I’m going to do this posting in two parts. One, quick and now, to point out that JPM passed gas in church so is selling at a 7%+ discount for the best bank in the USA (world?) today. I’ve taken 1/2 a position (and will fill it out if price drops more) this morning.
Later today I’ll add some more broad value and bottom fishing ideas.
JPM J.P. Morgan Chase Bank
The “deal” here is that they had a “surprise” $2 Billion “paper loss” in their derivatives hedging portfolio. They had an offsetting $1 Billion gain in the trade portfolio, net a $1 Billion loss in 6 weeks. The basic problem was that their “Model” had one set of expectations about total risk exposure ( $ 1/4 Billion ) when reality was that the particular derivatives were a bit “mis-priced” ( i.e. the Efficient Market Hypothesis is often wrong…) and actual risk exposure was, well, $2 Billion.
Everyone was stunned as Jamie Dimon is held up as a detail freak with incredible focus on risk control. So folks are astounded to learn that folks can make mistakes at all levels and that even J.D. can miss something. ( I’d assert “Especially when he has to spend so much time hanging out in Washington D.C. as congress critters are looking to damage, er, pardon “regulate” banks even more.)
OK, a couple of numbers. Market Cap is down $12 Billion today. On a $1 Billion net loss. Panic and worry that Congress will Act (and usually they act badly). The assets of JPM are about $2 Trillion IIRC the “talking heads”. So the loss is about like a dollar loss on a $1000 asset base. Hmmmm…..
So we have a fire sale over ‘penny on the dollar’ loss?
Notice the BIG spike in volume? LOTS of folks just dumping. The “Market Maker” must buy, but can set the price. He will be setting it low enough to pretty much assure a profit once the flood ebbs. Time to make a ‘Friend Of The Market Maker’ trade and buy with him.
Also notice that price had made an entry a couple of months back in January. “Failure to advance” to the downside. SMA stack ‘merged’ into a weave. Price rises over it and barely touches from above. RSI was ‘near 20′ in August then started making ‘higher lows’. MACD went to ‘blue on top’ and with slope upward, then crossed above zero. Typical “Buy the bottom”.
Now we had had a nice run up and gotten a bit toppy. Volume at the bottom was very high. In the last couple of weeks it had gone low, and MACD had gone to “red on top”. Time for a ‘correction’ back to the SMA stack and a ‘buy the touch in the trend’… but the news hit and knocked price back to what it was in January. You don’t get that kind of chance to pick up 4 months of gain on the cheap very often.
Could it go lower on Monday? Maybe, but not likely. Usually there is a 2 or 3 day length to these kinds of things (as it takes 3 days for the ‘average rube’ to find out an panic sell). But this one has been so widely covered in the news and the “Talking Heads” have been so biasd to the side of “I’m buying”, that I think the Rubes will be offset by the professional bottom fishers. If it does go down more, I’ll be buying more. “Scaling in” to a full position (or perhaps even a double position). We’ve got a decent dividend (over 3%) with growth in a stellar bank at a discount. If it gets even lower in price, the dividend is a higher percentage. RSI is ‘near 20′, so a buy indicate for ‘soon’ anyway.
Realize that “Bottom Fishing” comes in two forms. A ‘fast trade’ where you do what the market maker does. A ‘slow accumulate’ for the long term. The Market Maker will be looking to exit his trade on Tuesday or Wednesday next week. So toward the middle or end of the week it ought to be going up some. You can ‘buy a chunk and flip it’ in a couple of days trading with the market maker. Often buying on the first 2 days of trading and selling on days 3-6. Or you can just pick up a very nice bank at a steep discount and with a dividend that makes bonds look crummy. I’ll be doing some of each.
Day Trade or Rapid Swing Trade Time Scale
On a trade timing, or Day Trade basis, it is important to look at a faster chart. These are 10 day 15 minute tick mark charts. All it takes is setting the controls to those values on the left hand side of the Advanced Chart option at BigCharts.com
There are two of these. The first one has “Bollinger Bands” on them. It compares price to the standard deviation, so they make wider bubbles when prices move a lot and the standard deviation expands. Notice how price ‘pulls away’ from whichever BB it is tracking at major reversals? Yet tends to track an edge during trends? The first chart also has a 40 period (or 10 hour) Simple Moving Average line. Price tending to ‘kiss’ it from below, then fall away. Until the bad news and the “Market Open” price plunged down. So we’d had a typical ‘surfing down’ that happens in a correction. Then the news hit and prices shot through the SMA stack on the longer term chart above. BB bubble blows out huge.
