Monday’s Trading
The market is overbought on the daily chart, and oversold on the hourly chart, so perhaps some low-volume sideways-to-upward consolidation action is in order before the next leg down. I think any move upward is a shorting opportunity.
Does somebody know if the BLS’s birth/death calculation is used for the unemployment rate? Gerard? Crash? I’m thinking that maybe the unemployment rate may carry more weight with the market than the actual number of jobs which is now a widely ridiculed statistic.
Watch the comments as I will be posting updates throughout the day.
July 28th, 2008 at 3:01 am
I am pretty sure the unemployment rate is based on the household survey. This survey does not use the birth/death garbage.
July 28th, 2008 at 4:04 am
Asia flat. Sydney and Europe down 0.5-1%. I think the two bank failures on the west coast on Friday has finally filtered into the news in Europe.
They tried to keep that quiet. Really insignificant failures, but it shows the nervous bulls are still very nervous. As they should be.
July 28th, 2008 at 7:11 am
ANZ (Australian bank) with large losses and warns of conditions ahead. But futures are up in the U.S.?
Moral hazard institutionalized by Congress and the President. Of course futures are higher.
July 28th, 2008 at 9:44 am
Thanks JT.
July 28th, 2008 at 9:46 am
SPY is trying to recapture $126. It may be able to do so since it is so oversold short-term. However, I don’t think it would be able to stay above there for long.
July 28th, 2008 at 11:00 am
SPY’s rally attempt has failed. Now it is struggling to hold above Thursday’s and Friday’s lows just above $125. If it can’t do that, then the next leg down will begin.
July 28th, 2008 at 11:14 am
“Does somebody know if the BLS’s birth/death calculation is used for the unemployment rate? Gerard? Crash? I’m thinking that maybe the unemployment rate may carry more weight with the market than the actual number of jobs which is now a widely ridiculed statistic.”
Matt,
No, the B/D calc is not used for the unemp rate.
Yes, the unemp rate definitely carries more weight.
The unemployment rate is manipulated by fudging with the denominator in the unemp calculation. The BLS will remove anybody who had their unemp benefits run out and/or are not actively seeking work.
After the monthly BLS report, go to Mish’s website. He will display a table that shows 2 unemp rates. Last month, the reported number is 5.5%. But another number showed 9.9%. Check it out this Friday.
July 28th, 2008 at 11:18 am
I just bought some SPY puts (SPYTU).
July 28th, 2008 at 11:20 am
OK, thanks Crash.
July 28th, 2008 at 11:29 am
Baltic Dry Index down another 1.4%. It is now down 12 days in a row according to my source.
Having said that, we need some more weeks to see if this trend in BDI is for real. I think it is, even though high-season is about to begin.
We’re going down.
July 28th, 2008 at 11:40 am
It is interesting that Treasuries and Gold are almost unchanged, and VIX is only slightly higher (although the VIX is accelerating as I type this).
Crash,
One thing about Mish (Shedlock): he has useful info, but he is such a perma-bear that you have to question his numbers sometime.
July 28th, 2008 at 11:55 am
I just took profits on my SPY puts because SPY bounced with strong volume at $124.75 and oil has lost its momentum. It was a large trade, so the 6% return I made was enough to make my day. I still have a short position in the futures though, and I will hold that for awhile.
July 28th, 2008 at 12:07 pm
SPY is bouncing, but by much less than USO is falling.
July 28th, 2008 at 12:25 pm
KOL is making another bear-flag pattern, so I just bought some puts (KOLTS). The bear-flag may take a few days to play out, but KOL should be able to hit $42 by the end of this week.
July 28th, 2008 at 12:47 pm
Matt, what are you going to buy back your S&P puts? SPY failed to hold the 124.8 level — fell through it like a knife. whats your interp of this?
July 28th, 2008 at 12:51 pm
Hi Tony G,
I’m back in the puts. The tape is very weak today, so I’m thinking SPY may crack $124.
