WSW Friday, June 19, 2009

Daily Notes

The market This Week

Remember that on any stock or ticker I say I’m looking at, you don’t just go buy it. You wait for a stock entry indication to get the best possible entry into the position.

Wall Street Week – Friday, June 19, 2009

OOTUS (Out Of The U.S.) took a break this week, but I think it is still working longer term. The currencies did win, other than starting off Monday with a large drop from the prior Friday. I’ve tightened my timing to more of a trade cycle just in case. See the racing stocks tab for currencies and for foreign emerging stock markets for the latest moves.

The Brazilian Real was a bit flat, while , The Aussie Dollar, and the Great British Pound and the Yen were all were winners on the week. That’s a clue as to where money is flowing. Follow the flow…

For now, take a look at this chart of VIX – the Volatility Index. Volatility goes “way high” in a crash. We have returned to near normal volatility.

VIX  - Volatility Index (not a ticker, you can't trade it)
VXX - Short term VIX futures ETN (a ticker you can trade)
VXZ - Medium term VIX futures ETN (a ticker you can trade)
FXY  Japanese Yen
SH  "Short" sell of SPY
SPY  S&P 500 benchmark

So this says you can expect fairly slow changes of direction from the market, but with a slight upward bias. (You could still have a dropout for a week or so – a trend does not eliminate the wobbles.)

Dollar Trade -Down - getting old

Dollar Trade -Down - getting old

Here we can see the “dollar down” trade is getting old. Don’t expect much action in the dollar for a while. The dominant trend is still “dollar down” but we will start having shallow stair steps. There might even be a couple of blips up from time to time as Central Banks around the world and the Fed intervene in the market.

Ideas of the Week

This week is about watching the positions I have on and stepping away from any that fall apart.

Hog Wild in China?

Hog Wild in China?

The Farms – where I bought a small part of HOGS, FEED, CALM and CVGW.

CVGW  Calavo Growers - Calif.  Avocados and veg.
MLP   Maui Land & Pineapple - with a tourism kicker... 

CGLA  Cagle’s Inc - Atlanta Georgia - Chickens and feed
CALM  Cal-Maine Foods - Eggs
SAFM  Sanderson Farms - Mississippi Chickens & Poultry
PGPDQ Pilgrim’s Pride in bancruptcy (trailing Q on ticker)

HOGS  Zhongpin Inc, - Chineese hog farms
FEED  Agfeed Industries - Chineese hog farms & hog feed
SFD   Smithfield - Huge intl. meat & hog producer
HRL   Hormel - Spam spam spam spam ... and a whole lot more

SPY   S & P 500 baseline

So now I’m watching these farms as a part owner of a couple of them!

What does the 10 day hourly chart say is happening now?

The charts on this posting are very large. On a Mac with Safari, “CTRL” and a mouse click lets you open them in another window for better viewing. Other browsers, YMMV…

Here’s a 10 day houly chart of the Dow 30 Industrials (DIA), the S&P 500 (SPY), the Nasdaq tech companies (QQQQ), the Russel 2000 (RUT), and both a Brazil fund (EWZ) and an Australia fund (EWA). It also has a ‘short fund’ (SH) on the chart so you can see what being short this market is doing right now. We also have EWO, an emerging Europe Austria fund, EWW for Mexico and IIF for India.

10 Day Hourly Interval Broad Market

10 Day Hourly Interval Broad Market

This is a live chart, so my comments will describe how it is now, but in a week it will be showing new data and a new week. Since I think it’s more important to be in touch with what the market is doing NOW than to preserve the historical chart, this is, IMHO, a reasonble choice. Just don’t be surprised if the chart I describe is not the one you see a few weeks from now!

We see that the U.S. market is in a flat wobble but with a slight bias to the downside short term. We expect to see that end post options expiration. If it continues to roll down, we have a “busted trade” and need to step aside and into cash fairly quickly. No need to be there. Several other markets have joined the flattening.

Other Asset Classes

The 10 day hourly asset class race:

10 Day Hourly Interval Asset Class Race

10 Day Hourly Interval Asset Class Race

SPY  S & P 500 US stocks
GLD  Gold
EEM  Emerging Markets
FXY  Japanese Yen
JJC  Copper
SHY  Short term bonds 1-3 year
USO  U.S. Oil
DBA  Agricultural basket
SLV  Silver
WOOD  Wood / Timber

Not much. Yen and some oil. Quadruple witching has a lot of things expiring…

So what happened in the Tech Market relative to world markets?

