In the midst of the Japan quake, Tsunami, Nuclear problems . . . .

I'm counting on

- an over-reaction to terrible natural disaster news
- an over-reaction to terrible man-made safety failure news
- an over-reaction to sector analysis

As it relates to the auto sector and the chip sector, the general news across radio, TV, the web and print is talking about globalization of manufacturing and just-in-time inventory practices. These are not new - twenty plus years ago, I worked for Digital Equipment in the Detroit area and was heavily involved in the semiconductor and automotive spaces. And yes, even then, disasters were contemplated and disaster planning was part of the manufacturing process.

Let me be clear, all three issues are serious and are not to be swept aside. It's just that fear in my eyes, is a stronger emotion than greed. Action on that opinion is part of my competitive edge.

I took advantage of this yesterday by buying a calendar put spread @75 with the intent of layering a 75/80 diagonal or simply letting the MAR 75 expire and then selling the APR 80 after March expiration. The trade cost me $0.97 and is now worth $1.575 .... a 62% gain.

I may close half this afternoon and capture the gain. At present Delta -10.07, Gamma -1.51 and Theta 15.15. I could buy the MAR 75 put for .74 and sell the APR 80 for $4.25. Or I could wait 'til next week and see where things stand. I'm leaning towards the latter.

IN ENGLISH, Toyota was trading at a 1-year high of 93.9 on 3/1/2011. On the 4th, it dropped below its 20-day moving average at 90.75 and by the 11th had dropped below its 50-day around 86.50. Yesterday it dropped below its 100-day at 81. Under normal, non-crisis scenarios I would expect it to continue down, but upward volume is a bit too strong. I believe it will stabilize above 80 within the next month.

SO, I sold someone insurance that I would buy their Toyota stock at 75 until Saturday. If TM closes above 75, I keep the premium. If it's below 75 (and I do nothing else) I own TM at 75 - if it continues its decline, I am losing money.

If, as I expect it will, TM approaches 80 again the next few days, I will sell an 80 put that expires APR 15th.

Fueher's take on the bank stocks

A short film clip with sub-titles can be found here.

Interesting forthcoming Goldman trade

watch your email this week. This is a variant on Fari's trade. If it works, kudos to the master! if not, I take the blame ... but I like the risk/reward.

What does a crash look like?

from David Elliott of WallStreetTeachers.com

Checkout David's chart/indicators.

What does a crash sound like?

The Thursday May 6th 2010 1000 point drop sounds like this

This is a recording of Ben Lichtenstein from Trader's Audio. The company provides a webcast from the Chicago Mercantile Exchange S&P 500 pit. The E-mini S&P 500 index futures index (ETH June 2010) dropped from about 1160 to 1066.50 that day. Between 1:30 pm and 1:45 pm central time the index dropped from 1130 to 1066.50 - over 60 points! (I consider 10 points a big move). From 1:43 to 1:45 the index dropped 40 points ... in 2 minutes!

The VIX ("fear index")had its biggest gain since 9/2008 hitting. From a low of 24.43 (considered high) to a high of 40.71 settling the day at 34.16. over the past 10 years a rough range from 10 to 20
would be considered normal.

a word about his lingo:

"paper" - institutional trades
"9 even, 97 even" refers to 1099.00 and 1097.00 on the S&P 500 futures
.. more lingo can be understood from Ben's web site.

A word about the ETFs

From the ProShares TBT website (emphasis added):

"This ETF seeks a return of -200% of the return of an index (target) for a single day. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their ProShares holdings consistent with their strategies, as frequently as daily. For more on correlation, leverage and other risks, please read the prospectus."

As such, the strategy is a short-term strategy -- the holding period should be days, maybe weeks, but not months.

you mean NOW?

In my last post I talked about the fundamental reasons why the TBT/TLT trade should work and explained some of the risk involved. I've been asked if TODAY was the time to buy - the answer? not yet.

(click on the chart to enlarge)




The chart shows opening the trade July 8th at $4.18 ($102) and closing it July 15th at $13.78 (+$2,748) for a profit of $ 2,646. These are buy-to-open and sell-to-close points for a number of reasons including:

OPEN
- the pair was getting very close to its 200 day moving average
- RSI touched the 5% level

CLOSE
- the pair had gone above both the 50-day and 20-day moving average
- RSI touched the 95% level

Looking back on this trade, I added a PairCorrelation study. Note that the ETF pair was correlated below -0.95 and was getting close to exceeding that threshold. A perfect inverse correlation would be -1.00.

What did you ask me? Oh yes, is it time to open the trade?

I said no because all the moving averages are converging and the RSI is not yet below 5%. I like the fact that the correllation is still below -0.95, but that's not enough. As they say, it's important to wait for confirmation.

Fed Ending Treasury Purchases

This is significant - the purchases are what kept interest rates low. I believe now is the time to begin scaling into a series of trades that take advantage of declining bond prices and increasing rates.

Here's the premise: we're at the beginning of a trend where we see an increased desire for risk assets ... selling treasuries and buying stocks, alongside rising rates (within 6-12 months).

How do we do it? As of this writing you can take in $0.34 a share buying 200 shares of TBT and selling 100 shares of TLT.

This strategy uses ETFs in a long/short play that minimizes (or increases) the cash in your account. On the downside, it takes $9400 in buying power to execute the trade in a standard retail margin account.

Why should it work? When interest rates rise, bond prices decrease. You can buy a fund that increases twice the percentage of a fall in bond prices. You can pay for it by selling twice the number of shares of a fund that increases the same percentage as a gain in bond prices. When bond prices decrease, the value of the fund you bought rises and that of the fund sold decreases. When its time to close out the trade (both sides!), you sell the fund that has increased in value and buy the fund that has decreased in value.

How do you lose on the trade? If the stock market drops, investors will shift their holdings to what they perceive as safer assets (government bonds). As demand increases, bond prices will increase and rates will decrease. Second, one of the less understood features of these ETFs is tracking error - the variance between what the fund achieves and the change in its underlying index. That is one reason why ETFs are are considered short-term hedging instruments.

Third, if the markets stay range-bound .. say up 10% Monday, down 10% Tuesday, and so on through the following Monday, here's what happens to $100:

Mon	+10%	110.00
Tues	-10%	99.00
Weds	+10%	108.90
Thu	-10%	98.00
Fri	+10%	107.80
Mon	-10%	97.00

The bond went up 10% three days, down 10% three days and instead of back to even, the trade is down 3% !

I do expect periods where the behavior goes against us. I also expect to hedge the trade and move in and out of the trade more than several times over the next 3 years.

Reviewing the July Prediction

Here's the current picture of the July 5th prediction .... the SPX drops to the 730-780 range by the 1st week of March 2009.

It's possible that we've already hit the bottom in November, but I don't think so.  My estimate is that there will be an Obama bounce up around the inauguration and then a post-partum depression of sorts (downward move) with a gradual grind in a trading range through February.