Why Stocks Are Due For A Pause

Market Summary

Earnings Season also unofficially begins with the release of Alcoa’s (AA) results on Monday. However some investors remained concerned about the effects of "Brexit" and the upcoming earnings season. Near record lows in 10- and 30-year U.S. government bond yields underscored those concerns. "I am maintaining a cautious outlook for the next couple of months," said Phil Orlando, chief equity market strategist at Federated Investors in New York, citing Brexit, uncertainty about rate hikes and the November U.S. presidential election. "I think investors are just whistling past the graveyard here; there is a lot of ugly stuff on the horizon that everyone is just sort of ignoring. It just strikes me there are just too many things that can go wrong over the next couple of months."

A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum. This type of momentum fund is considered a reliable proxy for the general stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend. The updated chart below displays stocks recent uptrend. However the orange circles denote overbought levels where in the past the market advance consistently has stalled out. We recentlydiscussed how investors overreacted to the Brexit vote and oversold stocks and therefore the market was due for a robust bounce back from the Brexit selloff. Technically and fundamentally the major indexes are due for a pause. Stocks are overbought and buyers will probably sit tight ahead of quarterly earnings season that kicks into high gear in a few weeks. Usually price action is subdued at the start of earnings announcements, plus most investors don’t want to get overly aggressive until they can get a read on what the FOMC will decide at their next meeting in a few weeks.

Trading Strategy

According to the Stock Trader’s Almanac the average price tendency is for a summer sell-off that usually begins in mid-July and lasts until mid-October. Part of the reason is perhaps due to the fact that July starts the worst four months of the year for NASDAQ and also falls in the middle of the worst six months for DJIA and S&P 500. Mid-July is also when we typically kick off earnings season, where a strong early month rally can fade, as active traders may have “bought the rumor” or bought ahead on anticipation of good earnings expectations and then turn around and “sell the fact” once the news hits the street. Our recently analysis was realized where we asked, “…Now the question is where will the market bottom out? The best bet is that investors overreacted to the Brexit vote and stocks will eventually bounce back, especially since some pundits believe there is a possibility the FOMC could lower rates at one of their upcoming meetings. If this prediction comes to fruition the current pullback might be great opportunity to bid on undervalued shares...If the market does pull back, that might be a good opportunity to “buy the dip” with shares in the leading sectors…” We discussed above our prognostication suggesting the market is due for a pause. If this analysis plays out that might be another opportune time to bid on shares in “risk-off” defensive stock groups such as Consumer Staples, Health Care and Utilities which have been leading the market higher over the past month.

By Gregory Clay

Investment Strategist

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gregoryclay@nellaadvisors.com

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Why Investors Survey Signal New Market Highs

The American Association of Individual Investors (AAII) Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. The current survey result is for the week ending 05/25/2016. The AAII reports that the percentage of individual investors optimistic about short-term gains occurring in the stock market is at its lowest level in 11 years. At the same time, the percentage of investors describing their outlook as neutral is at its highest level in 16 years, according to the latest AAII Sentiment Survey. Optimism is below 20% and neutral sentiment is above 50% on the same week, for just the sixth time in the survey’s history. Bullish sentiment, expectations that stock prices will rise over the next six months, declined 1.6 percentage points to 17.8%. This is the lowest level of optimism recorded by the survey since April 14, 2005 (16.5%). It is also the 29th consecutive week and the 62nd out of the past 64 weeks that bullish sentiment has been below its historical average of 39.0%. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, jumped 6.3 percentage points to 52.9%. Neutral sentiment was last higher on April 12, 1990 (56.0%). Neutral sentiment has now been above 40% for 12 consecutive weeks and above its historical average of 31% for 17 consecutive weeks, as well as for 69 out of the past 73 weeks. As a contrarian indicator the current AAII reading points to a continued short-term bounce toward the market highs.

 

The questions posed in an article published in the Reformed Broker is has the market corrected through time, rather than through price, enough to spark the next bull leg higher? Since the AAII Sentiment Survey started in June 1987, a neutral sentiment reading above 50% has only been recorded 28 times. Only six of those readings were recorded after 1989 (January 1991, July 1991, August 1994, February 2003, December 2015 and this week). The remaining 22 readings are all from the approximate two-year span of December 1987 through October 1989. On average, the S&P 500's 26- and 52-week returns following such occurrences were 8.4% and 20.5%, respectively. Even rarer is having bullish sentiment below 20% and neutral sentiment above 50% on the same week. This week is just the sixth time such a combination has happened. It previously occurred four times in 1988 and once in 1989. On average, the S&P 500's 26- and 52-week returns following those five occurrences were 11.2% and 25.7%, respectively.

