Friday’s Trading
Recession Priced In? Ha!
Some analysts are saying that the market shrugged off Thursday morning’s bad economic news because the recession is priced in. I don’t believe that for a second. It seems pretty obvious to me that large hedge funds pushed prices back up to where they needed them to be profitable on their options positions. And that is easy to do in thin summer trading.
So perhaps this is a way to play Friday morning’s three economic reports. If they push the market up or down, fading the move, and depending upon the hedge funds to bring prices back to where they were might work. For example, XLF was pinned right around $21 all day Thursday. If it pops or drops Friday morning, it should eventually get back to $21. I’m using the XLF as an example because its volume was very light on Thursday, and that makes it easy for large hedge funds to control it.
I probably won’t make any such trade, but I will be watching to see if the concept works.
The Crashing-Commodities Rally
When oil traders get margin calls as oil falls, they are forced to sell other things. If they had been playing the wider commodities bull, they were probably forced to sell things like KOL, UNG, POT, etc. So oil drags down everything else.
Another large part of the commodities play was investing in natural-resource countries like Brazil, Australia, etc. So, when falling oil forces those positions to be liquidated, that creates a tidal wave of money flowing back into the USA causing the dollar to soar.
Australia and Brazil (EWA and EWZ) have the same chart as oil (USO).
Other traders who were invested in these areas, but did not get margin calls, probably have simply fled back into non-commodity areas such as tech and financials.
So, a stab down in oil prices produces a stab down in all commodities, a stab down in natural-resource countries, a stab up in the dollar, and a stab up in non-commodity-related stocks.
The analysts who are starting to believe that this bear-market rally is for real are living in a dream world. When this commodity money stops sloshing around so violently we will see what the real deal is.
Of course, if the rally continues, there is always the possibility that it will suck in more-and-more suckers. If the public comes in as it did during the March-to-May rally, then this rally can keep going.
Iran Back on the Front Burner?
On Thursday, the Russians said that they were suspicious that humanitarian deliveries to Georgia from the USA might contain military equipment. Maybe the Russians will try to prevent the flights by bombing all the airports big enough to handle the cargo aircraft.
The Russians seem intent on preventing the humanitarian aid. On Thursday, the Wall Street Journal reported that the Russians were allowing the South Ossetia militia to rough up UN aid workers; firing shots over their heads, stealing their vehicles, etc. That’s not a good sign.
In any case, this pissing contest with the Russians is not going to work any wonders for getting them to cooperate with pressuring Iran. In fact, the Russians might retaliate for what they consider to be American interference in Georgia by increasing assistance to the Iranians. Selling them more nuclear gear, military equipment, etc. The Israelis are particularly concerned with the Iranians getting the Russian S-300 air-defense system.
Israel was also deeply involved in Georgia, financing a pipeline, training the Georgian armed forces, and selling them military equipment. So maybe that explains whey Russian naval vessels began calling at Syrian ports a few months ago.
Since it looks like the Russians are intent on giving the Americans and Israelis a black eye in Georgia, maybe they will be more motivated to return the favor with a strike on Iran. In fact, the USA has already retaliated against Russia by speeding up the missile-defense deal with Poland - another issue the Russians are very upset about.
So, events are escalating. Maybe it will boil over in the form of an American/Israeli attack on Iran that sends oil soaring. So far, the market has ignored this crisis, but it is actually getting worse, and it can flare up at many different points since the Russians have been making their presence felt all over the world. They staked a claim to the ocean-floor mineral rights at the North Pole; are assisting Iran; are mildly threatening Israel; are complaining loudly about the USA’s involvement with its former provinces and satellites, etc.
Watch the comments section for updates throughout the day.
August 15th, 2008 at 2:16 am
Matt,
Given the Qs and Spy are overbought the last few days, what will typically happen post option-expiration (next Mon, Tues)? Will it maintain its upward bias or reversal?
-Kevin
August 15th, 2008 at 6:14 am
i’m trying for 1 % more qid today @ 37.80 - that bid for now, may adjust it higher.
