Friday, October 29, 2010

Calm Week Of Stock Equity Market At Inflexion Point

Both daily trading range and volume shrink in this week. Market participants are hesitating to trade in a market without direction. Some institutional investors attempt to sell down the market but there are not many followers. Investors with holdings and unrealized profit are afraid that stocks sold at current price cannot be bought back at a lower price. Investors with cash on the sideline are waiting for the ideal entry point. But it appears that the majority of market participants anticipate an immediate correction at current peak level. The majority of sellers are traders and individual investors liquidating only a small portion of their portfolio.

On the other hand, there is ample supply of capital in the financial market. Concentration of wealth and the wealth creation effect of stock equity appreciation make investors hungry for yield. The majority of individual investors continue to flee the stock equity market and go into the bond market. As mentioned in the Yahoo! article "First-Ever TIPS Auction at Negative Yield: What It Means", the offering of $10 billion in Treasury Inflation Protected Securities (known as TIPS) was priced to yield an interest rate of -.55 percent. In another Yahoo! article "Cotton, coffee and sugar all rally to end week", commodities are back to recent high level.

Although market sentiment on economic growth is bleak, especially on unemployment rate, assets price are driven by wealth allocation which is mostly held by household. Therefore stock equity and real estate become unpopular after the financial crisis. However, institutional investors are benefited from the rally of stock equity.

From Yahoo! article "For Many Market Strategists, Equities Are Top Dog Again", asset allocation strategists haven't had an easy time in recent years. They've grappled with deflation, recession, plummeting U.S. stock markets and surging foreign economies. And for awhile they dished out bigger weightings to defensive plays-bonds, cash and commodities.

But in 2011, strategists expect the stock market to notch double-digit gains and recommend investors boost allocations to ride the wave, whether its lower-risk consumer staples stocks or global companies tapping into emerging market supply needs.

"The S&P 500 is growing its earnings," says Joe Zidle, head of global wealth management investment strategy at Bank of America Merrill Lynch. "And we think that stocks are undervalued relative to historic price-to-earnings ratios."

Market is waiting for trigger signal for the next move. Probability of an imminent market correction exists. Short term speculative traders can use swing trade strategy to make profit from market movement. In the long run, stock equity will catch up with other wealth assets.

Sunday, October 24, 2010

Wealth Creation Effect Of Equity Stock Shifts Market Dynamics

Broad market index is buoyed at recent high level with relatively higher trading volume. Market is oscillating and seems to look for a breakout. Dynamics is changing from slow rally to a competition among market participants. Some institutional investors see the significant profit since the bottom in last year and attempt to take profit for part of the investment portfolio. On the contrary, some individual investors who sold part of the investment portfolio during the bottom sees the recovery in the remaining portfolio and dividends in the last quarters. The low return of money market and the possible peaking of treasuries and bond lures them to take more risk in the equity stock market. Opportunistic traders are pushing the movement of market to make profit from the volatility.

Although the long term outlook is optimistic, there is uncertainty in short term market movement. It is not a good time for long term investment. There may be lower entry point which a lot of investors are waiting. There is possibility that market may dip due to profit taking. However, there is a lot of liquidity looking for financial return on the global scale. Any dip would attract support from various investors.

The speculative trading portfolio has new position in stock holding and maintains a bullish holding on leveraged ETFs. However, the trading strategy is more inclined to day trading rather than buy and hold.

The Yahoo! article "Small investors shun stock funds -- and miss the big rally" describes current market.

Individual investors are boycotting the stock market, while hedge funds have regained their swagger after wandering in the wilderness.

"We're at an inflection point where investors are beginning to become more tolerant of risk," Heinz said. "We had been at historically low levels for a long time. Only now are we starting to see investors start to take advantage of opportunities in the marketplace."

Despite the renewed flow of capital into hedge funds, which invest in an array of assets, including stocks, commodities and currencies; the average investor continues to boycott the U.S. stock market.

"Individual investors are willing to take some risk, but not in large cap U.S. stocks," he said.

Friday, October 15, 2010

Market Turbulence

Market ends nearly flat on broad index in this week. However there is turbulence in which opportunistic day traders may make a fortune. Unfortunately the speculative trading portfolio is not able to take advantage of market fluctuation. The trades were made at the wrong timing, sometimes too early or missing the right time. Stock trading is not pure gambling and the skills can be improved with experience and knowledge.

As mentioned previously, the portfolio has stock holdings with sold call option obligation. The majority of sold call options expire in the money. The underlying stocks appreciate much faster than initially thought of. Therefore option buyers will exercise the right to purchase the underlying stock at the option price. The stock portion of the portfolio will drop to a low percentage next week. Although it remains optimistic on market outlook, short term market oscillation may provide a more favorable entry point for stocks acquisition. There are holdings on bullish leveraged ETFs. The total holdings including hedging are currently more than 100% of portfolio value. In earlier post it is mentioned that leveraging can amplify profit as well as being destructive to the portfolio in unfavorable condition. From prior experience during the financial crisis, it should be very cautious of the impact on portfolio. A declining market and forced liquidation can quickly shrink the portfolio value.