By Gregory Clay

Investment Strategist

Click here to Connect on LinkedIn

gregoryclay@nellaadvisors.com

P.S. click on http://www.theoptionplayer.com/ to sign up for a free trading newsletter

Fed Still Feeding The Bulls

Market Summary

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Feb. 11th was the 2016 low for the stock market. Since then easing concerns about slowing growth in China, as well as a possible U.S. recession, have triggered an explosive rally that in five weeks wiped out Wall Street's worst start ever to a year. After a sixth straight winning week the Dow Jones industrial average staged its biggest comeback from a deficit during a quarter since 1933. U.S. stocks erased losses for the year as the Federal Reserve's scaled-back path for interest-rate increases sparked demand for riskier assets. Crain’s reported that actions by central banks to stimulate growth have fueled a rebound in risk assets from equities to raw-material prices, after almost $9 trillion was erased from global stocks at the start of the year. The Fed's updated projections indicate two quarter-point increases this year, down from four forecast in December. “Never underestimate the power of the Fed to impact the markets. The doves are clearly winning the argument resulting in yesterday’s dovish announcement, which dragged the Fed back far more in line with market views on the potential for rate hikes in 2016,” said Richard Perry, analyst at Hantec Markets, in a note. For the week, the S&P 500 Index advanced 1.4% while the Blue Chip Dow Jones Industrial Average rose 2.2%. The Nasdaq added 1.0% while the small cap Russell 2000 crawled up 1.3% for the week. As confirmed in the chart below, the Fed’s dovish interest rate comments have stabilized treasury prices and continue to catapult gold stocks.

A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum. This type of momentum fund is considered a reliable proxy for the general stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend. Last week’s analysis played out as advertised as we opined “…Next week is critical for determining the market trend…stocks are in a trading range. Most market technicians believe the most likely scenario is the MTUM will break out and continue higher in the direction of the current trend…” Technical analysis suggests there is still plenty of room for the uptrend to continue.

  

Trading Strategy

A few weeks ago we discussed the relationship between stocks and energy price when we said “…equity and energy prices have been trading in lock step all year. Market pundits have offered various analyses on why this is happening. There is usually unique asset classes associated with the movement of stock prices, e.g. dollar, bonds, interest rates, etc. Until this relationship is broken, some investors are observing energy prices as a clue to stock movement, especially for day trading…” Regardless of the driver, the oil rebound is putting Wall Street in a buying mood. The oil crash was viewed by many as a sign of impending economic collapse, causing the stock market to tank at the beginning of the year. But now the Dow has recouped all of its losses for the year, up from a stunning loss of nearly 2,000 points at one point. As mentioned previously, February 11^th was the market low and the graph below displays asset performance since. In the graph you can see the results since the February correction are equivalent to more than an entire year of gains. What’s notable is that the smaller cap higher risk stocks are leading the way, which confirms investors are committed to trading “risk-on”.

Last week we mentioned “…As reported in the Stock Trader’s Almanac… March’s option expiration week…has a bullish bias…However, the week after tends to be bearish for DJIA and S&P 500…” The Trader’s Almanac also says next week is a shortened trading week due to Good Friday and Easter. The days before Good Friday are generally positive and the shortened week also has a bullish slant. Rallies by industrial, raw-material and energy stocks helped the equity indexes climb all the way back from losses that reached over 11% a little over month ago. The graph below confirms our recent trading suggestions are working out as we said “…all systems are on go as all the major S&P sectors are positive over the past 30 days. As recession talk subsides and potential Fed rate increases fall off the table investors are increasingly willing to take on more risk…the best performing sectors are considered the highest risk equity classes. We are currently in the middle of what is considered the “best six months of the year” for the stock market. We like undervalued or oversold shares to bid on because the current bullish trend has more room to run…”

By Gregory Clay

Investment Strategist

Click here to Connect on LinkedIn

gregoryclay@nellaadvisers.com

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Looking For The Bounce

Market Outlook

It took Friday’s best one-day performance for the Dow Jones Industrial Average and S&P 500 index since March 4^th to spur the indexes to their modest gains for the week. Obama’s targeted air strikes in Iraq this week intensified the risk in one of the world’s biggest oil-producing nations jolted the energy markets, sending crude prices higher. The updated graph shows the Nasdaq 100 and S&P 500 indexes up year-to-date, while the Dow Jones Industrial Average and Russell 2000 down for the year.