Recent months - A Tale of Two Markets

Recent months - A Tale of Two Markets

QQQQ  Nasdaq 100 mostly Tech companies
DIA  Dow Jones 30 Industrials
SPY  S & P 500 largest companies in the U.S.A.
MDY  Midcap  (Middle sized in terms of market capitalization)
RUT  Russel 2000 - a collection of 2000 companies from small to large.
EWZ  Brazil fund
EWA  Australia fund
EWO  Austria fund
EWW  Mexico fund

The tech sector is continuing to run. A bit slower than some of the Emerging Markets, but still nice and less volatile to the downside, too. We have a technical “trade in” call with the Slow Stochastic pointed up after a crossover to the upside. I’ve put on a short trade using the QLD leveraged Exchange Traded Note.

Were Bonds a good idea?

OK, lets take a peak at the Bonds Race.

Oddly, yes. But mostly the corporate bonds (LQD) and the long term government paper (TLT) and only by a tiny little bit. But only if you like lots of volatility as the various actions were held. It is still time to be out of bonds.

Money in short term paper only (less than 2 years) or TIP Treasury Inflation Protected Securities.

What sectors won this week?


5.97%  DJ US Health Care Providers Index	  
3.23%  DJ US Biotechnology Index	  
2.96%  DJ US Recreational Services Index	  
2.68%  DJ US Health Care Equipment & Servi...	  
2.44%  DJ US Aerospace & Defense Index	  
2.22%  DJ US Soft Drinks Index	  
2.10%  DJ US Drug Retailers Index	  
1.97%  DJ US Medical Supplies Index	  
1.92%  DJ US Health Care Index	  
1.75%  DJ US Beverages Index	  

Not much to work with. News flow was from Government about the Nationalized Health Plan being pushed and how it wont be so bad after all. I have a general trade rule of just stepping away when The Ministry of Stupidity Speaks. I just don’t trust governments to run businesses well.

This week had pretty slim pickings, and much of that was healthcare related. Count me out while congress is in session. Then we had some traditional “defensive” stocks like beverages along with some aerospace and defense. Of the whole list, the Recreational was most interesting with some movie theatre chains and cruise lines popping up.

What do the 10 Worst Performing Industries tell us?

-20.91%  DJ US Platinum & Precious Metals In...	 
-15.81%  DJ US Nonferrous Metals Index	  
-15.66%  DJ US Coal Index	  
-11.97%  DJ U.S. Industrial Metals & Mining...	  
-11.62%  DJ US Basic Resources Index	  
-11.50%  DJ US Mining Index	  
-11.48%  DJ US Aluminum Index	  
-11.08%  DJ US Consumer Electronics Index	  
-10.91%  DJ US Oil Equipment & Services Inde...	  
-10.86%  DJ US Oil Equipment, Services & Dis...	  

All the things we’ve loved the most. And in about a 4 to 1 ratio of new highs. That’s a tough tape. (Which is why I lighted up some days prior.) Why does this happen? Options.

When a lot of folks have a lot of money in options, and they are about to expire, the options are often sold off. This indirectly moves the price in the stock, depending on what volume there is of both. Similarly, if folks have a lot of gain in a stock, they will buy “puts” to “protect” their gains. This has a paradoxical effect. The Market Maker in options does not want to own the risk of selling that put, so they do a “conversion” that involves the short selling of the stock. They create their own selling pressure. So as options expiration approaches, expect things that have run up a lot to “revert to the mean” ( incidentally, when that put option expires, the market maker buys back the short, creating a small price bump). So I tend to sell a large part of my strongest positions, just to buy them back in the last day or so of the expiration week.

This is also a time to watch for “sector rotation” as money taken out of those (prior?) winning trades gets rolled into a new sector. So we watch for a roll over, a go flat, or a sector rotation and respond appropriately.

A Broad View

Finally, my “Rorschach Race” (under the “Racing Stocks” tab up top too).

