Interdum stultus opportuna loquitur...

Thursday, September 15, 2005

USRant: But First, Latham...

Note - from June 24th 2009, this blog has migrated from Blogger to a self-hosted version. Click here to go straight there.

Last night's Enough Rope - where Mark Latham put the boot into everyone - was exhilarating. I don't think the country realises what it missed out on by refusing to make him Prime Minister. He is a genuine 'rough diamond' - still a politician (and therefore, in the rant taxomony of humanity, a piece of parasitic scum), but one with whom I would love to have a beer. His remarks about Howard's 'short man handshake' were classic - especially given that Andrew Denton is a typical 'short man', right dow nto the pretend-intellectual facade.

He's a big unit, that Latham, and frankly - despite the fact that he's a politician (and therefore, in the rant taxomony of humanity... you know how it goes) - he's my sort of bloke, as opposed to shitbags like Howard and Downer, where I would be constantly fighting the urge to beat the crap out of them and piss on their steaming corpses. (And remember - I'm no mate of the Labour Party).

Anyhow - for those of you who aren't Australians, the reference will be completely lost: I might as well have been writing in Swahili. Simply put, Latham is as close to George Galloway as Australian politics will ever produce. I hope he travels with a light heart for the rest of his life; it's well past due for someone to rip the scab off the festering sore of the Two-Party, One-Party State.

Now, back to normal Ranting...

Yesterday I was very clear about long entries based on the end-of-day buying divergence. To recap, I said...

Grit your teeth, coz this one might just sting a bit, what with 10550 broken and all... if there's an early bounce tomorrow, I would be grabbing any profitable exit with both hands, thanking Crom and Odin for the bounty, and looking for a short signal at the top of any bounce.

Well, the morning panned out precisely as I anticipated - an early bounce that really wasn't warranted, and which fizzled right at the end of the first 15 minutes of trade. "Grabbing any profitable exit with both hands" was the perfect strategy for any overnight holds. Let's examine that chart...

Dow 15-minute chart 

Notice that there was no short signal at any time during the session; the only decent trading opportunities were the usual 'fade the first hour extreme' that I have written about several times before. The blue dotted line is the first-hour high, and the purple dotted line is the first-hour low. Notice how, just after the end of the first hour, the low was breached by just enough to get 'breakout' traders interested (and which coincided with a 'tease' breach of 10550)? Then... smack. A bounce that took the Dow towards the first hour high (but which stalled before getting there... 10575 got in the road).

Once the thing stalled at 10575, it dropped al lthe way to 10520 (10525-ish), and did not even pause for breath at 10550.

The thing to notice from all this palaver is the tendency of the Dow to trade in a very predictable pattern (which I've also written about before) - from 'quarter to quarter' - when it's got nothing else on its mind. 

The real art in this game is to understand which 'quarter' is meaningful. By the time it actually broke in a tradeable way, 10550 had been traversed five times - thoroughly diluting its 'stopping power'... (hint: how many times a quarter is traversed is one of the things that determines whether the 'next' traverse can be expected to be a 'tease'... at least the first three are teases on a low-volatility day.)

Anyhow - enough about all that. The 'first hour fade' is one of the "fielder's choice" methodologies, and should only be attempted when the trader already has brass in pocket from an earlier trade... never use this approach to try and get off scratch, because it will result in nervous trading... and therefore in losses.

Mid-session there was another buying CCI divergence (compared to yesterday's low); unexpected, but as I've also written before, you've got to take the devil on every time you see him, even if it looks like a lost cause. Yesterday's closing divergence is a classic example - it looked like on that stood a good chance of biting us on the bum, yet it turns out that it worked a treat. The same was true oftoday's buying divergence.

I'll say this until I'm blue in the face; if you wait for the high-probability events, and aim only to snaffle one S&P point a day, your rate of return is 2.5% a day - which makes Soros look like a rank amateur. (But he's trying to move around hundreds of millions of dollars - which is much harder; moving $2k-$200k is much much easier). 

To put that in perspective, a trader that can routinely garner a point a day will double his margin in 40 sessions (a nice Biblical number). In a year, a 1-contract account will turn into a 64-contract account - and that assumes that you only increase the number of contracts traded at the end of each 40-day period (once you get above 40 contracts, 1 point a day enables you to add one contract a day). 