August 15th, 2008 at 7:56 am
Gold and silver way down this morning. Any thoughts, anyone?
August 15th, 2008 at 8:40 am
I think your analysis of “georgia” and “iran” and “usa”
may really reflect your biases more than the facts.
i believe the events support another viable view regarding iran
and u.sa. which is more constructive.
i will point out that you must explain why an invasion of georgia
resulted in no bounce in crude to explain the more constructive
view of usa to iran relations.
August 15th, 2008 at 8:52 am
I think the no bounce in crude WAS explained - margin calls, perhaps a herd stampede out of a sector perceived as yesterday’s trade, a short term rise in the US dollar, etc.
As far as events in Georgia, whatever one’s view is, perhaps speculators haven’t priced it in, I’m not at all sure why that would be though. Of course that doesn’t mean it won’t be priced in at some point…
August 15th, 2008 at 9:04 am
matt….regarding your israel /usa attack on iran……dont be surprised if it happens soon…..ie before the scheduled shipment of state of the art surface to air missels arrive in iran from russia in late august………
August 15th, 2008 at 9:14 am
Here’s something I just noticed: May options expired on Friday May 16. Spy topped out the following Monday.
August 15th, 2008 at 9:38 am
IWM strong today leading the charge
August 15th, 2008 at 9:49 am
bob,
USA/Iran relations are constructive - now. I am saying that a new cold war with Russia has the potential to change a lot of things. A cold war works like this: the USA and Russia do not fight directly, but sponsor proxy wars among smaller nations. Israel/Iran seems like a candidate for such a proxy war.
Matt
August 15th, 2008 at 9:53 am
Matt-
I just made my Feb 2009 SPX bet. And
starting next week my focus will be on
a move to Australia. So, if it helps you
save resources, you can delete my ability
to post on the BLOG. THANKS!!! for all
of the excellent trading info. I wish you
and everyone on the BLOG every success.
MEB
August 15th, 2008 at 9:58 am
Someone bet the farm on oct qqqq puts(47)look at the volume
August 15th, 2008 at 10:02 am
It looks like XLE/XLB/XME refuses to pick up the batton today because of falling oil. I don’t think XHB/XRT/XLF can run the next leg, particularly since XLF’s Thursday volume was about 1/2 of Wednesday’s.
I picked up a little JPM position, but I wasn’t sure what the market will do, so I will add to it later in the day.
I’ve got a question for the group: what does
“Retained beneficial interests in securitizations (first-loss or equity tranches)” mean on a balance sheet?
August 15th, 2008 at 10:02 am
After
I bought a little GLD at the open, if $GOLD closes below 800 I will close it out.
August 15th, 2008 at 10:06 am
POOF
August 15th, 2008 at 10:11 am
Pooch,
I see that, good eye. Based on the prices and matching volume, I’m 95% sure it is a spread bet:
buy QQQQ Oct 47 put @ $1.32
sell QQQQ Oct 43 put @ $0.42
cost: $0.90
Volume: 25,000+ contracts -> $2.3 million
Break-even: QQQQ @ $46.10
Max profit: QQQQ +$8 million
Max loss: QQQQ >=$47 -100% -> -$2.3 million
August 15th, 2008 at 10:13 am
correction:
Max profit: QQQQ <= 43 $7.8 million
August 15th, 2008 at 10:13 am
i switched my QID order to mkt just now and paid 39.05.
coulda shoulda woulda bought when it was lower, but then again i think anything under 40 for qid will likely be okay at some point.
August 15th, 2008 at 10:13 am
correction:
Max profit: QQQQ <= 43 $7.8 million (+340%)
August 15th, 2008 at 10:22 am
Missed the Oct 43
August 15th, 2008 at 10:26 am
My “reversion to options pinning” idea above worked out pretty well this morning. Too bad I didn’t play it. Maybe next time. Or maybe next August when volume is very light again and the big options traders can have their way with the market.
August 15th, 2008 at 10:27 am
what time do options expire? 1:00?
August 15th, 2008 at 10:31 am
Pooch,
Still a great observation, and still a huge bet on QQQQ downside.
