4 Seasonally Strong Sector Trades to Accumulate (or Hold)

Friday, August 24th, 2012

by Don Vialoux, Timingthemarket.ca

Broader Markets Reveal Peak – Use the Weakness to Accumulate or continue to hold Seasonally Strong Gold, Gold Equities, Canadian Energy Sector, and Software

August 24, 2012

(Editor’s Note: Don Vialoux is scheduled to appear on Berman’s Call on Monday at 11:30 AM EDT)

Interesting Charts

More short term technical evidence that U.S. equity markets have passed a short term peak! Short term momentum indicators for the S&P 500 Index have rolled over from overbought levels. The Index is about to break below its 20 day moving average at 1,399.12

Ditto for the Dow Jones Industrial Average! It already has broken below its 20 day moving average.

Weakness in equity market sparked an increase in the VIX Index.

One of the weakest sectors yesterday was the steel sector following a downgrade by Dahlman Rose.

The gold and gold equity sectors were the exception.

Updates on Seasonal Trades Recommended Since The Beginning of June

(Based on reports published by www.globeandmail.com )

June 11: Accumulate the Leisure and Entertainment sector

ETF: PEJ at $20.73 Current price: $21.51

Comment: Units are about to break below its 20 and 50 day moving averages and short term support at $21.34. Strength relative to the S&P 500 Index has turned negative. Take profits.

June 22: Accumulate the Fertilizer sector

ETF: SOIL at $12.20. Current price: $13.74.

Comment: Technical profile has started to turn negative. Units closed below their 20 day moving average yesterday. Strength relative to the S&P 500 Index turned negative two weeks ago. Take profits.

July 2: Accumulate the Software sector

ETF: IGV at $62.18. Current price: $63.30

Comment: Technicals remain positive. Intermediate trend is up. Units trade above their 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive. Continue to hold.

July 6: Accumulate gold bullion

Gold price: $1,578.90. Current price: $1,672.80

Comment: Technicals remain positive. Nice breakout above resistance at $1,642.40 earlier this week. Strength relative to the S&P 500 Index has turned from neutral to positive. Continue to hold.

July 13: Accumulate Canadian gold equities

ETF: XGD at $18.01. Current price: $19.65

Comment: Technicals remain positive. Nice break above its 50 day moving average last week. Strength relative to the TSX Composite Index remains positive. Continue to hold.

July 20: Accumulate the Canadian energy sector

ETF: XEG at $15.12. Current price: $16.11

Comment: Technicals remain positive. Units continue to move higher above a reverse head and shoulders pattern. Strength relative to the TSX Composite Index remains positive. Continue to hold.

Sell the Transportation Sector

Dow Jones Transportation Average at 5,126.65. Current price: 5,115.64

ETF: IYT at $91.56. Current price: $91.34

Comment: Technicals once again are turning negative. Units briefly fell below their 20, 50 and 200 day moving averages yesterday. Strength relative to the S&P 500 Index remains negative. Continue to sell/avoid/short.

August 6: Sell the Airline sector

ETF: FAA at $28.66. Current price:$28.90

Comment: Technicals remain negative. Units closed below their 200 day moving average yesterday and are testing their 20 day moving average. Strength relative to the S&P 500 Index remains negative. Continue to sell/avoid/short.

************

Adrienne Toghraie’s “Trader’s Coach” Column

“Choices”

By Adrienne Toghraie, Trader’s Success Coach

www.TradingOnTarget.com

How many opportunities do we let slip by because of the comfort of knowing that we can start tomorrow? I talk to some of the same people year after year at shows who tell me of their plans to become a trader only to repeat themselves the next year. Here are some of the promises I have heard traders make that keep them from becoming the person they want to become. I will:

· Start reading that book tomorrow

· Make arrangements for that seminar

· Quit my job

· Spend more time with my family

· Plan that trip

· Take on that hobby

· Volunteer for that cause

· Give up the drugs I am currently taking

· Go to see the doctor

· Hire that coach

· Lose that weight

· Do the things that it takes to become a better trader

The fact is that yesterdays are what brought you to this moment of now and today is what will decide tomorrow. If you put off your life until tomorrow, you will not enjoy the life you want to have.