Buying stock market dips has been a very profitable strategy this year. Declines in the S&P 500 index have lasted an average 1.5 days…using dips to get better prices on stocks you have been eyeing has generally paid off…the S&P 500 index has recovered its losses from each price pullback…Investors found little reason to move money into stocks, faced with the growing geopolitical concerns in Israel and Ukraine, as well as banking problems in Europe…investors moved funds out of equities and invested in treasury bonds and gold as these assets prices moved higher… The updated chart shows as market volatility edges up, investors park funds into treasuries and gold on days they are selling equities and pulling money out the next day to bid equities higher.

The late July stock market decline turned the month into a loss and snapped the consecutive five-month winning streak for the Dow Jones Industrial Average and S&P 500 indexes. And of course, the NASDAQ and Russell 2000 ended down as well, with the Russell losing a whopping 6.1%. This was the worst month for the Russell 2000 since May 2012. Market weakness was broad based with 27 of the 29 S&P sectors tracked posting declines last month. For the current quarter investors are playing it safe by investing in safe-haven assets. Equities have experienced selling pressure the past few weeks as investors have been cautious about high stock valuations and worried about geopolitical crisis in Ukraine and Middle East. Bonds and gold are the primary ‘risk off’ assets investors are using at the expense of equity investments.

  

Investor Analysis

According to the Stock Trader’s Almanac Next week is options expiration week and mid-August is often better performing than the beginning and the end of the month. This strength is punctuated with a four-day string of bullish days that wrap the weekend from August 14 to 19. A bullish day is defined as a trading day in which the S&P 500 has risen greater than or equal to 60% of the time over the past 21 years. Unfortunately, this bullish cluster has not always resulted in full-week gains during option expiration. Both DJIA and S&P 500 have suffered a weekly loss in three of the last four August expiration weeks. Historically speaking, the consumer sector tends to begin its favorable period near the end of September and typically remains strong until the beginning of June in the following year. Back-to-school and holiday spending combined with the effects of the “Best Six Months” is the most likely driving force behind this seasonality.

As displayed in the updated graph below, over the past 90 days the biggest winners in the equity market have been technology and healthcare stocks. The technology sector has been booming primarily because it consists of a lot of high beta stocks that recovered sharply from the tech crash that happened earlier this year. Healthcare stocks are benefiting from the Affordable Care Act (also known as Obamacare). Also, some of the healthcare shares belong to pharmaceutical companies that are considered high beta stocks. The current price pullback might be a good opportunity to purchase some of these hi flyers at a cheaper price before the market surges higher again.

These recent trading strategy suggestions are still valid "...options traders should return to a neutral weighting between bullish and bearish positions. Bullish in the event that the indexes regain their upward momentum, and bearish in the event that bonds and commodities prove to be correct and economic uncertainty translates into equity weakness…” The updated graph below confirms recent weakness in equity shares, especially cyclicals. Those investors who took our advice and executed bearish positions to hedge long trades should still be showing a net gain. And of course when the market does bounce back, the long positions should sustain profits… we consider the current market action to be a ‘trader’s market’ with triple-digit daily up and down price moves. Traders can get short-term profits from bearish positions on down days, and gain from bullish plays on price recoveries…”

By Gregory Clay

Investment Strategist

P.S. click on http://www.theoptionplayer.com/ to sign up for a free option trading educational newsletter

Investors Are Still Biting

Market Summary

Investors are continuing to ‘buy the dips’ as they have been for the past few months which contribute to the current range-bound trading environment. Most of the major equity indexes basically finished the week flat, even though the DJIA and S&P500 managed to hit intraday all-time highs last week. The recent pattern has been investors cashing out gains at high prices, pushing prices down as shorts pile on; then buyers step in to buy the dips, pushing prices higher with a ‘short squeeze’. The smaller capitalization indexes are lagging the broader market as exhibited by the Russell 2000 being stuck below its 200-day SMA, a sign of weak momentum. Investors are concerned about weakness in small caps, biotech and technology sectors being a precursor to overall market losses.