Typical of a ‘bad news’ event. IFF you think that bad news is just the start of things, you run away screaming as soon as you can. Notice that the typical pattern is a plunge at the open, a rise at about 10 am (Pacific Time) and then a drop back into the close. Best “Friend of the Market Maker” buy times are very early / at the open, or near the close. The market maker usually buys ‘way low’ at the open on bad news, then runs it up a buck or two to redistribute that volume to institutional buyers bottom fishing, then runs it back down a bit for the late sellers. Likely even lower Monday (depends on news over the weekend) and when the flood of sellers thins out (see those volume bars decreasing?) the Market Maker will slowly raise the price on any volume he had to absorb and carry for a few days.
If you look at RSI on this time scale, it’s a bit different shape, but the same effect. It said “sell” back on Tuesday a week ago (you get a ‘touch 80′ more often and the ‘lower highs’ tends to be too late for the best trade on fast charts) and it is now at 20, saying ‘buy’.
Notice that MACD on this time scale it is way below zero (as stock price is falling), but has had a crossover to ‘blue on top’. Slope is a bit shallow, so likely another day low to come, still, a fair bet to ‘buy now’ for the fast swing trade.
DMI has ‘red on top’, but it’s a slow indicator. DMI- has crossed over the black ADX line. That usually means ‘trend ending’, and if you look at the prices today, other than the typical low-high-low-again of the Market Maker buying-selling-buying, it’s overall a flat range. So again a reasonable indication. (Things that are horrible and not a reasonable risk to buy tend to: start down, try to get a bit of 10am rise, and just fall off a cliff.)
So as a ‘Day Trade’ (buy open sell 10am Pacific) or as a fast swing trade (buy open or close, sell in a few days when the Market Maker sheds inventory) it’s an OK indication on this chart.
Here’s another chart with Volume+, Momentum, and Rate Of Change ROC for another view.
Here you can see how volume is fading during the say. Panic is abating.
On this time scale, Momentum and ROC are very similar. You can see the general ‘below zero with dips’ of the slide back toward a ‘buy the touch in a rising trend’ moment, then the plunge on a surprise bad news. More interesting is how during today we have the Big Dipper at the open, then back to zero on the Market Maker Makes Lunch Money moment, then a shallower dip toward the close. Confirming lower downward momentum toward the end of the trade day. Those “higher lows” on Momentum and ROC excursions also tend to indicate “positive turn coming soon”. (But remember, on this time scale “soon” could be Monday Noon Lunch Money trade, not a week from now… )
OK, price goal? Look back on the longer term chart. It has a down trend. Project it forward. When the price hits that point, it’s a trade point exit. Perhaps even a bit before. IFF the price crosses that trend line and establishes a new upward trend, then you can establish a “trend trade”, but as long as the present trend is down, we’re just doing a ‘counter trend trade’ and that means you exit back at the trend line (or a bit before).
I probably also ought to note that this is a High Risk Trade Behaviour. Like trading BP on the oil well blowout. IFF you are a trader, you can do the ‘buy sell buy sell’ shuffle on the 10 d Hr chart. If you are a long term investor, the key is to know the risks. For BP, we had entirely unknown risks, largely in the hands of the courts and lawyers with pot stirring by politicians. For JPM, doesn’t look like any court issues and the politicians were already pot stirring so unlikely to change much on this news (i.e. ‘priced in’). It’s an internal trade boo-boo and J.D. is going to be spanking parties involved as needed. All limiting risk.
Realize BOTH of BP and JPM as trades work about the same. For investments, though, it’s all about those long term risk questions. If you can’t answer them, it’s better to step back. The general rule of thumb is “Never try to catch a falling knife.” so buying on this dip is a high risk trade, not for the typical investor. For them, you wait for a clear “cross the SMA stack” after a “bottom weave” moment.
A more typical “bottom fish” trade looks more like Natural Gas. The main ticker here is UNG a USA Natural Gas ETF. The comparison tickers are a wide collection of natural gas companies, “integrated oils” with a lot of natural gas exposure, pipeline partnerships, etc.
