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Written by Sluf
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Friday, 29 October 2010 17:58 |
This next week will be interesting... there are 2 major, random events and a major scheduled event. You need to be positioned going into this next week and you probably shouldn't make any long-term positions until the end of the week. "Should" depends on the exact circumstances... but in general, I would stay put with my defensive portfolio through Thursday noon... then BUY.
Event 1: The election. Intrade reports the market for a Republican house at $92.40 and a Democratic Senate at a measly $54.80. If there is a swing in both houses, I think you will see a slight boost to the market... If there are some major upsets and the Republicans don't pwn the House, you will see a market drop. If something tragic happens (low-probability, major disruption to any election area), I think the market will make a significant pullback.
Event 2: Quantitative Easing II (QE2)... the act of buying treasury securities (more demand = higher price = lower yield) from money created out of thin air. The hopechangehope is that you spur the economy through low interest rates. The risk is that the spur is nor of a dull poke and you get no growth... or you do get more growth than you wanted meaning a sudden reversal of interest rates to slow inflation. A few weeks ago, we heard that the Fed is not worried about "some inflation" to help move the economy, so that pretty much tells us there will be some QE... the question is how much? The talking head have been throwing around the $1,000,000,000,000 ($1T) level... to put that in perspective, the total Air Force 2011 budget is only $170B!
If we see anything less than $1T, you will see a 3-5% drop across the market with the big movers of late (CRM, CMG, CSTR, NFLX) taking something closer to a 10% haircut. If we see anything above $1T or if we get it all in the system in less than 12 months, I think you'll see a modest move up. Stocks have inched higher since we heard that the Fed was considering this move so I think the $1T is already baked into the PPS. Nothing if we get more... a drop if we get less.
Event 3: Jobs... Government payrolls should continue to drop and private payrolls will move higher. We're not to +200,000 yet... and I would follow this link all week to gauge the results. http://biz.yahoo.com/c/ec/201044.html I'm not expecting any blow-out numbers anywhere, but if there is an unexpected drop, I think the market will use it as an excuse to take some money off the table.
Now, all the news will be out before the market open on Friday (except pending home sales, but that will impact us 6 months from now). I think if you watch your stocks toward the end of the week, you can buy at the open on Friday and do ok regardless of the price action early in the week. That may mean taking a little risk Thursday afternoon to pick up any roadkill and accept the payroll data on Friday morning.
Me? I'm defensive (cash) right now. I'll be watching any big moves to close any short calls and set some short puts with any gaps to the downside. I think 80% commitment by the open on Friday will be acceptable between now and Christmas.
Sectors:
- Producers (airlines... maybe not me, autos like Ford, and CAT & DE)
- Banks (Citi will be my long-term pick this next week with Bank of America set for a short-term boost even though they're still carrying the dead body of Countrywide on their shoulders)
- Gold (yes... in the mining space, Rangold)
- Solar/alt energy (new sector for me but I'll have a recommendation this weekend)
- Consumers (maybe... Fortune Brands?)
In the "You got to be shitting me file".... Coinstar... they own the green coin counters in grocery stores that pull a nice 9% of every dollar they count. The were up HUGE today... and I missed it. They have been on my radar since Netflix (NFLX) reported a blowout quarter about 6 months ago... I was looking at a red NFLX kiosk when I heard the news and saw a green Coinstar kiosk next to it. Anyway, I lost track of their earnings. In this case, if you think a stock will have a huge move, you may not want to buy the stock. Yesterday, you would have risked $46 to own the stock. If you were expecting a 10% jump, you would have spent about $1.50 and made over $6 in profit. If you put the $4600 that you would have spent in the stock and spent it all on a 10% climb in the PPS (this is an all-or-nothing/high-risk play), you would have purchased about 30 contracts and netted over $23,000 today. You could have purchased a conservative Nov $36 call for $10 (the PPS was about $46) and made a dollar-for-dollar increase in the PPS (i.e. double your money overnight).
Individual stock picks this weekend.
Sluf |
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Written by Sluf
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Sunday, 17 January 2010 22:51 |
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In this first diagram, we can imagine any stock today and the probability of the PPS movement into the future.The darker the green, the higher probability. Short-term and close to today’s PPS have the highest probabilities while farther out expirations and PPS far from today’s price have a lower probability. Not every stock has a circular probability… higher volatility equities would be stretched into the vertical, not necessarily in the time axis. Lower volatility stocks would be compressed in the vertical, looking like they are stretched in the time axis. I will discuss the shape of this half-hemisphere later.
Natural free market forces will act upon a stock during trading. As a result, limit orders will inhibit PPS movement up and down. We can infer a red shaded area that represents the maximum up and down movements each day. While this red area is not exclusive, we can assume statistically that the PPS will not move into these areas from a given PPS. Each stock as its own up and down limits and individual stocks may change that limit over time.
Prudent investing means that you deliberately purchase a stock at a certain price because it is going to rise in value. Prudent investing would also mean that you know going into the transaction that you know when that same stock is over-valued as you unload the equity. The area above your predetermined PPS is exclusive, meaning you will never see the PPS in that area because you have already placed your limit order at the point where you think the stock is over-valued – this is your limit order to sell that will execute when the PPS hit the designated price. Likewise, the lower hashed area is restrictive as you lose move in this area and you would not have purchased if you thought the PPS would fall – this is your stop order that will execute if the PPS stumbles lower.
NOTICE: One-half of the dark green area (high probability PPS values) is exclusive. While you have access to the other half (above today’s PPS in a bullish prediction), you would tend to have higher probability of a PPS value if you modify the buy-and-hold strategy.
This graph depicts a covered-call scenario. I have purchased the stock and determined my exit (over-priced value). In addition, I have defined a period to realize my returns. By establishing a period, we give up the lighter green/white areas in exchange for dark green below the PPS. The short call means I get cash today regardless of the PPS in the future. This effectively lowers my entry point but does not lower the PPS today.The result – a lot for dark green area that will make money. The only losing situation is in the lower hashed area and even then, that red covers light green and white PPS probabilities… i.e. lower probability we will find ourselves there. |
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Last Updated ( Wednesday, 20 January 2010 07:49 )
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