If you add a contract every time you accrue 40 points aggregate profit (e.g., with 20 contracts you can in principle add a contract every 2 days if you snaffle a point a day), the account winds up as a 275-contract account at the end of a year... although to my way of thinking any account size > 50 is being greedy, and trading more than 100 is nerve-wracking. One point on a 50-contract account is $2500 a day, which is more than "livable"... when a month's worth of gains is enough to pay for a year's tuition at "Haaaahh-vid", you're doing OK.

This is why I am so adamant that only the highest-probability entries be expoited - from there it's the "fielder's choice" as to whether they want to risk frittering away the day's one-point win by taking additional risk. I invite you to go back through the historical Rants and examine how few days there have been where you couldn't snag one solitary point... even in yesterday's decline - with not a single short signal (bugger) - that oh-so-important point was there to be had. And yet so few people manage to do it.

Leverage plus discipline - that's all there is to it. No 'blood of ice/nerves of steel' crap... just the diligent application of a set of simple, sound principles. Honestly, that' s all there is to investment analysis of any sort.

When - imagine that - prefaratory remarks, and not an 'f-bomb' in sight. I'm obviously going soft.

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk performed 2 repurchase operations.

  • a $10.06billion, overnight repurchase with $7.96billion in T-backed collateral undertaken at a 12.2 basis point premium to the Fed Funds Rate (FFR); and
  • a $2billion, 7-day repurchase with $1.022billion in T-backed collateral undertaken at a 9 basis point premium to the Fed Funds Rate (FFR).

What did I say earlier in the week about the 'heads up' provided by the Fed's OMO desk? I said this...

Close to an FOMC meeting, the repo issue starts to happen at a premium to the prevailing FFR in anticipation of the new, higher FFR... but that usually doesn't start to happen to the overnight repurchases until a couple of days before the FOMC meeting, so I'm only mentioning it as a 'heads-up'. The big tip of the hand on the FOMC move will happen when the Fed's OMO desk performs this week's 14-day repurchase (that usually happens on Tuesday or Wednesday); if that repurchase is performed at a significant premium, it is a certainty that the Fed will hike rates again.

OK, so today's longer-term repo was a 7-day... the logic still holds. the FOMC tightens next week, for sure (I doubt I will get a Nobel Prize for that observation - it's been obvious they were going to do so).

Major US Indices

I've already done the technical palaver above, so let's move on...

The Dow Jones Industrial Average managed a gain of 13.85 points (0.13%) i na very sloppy session, closing out the day at 10558.75 points. 

The index hit an intraday high of 10582.07 at the end of the first 15 minutes, and fell as low as 10520.93 during the session - the low registered just after midday, and provided the lovely buying divergence seen on the chart at the top of the post.

The economic news  wasn't flash - the CPI rose 0.5% (over 6% annualised) for the month, but the 'core rate' - the rate that applies to non-eating, non-driving Americans - was unchanged for the month. So those phantom workers in the CES birth-death model aren't having to deal with much inflation at all - since, being non-existent, they neither eat nor drive. Reminds me a bit of the parable of the lilies of the field.

Apart fromthe CPI, Business Inventories dropped hard despite a pop in sales. Why would businesses be depleting inventories if we're back in 'good times'? There was a hint in the New Jobless Claims number, which spiked to a tad under 398k (consensus was for 350k). You can blame the number on Katrina if you like, but that should already have been fctored into the consensus guess.

Within the blue-chip index, 15 stocks rose, the biggest gainers being Mcdonalds (MCD, +3.37% to $33.45) and Boeing (BA, +1.40% to $65.08), which accounted for 16 Dow points between them. Losers in the Dow numbered 14 and were led by Pfizer (PFE, -1.27% to $25.70) and Caterpillar (CAT, -0.96% to $57.74), with these two stocks contributing -7 Dow points worth of downward pressure on the index. Volume traded was tilted in favour of the losers by 173.4m shares to 163.7m.

The broader S&P500 added 0.57 points (0.05%), at 1227.73. Within the index, gainers numbered 242, while 242 S&P500 stocks fell for the day. Volume was tilted 1.3:1 in favour of the losers with 1058.45 million units traded in the losers as compared with 805.60 million traded in the losers .

Over at Times Square, the Nasdaq Composite dipped 3.18 points (0.15%), to close at 2146.15, while larger-cap technology issues fared better with the Nasdaq100 losing 1.08 points (0.07%), to end at 1588.55 points. Within the tech benchmark, gainers numbered 36, while 61 Nasdaq100 stocks fell for the day. Volume was tilted 1.6:1 in favour of the losers with 435.61 million traded in the losers compared to 275.92 million in the winners .