Matt
July 28th, 2008 at 12:55 pm
Everyone is expecting a rally after this ‘wash-out’. However, events might change things.
July 28th, 2008 at 1:07 pm
I just took profits on my second SPY put trade for the day. There appears to be a lot of support just above $124, but I may re-mount the trade if SPY goes back down and starts eroding that support.
July 28th, 2008 at 1:27 pm
Matt, what do you think about buying some calls on SHY. i think s-t treasuries will rally and theres no way in hell the fed increases rates.
July 28th, 2008 at 1:42 pm
Tony G,
I see what you mean. It might be a good trade, but I don’t follow bonds closely, so I don’t have a strong opinion.
Matt
July 28th, 2008 at 1:51 pm
$124 is an important level for SPY because that is where the big rally closed on July 16th.
July 28th, 2008 at 2:09 pm
Matt
The unemployment number should be rough. Payrolls claims are understating the true level of unemployment, because recent college grads are failing to get jobs at an unprecedented rate. Since they have not worked a full time job, they are ineligable for unemployment claims, but they still show up on the unemployment numbers. Look for market shock at a nasty headline number.
July 28th, 2008 at 2:18 pm
The BLS stopped counting as unemployed workers who have been out of work so long that they have run out of unemployment benefits and are considered to have stopped actively looking for work, despite the fact that those workers are ready and willing to work. Before the Carter Administration, those long-term unemployed were counted in the headline figure — and it became an embarassment to the Carter Administration when unemployment soared due to the Oil Crisis and rolling recessions. Once they removed these “discouraged” workers from the count, succeeding administrations found that this statistical “trick” worked very well and it has been retained ever since then. That’s why the headline figure of unemployed is not a statistic which is comparable to the levels of unemployment before the mid-’Seventies. Back in the ‘Sixties, economists believed that 6% was an absolute floor below which the employment rate could not fall.
Here is the link for the BLS for total unemployed:
http://www.bls.gov/webapps/legacy/cpsatab12.htm
In U6 column, check “Seasonally Adjusted” then click “Retrieve Data”
Seasonally adjusted total unemployment according to the BLS right now is 9.9 percent.
The unemployment rate is calculated as follows:
COLLECTION AND COVERAGE
Statistics on the employment status of the population and
related data are compiled by BLS using data from the Current
Population Survey (CPS). This monthly survey of households
is conducted for BLS by the U.S. Census Bureau
through a scientifically selected sample designed to represent
the civilian noninstitutional population. Respondents
are interviewed to obtain information about the employment
status of each member of the household 16 years of age and
older. The inquiry relates to activity or status during the
calendar week, Sunday through Saturday, that includes the
12th day of the month. This is known as the “reference week.”
Actual field interviewing is conducted in the following week,
referred to as the “survey week.”
Each month, about 60,000 occupied units are eligible for
interview. Some 4,500 of these households are contacted but
interviews are not obtained because the occupants are not at
home after repeated calls or are unavailable for other reasons.
This represents a noninterview rate for the survey that
ranges between 7 and 8 percent. In addition to the 60,000
occupied units, there are about 12,000 sample units in an
average month that are visited but found to be vacant or
otherwise not eligible for enumeration. Part of the sample is
changed each month. The rotation plan, as will be
explained later, provides for three-fourths of the sample to
be common from one month to the next, and one-half to be
common with the same month a year earlier.
Link:
http://www.bls.gov/opub/ee/empearn200804.pdf
page 195
July 28th, 2008 at 2:26 pm
Matt, if you weren’t aware of this, Patriot Coal is supposed to be reporting earnings tomorrow. FYI re your KOL puts.
July 28th, 2008 at 2:30 pm
SPY has held up as USO soared during the last 15 minutes, so maybe $124 will be the low for today.
July 28th, 2008 at 2:33 pm
Hi Awake,
The market may be pricing it in right now. The actual report might be anti-climatic.
Matt
July 28th, 2008 at 2:35 pm
Hi Brian,
Thanks for the info. I had heard of the U6 number before, but I never actually went and looked at it. Very enlightening.
