When to Ignore the Technicals

When the Fed chief says he doesn't care about a weak dollar, or the prices of commodities rising so that we can avoid deflation, you better believe the market will move higher on that. Except now EVERYONE is going to jump on the short dollar / long commodities trade. If you want to help inflate the bubble, jump on in, but I would suggest that you use options so you don't get burned when the bubble bursts.

Some of the only good economic news that I've been able to find:

The Baltic Dry Index has doubled in the past month. It's still more than 50% below its all-time high, but still nothing to sneeze at.

I'm not willing to participate in the market's ecstasy at these levels, but I am a little short financials and long-term bearish over the next 6-9 months.

Knowing When to Sell

This market has been overbought for the past three months. Unless you're Apple or Goldman Sachs, your company probably hasn't increased its earnings with increased revenue. Maintaining profitability by laying people off is only hurting this economy more.

Goldman Sachs' projected year end level for the S&P is 1,150. Let's say that 1,100 is close enough. If you're staying in this market for 50 more points, you're being too greedy. It's time to sell. Get out or buy some puts on the Russel 2000 to hedge your bets.

Forex

When searching for Forex information on the internet you are likely to find articles relating to trendlines and trendline analysis. Tom DeMark is a specialist in the field of technical market analysis and his best-selling book The New Science of Technical Analysis is chalk-filled with technical indicators and rationale to explain the market.

Derivatives

Derivatives are a class of securities whose price is derived from one or more underlying assets but may include additional factors such as interest rates, time to expiration and various other economic factors. The derivative itself is a contract between two or more parties to exchange a fixed amount of the underlying security at a given date and price. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized as risky investments because of their high leverage. 

This page will primarily focus on the two most common forms of derivatives: options and futures. The primary difference between options and futures is that options allow the right to buy or sell the underlying asset at expiration, whereas futures have an obligation to buy or sell the underlying asset at expiration.

Options
Options are a contract between two people for the right to exchange a fixed amount of shares (typically 100 shares per contract) of a given security at a given strike price on a given date. Stock options are issued as puts (downside exposure) or calls (upside exposure) and can be combined to create spreads, which are used for effective risk management.

Common options spreads:

• Vertical Spread
• Covered Call
• Collars
• Diagonal Spreads
• Backspreads
• Iron Condors
• Straddles and Strangles
• Butterflies and Condors
• Calendar Spreads

Futures
Futures are a financial contract obligating the buyer/seller to purchase/sell an asset--such as a physical commodity or a financial instrument--at a predetermined future date and price. A futures contract will include the type and quantity of the underlying asset in a standardized format that is traded on a futures exchange. Some futures contracts require physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, an oil producer can use futures to lock in a given price to sell his oil at and reduce risk (hedge). However, individuals and hedge funds are allowed to speculate on the direction of oil by purchasing or selling oil futures.

This page will gradually expand to include ways to dynamically hedge your derivatives positions and explain various ways of pricing options and futures premiums.

Fundamental Analysis

Fundamental Analysis evaluates a security by examining the intrinsic value of the underlying company, country, or financial sector through measuring economic, financial and other qualitative and quantitative factors. Fundamental analysts also study macroeconomic and microeconomic factors that effect the security's value.

The goal of fundamental analysis is to produce a value that can be compared against the security's current price, to determine if the given security is overbought or oversold.

This method of security analysis is considered to be the opposite of technical analysis. For an exhaustive reference of fundamental analysis, consider purchasing a copy of Benjamin Graham's Security Analysis.

Eventually, this page will contain live updates of stock analysis and resources.

Technical Analysis

Technical Analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts does not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

The majority of information provided on this site is based on technical analysis and these are several very common studies used to generate that information:

• MACD
• Stochastics
• RSI
• Bollinger Bands
• Guppy Multiple Moving Averages

Daily Levels

S&P 500



Note:
The Russell 2000 levels are calculated from the IWM ETF.

Disclaimer:
Quotes may be delayed up to 20 minutes. Information is provided 'as is' and solely for informational purposes, not for trading purposes or advice.

September 2, 2009

Today was a lackluster day. The market is looking forward to the employment numbers coming out on this Friday, so I would expect the market to drift lower until then.

On a side note, Agriculture stocks have been getting some attention recently. Big names like Potash(POT) and TerraNitrogen (TNH) are at decent valuations and might be worth taking a look at.

As the market consolidates, I wouldn't look to do much until Friday comes along.

Disclosure:
At the time of this write, I had no position in any of the stocks mentioned.

Summer Reading

Interested in learning more about options? Try reading one of these books:

• Jon, Sheldon Natenberg's "Options Volatility and Pricing" 
• Lawrence McMillan's "Options as a Strategic Investment"
• Nassim Taleb's "Dynamic Hedging"
• John Hull's "Options, Futures, and Other Derivatives."

Or these for trading:

• Taleb's "Fooled by Randomness"
• Benoit Mandelbrot's "The Misbehavior of Markets"
• Jack Schwager's "Market Wizard" series
• Roger Lowenstein's "When Genius Failed."
• "Liar's Poker," by Michael Lewis
• John Allen Paulos' "A Mathematician Plays the Stock Market"

The following is taken from a post by Chris McKahnn:

Finally, there is "My Life as a Quant" by Emanuel Derman. This one may be hard to find, as I got it from the local library, but if you like math, physics, or options theory, this is an excellent read. Fighting Paulos' efficient market discussion, Derman takes on the problem of the "volatility smile" (the differing levels of implied volatility for different strikes within a given month).

"I realized that the existence of the smile was completely at odds with Black-Scholes' 20-year-old foundation of options theory. And if the Black-Scholes formula was wrong, so was the predicted sensitivity of an options price to movements in the underlying index, its so-called 'delta.'"

Derman spends much of the book discussing models, their development, their uses, and their limits. His conclusions clearly have been largely ignored, as evidenced by the market turmoil at the end of last year, which many believe to have been caused by over-reliance on models.

"Models are only models, toy-like descriptions of idealized worlds. But no mathematical model can capture the intricacies of human psychology. ... I saw that if you listen to the model's siren song for too long, you may end up on the rocks or in the whirlpool."

August 28, 2009

Yet another slow day. China was down almost 3% last night and I would have expected that to have more influence in today's market action, but no dice. Lower consumer sentiment dragged the market for most of the day. Intel raised their guidance, which helped buoy tech today, but this market already has a lot of good news baked into it, and I think what we're seeing is things beginning to stall.

The McClellan oscillator is showing that the market is poised for a pullback:

 

Disclosure:
At the time of this writing, I had no positions in any of the stocks mentioned.