed by memorable market corrections. The index hit that level two months before the Asian currency crisis in 1997 and two months prior to the 2008 market highs. With cotton hitting all-time highs recently and other commodities hitting extreme levels as well, the index has alerted us to a “red flag” point once again.
Bear in mind that this chart tells a fundamentals story; it’s not a piece of technical analysis. When prices for consumables get too high, they begin to have a material impact on corporate profits. So the rosy earnings picture that we’ve seen over the past couple of quarters could be in jeopardy. Should the Fed decide to slow inflationary pressures, their actions definitely will impact the markets in the intermediate term.
The Traders View
An equities market’s slow and consistent climb higher doesn’t always end when the technical analysis says it should. Meanwhile, we can’t ignore the bigger forces that continue to work in the intermediate to longer time frames. These subdued but ultimately stronger forces lend a cautious tone to the equation.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
The Many Ways to Play a Directional Turn January 28, 2011
Posted by smarttradepro in Current Issues.Tags: pointing to a market correction., stock market that is overbought, Ways to Play a Potential Market Drop
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Last week’s article on market extremes elicited several types of responses from readers. There were the very kind thanks for the insights (always appreciated on this end!). There were references to others who had similar opinions (thanks for the insights!). And lastly there were the requests for how to play the potential drop in the equities markets from these lofty heights.
In response to those requests, I have to remind everyone that Tharp’s Thoughts is not a trading recommendation newsletter. On occasion, we present research intended to provide insight into current market conditions that could help traders and investors formulate trading ideas. Providing individual trade recommendations, however, is outside the scope of our purposes for writing here.
With that said, I thought it would be instructive to present several possible ways to play this potential market-topping action. Let’s look at some different ways that a trader might express that the idea of a potential correction. First, let’s review where we are.
This Market Is Technically Stretched
Last week, we looked at a couple of factors that pointed toward a stock market that is overbought and due for a correction. One of these indicators is the chart from last week that showed accelerating price activity.
Since last Tuesday, one market maven has told me, “General market activity has kicked another leg out from under the stool,” meaning that even more elements are pointing to a market correction. First is the general retreat of the commodity complex where most of the major dollar-denominated commodities (gold, oil, etc.) continue to head down.
And as we see in the chart below, acceleration lines are being broken and the subsequent rebound has yet to reach new highs.
Last week I said that one could play this potential market-topping activity by trading the correction. If that correction failed to materialize, you could reverse and play the breakout.
Today, though, let’s look at several ways that you could express the opinion that the market might go down a bit.
Multiple Ways to Play a Potential Market Drop
For this exercise we’ll concentrate on the S&P 500 index, noting that there are similar trading instruments for other market indexes.
Let’s look at a laundry list of ways to trade a market drop:
- The time honored way would be to sell short the index. One could do this by selling the futures contract (S&P e-mini symbol:ES) or selling short the Exchange Traded Fund (symbol:SPY).
- Tax-advantaged accounts (e.g., IRAs, SSRPs and the like) will not allow the use of margin that is required to sell short. For those accounts and really for any trader, there are inverse Exchange Traded Funds (ETFs) that rise in price by an equal percentage to the underlying index’s drop. For the S&P 500, one such ETF that trades over a million shares per day is the Proshares Short S&P 500 (symbol:SH).
- You can also add leverage to your inverse ETF by buying the UltraShort ETF that rises twice as fast, in general, as the market falls. The symbol of the most popular 2x inverse ETF is SDS. Over the past year, this ETF has had an average volume between 25 and 58 million shares per day! With the market at more extreme overbought levels today, SDS is trading at its lowest volumes of the year, but still averaging around 28 million shares a day!
- For even more leverage on a stock play, there are 3x leveraged ETFs such as SPXU, which is trading over 4.5 million shares per day.
- Of course, for really high leverage, one could buy options (puts) on stock for a higher reward-to-risk profile (for example, puts on the SPY). With this play, one would need to manage time decay, volatility changes and the other challenges involved with buying options premium.
Before we move on, let me remind everyone that leverage is very much a double-edged sword. While leverage offers the allure of higher returns, it also demands an increased need to manage a much higher level of risk.
Now, the number of ways to trade a correction is almost as limitless as your imagination; let’s look at one final way to play it. A professional money manager might incorporate leverage and risk controls with the use of an options spread. In this case, with the SPY currently trading at just over 129, you could buy an April 129 (at the money) put for about $4.00 and sell an April 125 (out of the money) put for $2.60 or a net cost of $1.40 per options contract pair.
Your downside risk would be strictly limited to $1.40 per position and your maximum upside is $4.00 per position. Of course by using a stop loss that kicks in before the spread price drops to 0, which is how most would play it, this spread presents a very good reward-to-risk profile.