I always look for pairings on big option plays. Sometimes it is using different months, or combining puts and calls. They are very hard to find in front-months, but quite noticeable on later months because of the volume. 2-3 days ago I mentioned a GIANT Oct VIX bet, that was even more leveraged than this one. I’m following their lead and concentrating on October downside plays, looking at short-term trades for entries into Oct puts. Sep puts are a bit riskier.
August 15th, 2008 at 10:33 am
Aug equity options trade until 4pm. I don’t remember if they settle (get automatically exercised for shares) today or tomorrow.
Some Aug index options (such as VIX) trade until next Tuesday, and get settled on Wednesday morning.
August 15th, 2008 at 10:33 am
Kevin,
The short-term model that I use shows the market as being neutral, rather than overbought at the moment. I think options-expiration has held the market back from hitting an extreme overbought condition.
Matt
August 15th, 2008 at 10:42 am
Matt,
Technically, how does XHB look to you? Obviously there is strong resistance at $20, but it looks like the recent down days were preceded by up days on higher volume.
Fundamentally, I think the housing market is in better shape than the financial market.
August 15th, 2008 at 10:59 am
I was wondering why XLV and XLP were up, but JNJ was down: UBS downgraded them. Here’s the funny part:
“Fiscal 2009 EPS estimates lowered to $4.69 from $4.70. Price target raised to $77 from $73.”
Raise price target and lower rating, okaaayyy…. Well, they did lower earning estimates by 0.2%…
August 15th, 2008 at 11:03 am
MEB, I just received Atlas Shrugged in the mail. Have a good one in Australia and join us from there.
I like your trade. Good timing and good time horizon. Hey, we can’t beat all the well paid intellectuals on Wall Street in trading, but we sure as hell understand economics better than them. After boom comes bust.
And that’s why we will make more moeny than them in 2008/09.
August 15th, 2008 at 11:08 am
If you see XLF pinning at 21 today for the close…..wouldn’t that almost necessitate that if SPY were going to pin….it would be at 129…..not 130? My theory is…..how can financials drops that much from this minute to the close……without SPY dropping by more than $.08 from here?
CHEERS!
D
(full disclosure: long a shit ton of SDS at 63.82….just now)
August 15th, 2008 at 11:15 am
THANKS!!! Larry.
Hope you enjoy Ayn’s book.
I’m betting big that the second DOW
H&S target is hit by Feb 2009.
MEB
August 15th, 2008 at 11:18 am
Excellent. VIX marginally below 20. Oil falling towards 100.
August 15th, 2008 at 11:26 am
On CNBC now. People are saying that growth is still very strong in emerging markets.
If anyone wondered: They are wrong. The boom and bust is bigger there.
August 15th, 2008 at 12:29 pm
Paul,
XHB looks good on the weekly chart too. It is holding its uptrend line, but Monday’s high-volume reversal looks like it might be a big problem. XHB looks like it intends to test the $20.20 area again though, and if it can break through, it should be able to run right up to the next resistance area at $21.
Matt
August 15th, 2008 at 12:35 pm
David,
SPY and XLF don’t always trade in lockstep.
Matt
August 15th, 2008 at 12:36 pm
meb 820,
I just got my copy of Street Smarts and will start reading it over the weekend. Have a good trip to Australia.
Matt
August 15th, 2008 at 12:40 pm
Understood….not in lockstep…but do you still see a 21 / 130 pin combo for the two?
Full disclosure: I closed the SDS for a nice gain…..and changed horses to QID after that last bump up. In at 38.84
August 15th, 2008 at 12:47 pm
I guess my GLD will not be open by COB today, unless GOLD has one incredible turnaround. Should have listened to Dennis Garthman (SP) the other day that said gold was very weak if it didn’t go up on the Russia/Georgia conflict.
August 15th, 2008 at 1:06 pm
David,
I’d be very surprised if stocks made any large moves this afternoon.
Matt
August 15th, 2008 at 1:10 pm
While it looks like stocks are failing to rally off of falling oil, I think the large options players are holding stocks down. If that is the case, stocks should rally on Monday if oil stays flat-to-down.