EWJ  Japan fund
SPY  S & P 500
EWZ  Brazil fund
FXI  China fund
SH  Short S & P 500
RWM  Short Russel 2000
EPI  India fund
EWU  United Kingdom fund
EWP  Spain fund
EWG  Germany fund

We had a drop to flat across the board, with only the “short funds” winning on the week, but flat and trendless. The ‘failure to advance in India and Brazil is a bit of a worry, but may just be an artifact of our moment in time. We’ll see. If they don’t advance through that “double top” line, it will be time to start edging out. For now it’s just a worry point.

What Is Our Context

Let’s look at the S&P 500 largest stocks in America compared with some other kinds of assets; a couple of month maturity bond fund, oil, gold, Yen.

Asset Class Races

Asset Class Recent Race

SPY       The S&P 500 ETF
GLD       Gold ETF
USO       Oil ETF
FXY       Japanese Yen currency fund
SHY       1 to 3 year U.S. Treasury Bond fund
FXE       Euro currency ETF
SLV       Silver fund
BZF       Brazilian currency ETF
EWA       Austria ETF
WOOD      A wood and paper products fund

Yen won in the last few days. Everything else mostly faded. What did you expect in an options expiration “Quadruple Witching” week?

Things of gone flat at the end. Sell in May and go away? This argues for pulling money back from risky positions. I’m putting new money into those positions with large dividends (as discussed above) and more defensive stocks like HE Hawaiian Electric that has a nice modest dividend but is in a recovering (rising) position as folks realize that the rest of the world will continue to vacation in Hawaii (especially with a cheap dollar) and that takes electricity. Oh, and they own a bank too, so you get a bit of indirect exposure to Hawaiian real estate via the bank. I like HE at this point (own some and will be buying more). FPL (FPL Group – the old Florida Power and Light) and BOH Bank of Hawaii have similar “action” as two separate pieces with some in Florida exposure. If you live in Florida it would be a nice way to pay your electric bill to yourself ;-)

Anything more risky is being moved into a “trend trade the ripples” behaviour.

From here on out, for new positions, it will be harder to find rapid rises from June to September and you want some “dividend juice” if you can get it.

Stock Indicators – what and how

If all this talk of indicators is leaving you wondering what the heck I’m talking about, hit the link in the heading of this section and there is a bit of an explanation.

What about Brazil?

Brazil the EWZ ETF vs the BZF currency ETF

Brazil ETF vs Currency Race

Brazil took a hit this week. A while ago I had sold between 1/2 and 2/3 of my Brazil positions as they stopped the run up and options expiration approached. I’m bought back in fully now. The “double top” and DMI with red on top is a worry, so I’ve gone to faster trading using the “slow stochastic” and will sell out very fast if either Brazil or the Oils move against my.

What About Oils?

XOM  Exxon Mobil - Largest, U.S. / Global
COP  Conoco Philips - U.S.  with Russian exposure
CVX  Chevron Texaco - U.S.
PBR  Petrobras - Brazil
PCZ  Petro Canada
BP  British Petroleum
STO  Norway
E  Eni Italy
TOT  Total - France
RDSA  Royal Dutch Shell
IMO  Imperial Oil - Canada Oil and Oil Sands
SU  Suncor - Canadian Oil Sands
SSL  Sasol - South African Synthetic Oil Company

The more volatile Canadian tar sands stocks dropped the most, while the more staid Integrated oils held up better. I don’t buy into the notion that oil will be headed back down to $40/bbl. Just don’t see it. We’ll need to watch where the momentum takes the prices, but it smells more like a talked up “short oil against natural gas expecting convergence” when the reality is that natural gas will stay cheap for a while compared to oil since we just don’t have many folks running natural gas cars, yet. I took the flat end of the week as a time to round up my holdings a bit larger.

Some Near Oil and Oil Related Comparisions

Notice that the the Brazil ETF (named EWZ) tends to move with oil. That is because PBR Petrobras is a large part of it, and the rest tends to move with commodities in general (miners and steels). This week oil broke back above $72 again, but the news flow was full of folks “taking dirt” about the high oil prices (saying they would fall). I used this “dip:” as a chance to buy some more PBR and a bit of another oil toy SYMX Synthesis Energy Company.

This chart shows that USO, an oil ETN that holds futures contracts, has not moved up as well as XES, OIH or other oil services companies (that have almost exactly tracked the actual oil price). Why? Because of “contango”.

There are two conditions in a futures contract.

1) You pay more for delivery a few months from now. This is the “normal” condition, where someone gets paid to store the commodity. It is called “contango”. (Why? Don’t ask why, down that path lies insanity and ruin …)

2) You pay less for delivery a few months from now. This is called “backwardation” and it means that anyone with oil in storage has an incentive to sell it out now.