Matt
July 28th, 2008 at 2:41 pm
Paul,
The chart that Mish puts in his BLS Friday writeup is from the BLS site. It is the same thing that Brian is referring to in his detailed post above.
Crash
July 28th, 2008 at 2:47 pm
hahaha, PPT impotent with the covered bonds announcement. SPY just fell hard along with XLF. Matt, are you still against holding short positions over night?
July 28th, 2008 at 2:56 pm
Tony G,
Yep, that covered-bonds rally was beaten back alright.
No, I don’t mind being short over night, but the market is now short-term oversold, so I’m not opposed to taking profits either.
Matt
July 28th, 2008 at 2:57 pm
SPY is having a lot of trouble holding $124. With a tape this weak, I’m betting on another leg down before the close.
July 28th, 2008 at 3:12 pm
SPY has held $124 much better than I had expected. So, I have taken profits on everything except for my KOL puts. I’m not greedy, and milked this move very well, so I’m very happy with my trading today.
July 28th, 2008 at 3:17 pm
Crash,
I meant my statement about Mish as a general comment.
I read the Minyanville site quite a bit. The founder Todd Harrison has a very balanced view, even when he is wrong. On the other hand, Mish has posted quite a lot of posts there, often the same gloom-and-doom rehashed.
If your time frame is less than 3-months, it can be dangerous to pay too much attention to Mish because he only tells one side of the story. It is like standing in the middle of the street with a car bearing down on you. Sure, the car should brake, and the car probably will brake, but you probably want to move out of the way anyway… Another motto I take stock in that I’ve read there (I think Todd or Jeff Macke): “the market can remain irrational longer than you can remain solvent.”
July 28th, 2008 at 3:28 pm
Matt, if you don’t mind sharing i’d like to hear why you trade the index options rather than the 2x ETFs?
July 28th, 2008 at 3:36 pm
Tony G,
You didn’t ask me, but I presume it is because of higher leverage. This is especially important for technical daytraders. Take a look, today he closed a 6% gain on an option position. This corresponded to a 0.64% move (from his blog time stamps) of the SPY.
I trade options for the same reason.
July 28th, 2008 at 3:46 pm
Tony G,
Paul is right; it’s for the leverage. With options, I can make a lot of money while risking only a small amount of my capital. I may use the double ETF’s again in the future, however I am much more confident with my timing now, so I feel more confident using instruments with higher leverage.
Matt
July 28th, 2008 at 3:48 pm
SPY has lost $124, and is now eating away at the gains of the big rally on July 16th. The bulls must be about to faint.
July 28th, 2008 at 4:00 pm
Matt,
I love your blog, and am learning a lot from the discussions and watching your trades. I haven’t said much because I clearly know a lot less about this than most of you guys, though I have made a little money along the way.
I was wondering if you would share a reading list for learning more about short-term trading. The money I have made has been in the long-term inverse ETF’s, but I have an interest in taking a small part of what I trade with and beginning to do some short-term or day trading.
Thanks again for your blog and your insight!
Toby
July 28th, 2008 at 4:01 pm
Tomorrow is the last chance for the bulls
July 28th, 2008 at 4:30 pm
Hi Toby,
Glad you like my blog. The best book for technical trading is “Technical Analysis of Stock Trends” by Robert D. Edwards and John Magee. You can get it from Amazon. It’s a hundred years old, but it still works. The patterns that appear on intra-day charts are not as powerful as the ones that you see on longer-term charts, but they often work well. The book also covers support and resistance levels, which work very well in day-trading.
That’s the only book on technical trading that I’ve read so far, and I haven’t even finished it yet.
Matt
July 28th, 2008 at 4:42 pm
Paul, vix still in a downtrend? Is this where s&p goes to 1,330 and vix below 20?
Still short.
