Sunday, October 30, 2011

The Stealth-Dip Hypothesis

 
The Dow/Gold ratio measures the price of the Dow in terms of how much gold, in Troy ounces, it takes to purchase the Dow. Normally, economists look at this ratio to compare market valuations over large periods of time for which inflation is in play, (e.g. to compare valuations in the 1920's to today.) I have begun to look at the Dow/Gold pricing for a different reason: to get a view of the market that is independent of central bank monetary policy. The thinking here is that quantitative easements have the effect of artificially pushing down the valuation of the dollar, thus, the stock market is exhibiting artificially high prices and is masking the much awaited second dip in the market.

Dow/Gold on 10/29/2011
In the above PairRatio study I plot the dow futures (/YM) divided by gold futures (/GC) (Note: In order to get the plot of the ratio it is necessary to enter the difference between the two futures so I've hidden the main-chart plot and just show the PairRatio study.) I've drawn in the level of the infamous Mar 6, 2009 low of the ratio and as you can see the market dipped that level in August during the S&P downgrade fiasco. However, the market has since touched above the 09 low-level which, so far, is supporting my hypothesis of a stealth 2nd dip.



Saturday, October 29, 2011

Presidential Cycle Update

The year before the presidential election year is well-known for its bullishness. This can be seen in charts of data going back a hundred years or more (as the people at SeasonalCharts can show you.) My SeaPro5 study can show the average trend of a four year cycle going back 20 years (5 election seasons) on a weekly chart, projected from an anchor date. So once a month I like to post an update of where we stand wrt this larger time frame:
Seasonal Projection 4 Year Presidential Cycle
The last four weeks have been strongly bullish. The 1227 resistance level was overcome two weeks back after some challenges from bears resulting in the bar with a long lower tail. Then, last week we punched up through the year flat-line (dashed blue line at 1257.54) with what techicians call an "energy" bar, signifying that bears are licking some wounds. I am somewhat surprised that the year flat-line did not turn out to be a resistance level since it was a confirmed support level and broken by a similar energy bar (which just goes to show that TA is not a hard science.) The current projection has the market finishing the year up 100 points or so in the neighborhood of 1350.

Tuesday, October 25, 2011

XOM Wisdom?

My pup has 10 shares of XOM from Nonny and calls for advice. "Should I sell it now or wait?"  Here's my chart on XOM:


XOM with Seasonal Projections.
 My advice: you might get another dollar or two if you sell tomorrow afternoon - into the final pre-earnings hours - and maybe as much as 5 dollars if you wait for December but if you really need the money (and he does) then sell now and don't look back. With those dogi's setting up we could easily be trading down $2 tomorrow.

Wise advice?

Sunday, October 23, 2011

My MA

I recently shared a bullish diagonal trade on MA claiming strong seasonality, so I wanted to show you what I am seeing:

MA with Seasonal Projection
The purple line is the projection of seasonal performance averaged over the last 5 yearly seasons for MA as produced by my SeaPro5 study. The green shaded area represents an area of high probability for a trade and is bounded on the upper side by .3 x standard deviation of the seasonal data (you math wiz's should prove to yourself that 62% of the seasonal data lies above this bound.) The close proximity of this upper bound to the seasonal track indicates that MA has decent seasonal behaviour. So I see an excellent chance that MA will be challenging at least the 52 week high by earnings and a very good chance of a really nice move into the 380-390 area before post-earnings profit taking knocks it down.

I play this with a diagonal because, at this point, I want to be a seller of expensive earnings premium. I plan to roll weekly and possibly diagonally upwards depending on circumstances. If MA pops decently into earnings I plan to put on a bearish diagonal to leg into a double diagonal position in order to capture the backwash from profit taking.