Live chart at BigCharts.com
Several things here. First off, notice how as Nat Gas plunged, the folks who produce or transport it went up nicely. More product being bought cheap, so more fees from transporting it…
At the end, UNG has a nice reversal. It had reached abut 20 CENTS / gallon of gasoline equivalent… So price is pretty darned cheap. With the Obama admin kicking coal when it is down, folks all over the place will be converting things to run on natural gas. Heck, my utility company sells me Nat Gas at about $1 / GGE and just running that through a home sized generator ( couple of hundred bucks) I can make electricity for lower price than the tariff they charge me. (Over 20 cents / kW-hr in my marginal tier). I can get about 6 kW-hr / GGE.
Now your average home owner won’t be doing that, but a whole lot of companies will. Expect to see buses and transport swapping. Even my local high school put in a cogeneration plant that uses the waste heat to keep the swimming pool warm. (Made by Capstone Turbine who are selling units like crazy, but the stock just lays there at about $1 and wobbles…) So if I’m putting in a large factory that needs electricity and heat, I’m going to be looking at cogeneration plant.
Honda DOES sell a small home sized gogen system, but only in the North East right now (as they need the home heating). In Texas and California we need one that makes A/C too ;-)
So there are a lot of ‘derivative trades’ off of a falling ticker, especially in a commodity. In this case, the commodity is bottoming, so the major trade comes in the commodity itself at this point. There is likely still some room to run in the transportation companies from higher volumes, but that’s not a bottom fish trade at this point. (One I mentioned some long time ago, TGP, is an LNG tanker company that’s now yielding over 6%. The USA is likely to be shipping more LNG for years to come. WMB is paying over 3% and KMP is just shy of 6%.)
So look at the chart. MACD crossing over zero to the positive side with a nice slope up. Momentum, after a long ‘below zero’ with only minor pips above making a nice strong ‘blob’ over zero. At the end of April, DMI going to “blue on top” and with the black ADX line over 30, it is a strong positive move.
Price itself is over the SMA stack (not on this chart). All in all a nice “buy nat gas” just off a bottom.
Typically there will be a ‘Dead Cat Bounce’ where this kind of rise drops back to the SMA stack and makes a ‘higher low’. Right now the short sellers are covering. That moment comes when the shorts are out and their buying pressure ends. That’s the safest entry point. I typically buy 1/2 a position for the DCB trade, then a whole position at the ‘retest of the bottom’.
This is a pretty good example of how to do a “bottom fish” trade. If something is falling, ask who wins from that. They will likely have nice rises. Companies that are largely owners of a product, like CHK, tend to fall with it. The plunge in the last couple of months form what looked like a bottom was due to some scandal about the CEO doing odd deals and self deals… so I’d not be buying CHK until that “headline risk” is dealt with.
COP – Conoco Phillips, just spun out Phillips as a downstream business.
That’s why PSX only shows up as that blue wiggle at the end and why COP takes that “dip” on the spin out. COP is more or less flat over the chart. The fall in nat gas being offset some by their oil holdings and the spinout news. But now? If nat gas makes a price recovery, that goes right to their profit margin. Not a very exciting stock (essentially flat over 5 years (but with a drop / recover in the market crash). PE is 5.6 and dividend just under 5%. For folks not wanting excitement, it’s better than a bond. And with some “upside sweetener” if natural gas rises at all.
Similarly (though backwards – a merger) EP El Paso and KMI Kinder Morgan (not KMP the Kinder Morgan Partners that’s related) are merging. So EP takes that BIG jump on the buyout news. EP and KMI have both either gone flat or taken a drop as UNG makes a bottom. So these look sort of like a natural hedge. Buying some of each of those dampens the average volatility of the package.
My “play”? It would depend on what you want to do. For me, playing the DCB on UNG is attractive. Oh, and starting to shop for a natural gas generator ;-) For the spouse, some COP and WMB look nice, but I likely need to do more digging into all the players and see if the old XTO energy (that turned into something else) is still yielding more. Then there’s a further derivative play in utilities that are getting a bit ‘spread’ out of the UNG price. (PG&E is paying a bit over 30 cents / Therm and selling at 80 / 120 depending on usage traunch.) One could also look for companies selling “CNG conversion” kits and / or the folks who retrofit coal burners to natural gas.
Construction companies that build pipelines, companies that make pipeline equipment, even shipbuilders who make LNG tankers all become places to “dig”.
But for now, I’m just doing the UNG trade. And swapping the stove top from electricity to gas ;-)
OK, more later…