In the last two days of this week, there are some institutional investor selling to take profit. This increases trading volume and drags the market down. There are also some buying from other institutional and individual investors to support the market. It can be seen that there are now more participants and the market dynamics may shift. Nevertheless, if the market becomes calm again, it is more likely that the pattern will be slow drift upward rather than steep dip.

As the guest in the Yahoo! article "Buy "Things" Not "Paper": Chris Martenson's Case for Commodities vs. Stocks" says, “All I see is a wall of liquidity that is eventually going to be chasing too few things”. But he parked his wealth in resources, not stocks.

Although market sentiment is bearish, it continues to climb the wall of worry. Equity stock market is an engine for wealth creation/destruction as well as wealth transfer. The majority of investors, both institutional and individual, suffered from the financial crisis. However only a small portion benefited from the aftermath rally. The total wealth is still less than the peak but a small percentage of people actually grow their wealth much larger than before the financial crisis. Thus the concentration of wealth makes the selling pressure very limited, for most kind of property including the currently most popular bonds and treasuries, commodities, and the least popular stock equity. The unpopularity of stock can be understood because of the wealth destruction during the financial crisis. Currency in the form of cash should be a safe asset but the low yield annoys the holder. Real estate is currently in a state treated by investors similar to the gold when it was valued around 400USD an ounce. It remains flat for extended period of time before investors jump in again. Many investors think that it is undervalued but there is no buying to push the price higher.

The market is liquidity driven. The probability for property to move in the upward direction is higher than in the downward direction. The speculative trading portfolio is currently concentrated on leveraged ETFs holding. Unlike the portfolio during the financial crisis, there should be enough buffer to maintain the portfolio for the market to move in unfavorable direction for reasonable amount before full recovery if achievable.

As mentioned in the Yahoo! article "Barry Ritholtz: Stick With "What's Working" and Don't Fight the Fed", "This market has had repeated opportunities to roll over, to fall on bad news, to follow other courses lower, or to take a modest sell off...and turn it into something more dangerous," he writes. "In just about every case, Mr. Market has refused to cooperate with the bears."

Friday, October 8, 2010

Stocks Continue To Climb Wall Of Worry

Stock equity market ends higher this week. Trading volume remains relatively low for a gradual increase in broad market index. As mentioned in the Yahoo! video "It Ain't Over Till It's Over: Stocks Can Continue to Climb Wall of Worry, Says Jon Najarian", institutional and individual investors with prior holding on stock equity are not selling for profit taking. Some impatient investors with money on the sideline seeing the recent rally start to allocate more stock equity into the portfolio. This provides support for the market despite unfavorable news.

Stocks in the portfolio increase significantly in value. However the portfolio value does not increase proportionally because the sold stock options have a negative impact. The majority of options become in the money and will probably be exercised at the option price which is currently about 5% below market value. Market performs much better than previously expected.

Market movement is tightly range bounded most of the time during this week. It appears that investors waiting on the sideline for a dip to enter the market need to continue to wait. Opportunistic traders can day trade while the market moves sideways.

Since market has reached recent high, it would remain calm for some time. Earnings announcement may create oscillations. Although the outlook of stock equity in the long run is optimistic, short term trading in the speculative trading portfolio emphasizes more on instantaneous market movement. The stock portion of portfolio will be held until option expiration. The leveraged ETFs portion will be used for day trading with caution.

Tuesday, October 5, 2010

More Investors Jump Into The Equity Stock Market

The quarterly earnings announcement starts this week and attracts more investors on the sideline than last week. This causes volatility in the market. Traders should be cautious on the instantaneous movement of the equities in the portfolio.

Investors take on more risk from the safety of money market. As mentioned in the article "The Bond 'Bubble': Are Small Investors Taking Too Big a Bet?" Furthermore, retail investors haven't been binging on long-term bonds, which stand to lose the most if interest rates rise. What they have been doing is responding rationally by moving out of money-market funds. Nearly $500 billion has come out of money funds so far in 2010. Thus, it seems, most people aren't selling off their stock funds to buy long-term bond funds. They are getting out of money markets and inching into short-term and intermediate bond funds.

Since many of the new market participants are attracted by higher return of stock trading but do not have enough confidence in the economy outlook, any news can easily drive the herd to run in either direction.

The speculative trading portfolio is holding stocks with sold call options. Market rally has driven a large portion of the options to become in the money. It is expected that some may be exercised later in the month. The leveraged ETFs portion of the portfolio is not for holding purpose as discussed in earlier post. They are primarily used for day trading purpose, especially in current market condition with sudden increase in trading volume by speculating investors on the sideline. There is opportunity in the wild movement of the market.

The stock portion of portfolio will be restructured after option expiration. The day trading strategy in leveraged ETFs will also be reviewed with experience gained in the tradings.