Friday, October 21, 2011

Double Dip - Over and Done

The much anticipated double-dip is over and done. You say you didn't hear the market crashing back down to 666!!? Well, it did but it was disguised by monetary policy. If you price the market in terms of a currency that is impervious to central bank interventions then you will see this. The currency I'm talking about is gold of course. The way to see this is to plot the ratio of the dow divided by the price of gold. Here's the plot I'm keeping watch on:
Dow/Gold Ratio
In the above PairRatio study I plot the dow futures (/YM) divided by gold futures (/GC) Note: In order to get the plot of the ratio it is necessary to enter the difference between the two futures so I've hidden the main-chart plot and just show the PairRatio study. I've drawn in the level of the infamous Mar 6, 2009 low of the ratio and as you can see the market dipped that level in August during the S&P downgrade fiasco. However, just today the market has recovered above the 09 low-level which is what has instigated me to declare the dip as over and done.

The channel is a linear regression channel that I drew from Sep 30 back to the 5.7 low and then extended to the right. The market has been respecting this channel remarkably well, wouldn't you say?

_

Wednesday, October 19, 2011

Analyzing The Unlikely Calendar

One of the points I assert about rolling short options is that an option with more time on it almost always trades for a higher price, thus, you can almost always roll-out almost any short option for a credit. To see that this must be so you can consider the implications of the opposite: the front month trading for a higher price than the back month. I claim that this is the equivalent of the market giving away riskless trades in the form of credit-calendars (i.e. selling a front month option and purchasing the same strike option with more time to expiration.) The Analyze tab of the ThinkDesktop trading platform gives one a way to visualize this by plotting the profit/loss graph for such a trade:



So here I contemplate an unlikely calender: selling the SPY Nov 123 Call while simultaneously buying the SPY Dec 123 Call for a credit of 10 cents. This trade always produces a profit even when the underlying price moves very far away from the current price (~122.25) Notice that if SPY closes anywhere in the 68% probability range (light blue shaded area) on expiration you will realize some nice gains whereby a $10 credit increases to a profit from $50 to $350 (red line.) Such situations will quickly be traded out of existance by electronic arbitrageurs, and probably the market maker will lose his job because these only ever come about by error.

Sunday, October 2, 2011

Bull Sign: Dow/Gold Ratio Recovery

Today's exercise on the ThinkDesktop is to create a ratio chart for the dow/gold ratio. Start with a simple chart with no studies. Then in the symbol input field type /YM - /GC. That will bring up a chart that displays the difference between the dow and the gold futures. Now click the Edit Studies button (leftmost button on the chart tool bar at top) and add the study called PairRatio. Select Yes in the reverse box, then click Apply and Ok. We are not interested in the price graph of the /ym-/gc difference so click Style/Settings and uncheck Show Price Subgraph, then click Ok . You should be left with a chart that looks like this:


Dow/Gold Ratio Now - 30Sep2011
 This is the Dow/Gold ratio, a widely watched metric that purports to indicate the health and direction of the economy. Save this chart as a grid so you can refer back to it later. This ratio is literally how much gold it takes, in troy ounces, to buy the dow: 6.6431. Economy watchers like to watch this ratio because it is independent of monetary policy. A high value was set at 43.7 in 1999, 27.9 in 1966 and 18.4 in 1929 (according to Fred's Intelligent Bear Site) and it has gotten down to 1 in 1980, although other low points occured in the 2-4 range)

Most significantly the d/g ratio is lifting off a low of 5.7 after breaking below the 6Mar09 low of 7.1:

Dow/Gold ratio circa: 6Mar09

So we may already have had our double dip and most traders haven't woken up to the fact because it didn't repeat the numerical values in 2009 owing to monetary policy changes.

You might say a stealth double-dip.

-

Saturday, October 1, 2011

Pre-Presidential Cycle Update

The year before the presidential election year is well-known for its bullishness. This can be seen in charts of data going back a hundred years or more (as the people at SeasonalCharts can show you.) My SeaPro5 study can show the average trend of a four year cycle going back 20 years (5 election seasons) on a weekly chart, projected from an anchor date. So once a month I like to post an update of where we stand wrt this larger time frame:


  The market has diverged significantly from the seasonal projection anchored on the first of the year. My smallDog interpretation of the technicals is that I expect the market to bounce around between confirmed support and resistance areas for a while until one of those levels is broken for more than a week. A "while" could mean for a year or so, maybe through the Nov 2012 elections. While some people might see a Head & Shoulders pattern setting up, I urge extreme caution with that pattern which has been broken several times in recent years with short interest badly punished.