Taking a gander at the year-to-date performance graph below, what is clear is that investors are seeking yield. Note the highest performing sectors are utilities, treasury bonds, and real estate which all provides high yields compared to all the other sectors. Investors are pouring money into U.S. Treasury bonds, considered the world's safest asset and they're loading up on dull, but reliable utility stocks. They are playing it safe by dumping holdings that would get hurt most from a stalled recovery, like stocks of retailers and risky small companies. This clearly confirms investors are nervous about the economy and eschewing high growth stocks in favor of capital preservation. The sector rotation continues from the riskier high-growth and momentum names to conservative high-yielding shares. Pimco's Bill Gross called this new secular investment theme "the new neutral". Gross expects slow economic growth and low real interest rates over the next five years, and this will fuel the hunt for yield.

Investor Analysis

In recent articles we discussed our forecast for stocks prices to nudge toward new highs and then drop back down to a support level in a trading range. As earnings season is winding down, the stock market avoided a broad-based selloff which is consistent with our expectation for continued range-bound trading. Looking under the hood of recent market action we can see sector rotation going on. It appears investors are stepping up to the plate and scooping up some of the high-flying stocks that have dropped in price. While it is still relatively risky to trade a lot of the ‘high momentum’ stocks, if there are shares you really like, it might be worth the risk to buy in if you are prepared to ride out future volatility. Any bullish trades need to be hedged for downside protection as the current bull market is getting tired and traders have become quicker on the trigger with bidding down prices. Market neutral portfolio positioning is currently the best trading strategy to take advantage of prices vacillating between recent highs and support levels.

By Gregory Clay

P.S. click on http://www.theoptionplayer.com/ to sign up for a free option trading educational newsletter

The SPY ETF (SPY) Is Flashing A Buy Signal

Market Summary

The stock market remains in a long term bullish trend as investors are discounting negative data and celebrating positive news. The market is always somewhat disconnected from Main Street and usually the market gets it right when reflecting future political and economic events in current prices. Investors don't believe that the Federal Reserve, White House and Congress are willing to take a chance on risking an economic downturn any time soon. The market for now is telling us that employment is growing at a decent pace in the private sector and the economy is actually improving.

Investor Analysis

With treasury bonds not supplying the returns investors want, investors have few options other than putting money into stocks. Take a look at the SPY ETF (Exchange Traded Fund) daily chart below. You can easily see how the SPY ETF has been in a bullish uptrend all year along with the broader stock market.

Possible Strategy

Invest in the SPY ETF to take advantage of broad-based stock market gains. The SPY is an exchange-traded fund (ETF) managed to track the Standard & Poor's 500 Index (S&P 500). The investment seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index. By trading like a stock, the SPY has continuous liquidity, can be short sold, bought on margin, provide regular dividend payments and incur regular brokerage commissions when traded. The SPY is used by large institutions and traders as bets on the overall direction of the market. They are also used by individual investors who believe in passive management (index investing). In this respect, spiders compete directly with S&P 500 index funds. 

Smart investors looking to benefit from the stock market recent price surge and limit the downside risk are stepping in to buy when prices pull back a bit so that they can get shares at a cheaper price. One theme that has been constant all year is investors waiting on price dips and then stepping in to bid the prices back up. As highlighted in the chart above, the major stock indexes are currently at a level where investors usually move in to buy.

  

By Gregory Clay

Now Might Be The Best Time to Buy Gold

Market Summary
Gold turned bearish last fall leading up to in the crash in the middle of April culminating in largest consecutive two-day price drop in decades for the precious metal. A pullback in gold prices was inevitable after it recently experienced the longest rally in almost a century. Gold stopped being considered the safe-haven investment it once was after prices fell when the euro currency almost collapsed last year. Typically, when the currency market goes into crisis mode, gold prices go up. Of course the news that billionaire investors George Soros and Louis Moore Bacon dumped holdings of gold products at the end of last year contributed the 'herd' mentality of investors stampeding to dump the precious metal.