For all of these trades, the protective stop loss could be placed just above the recent highs. Depending on how aggressive you’d like to be and your time frame expectations, one might place the stop 0.25 times to 1.5 times the Average True Range above the recent highs (or below the lows for the inverse ETFs).
A reasonable first profit target for a correction is the 124 – 125 area on the SPY.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
Market Extremes: Common Themes and Characteristics January 21, 2011
Posted by smarttradepro in Current Issues.Tags: higher probability play is to follow the pattern., price slope lines are very good indicators, what the market is likely to do, When markets hit extremes
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“Markets can remain irrational a lot longer than you and I can remain solvent.”
“I should have drunk more champagne.”
– Both Attributed to John Maynard Keynes
The basketball had just been passed to me on the left wing. The game was tied late in the fourth quarter. It was my senior year at Radford High School and we were playing our arch rival, Blacksburg High School, the team that had ruined our perfect season at the junior varsity level just two short seasons ago.
Guarding me was an all-state football player, which meant that he was a superb athlete with great instincts in any sport. At this particular moment, we were running a set play. My role, once the ball got to me, was to make a decision: shoot if I am open (I was not) or pass to a player cutting toward me from the other side of the lane.
This was our standard set and the guy guarding me had already seen us run this play a half dozen times. In fact, he had almost intercepted my pass the last time we ran it; he was beginning to recognize the pattern of the play.
What happened next was the stuff of legend, a story I will tell my grandkids some day (or at least one I will share with the readers of Van’s newsletter…). I broke the pattern. I faked the pass that I had already made many times that night. Then, with a quick crossover dribble to my left, I zipped past a clearly superior athlete for an easy lay-up.
Pattern recognition had given my opponent an edge earlier in the game. Breaking the pattern turned the table back in my favor for this one play.
The markets play out this same “game” over and over again. The market follows a set pattern with great regularity, one that can be exploited if recognized early enough. And just when market participants get most comfortable, the pattern is broken. Let’s look at how to take advantage of both situations.
A Key Characteristic of Blow-Off Tops
When markets hit extremes, they usually do so for simple reasons. Buyers become overly enthusiastic and price an asset above a sustainable level. There are stages along the way in this process that go something like this:
- Recognition of initial price strength brings in aggressive institutional players.
- More conservative institutions then decide that they can’t miss the move and join in.
- Then retail players jump in “en masse” along with the last of institutions who are forced to have the “hot” asset in their portfolio.
- Finally, the end stage of the buying frenzy is powered by both greed and fear—players adding to profitable positions and the last new comers afraid of missing out on the move.
This pattern of staged entry for groups of buyers gives us reproducible signs of a blow-off top. My favorite indicator of this process is the accelerating rate of rise that we see in this chart that published in this newsletter just days before the 2008 peak in crude oil.
The blue lines under the price bars show a “progressively steeper ascent.” (My technical analysis friends will note that these blue lines are not “true” trend lines since only one of the four offers three points of resistance along its slope.) These lines show the acceleration of the price rise and can be an indicator of buyers coming into the market in clumps.
Two months ago, cotton hit all-time highs and was truly a runaway train! I don’t think I’ve ever been able to draw in five lines of steeper ascent. Price dropped more than 25% in the two weeks that followed and has since climbed to even higher highs.
And now for the kicker: the current equity market is looking like those other blow-off markets. Here’s a couple of charts showing the S&P 500. First, a longer view back to the March 2009 lows.
This gives us a perspective for the longer term trend and we’ve started to accelerate off of the lows set at the end of last August. Let’s take a closer look at this more recent time frame.
The markets really can’t sustain this type of upward movement for long. BUT, we must remember the quote attributed to Keynes—the market can remain “irrational” for a long time. And this is especially true when the massive governmental intervention is still working through the system.
The bottom line comes from our basketball analogy above. Patterns like the acceleration of price slope lines are very good indicators as to what the market is likely to do, and following them can help us locate pullbacks. As I learned in the basketball game, it’s the occasional break of the pattern that can lead to big payoffs.
So how can we play both sides of the trade? Here’s a useful general procedure:
- The higher probability play is to follow the pattern. In this case, play a short after a breakdown below the first or second slope acceleration line from above (depending on how aggressive you’d like to be).
- Then this becomes an “if not A, then B” trade. If it goes your way, fine. If not, you would reverse your position and go long on the breakout to new highs.
This type of strategy can help you play these market reversal points and take advantage of the predominate move (reversion to the mean) while giving you a chance to catch the directional move if the trend continues.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
Great Trading,
D. R.