Friday, October 1, 2010

"Stocks Blithely Ignore Traditional Warning Signs"

About a month ago just before the beginning of recent rally, an author published an article "Far Too Many Bears for Stock Market to Crash?" The author accurately and timely predicts the recent rally in September. Recently the same author published another article "Stocks Blithely Ignore Traditional Warning Signs". It states that "There are so many charting indicators (i.e., no fewer than six Hindenburg omens) that say this market should be collapsing – but it isn’t…so far." The article explains the fear of many individual investors who are waiting on the sideline.

One of the comments has insight of current market dynamics. Most of the arguments fit into the speculative trading strategy for the investment portfolio. It is reprinted as follows.

I have many of the same reactions to the marker lately as you do and although I also appreciate the insights and talent of guys like Bob Prechter and Dr Robert McHugh it does appear that something is no longer adding up.

I suggested as much in my own commentary when I wrote that technical analysis itself was now under attack and very susceptible to manipulation. The suggestion is that we can no longer rely on many of the indicators that the experts are using to chart the future. Furthermore, it has occurred to me that at a time when very few “real” investors still populate the markets that “very little effort” and not a whole lot of money can move markets in the direction of choice for those who are still participating.


We are getting false signals every single day and that is only leading investors to be fearful of everything. Is it any wonder that money has panicked and fled to the safety of bonds? And what safety are bonds when the dollar itself is going through a transformative devaluation that is draining wealth and buying power even as it offers historical low interest rates.

It is robbery by manipulation and I would strongly urge anyone with any sense to not run to that (so-called) refuge of safety but instead take a closer look at what is really moving in the markets. A lot of money is being made out there right now and it is not by people holding short positions and waiting for Armageddon.

Are we actually being cheated through a manipulation in the marketplace that pushes the herd to the cliff edge while all the real bargains are picked up at a fraction of their cost and our “safety” picks just drain our assets away? You better believe it. I am convinced this is a time of incredible buying opportunities despite the hazards of a sharp market sell-off. The risks can mirror the rewards in this kind of an environment but this really is a game for day-traders and those blessed with better than average market intuition and killer instincts.

So can you still make money? Absolutely. I would keep an eye on commodities, precious metals juniors, ETF’s encompassing developing markets and strategic resource plays that are overlooked by most other people. Rare earths are of of course but one example.

This is a great time to be a “stock picker” and do your own leg work. The easy money days when almost everything rose more or less in unison are gone for awhile and yet selective companies are doing stellar business and paying out the goods.

I wish I could depend on guys like Prechter and McHugh but the world of investing has become a casino of poor odds (as many others have noted) and the face cards are now in the hands of insiders who are yanking our chains and sending a multitude of shock-waves of fear through the ranks of investors to the point that the herd is primed and ready to move off the cliff in unison.

Let’s stay sane and not join them in that big leap.

And in the meantime, I would just caution to say that it will pay to stay on top of backstopping for losses and be prepared for the culminating event that brings this manipulation to a sorry conclusion.

Equity Stock Market Ends Flat This Week But With Oscillation

The equity stock market ends flat from last week. The average trading volume is higher due to more individual investors participating in the market. The increased trading volume is not in favor of a gradual climb of the equity stock but creating oscillation instead. This provides profit making conditions for opportunistic traders.

The article "After a Great September for Stocks, Now What?" analyses the market outlook for the fourth quarter. There are three possible scenario namely, bullish, bearish, and muddle-through respectively. The author finds himself in the last camp. Some of the individual investors previously waiting on the sideline change from pessimistic to a muddle-through scenario and start to participate again with limited trading activities. This results in the increase of trading volume as well as stock price oscillation.

The speculative trading portfolio is holding the stocks which have increased in value. On the other hand, call options expiring in October are sold to realise small profit. Initially they are out of money by 5 to 10% at the time of selling. Now some become in the money for 5 to 10% of value. Thus the growth potential of the stock portfolio is limited but the downside risk exists. However it is believed that the probability of a sharp decline of the equity stock market in this month is small. Some of the stocks in the portfolio may be liquidated to satisfy call option requirement. Although major indices reach year high, many stocks are lagging behind due to various reasons.

The leveraged ETFs holding is changed from neutral to slightly bullish. This enables the portfolio to appreciate in value if the market climbs higher while the gain of stock equity in the portfolio is largely offset by the call options sold. Some gain in the portfolio is achieved by speculative day trading of leveraged ETFs in this market environment. As mentioned in previous post, there are strict rules to be followed for trading to mitigate risk. Leveraged ETFs are mainly used for trading purpose and not suitable for holding for extended time. Despite a subject of much controversy, misinformation, and confusion, leveraged ETFs can be a useful trading engine if managed properly. Five Facts Every Investor Should Know About Leveraged ETFs.

Quarterly earning announcement is approaching. Corporations should be able to maintain revenue and profitability although the growth outlook may not be very promising. However, capital from both individual investors and institutions are seeking opportunity in the asset market of bonds, equity stocks, commodities, and currency. The market is likely range bounded at current level for some time. Also there is likely more oscillation due to increased individual investors participation and earning announcements.