The beginning of 2011 was the last time gold prices were as low as they have been lately and the price immediately surged higher to end that year at a multi-year high. Gold'srecent crash put smiles on the faces of many Middle East Indians as their fascination with the precious metal sparked a buying frenzy at the recent discount prices. Buying gold is more than just tradition in India, and the centuries-old custom of Indians to rely on the yellow to safeguard their wealth from generation to generation is undeniable. Anyone who follows gold knows that the Indian demand on the physical market is one of the strongest underlying foundations of the gold market. After prices bottomed out a few weeks ago gold has been rallying primarily due to surging demand for the actual metal rather than the investment funds that have become so popular with investors attempting to cash in on the surge in recent years. "Depressed price levels were perceived as an attractive entry point by physical buyers and bargain hunters," ETF Securities said. "The longer-term fundamentaloutlook for gold has not changed and appears robust in our view, despite the sharp falls seen in recent weeks."

 

Investor Analysis

As confirmed in the weekly chart above, after gold hit bottom a few weeks ago it has staged a comeback. Recent history, technical signals, and several investment analysts signal a bottom for the metal’s prices. If the signs are correct, now might be a low risk opportune time to buy to gold to catch the next bullish price surge.

Possible Strategy

Above a daily chart for the SPDR Gold Shares (GLD) exchange traded fund (ETF). GLD is a popular ETF investment that seeks to replicate the performance, net of expenses, of the price of gold bullion. Investors interested in participating in the gold market can buy into the actual GLD ETF. Or a more cost effective option might be to purchase GLD call options. Purchasing the July expiration GLD $145.00 strike price call option would cost approx. $4.00 per share (based on yesterday's close), but would generate gains the further gold moved higher prior to July 19^th. For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/

By Gregory Clay

Good Time To Buy A Little Gold

Market Summary

Gold crashed below its recent trading range to six-month lows as upbeat U.S. economic date has diminished the appeal of so called "safe-haven" investments. Of course the news that billionaire investors George Soros and Louis Moore Bacan dumped holdings of gold exchange-traded products contributed to the "herd" mentality of investors stampeding to dump the precious metal. The U.S. dollar is displaying strength compared to other currencies and this is pressuring commodity prices. However, technically, gold was severely oversold and the price should stay above the current level. As we can see in the GLD ETF daily chart below, the $152 support level has held up and the price has always recovered when it reached oversold levels.

Investor Analysis

As confirmed in the chart above, gold hit bottom last week but has staged a strong recovery over the past few days. Gold futures rebounded Monday from last week's selling to score their biggest gain of the month, as analysts say recent report hinted at a potential bottom for the metal's prices. Investors also are reconsidering gold's safe-have appeal after voting results from Italy's election and a rating downgrade on the United Kingdom.

Possible Strategy

Above a daily chart for the SPDR Gold Shares (GLD) exchange traded fund (ETF). GLD is a popular ETF investment that seeks to replicate the performance, net of expenses, of the price of gold bullion. Investors interested in participating in the 'gold rush' can buy into the actual GLD ETF. Or a more cost effective option might be to purchase GLD call options. Purchasing the end-of-March Quarterly expiration GLD $154.00 strike price call option would cost approx. $3.00 per share (based on yesterday's close), but would generate gains the further gold moved higher prior to March 28^th. For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/

By Gregory Clay

Take Advantage of Bank of America (BAC) Price Move

Market Summary

Big banking stocks rallied hard last week with Bank of America (BAC) leading the way by soaring 9% for it best performance since September. Stocks around the globe and the euro were mostly lower on Monday, with investors cautious over whether Greece will receive emergency aid to keep it financially afloat and no signs of progress by U.S. lawmakers to avoid the U.S. "fiscal cliff." Without agreement by Congress and the White House, sharp tax increases and government spending cuts will take effect in 2013, raising the specter of stifling the fragile U.S. recovery and pushing Wall Street indexes to follow the global trend lower. BofA shares fell today in light of the onslaught of lawsuits related to the risky mortgage securities. This has resulted in huge litigation costs for the company, which will have a profound impact on its financials.

Investor Analysis

As mentioned above, Bank of America (BAC) shares benefited from the big stock market move during thanksgiving week. Note in the chart above that over the past month of so, when shares reach the current price traders usually start selling to drive the stock price back down. The largest equity options trade today was in Bank of America (BAC). Shares dropped 7 cents to $9.84 and were among 22 Dow Jones Industrial Index stocks to finish with losses.