Bad choices

We lost three celebrities whose lives we have followed for many years. Ed McMann, who was the comedian who was Johnny Carson’s sidekick for over thirty years. The choices he made about his financial situation after a lucrative career brought him to a place of needing rescue from foreclosure of his home from Donald Trump the billionaire.

Farrah Fawcett, the actress and pin up girl, we lost to cancer. She created many stressful situations in her life by some of her choices that weakened her body.

Michael Jackson, an icon of rock music, abused his body with prescription drugs and his body by extreme dance rehearsals. And now his children will be without their father and the rest of us will mourn his early passing.

Good choices

Clark was a participant in my Master Class in Australia a few years ago. He is a land developer from New Zealand who decided that he wanted to enhance his income by trading. He asked many questions during the class, which revealed a lot about him. I have learned over the years that by the questions people ask I can usually tell if they will succeed in trading. At lunch I was able to learn more about him, which made me feel certain about the belief I was developing that he would be successful as a trader.

Clark told me about how he worked with his father in construction from the time he could lift a hammer and he loved every moment. He said that his father’s story telling made it not seem like work. It was from this experience that work became a pleasure for him. His mom encouraged him to save two thirds of the money he earned, so he worked extra hard because the third that he could spend would be for the games and entertainment he enjoyed. Clark’s mother also encouraged him to take care of his health by eating well and having balance in his life. Clark purchased a small property at the age of sixteen and built a small house with his father’s licenses. With the profit he earned from selling this property, he purchased and even larger property. This pattern continued to where he is today as a highly successful developer.

I recommended a trading mentor to Clark specific to his personality, and I also recommended that he take my Top Performance Seminar after he traded for at least a month. Clark completed my Trading On Target Course by the time I saw him again. He made two trips to the United States to complete both of my suggestions. After six months since I originally met Clark, he is now earning a substantial living from trading and only putting in two to three hours a day while still maintaining his business. I asked Clark how he finds trading. His response was that the whole process was a blast and he is having a lot of fun. His wife and children were also happy because they got to vacation in the states when he came to study here.

What is time for you?

Is life full of fun time in work and play? Is each area of your life developing into how you want your future to be? If not, make a plan and act today so that your trading and everything that supports it will bring you to a better tomorrow.

New Free Monthly Newsletter

More Articles by Adrienne Toghraie, Trader’s Success Coach

Sign Up at – www.TradingOnTarget.com

************

Eric Wheatley’s Weekly Listed Options Column

Good morning,

Since I’ve started this job, I’ve pretty much been a professional reader and writer. I go through dozens of articles per day and I’ve realised one has to be wary of some of the dumb things that are written in the business press.

Last week, after a string of lessons on options basics, we dove into covered calls. On Friday, as I devoured my daily ration of articles, I stumbled upon this. It was published in a national paper of some repute and wonderfully frames what I meant in this little paragraph:

“George got $2.50 for a three-month call option. In selling the option, he promised Bob that he would sell his 100 shares to Bob for $50 per share if the stock’s price were to rise. Of course, the first knee-jerk reaction to this is that putting a ceiling on one’s potential gains for a measly $2.50 is stupid; particularly if you are holding the shares, so if their price drops through the floor, you’re on the hook. (Put another way, the MOST George could gain is $2.50, yet he could lose his shirt if XYZ were to drop to zero. This concept is hard to defend if your interlocutor has little understanding of finance and just wants to get rich in the stock market)”.

Long-only stock pickers are a fun group of people. They usually have little time nor tolerance for charts or derivatives. The best of them will plough through financial statements and attend conference calls with company directors and otherwise do everything they can to outwit the markets and beat the benchmark (which they pretty much never do because of their fees). They have one and only one goal to which they are wholly dedicated: to find stocks that will go up faster than the index.