USO holds contracts for future delivery. Each month, it sells the present contract and buys those further out. In “contango” it is constantly buying expensive oil and selling it cheaper. That prevents it from exactly matching spot oil prices.

In some ways, XES or OIH make a better guide to actual oil prices. And a better way to “bet on oil”. (Personally, I like the oil trusts that pay out a monthly dividend, even though they don’t move as fast as the other oils, but a mix of both XES and PGH is better than either one alone.)

The REITS race – Real Estate Investment Trusts

PSA and HCP both are interesting here (Junk and Health Care – probably both will be with us for quite a while ;-)

The chart shows REITS bottomed, bounced a bit, and rolled down this week. I’m continuing to hold a small position in REITS with both mall REITS (RPT, PEI) and timber (PCL) along with some logistics (PLD). The best of the 4 is RPT, the safest is PCL, and the slowest but with the most potential (and risk) is PLD. No big positions yet, just a tiny marker.

PEI  Pennsylvania Real Estate - Mall REIT
VTR  Ventas - sr. care, nursing homes, hospitals
PSA  Public Storage - junk storage units
BXP  Boston Properties - office REIT on BosWash corridor  
HCN  Health Care REIT -  extended care, senior care, medical offices
HCP  Health Care Properties - ex. care, senior living, Dr. offices
PCL  Plum Creek Timber - lumber and trees REIT
SPY  S & P 500 broad stock market benchmark
RPT  Ramco Mall REIT
PLD  Prologis - logistics 

And Other Bottom Fishing

At any given time, you want to be rolling some of your big winners into positions that have a lot of head room. If something has doubled, it is not likely to double again at anywhere near the same rate. If something is down 90% (so it would take a 10 times growth to get back to that point) it is much more likely that it can take a “double” back to just 80% down… That’s a “bottom fishing” candidate.

Well, last week Aluminum stocks were showing big life off of a hard bottom. Raw aluminum (JJU) has moved up nicely and the Bottom Fishers are starting to pick up extremely expensive to build assets very cheaply. This week we had a ‘dip’ and I bought a little.

The Aluminum Race

The Chinese aluminum company ACH is running hard, partly because it is part of the FXI basket largely used as a “China Proxy” in the west, but I hold all Chinese positions to be a bit more speculative than I like, so I’d be more inclined to have a “small” in ACH and a “full” in AA (or split between NHYDY Norsk Hydro in Norway and KLU / AA in the US.) Let your risk tolerance be your guide. But as the world economy recovers, aluminum will move with it.

Conclusions and Likely Actions

I’m holding my OOTUS positions in Australia, Brazil, metals, miners, and ‘stuff stocks’. I have added some other sectors in Cell Phones, Recreation and Utilities. I’m mostly invested, but nervously watching a potential “double top” failure to advance to the topside (as a potential reversal / go flat marker). I will be evaluating what I hold and watching to buy more India if I sell out of something else and the charts are right. I’m still watchingNIB Cocoa, JO Coffee and MOO along with some ships to ship it in as potential trades. Oil will likely be volatile (when isn’t it) and giving some trade opportunities.

Click for Disclaimers, Disclosures, and Where To Get Charts

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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3 Responses to WSW Friday, June 19, 2009

  1. pyromancer76 says:

    Are you on vacation, Mr. Smith? I am missing the next installment, but I hope you are enjoying your “leisure”. Thanks for your efforts to educate.

  2. E.M.Smith says:

    I had family visiting and, frankly, had very little traffic happening, especially on the financial postings. This was disappointing for the simple reason that the 5 friends I had particularly told about these pages and for whom I did most of them (to help them through these markets) had largely not bothered to read them.

    It is a bit hard to get motivated to put in 4 or 5 hours of work to make a summary of financial markets with advice on how to handle it, and then discover that the people for whom you did the work don’t care.

    So I’ll do another page (tomorrow) but at present we are having a traders market. It’s basically sideways and just bouncing up and down on a day trade basis based on news events.

  3. pyromancer76 says:

    Your friends are the losers. They are missing out on excellent information on various markets — among a multitude of other subjects. I wish I could send more traffic your blogway. Yours is one of my daily — at least once — visits.

Comments are closed.