Possible Strategy

Investors who want to take advantage of the downside price move could consider a simple strategy to profit from the Bank of America's possible move lower. For example, buying a BofA regular December expiration put option (NYSE: BAC). Purchasing a December $10 strike price BAC put contract (each contract is 100 shares of stock) would cost $.41 per share based on yesterday's close ($.41 X's 100 shares = $41 per contract), but would generate gains the further stock price dropped below $10 prior to December 21^st. For example, 10 BAC put contracts would cost an investor approx. $410 ($.41 X's 100 shares X's 10 put contracts). If before the expiration date the stock price drops back down to $9 as it has done recently, investors would double their money by cashing in ($10 strike price less $9 = $1.00 per share difference [$1 per share X's 100 shares X's 10 contracts = $1,000] minus the $410 cost = approx $590 profit.

For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/

By Gregory Clay

Presidential Election Pushes Gold (GLD) Prices Higher

Market Summary

Last week precious metals such as gold recorded a fourth consecutive weekly loss due to a favorable payroll report strengthening the U.S. dollar. A stronger dollar tends to pressure prices for dollar-denominated commodities such as gold since it makes them more expensive for holders of other currencies to buy. On Monday gold started rebounding and today gold and other precious metals advanced higher on the possibility of a Barack Obama victory in today's presidential election. The prospect of another four years for President Barack Obama is seen as bullish for the precious metal, said Brien Lundin, editor of Gold Newsletter. “The market perception is that Obama may pull it out,” Lundin said. Gold futures have been buoyed by the Federal Reserve’s ultra-easy monetary policy — which is expected to continue if President Obama is reelected. “The prime driver for gold and silver has been the prospect for monetary inflation and quantitative easing,” Lundin said. “So an Obama victory would support [the view] that these policies would continue unabated.” Slight weakness in the dollar also buoyed gold prices. 

Investor Analysis

As confirmed in the chart above, gold hit bottom last week but has staged a strong recovery over the past few days. The chance of a Mitt Romney presidential election win is viewed as a negative for gold. Traders appear to expect President Obama to prevail, if they are correct this should drive gold prices back up to the level prior to the presidential debates.

Possible Strategy

Above a daily chart for the SPDR Gold Shares (GLD) exchange traded fund (ETF). GLD is a popular ETF investment that seeks to replicate the performance, net of expenses, of the price of gold bullion. Investors interested in participating in the gold rebound can buy into the actual GLD ETF. Or a more cost effective option might be to purchase GLD call options. Purchasing the November expiration GLD $168.00 strike price call option would cost approx. $1.26 per share (based on yesterday's close), but would generate gains the further gold moved higher prior to November 17^th. For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/

By Gregory Clay

Option Play (GLD) For the Gold Rush

Market Summary

Last week, Fed Chairman Ben Bernanke gave a policy speech at Jackson Hole Wyoming that hinted at the inevitability of further quantitative easing (QE). Market action following Bernanke's comments suggest that traders don't anticipate the Fed will announce the next round of QE at their upcoming policy meeting in a few weeks, but expect the next program to start in the fall. Reacting to the expectation of more QE, the dollar plunged to its lowest level in three months on Friday based on anticipation that the Fed will probably flood the economy with even more dollars to purchase assets - this in turn will further drive down the value of the dollar. As a direct corollary to further quantitative easing debasing the dollar and Fed asset purchases, precious metals exploded after Bernanke's speech – a lower dollar equates to higher gold prices.

  

Investor Analysis

Gold hit bottom this past May and prices moved higher in June. In subsequent months gold traded range-bound as inflation was subdued and the dollar was strong. A few weeks ago, concerns about rising interest rates and higher inflation pushed gold prices higher through the top of the trading range. As mentioned above, the Fed Chairman's speech set the tone for gold to explode back towards higher price levels set the end of last year – about the same time as the Fed did the previous version of QE.

Possible Strategy

Above a daily chart for the SPDR Gold Shares (GLD) exchange traded fund (ETF). GLD is a popular ETF investment that seeks to replicate the performance, net of expenses, of the price of gold bullion. Investors interested in participating in the 'gold rush' can buy into the actual GLD ETF. Or a more cost effective option might be to purchase GLD call options. Purchasing the October GLD $164.00 strike price call option would cost approx. $4.00 per share (based on yesterday's close), but would generate gains the further gold moved higher prior to October 19^th. For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/

By Gregory Clay

Cash In On Stocks Downward Move

Market Summary

What has to be a serious concern for the bulls is that most of the major indexes are selling off from 'triple-tops'. A triple-top is a pattern used by many technical analysts to predict a price reversal when the market is trending upward. The pattern is identified when prices create three peaks at virtually the same level (see stock chart below). The price pullback off resistance at the third peak is considered to be a sign that buyers have become exhausted. Trip-tops are considered more difficult to overcome compared to other topping patterns, requiring much more time and volume to reverse.