When a stock picker is asked about passive investments, short selling, complex portfolio management techniques and, especially, covered calls – things that are completely foreign to their daily lives and, let’s face it, which don’t generate fees for their firms – he or she will become hostile and start spewing out things which, for all intents and purposes, run against decades of academic study and common sense. Upon reading the aforementioned article, here are some statements which caught my eye:

· “90% of options expire worthless”. We’ve covered this at least twice in this space. It’s a non-starter because the statement itself is nonsensical. Options are asymmetrical instruments, like insurance policies, Russian roulette or lottery tickets. People who live in the fully symmetrical world of stock picking (things go up, things go down) have trouble with this concept.

· “If the price of the underlying stock collapses before the call expires, the call-buyer won’t exercise the option because the stock can be purchased more cheaply on the open market compared to the contract strike price. In this case, you continue to own the stock – with all of its downside – but you also keep the premium income”. Note the term “collapses”. The same statement could have been made by writing “…the price of the underlying stock is below the call’s strike price at the call’s expiry”. But no, if you carefully evaluate and buy a stock for your long-term portfolio, it will “collapse”, not move within a predictable range as 95% of stocks do over the short term. It’s also odd for a stock picker to mention “all of a stock’s downside”, given that stock pickers hold even greater downside risk than covered call writers.

· “If the stock soars, the call-buyer will exercise to buy the stock at the (below-market) strike price, forcing you to sell the shares below the market price. So, you get virtually all of the downside risk exposure while cutting off most of the upside potential. And given the history (and expected future) of generally rising long-term prices, this strategy’s long-term potential is not attractive”. In this case, of course, the stock “soars”. Yes, the long-term tendency for stock prices is to rise. Also, we have already gone into the fact that stock options are unique in the options trading world in that they have a skew built into their prices. In-the-money calls are more expensive than in-the-money puts BECAUSE stocks are asset-based securities and have a long-term tendency to gain value.

· “In other words, this strategy negatively skews the risk-return profile. Covered call writing strategies are promoted as a source of income with less risk than owning stocks outright. But adherents to this approach are giving away too much future upside in exchange for current income. The amount of forgone upside may well dwarf the extra income over time”. Here we go.

· Study after study (those are just two I got from a quick Googling) going over the subject over various time periods in all market conditions have shown that covered calls skew the risk-reward ratio in the investor’s favour. Why does the argument against covered calls get any traction? Because stock pickers and options neophytes assume that the premium received when selling an option is a pittance or a rounding error which can be brushed aside in one’s calculations. “Oh yeah, you get that tiny little premium, but what if the stock COLLAPSES? What if it SOARS??”. The fact is, anyone who has spent any time in the markets knows that stocks don’t collapse nor soar all that often. The POTENTIAL for collapses and… soareses is already priced into the options’ premiums. When you sell an option, you are receiving the market’s evaluation of the probability AND AMOUNT of collapse or soar. Sure, over any given period a stock could be more volatile than what the market evaluated. But over an investment horizon of years or decades, the options market has proven itself to be rather accurate in its valuation of volatility. As we have already seen, if anything, the path-dependant nature of options market-making adds a little juice to options prices, which goes into options writers’ pockets.

Also, as a portfolio manager, here’s a hint to the gentleman: I was an options trader and draw upon that experience to my clients’ benefit. I’ll grant him that in a secular bull market, covered calls may underperform the straight holding of stocks. You know what I’d do in a strong bull market (e.g. 1994-1999)? I wouldn’t be putting on covered calls. If he’s intimating that covered calls are bad RIGHT NOW, then we have a distinctly different definition of a secular bull market.

As to “Option trading is a quant game and big options traders – who often exclude traditional money managers – are in the best position to find pricing inefficiencies with their sophisticated computer models that can make decisions in a nanosecond”. Ummm… not even close dude (and this is the best proof that the writer in question has no clue). Nanosecond trading based upon models and/or electronic arbitrage exists in futures trading. It exists in stock trading. But if anyone thinks that you can actively trade options in-and-out on a “nanosecond” basis, that person has never actually seen an options quote, much less put their money in play. Options are a segmented market. Any given stock can have dozens or hundreds of different listed options across different strike prices and expirations. The liquidity on those options is therefore also segmented. Even on the biggest, most liquid options classes, if you try to buy and sell mechanically on an in-and-out basis, you’ll be paying the bid-ask spread on instruments which just aren’t made for that kind of trading. The “quants” and their models will try to take advantage of perceived opportunities, but the resulting position will inevitably be held for a while and probably be traded against in the underlying market. This has nothing to do with the program trading intimated in the text.

