In today’s feature the “Luck of the Irish” will hopefully mean that we can make some green (as in backs) from today’s trading strategy. The markets have been more volatile in both price and volume lately, for good reason. Geopolitical events in the Middle East and North Africa are becoming more widespread. The Japanese crisis is more uncertain with each passing day.
On a technical basis, all the major market indices appear to have broken their up trends and recent support levels. Because markets rose at such a fast past since the beginning of September, there is very little support between here and their respective 200 day moving averages. This could mean there is more downside to go before reaching next support.
There is a lot riding on the depth and duration of this correction. The primary reason the rally started was that traders felt that the Fed had their backs in a sense. As Ben Bernanke outlined his Second Quantitative Easing Strategy (QE2), many traders did a little math and recognized that $4 to $5 Billion of new money was going to move from the Central Bank to Primary Broker Dealers on a daily basis for the next nine months.
The Fed monetizing debt, while simultaneously pumping banks with a plethora of cash, gave a level of comfort to traders that the stock market would be a one way street up. Until mid February, that has been true. The VIX “fear index” dropped below levels of complacency not seen since before the 2007 Great Recession began. Optimism among both institutional and individual investors held bull to bear ratios at extreme levels for extended periods.
It almost felt like the golden age of investing was back, as the “mom and pop” investors who missed the double off the bottom over the last 20 plus months started to come roaring back in. Now that the belief that the Fed can print our way into prosperity is coming into question, a vacuum of confidence could occur.
In the near term it appears that the market has more downside to go as support has been violated. Using one of the oldest and most actively traded ETF’s the SPDR S&P 500 (SPY) to create a synthetic short position by Selling an April 125 Call for $4.24 and Buying an April 125 Put for $3.37 per contract could be profitable in this environment. In this example you start by pocketing $87 per contract immediately.
A couple of technical analysis methods point to SPY having a near term price target of $119. Two reasons: First, that is where its 200 day moving average is. Second, this run started at the end of August with SPY trading at $104.29. It reached a high on February 18th of $134.69. A normal 50% Fibonacci retracement puts SPY at $119.49.
Should this happen in a week’s time this trade could result in a profit of approximately $650 per contract. The risk comes into play should the market move up quickly. SPY closed yesterday at $126.18. Should SPY trade here or lower this will be a good trade.
If you currently own shares of SPY, employing the same strategy creates a collar on your position and is an even lower risk trade should the market recover as your exposure is limited, but so is your return.
There are many reasons to believe that the market could continue in its downward trajectory. Not only are markets ripe for a pullback, should it start to accelerate down, a generation of investors will be lost as they throw in the towel quickly and the confidence of even most astute investors could be shaken. If that happens SPY could overshoot $119 making this recommendation even more profitable.
Thursday, March 17, 2011
The Real Price of Oil
Last week marked the two year anniversary of the March 9th, 2009 low for the S&P 500; it also was the 11th anniversary of the NASDAQ high of 5050 set back on March 10th, 2000. Is the cup half full or half empty? It all depends on your perspective.
The mood of the stock market has grown increasingly more downbeat over the last few weeks. It’s no wonder, as investors are facing widespread geopolitical turmoil in the Middle East and a catastrophe of yet unknown proportions in the world's third largest economy.
Almost defiantly, markets have displayed impressive resiliency. The combination of these events might have the ability to knock down any strong market. So far though it has absorbed these shocks, but markets remain vulnerable to a deeper correction.
Over the last couple of years governments have pumped money into their economies on a fast and furious basis to keep them propped up. This has resulted in a global increase of prices for food and energy. Higher food costs and lack of opportunity are the main factors causing much of the turmoil in Middle Eastern countries.
The problems over there are creating issues over here as we are seeing gas prices around $4 per gallon. Higher gas prices have the same effect as higher taxes only without any additional benefits. It leaves less money for consumers to spend on discretionary items, which could cause contraction for the overall economy.
In addition higher energy costs results in higher prices or fewer profits for most everything. Getting goods from the raw material stage through the manufacturing process to the end user will require additional cost. Already high food prices will surely continue to rise with the additional cost of shipping the goods from the farms to the grocery markets.
Unfortunately oil is the lifeblood of our society. Many daily activities require oil. From factories to farms, oil is needed as coolant or fuel. Heating homes, creating electricity; everything from lubricants to lipstick, and medicine to plastics, requires oil.
Americans consume more gasoline than South America, Europe, Africa, and Asia combined! We are gasoholics! We have an addiction with oil. Two thirds of all the oil used in America is for transportation.