August 15th, 2008 at 1:14 pm
Larry,
“Hey, we can’t beat all the well paid intellectuals on Wall Street in trading, but we sure as hell understand economics better than them.”
Two things:
1) Overconfidence leads to emotional vs robotic trading, which isn’t good as Matt said
2) Wall Street prices the market, not us. It is very easy to be “right” and lose lots of money. That is why I (usually) don’t go for options with less than 30 days on them. Think about the guys (I wasn’t one of them) pointing out the subprime/housing problems in 2005/2006. Or think of the tech bubble in the late 90s.
Of course, if you time frame is far enough out, then you’ll do well.
August 15th, 2008 at 1:33 pm
Punch up a weekly chart of the Australia ETF, EWA. There is a massive head-and-shoulders top spanning over a year-and-a-half.
August 15th, 2008 at 1:35 pm
Matt,
There are two ways to look at things (Oil is dropping, but stocks are not rallying):
1) option players are pinning the stocks, holding them down
2) no buyers -> rally over
Case 1 would imply a battle of sorts, so even if stocks didn’t move much, we should still see good volume. So if stocks don’t move on low volume, I think Monday is down. If they don’t move on high volume, then Monday will likely be up.
Of course, global conditions over the weekend could override either of these moves, but I don’t see the Georgia situation improving that quickly.
August 15th, 2008 at 1:44 pm
I see it, Matt, but it looks like the easy money on EWA was made a few weeks back on that chart. How much farther down do you think the pattern predicts?
Take a look at a weekly chart of UNG. Talk about a hot potato…Looks to be bottoming, maybe at $36?
August 15th, 2008 at 1:53 pm
Also, I think the dollar bottoms near 145 (FXE) and fills the gap between 150-153. More so than stocks, currency valuations are more of an art than a science, which would make patterns stronger.
Actually, here’s something: FXE has traded from 135 to 160 and back down. However, it has never traded between 150.81 and 150.97. It gapped this on the way up in February, and gapped it again on the way down again in August.
August 15th, 2008 at 2:06 pm
For those hurricane watchers on the blog, here is a good site with NOAA streaming images of the storms and there patterns from Africa’s coast to the Carribean
http://www.stormcarib.com/goes.htm
August 15th, 2008 at 2:08 pm
Should have added, need to scoll down a bit on the page to see the gulf aera.
August 15th, 2008 at 2:53 pm
Are you guys getting tired of watching the paint dry on the SPX today?
There are some very interesting chart formations out there:
SPX daily– The upper and lower trend lines show a well formed ascending but contracting wedge. No real loss of momentum yet, but we should trade in a narrowing range and hit resistance at the 200 day moving average now at 1357. I’m a bit skeptical that we’ll make it that far but we’ll see. A break of the lower trendline will lead to a very strong and quick decline.
NYA daily – has a well formed contracting triangle with a flat bottom and declining top. This is a bearish formation. We are approaching the apex. This chart looks much weaker than the SPX and speaks volumes about the real support in the market.
RKH is rolling over as the daily volume declines from the mid-July highs. Not good for the banking bulls.
XBD is losing momentum – less strength on this move up than the March-May push; possible non-confirmation.
XOI has lost downside momentum on the daily chart; no sign of any upside move yet. It’s hard to see much upside with commodities still in mid-flush.
OSX – Downside momentum continues
XCI – nice recent momentum but consolidating at the 850 level. Is this a pause before going higher or a non-confirmation top? Stay tuned.
It may be too early to call a top to this correction, but I think I’ll close out my 25% long position that I established July 16th. There isn’t all that much left on the upside: max 4% but probably a lot less.
Regards,
August 15th, 2008 at 3:00 pm
Paul,
For a head-and-shoulders pattern, you subtract the peak from the neckline to get a downside target. So, EWA peaked at about $35, and the neckline is at about $23, so you would look for another $12 down for a downside target of $11.
Maybe it won’t play out that way, but I find the chart fascinating because it is so perfectly formed over such a long period of time. It is very bad news for Australia, but also for traders who are thinking that this is just a temporary pullback in commodities.