So, in closing (and you can tell that I could go on all day), don’t get options advice from a stock picker. Stock pickers are undoubtedly good at what they do, but they don’t use options and, if you don’t use them, you don’t understand them enough to comment on them. I’ll always affirm that options aren’t really all that complicated if you’re actively interested in learning about them. If you aren’t, please keep your commentary within the bounds of subjects on which you have some knowledge.

*****************

New development: I’ve gained a little experience in the world of Twitting over the past couple of weeks and have realised that the bilingual idea wasn’t going to work. I’ve therefore decided to start a new account on which I’ll be posting articles which, to my mind, offer some value-added commentary on the world of economics and finance along with my usual facetiousness. From now on, I’ll post two or three which I really liked in this space. If you want, you can follow me at @jchood_eric_en.

· An overview of the European crisis and its inevitable conclusion (or so says a geopolitical guy whom I really like, though I may not always completely agree with).

· An analysis stating that the Canadian housing market isn’t a bubble and will be fine as long as nothing, y’know, unpredictable happens (filed under “gotta love economists”).

· A contrarian view as to the reinstatement of Glass-Steagall and the wisdom of splitting up big banks.

In this week’s French-language blog: a buddy brings me to one of those shiny-pole-filled places which fascinate visitors to my hometown and which will not be described explicitly here.

Cheers!

Éric Wheatley, MBA, CIM
Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.
eric@jchood.com
514.604.2829; 1.855.348.2829
Twitter: @jchood_eric_en

Blogue en français : gbsfinancier.blogspot.ca

*****************

Little known fact about John Charles Hood #40

John Charles Hood knows a few stock pickers. Apparently, they flick quite well too.

Special Free Services available through www.equityclock.com

Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.

To login, simply go to http://www.equityclock.com/charts/

Following is an example:

Consumer Discretionary Sector Seasonal Chart

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.

Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc

Horizons Seasonal Rotation ETF HAC August 23^rd 2012

Tags: Bullion, Canadian, Canadian Market, Russia, Seasonal, Seasonal Trades, Seasonality, Vialoux
Posted in Markets | Comments Off

European and Chinese Flash PMI Continue to Show Weakness

Friday, August 24th, 2012

by Mark Hanna, Market Montage

Overnight another batch of poor economic news as flash Purchasing Manager indexes continued to show significant weakness.  While there is nothing “new” here we are certainly not seeing any form of imminent turnaround in the data.  In fact Chinese data was the worse in nine months.  But I guess that means it will force the hand for more easing and that is all that seems to matter to the market in its current state.  Futures were actually UP modestly on the Chinese data last night until Mr. Bullard from the Fed came on CNBC this morning and tried to downplay yesterday’s FOMC minutes.   Europe also showed nothing but flatline.

But all in all, it is a very light trading environment and other than the volatility caused yesterday afternoon the market has done little since the August 3rd spike but churn with a slight upward bias.  The S&P is up about 12 points from August 7th as we continue to see a very narrow range most days.  It remains a strange environment where a lot of bad economic data doesn’t matter to the market.

China

• China’s factory activity in August shrank at its fastest pace in nine months as new export orders slumped and inventories rose, a signal that a persistent slowdown in economic growth has extended deeper into the third quarter.  The HSBC Flash China manufacturing purchasing managers index (PMI) fell to 47.8 in August, its lowest level since November, from 49.5 in July.
• “Details of the flash report showed sharp deterioration in all the sub-indices except for employment and delivery times, but employment index didn’t improve either from the lowest level (47.7) since April 2009. Production index fell below the boom-bust line again to 47.9, and total new orders index was down to 46.6 from 48.7 in the previous month. Worse still, export orders dropped to only 44.7 in August a level only seen during the Lehman crisis.”