With the earthquake that has devastated Japan; a huge problem for the country will be the restoration of power and water for many of their citizens. Electricity is out for millions and will take several weeks or months to restore. In the meantime, electricity would be rationed with rolling blackouts to several cities, including Tokyo.
A total of four nuclear plants in Japan have reported damaged and are offline – some permanently. There has to be a replacement for that energy shortfall. Nuclear power plants take years to build so it is not going to come from that source. Oil along with coal will be the most likely candidates as Japan will reopen some of their old non nuclear facilities. This will create an even higher demand for oil.
The battle in Libya as well as demonstrations in many other oil producing countries is a sign of instability. This could lead to supply issues and higher oil prices. There are several reasons to be concerned that our own economies fragile recovery could be derailed.
The United States Oil Fund (USO) is one of the most actively traded oil based funds on the market today. Through the use of the actively traded futures contracts, it tracks the price changes of light, sweet crude oil.
USO went up 21% in a recent three week period, only to pull back 4% last week. USO closed Monday at $40.91 and has big support in $38 per share range. With all the negative issues regarding potential supply disruptions and increased demand for oil, we could see price increases for the foreseeable future.
An investment in OIL could act as a personal hedge and help offset some of your increased costs at the pump. Use a stop of $37.70 and be hopeful that it drops to that level, because that will spell relief for American consumers. If the cost of oil continues to rise, you can expect the stock market to eventually capitulate and tumble due to the higher associated costs for almost everything else. That is the real price that we could pay for oil.
The mood of the stock market has grown increasingly more downbeat over the last few weeks. It’s no wonder, as investors are facing widespread geopolitical turmoil in the Middle East and a catastrophe of yet unknown proportions in the world's third largest economy.
Almost defiantly, markets have displayed impressive resiliency. The combination of these events might have the ability to knock down any strong market. So far though it has absorbed these shocks, but markets remain vulnerable to a deeper correction.
Over the last couple of years governments have pumped money into their economies on a fast and furious basis to keep them propped up. This has resulted in a global increase of prices for food and energy. Higher food costs and lack of opportunity are the main factors causing much of the turmoil in Middle Eastern countries.
The problems over there are creating issues over here as we are seeing gas prices around $4 per gallon. Higher gas prices have the same effect as higher taxes only without any additional benefits. It leaves less money for consumers to spend on discretionary items, which could cause contraction for the overall economy.
In addition higher energy costs results in higher prices or fewer profits for most everything. Getting goods from the raw material stage through the manufacturing process to the end user will require additional cost. Already high food prices will surely continue to rise with the additional cost of shipping the goods from the farms to the grocery markets.
Unfortunately oil is the lifeblood of our society. Many daily activities require oil. From factories to farms, oil is needed as coolant or fuel. Heating homes, creating electricity; everything from lubricants to lipstick, and medicine to plastics, requires oil.
Americans consume more gasoline than South America, Europe, Africa, and Asia combined! We are gasoholics! We have an addiction with oil. Two thirds of all the oil used in America is for transportation.
With the earthquake that has devastated Japan; a huge problem for the country will be the restoration of power and water for many of their citizens. Electricity is out for millions and will take several weeks or months to restore. In the meantime, electricity would be rationed with rolling blackouts to several cities, including Tokyo.
A total of four nuclear plants in Japan have reported damaged and are offline – some permanently. There has to be a replacement for that energy shortfall. Nuclear power plants take years to build so it is not going to come from that source. Oil along with coal will be the most likely candidates as Japan will reopen some of their old non nuclear facilities. This will create an even higher demand for oil.
The battle in Libya as well as demonstrations in many other oil producing countries is a sign of instability. This could lead to supply issues and higher oil prices. There are several reasons to be concerned that our own economies fragile recovery could be derailed.
The United States Oil Fund (USO) is one of the most actively traded oil based funds on the market today. Through the use of the actively traded futures contracts, it tracks the price changes of light, sweet crude oil.
USO went up 21% in a recent three week period, only to pull back 4% last week. USO closed Monday at $40.91 and has big support in $38 per share range. With all the negative issues regarding potential supply disruptions and increased demand for oil, we could see price increases for the foreseeable future.
An investment in OIL could act as a personal hedge and help offset some of your increased costs at the pump. Use a stop of $37.70 and be hopeful that it drops to that level, because that will spell relief for American consumers. If the cost of oil continues to rise, you can expect the stock market to eventually capitulate and tumble due to the higher associated costs for almost everything else. That is the real price that we could pay for oil.
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