And of course, Australia exports a lot of natural resources to China, so it speaks volumes about China too.
Matt
August 15th, 2008 at 3:13 pm
Paul,
UNG’s downside momentum has certainly slowed, and it has bounced off of the $35-$36 area twice before, so it should be able to catch a bounce in the next couple of weeks. USO has a very similar chart: decreasing downside momentum and a pretty good support level just a few points down.
Maybe a bounce in energy will put an end to the bear-market rally in stocks.
Matt
August 15th, 2008 at 3:38 pm
Gerard,
I would call the NYA chart a symmetrical triangle, which is a neutral pattern. It could improve into an ascending-triangle. The daily TICK has also been in a steady sideways range, so that looks neutral also, though it has lost a bit of momentum.
On the weekly chart, this bounce in the NYA looks like a bear pennant.
Matt
August 15th, 2008 at 3:54 pm
Note:: A strong cycle went live this afternoon into Tues morn….nat gas, oil, gold and fert prime reversal candidates during this period.
If dollar corrects but lightly look for more strength into yr end—will be massive headwind for equities and continued liquidation of “stuff” post cycle influence.
August 15th, 2008 at 4:00 pm
Matt, thanks for the read on XHB and the info on the H&S pattern. I agree that says a lot about commodities. Of course, it may take a long time to finish the pattern.
Gerard,
Yeah, this is boring. The most excitement was watching my MBI position go against me on a 9% move (after a 20% yesterday). They have a lot of info on their website, including an intro to “Mark to Market” exposure.
http://www.mbia.com/investor/selected_exposures.html
They even point to the ABX index (the link I provide yesterday) which shows “suggests that losses will be north of 40% (referring to the $0.60 price). ” They go on to interpret that as “the index is saying that 40% of all borrowers who got these loans in 2006 will be foreclosed out, and the lenders will lose ALL THEIR MONEY.” However, this shows a basic misunderstanding of the ABX. The underlying securities are CDO tranches that will generally be worth either 0 or 100% at maturity. Some of these will be worth 0 if as few as 10% of the underlying mortgages default. So the ABX is really saying that 40% of the underlying CDOs will default, which will be caused by mortgage default rates much smaller than 40%. So either MBIA doesn’t know what they are talking about, or they are deliberately trying to mislead investors. Either way, I’m comfortable holding my position.
August 15th, 2008 at 4:16 pm
Well, this rally has gone farther than I thought, but then again, so did the March-May one. I’m going at this much more carefully this time, thanks to your blog, Matt.
Anybody wanting some light weekend reading can take a look here:
http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx
Much more informative than a quarterly earnings statement. I think I already found something very interesting there, but I haven’t had a chance to fully check it out.
Have a good weekend,
Paul
August 15th, 2008 at 4:54 pm
Matt,
RE the NYA, are we looking at the same picture? I’m drawing my flat lower line right around the 8250 level and my descending line from the May high then the June high. In any case, it’s good to be challenged by a different perspective. That’s why chart interpretation is an art form, right?
After thinking about it, I think the SPX and the volume pattern is telling a bearish near term story. I took a 22% leveraged short position against the SPX at the close. I can’t always watch the market during the day so I tend to take my positions a bit early. In any case I work with the intermediate and long term trends. If we move up to the 1340 level on the SPX in the next couple of weeks I’ll be inclined to add to the short position.
On an intermediate level we haven’t relieved enough of the oversold condition to make this a low-risk shorting opportunity. If I’m right on a near-term drop in the SPX, I suspect there is a good chance that we’ll find that it is just evolving into a somewhat more complex corrective formation. One step at a time though. First we need to break the lower trend-line on the SPX.
August 15th, 2008 at 9:10 pm
Gerard,
Everybody draws their lines differently, but I have my NYA line begining at the July low, so it is sloping upward.
Before shorting the S&P, I want to see a high-volume crack of the uptrend line like we had on May 21st. And before that happens, we should see the XLF break down like it did on May 8th. You may be right, but I want to wait for the cracks to appear first.
Matt