Europe

• Private-sector business activity in the 17-nation euro zone contracted for a seventh consecutive month in August but at a marginally slower pace than in July, the Markit preliminary composite purchasing managers’ index for the region indicated on Thursday. The index rose to 46.6 from a reading of 46.5 in July. Economists had forecast an unchanged reading. A figure of less than 50 indicates a contraction in activity.
• The services PMI reading fell to 47.5 from 47.9 in July, while the manufacturing PMI rose to 45.3 from 44.0. The contraction continued across the euro zone, with national indexes for the core countries of Germany and France both signaling shrinking output.

Posted in Markets | Comments Off

Reading the Right Tea Leaves to Gauge Market Volatility

Friday, August 24th, 2012

by Daniel Morillo, Ph. D., iShares

Investors have become all too familiar with volatility in recent years as dramatic events like the Lehman Brothers bankruptcy and the downgrade of US debt have rattled global markets. Last month, my colleague Russ Koesterich said in a blogthat he expects volatility to remain elevated for the remainder of the decade.

That call might seem quite bold given the difficulty in predicting the type of individual events that tend to trigger volatility in the markets. But Russ wasn’t reacting to short-term events when he wrote that post. Instead, he was focused on underlying trends that could influence longer-term behavior of the markets. Why? Well, over extended periods of time, market volatility has been linked to uncertainty in broad macroeconomic prospects and not the latest breaking news headline.

There is a large body of academic literature that explores this link. But I’d like to illustrate this relationship using two simple macroeconomic metrics – economic growth and changes in the money supply.

First, let’s look at economic growth. Poor economic growth makes investment planning generally more difficult and more sensitive to specific market, political or policy events. As the chart below shows, since the 1960s US consumption growth (or lack thereof) has accounted for about 30% of the variation in annual volatility for the S&P 500 index[1]. In other words, the more consumption growth, the lower volatility and vice versa.

Now, let’s look at the volatility in changes to the money supply. “Narrow” money supply or M1 is the total amount of currency, checking and other liquid deposits in banks and other financial institutions across the economy. This metric is useful because the total amount of liquid instruments such as cash and bank deposits that investors and consumers hold is very sensitive to expectations about interest rates and credit conditions, which are the key targets of monetary policy. Since 1960, volatility in M1 changes explains close to 40% of the annual variation in S&P 500 volatility[2].

When combined, these two metrics can explain around half of the annual variation in S&P 500 volatility. That is a very large amount given the simplicity of the metrics used and the fact that they apply to more than 50 years of US equity market history. This makes simple, high-level scenario analysis for volatility reasonably straightforward[3] and explains why it is important for investors to look beyond short-term events.

In this case, low consumption growth (defined as the 25th percentile of consumption growth over the last 50 years, or annual consumption growth around 2% or less) and high money supply volatility (defined as the 75th percentile of M1 volatility over the last 50 years) would be associated with around 18% annual volatility over the next two to three years. That is well above the 13% annual volatility that is the median observed in the last 50 years of history.

This simple scenario analysis suggests investors should plan for an extended period of higher-than-normal volatility, independent of any specific views about the likely outcome of European debt crisis, US elections and other near-term events. A well-diversified portfolio, including strategies that seek stability in periods of high-volatility such as minimum volatility strategies, should be near the top of the list for investors to consider as they plan their long-term investments.

Daniel Morillo, PhD is the iShares Head of Investment Research and a regular contributor to the iShares Blog. You can find more of his posts here.

Diversification and minimum volatility strategies may not protect against market risk.

[1] Volatility is measured for every year since 1960 as the annualized standard deviation in S&P500 daily returns. Data for S&P500 returns is from Bloomberg. Consumption growth is measured as the real annual growth as reported in the FRED database.
[2] M1 data is obtained in monthly frequency from the FRED database. M1 changes are computed as month-to-month percentage changes. M1 volatility is computed as the annualized standard deviation of the monthly changes.

[3] Scenario analysis is done using a simple linear regression of annual volatility on the two metrics described for the full 1960-2011 period. Volatility and M1 change volatility are used in logs, as is standard practice.