Also, most of the major indexes have sliced through their 20 and 50-day moving averages setting up prices to test the March/April lows – if stocks break below this level the longer term trend converts from bullish to bearish. As mentioned in recent articles, stocks are dropping and the current market pullback suggests that a trend reversal similar to the previous two years is underway.

  

Investor Analysis

Most of the major stock indexes are breaking down and until prices reverse course the near term trend is down.

Possible Strategy

http://investorreport.blogspot.com/2012/05/ride-s-500-index-downward-move.html#links

http://investorreport.blogspot.com/2012/04/how-to-play-dows-price-pullback.html#links

http://investorreport.blogspot.com/2012/04/how-to-play-s-500-downside-price-move.html#links

Above are links to recent articles the described three different trades that benefited from the current stock price pullback. Each of the trades is profitable and investors who followed the suggestions should close out these successful trades ASAP as May options expire this week.

Investors who want to trade on a further downside price move are considering a simple strategy to profit from the S&P 500's possible move lower. For example, buying a SPY ETF (Exchange Traded Fund) June expiration put option – SPY represents S&P 500 Index.  Purchasing the $133 strike price put would cost $3.00 per share (based on yesterday's close, but would generate gains the further S&P 500 dropped below $133 anytime prior to June 15th. For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/

By Gregory Clay

Ride the S&P 500 Index Downward Move

Market Summary

Three yellow vertical lines are highlighted in the S&P 500 Index weekly chart below. The first two yellow lines highlight the point where stock prices topped out in the spring of 2010 and 2011 culminating in price corrections. The third line marks this year where stocks prices have dropped and we may be in the process of another downturn that appears to happen this time every spring? Similar to what is happening with the DOW Jones Industrial Average, the current market pullback suggests that a trend reversal similar to the previous two years is underway. Another major worry for the bulls are the recent bearish distribution days (down days on higher than normal trading volume). Bearish distribution days indicate that money managers are looking for the opportunity to sell shares - which further pushes down prices.

Investor Analysis

Most of the major stock indexes are breaking down and until prices reverse course the near term trend is down.

Possible Strategy

If the stock prices do continue downward, smart investors are considering a simple strategy to profit from the S&P 500's possible move lower. For example, buying a SPY ETF (Exchange Traded Fund) May expiration put option – SPY represents S&P 500 Index.  Purchasing the $136 strike price put would cost $1.82 per share (based on yesterday's close, but would generate gains the further S&P 500 dropped below $136 anytime prior to May 18^th. For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/

By Gregory Clay

How to Play the DOW's Price Pullback

Market Summary

Three vertical lines are highlighted in the DOW Jones Industrial Average Index weekly chart below. The first two yellow lines highlight the point where stock prices topped out in the spring of 2010 and 2011 and culminated in price correction. The third line marks the current year where stocks prices have dropped and we may be in the initial stages of another downturn that appears to happen this time every spring? At this point the current market pullback suggests that prices may have topped out and a trend reversal similar to the previous two years stocks is starting. Another major worry for the bulls are the recent bearish distribution days (down days on higher than normal trading volume). Bearish distribution days indicate that money managers are looking for the opportunity to sell shares.

Investor Analysis

Most of the major stock indexes have broke down below their price support levels and the technical momentum indicators and oscillators are bearish. Until prices reverse course the near term trend is down.

Possible Strategy

If the stock prices do continue downward, some investors are considering a simple strategy to profit from the DOW's possible move lower. For example, buying a DIA ETF (Exchange Traded Fund) May expiration put option – DIA represents DOW Jones Industrial Average.  Purchasing the $129 strike price put would cost $2.23 per share (based on yesterday's close, but would generate gains the further DOW dropped below $129 anytime prior to May 18^th. For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/

By Gregory Clay

How to Play the S&P 500 Downside Price Move

Market Summary

Three vertical lines are highlighted in the S&P 500 Index weekly chart below. The first two yellow lines highlight the point where stock prices topped out in the spring of 2010 and 2011 and culminated in price downturns. The third line marks the current year where stocks prices have dropped and we may be in the initial stages of another downturn that appears to happen this time every spring? At this point the current market pullback suggests that prices may have topped out and a trend reversal similar to the previous two years may be starting? Another major worry for the bulls are the recent bearish distribution days (down days on higher than normal trading volume). Bearish distribution days indicate that money managers are looking for the opportunity to sell shares.