NYSE Volume was super-chunky, with 2.06 billion shares changing hands, while Nasdaq Volume was chunky, with 1.74 billion shares being shifted from one online brokerage account to another (and back again, in all likelihood).

Major Market Statistics
Dow Jones Industrial Average10558.7513.850.13%
Nasdaq Composite2146.15-3.18-0.15%
NYSE Volume2.06bn--
Nasdaq Volume1.74bn--


My 9-stock "bellwethers" group fell by an average of 0.06%

  • General Electric (GE) +$0.33 (0.97%) to $34.38;
  • Citigroup (C) +$0.05 (0.11%) to $45.03;
  • Wal Mart (WMT) -$0.38 (0.85%) to $44.32;
  • I.B.M. (IBM) -$0.47 (0.58%) to $80.01;
  • Intel (INTC) +$0.06 (0.24%) to $24.55;
  • Cisco Systems (CSCO) +$0.19 (1.07%) to $18.03;
  • eBay (EBAY) -$0.01 (0.03%) to $37.65;
  • Fannie Mae (FNM) -$0.37 (0.77%) to $47.81; and
  • Freddie Mac (FRE) -$0.44 (0.74%) to $58.86.

Market Breadth & Internals

NYSE declining Issues beat out advancers by 1683 to 1552, for a single-day A/D reading of -131; and Nasdaq losers exceeded gainers by 1763 to 1265. The 10-day moving average of the A/D line fell to -62.6 on the NYSE, while the 10dma of the Nasdaq A/D fell to -209.9.

On the NYSE declining volume was greater than volume in advancing issues by 1027.6 to 999.2 million shares; On the Nasdaq declining volume exceeded volume in advancing issues by 1144.6 to 580.7 million shares.

123 NYSE-listed stocks rose to new 52-week highs, and 52 posted fresh 52-week lows, while on the Nasdaq there were 68 stocks that hit new 52-week highs, and 43 which fell to fresh 52-week lows.

Market Breadth Statistics

Advancing Volume (m)999.24580.73
Declining Volume (m)1027.571144.62
New Highs12368
New Lows5243

Market Sentiment Statistics
CBOE Volatility Index12.49-0.42-3.25%
CBOE Nasdaq Volatility Index15.760.191.22%
Equity Put-Call Ratio0.59-0.19-24.36%
10-day PCR0.6000%
SPX-VIX Ratio98.33.243.41%

Bond Market Analysis

Bonds fell at the long end, with the yield on the benchmark 30-year Treasury bond rising 5.8 bps to 4.511%. The 30-year bond futures dropped another 12 ticks to close at 115-09/32 (the session low was 114-30/32). I am really pissed off with myself for not being more diligent on the bond market; the 'rumbling in the waters' on August 31st corresponded exactly to the high in the bond market, but I didn't turn that into a decent fatwah against the bond. I was just too busy to give enough attention (although I did point several folks towards a shorting bias - they have written in mentioning it).

The middle of the yield curve was broadly lower: five year yields rose to 3.994%, and ten-year yields rose to 4.214%.

Spreads between short-dated (2-yr) Treasuries and high-grade corporate bonds of similar maturity profiles were 8.0 bps wider at 10.0 basis points; spreads between longer dated Treasuries and their corporate AAA counterparts fell to 39.0 bps for 10-year AAA, and 72.5 bps for 20-years.

Credit spreads (spreads between corporate bonds of the same maturity profile but different creditworthiness) were mixed with the AAA-A spread on 20-years 1.0 bps wider at 37.0 basis points and the 10-year AAA-A spread 1.0 bps tighter at 13.0 bps.

Treasury Yields
UST 13wk (yld)3.35500%
UST 2Y (yld)3.880.020.52%
UST 5Y (yld)3.9940.0360.91%
UST 10Y (yld)4.2140.0461.1%
UST 30Y (yld)4.5110.0581.3%

The Banks Index shed 0.33 points (0.34%), at 97.47; within the index,

  • Fifth Third Bancorp (FITB) -$2.07 (5.11%) to $38.45;
  • Comerica (CMA) -$0.94 (1.54%) to $59.96;
  • North Fork Bancorp (NFB) -$0.37 (1.41%) to $25.85;
  • Wells Fargo (WFC) -$0.58 (0.98%) to $58.61; and
  • PNC Financial Services (PNC) -$0.50 (0.88%) to $56.16.