Copyright © iShares

Tags: Koesterich
Posted in Markets | Comments Off

The Bullish Case for Energy Stocks

Friday, August 24th, 2012

by Russ Koesterich, Chief Investment Strategist, iShares

Lower crude oil inventories and less spare capacity among OPEC oil producers are just two of many reasons why I continue to be bullish on energy and energy stocks over the long term.

As I’ve been writing about for months, oil supply remains tight by historical standards. Among the reasons I gave in a post early this summer, I expect crude prices to rebound in the long term: marginal supply is increasingly coming from unconventional higher cost sources, many large oil producing countries require a high crude price to balance their budgets and OPEC has very little spare capacity.

My bullish stance hasn’t changed. Back in early June, the benchmark US crude had traded down from a spring peak of $110 a barrel to a low below $80. Since then crude has rebounded to around $95. Here’s why:

• OPEC – the large swing producer in global oil markets, has dwindling spare capacity. In May, OPEC’s spare capacity was barely above 11% of production, the lowest level since October of 2008. While spare capacity has rebounded a bit since then, it is still well below the long-term average. This may be a particular problem if tensions escalate in Iran and more Iranian crude is removed from the global market. With less spare capacity it will be more difficult for OPEC to make up the lost production.

• In addition to less spare capacity, we are also seeing a drop in crude inventories relative to demand. As of the end of July, based on data from the American Petroleum Institute, US inventories had the equivalent of 22.5 days of demand, which is also below the long-term average. As a result, I believe that crude will remain well bid. The major risk to this thesis being either a crisis in Europe or the US going over the fiscal cliff, either of which would likely produce another sharp slowdown in growth and hurt oil demand.

As if that weren’t enough, there’s this handy chart that I blogged about in June, illustrating that global oil demand is likely to greatly outstrip supply by 2030.

How should investors position themselves? In my view, investors should consider maintaining a strategic allocation to a broad commodity benchmark which includes energy. Second, as I’ve advocated in the past, investors should consider an overweight to global energy stocks. Since June 11, 2012, global energy companies have advanced roughly 10%, outperforming a global benchmark by around 3.5 percentage points. Despite the outperformance the sector remains cheap. I continue to advocate an overweight through instruments like the iShares S&P Global Energy Sector Index Fund (NYSEARCA: IXC).

Source: Bloomberg

Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog. You can find more of his posts here.

The author is long IXC.

International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments typically exhibit higher volatility. The energy sector is cyclical and highly dependent on commodities prices. Companies in this sector may face civil liability from accidents and a risk of loss from terrorism and natural disasters.

Copyright © iShares

Tags: Koesterich
Posted in Markets | Comments Off

For Marc Faber The Iron ‘Ore’ Lady Has Sung

Friday, August 24th, 2012

Frustrated with the know-it-all bullish ‘experts’ on the Chinese economy lambasting wise boots-on-the-ground deep-thinkers such as Hugh Hendry and Albert Edwards; Marc Faber (who discussed this in detail in the clip we presented here) today set about correcting some of that vacuous chatter on China’s dominance (with all its current stuffed inventory). Noting that the Chinese stock market is not exactly pointing to the growth everyone is relying on (and we add since the MAR09 lows it is only fractionally better than Spain), Faber brings up one chart (courtesy of The Bank Credit Analyst) to rule them all. Alongside the mega-bubbles of: Gold in 1970s, the Nikkei in the 80s, and the Nasdaq in the 90s, Iron Ore prices since the start of 2000 have them all beat – and recently (as we noted here) have begun to roll over.

The four biggest bubbles of the last 40 years… with Iron Ore the clear winner…

and how is China’s equity market doing?

as Faber adds:

All these indicators [which he discusses at length from electricity production to Macau gaming revenues and consumer spending habits to appliance and air-conditioning volumes] do not necessarily suggest that the Chinese economy is collapsing, but they reliably do suggest that the economic slowdown is more pronounced than official Chinese statistics would have you believe. In addition, these indicators do not imply that the Chinese stock market will decline further (but it could). Perhaps the weak performance since 2008 has already discounted much of the slowdown in economic growth.

Charts: The Bank Credit Analyst and Bloomberg

Tags: Hugh Hendry
Posted in Markets | Comments Off