  

Investor Analysis

Most of the major stock indexes are breaking down below their price support levels and the technical momentum indicators and oscillators are turning bearish. Until prices reverse course the near term trend is down.

Possible Strategy

If the stock prices do continue to pull back, some investors are considering debit spread strategies to profit from the S&P 500's possible move lower. For example, trading a SPY ETF (Exchange Traded Fund) May option expiration long $137 strike price put/short $134 strike put debit spread would cost .81  per share (based on yesterday's close – buy the $137 put @$1.12 and sell the 134 @ .31), but would generate $2.19 per share profit if the SPY dropped below $134 anytime prior to May 18^th (calculated as $137 minus $134 = $3.00 credit, less the .81 debit to buy the spread) For an explanation on the basics of option trading and description of how the trade is set up go to http://www.theoptionplayer.com/strategies/

By Gregory Clay

Good Opportunity to Play the S&P 500

Market Summary

For only the second time this year the S&P 500 index recorded a 1% loss for the day. Traders reacted to the latest concerns related to European debt and monetary policy in the U.S. As confirmed in the SPY 60 min chart below, the benchmark S&P 500 index has fallen in eight of the past 12 trading sessions, dropping below its 14-day moving average for the first time in a month. Traders appear to be turned off by comments in the recently released Fed meeting minutes questioning the need for further quantitative easing (QE)/ Investors have become intoxicated with easy money from the fed which has been a major impetus driving the stock market for the past few years. Without QE, it is questionable whether the economy can grow much more without government intervention.

Investor Analysis

Note in the chart above how recently, every time the S&P 500 index pulled back to its current level, prices recovered soon after. Now might be a good opportunity to purchase some shares at a good price as the current pullback will alleviate overbought conditions, and it is reasonable to expect prices recover again as the first quarter earning season progresses.

Possible Strategy

Investors can take advantage of the opportunity to play a price recovery with  an April option trade. For example trading a SPY ETF April option expiration long $138 strike price call/short $141 strike call debit spread would cost $1.82 per share (based on yesterday's close – buy the $138@2.78 and sell the $141@ .96), but would generate $1.18 per share profit if the SPY gets back above $141 prior to April 20^th (calculated as $141 minus $138 = $3.00 credit, less the $1.82 debit to buy the spread) For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/option-basics/

By Gregory Clay

How to Play the Current Price On the S&P 500

Market Summary

The S&P 500 index has more than doubled since prices where at the 12-year low and bear market bottom three years ago - on March 9, 2009 the index was at 676.53. The economy is improving and corporate profits are booming. But this is not enough to entice the small retail investor back into the market with a vengeance. Stock investing is dominated by institutional players more than ever as retail investors appear to be somewhat cautious after the 2008 market crash and extremely high volatility experienced in 2011. But what may be a bigger issue with retail investors is the persistently high unemployment level. The White House and some gung ho business analysts may be touting the recent job numbers as a drastically improved job market, but the reality is that the economy is not producing anywhere nearly enough jobs to absorb all those available and willing to work. With retail investors sitting on the sidelines, the Feds easy money policy and money managers sitting on tons of cash is what will drive the demand to push stock prices higher. 

Investor Analysis

As evidenced in the 60 min. S&P 500 chart above, for the past several weeks the major indexes are having difficulty breaching recent highs as the market is pausing and may be setting up for a near-term price pullback.

Possible Strategy

If the stock prices do pull back, some investors are considering debit spread strategies to profit from the S&P 500's possible move lower. For example, trading a SPY March option expiration long $137 strike price put/short $134 strike put debit spread would cost .86  per share (based on yesterday's close – buy the $137 put @1.56 and sell the 134 @ .70), but would generate $2.14 per share profit if the SPY dropped below $134 anytime prior to March 16^th (calculated as $137 minus $134 = $3.00 credit, less the .86 debit to buy the For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/option-basics/

By Gregory Clay