The Broker-dealer Index shed 2.72 points (1.54%), to end the session at 174.44; the ticket clippers lined up as follows -

  • Ameritrade (AMTD) -$0.68 (3.11%) to $21.17;
  • Bear Stearns (BSC) -$2.60 (2.46%) to $102.90;
  • Legg Mason (LM) -$1.89 (1.77%) to $104.85;
  • Charles Schwab (SCH) -$0.18 (1.24%) to $14.32; and
  • Morgan Stanley (MWD) -$0.47 (0.9%) to $52.00.

The Philadelphia SOX (Semiconductor) index declined 4.85 points (1.01%), to 473.26

  • National Semiconductors (NSM) -$1.28 (4.88%) to $24.97;
  • Freescale Semiconductors (FSL-B) -$0.72 (2.92%) to $23.95;
  • Micron Technology (MU) -$0.36 (2.72%) to $12.87;
  • Texas Instruments (TXN) -$0.89 (2.62%) to $33.06; and
  • Altera (ALTR) -$0.50 (2.57%) to $18.97.

Gold & Silver Markets

Gold rose $5.60 (1.24%) to close at $456.3 per ounce despite little movement in the US Dollar index. Call me perverse, but this looks like Dumb Money at work. That said, the week's CoT will tell the tale; it might be smart money taking advantage of a last-gasp spike in the USD...

The Gold Bugs Index added 14.14 points (6.58%), closing at 229.19

  • Harmony Gold (HMY) +$0.41 (4.66%) to $9.21;
  • Eldorado Gold (EGO) +$0.13 (3.89%) to $3.47;
  • Gold Fields (GFI) +$0.30 (2.42%) to $12.70;
  • Newmont Mining (NEM) +$1.05 (2.39%) to $44.99; and
  • Coeur d'Alene (CDE) +$0.07 (1.88%) to $3.79.

Silver rose $0.03 (0.47%) to close at $7.08 per ounce. The Gold and Silver Index (XAU) gained 1.76 points (1.68%), ending the day at 106.46 points.

  • Durban Rooderpoert Deep (DROOY) +$0.14 (10.69%) to $1.45;
  • Harmony Gold (HMY) +$0.41 (4.66%) to $9.21;
  • Gold Fields (GFI) +$0.30 (2.42%) to $12.70; and
  • Newmont Mining (NEM) +$1.05 (2.39%) to $44.99.
Precious Metals and Indices
PHLX Gold and Silver Index106.461.761.68%
AMEX Gold BUGS Index229.193.61.6%

Oil Market

Told you that the bounce in oil would be temporary, didn't I?

Actually, it's early days yet - far too soon to call an end to the bounce. The market responded very well to an early-session dip to $63.85  (and is still way above the critical $62.75 closing pivot).

The high-probability end-point for this bounce (assuming $62.75 holds for the rest of the week, and on Monday) is actually way up at $67.50 - that would make a beautiful head and shoulders on the daily chart - which, when the left shoulder is broken, will project down to $54.65. The fact that Crude will reverse back up before it gets down that far is not hugely relevant - it will get down to the high $50's.

Longer term, y'all know my views. Oil's going to top $100.

Today, it lost ground, shedding $0.36 per barrel, closing at $64.75 per barrel. The Oil and Gas Index (XOI) gained 9.66 points (0.93%), to 1051.64

  • BP (BP) +$0.79 (1.14%) to $69.96;
  • Kerr Mcgee (KMG) +$0.51 (0.55%) to $93.70; and
  • Marathon Oil (MRO) +$0.29 (0.43%) to $67.43.

The Oil service stocks (OSX) Index added 0.95 points (0.56%), closing at 171.17

  • Weatherford International (WFT) +$1.32 (1.95%) to $69.00;
  • Halliburton (HAL) +$0.97 (1.53%) to $64.32; and
  • Smith International (SII) +$0.34 (1.04%) to $32.95.
Energy Complex
Reuters CRB318.82-0.83-0.26%
Crude Oil Light Sweet64.75-0.36-0.55%
Heating Oil1.912-0.01-0.67%
Natural Gas11.3360.151.3%
Unleaded Gas1.8987-0.04-1.99%
AMEX Oil Index1051.64-2.38-0.23%
Oil Service Index171.170.950.56%

Currency Markets

USD Exchange Rates
US Dollar Index88.090.460.52%
Australian Dollar0.767-0.0046-0.6%
Swiss Franc1.26750.00960.76%
Canadian Dollar0.8435-0.0031-0.37%