July 28th, 2008 at 4:50 pm
There is a trendline running across the June highs on the SPX using a HLC bar chart. The rally off of the lows went above the line, then came back to touch it at 1250, rally and then came back to touch it again on the close today. The last two touches were from the top. Could the drop from 1290 to today’s close be a B wave in an ABC corrective sequence? I’m not trading it; just looking at the evolution of the price pattern and making an observation. We’ll know tomorrow if this has any significance. During corrective periods I always expect treachery from the market.
July 28th, 2008 at 6:30 pm
http://stockcharts.com/h-sc/ui?s=SPX&p=D&yr=0&mn=6&dy=0&id=p72929845222
SPX 1234-35 is lower Fibo support of the rally from 1200 to 1291; break here and we test 1200 with a weekly-close support at 1168-79; hold the close and the near-term target zone is still 1270s to 1300s-20s.
http://stockcharts.com/h-sc/ui?s=XOI&p=W&yr=3&mn=0&dy=0&id=p80910853593
Keep watching the emerging H&S cyclical top for XOI with the neckline at 1295 to 1324-31 (potential resistance) and a potential measured move target of XOI ~900s-1000. (The move in oil and energy stocks from early ‘07 was a classic faster-than-exponential blow-off trajectory of a bubble.)
http://stockcharts.com/h-sc/ui?s=BKX&p=D&yr=0&mn=6&dy=0&id=p23087720641
BKX 56-59 is next Fibo support from the Treasury- and SEC-induced low; break 56 and we test the 41 low with a target of the 30s; hold 56-59 and the potential target range is the mid-90s.
However, the BKX technicals imply the bearish outcome.
Monthly close resistance is SPX 1280, and the weekly resistance is now 1257-60.
The larger secular bear market self-similar structure implies that the SPX is now aligned with Japan in ‘97-’98 and the US in ‘73-’74, ‘37-’38, 1892-93, and 1836-37.
July 28th, 2008 at 6:52 pm
Very low volume today. Dangerous to get too bearish here.
July 28th, 2008 at 6:56 pm
Larry,
The VIX is mean-reverting, so when it dips too far down, it will eventually come back up - usually accompanied by a 150pt+ downward move in the Dow. Even in a bear market, the market will have updays. When the VIX gets far above its mean, then that is an oversold signal.
The nice thing about the VIX in a bear market is that it trends down and spikes up, and that the ITM far-expiration options do not experience time-decay. So if you want to go long in a bear-market rally, you can buy some ITM VIX options. As the market goes up, the VIX options will lose some value. However, when the bear comes back out of hibernation, the VIX options will regain their lost value.
Today the VIX went up 6% (http://finance.yahoo.com/q?s=%5Evix). If it had spiked up, then panic may have been in the books, and I would expect an upward correction to the S&P. As it was (VIX reversion to the mean), the market could go wither way.
The VIX is a secondary indicator. So I did write that it was in a downtrend, but the VIX doesn’t usually trend for long.
I’m short the S&P, but long some stocks (MSFT).
Paul
July 28th, 2008 at 7:15 pm
Gerard,
That trendline is also the same one as the lower, black line of the broadening pattern chart that I posted last week in Ride the Wild SPY. The market should be able to bounce off of it. If not, then we probably proceed directly to test the July 15th low.
Matt
July 28th, 2008 at 7:22 pm
Rich,
Thanks for the charts. I notice that the XOI’s chart is a lot different from the XLE. If the XOI is destined to roll over like the XLE, how do you play it? Is there an ETF that tracks it?
Matt
July 28th, 2008 at 7:27 pm
Crash,
The short-term models that I use show that we are oversold on the SPX and NDX, so I wouldn’t pile on the short side here either. However this low volume is interesting. If bids are being pulled, stocks can just float down; they don’t actually have to be pushed down with heavy selling. Maybe this is how we will get the big washout that everybody keeps talking about. Just something to keep in mind.
Matt
July 28th, 2008 at 8:54 pm
Brilliant team here. Nice intro too Matt.
I might take a very few chips off the table later today. Inflated GDP numbers to come before the job figures?
Not going long though. That air-pocket might continue.
July 28th, 2008 at 9:20 pm
Thanks Larry.