Stock Market Breadth Weakening

By Chris Ciovacco | February 22, 2012 | 7:49 AM |  0 CommentsTweet This

Stock Market Breadth Weakening

We often look at “market internals” to gain a better understanding of possible inflection points for equity prices. Market internals include numerous indicators with most being centered around market breadth. Market breadth measures the number of stocks participating in the general market’s trend. Healthy markets have a high percentage of participation; weaker markets have what is known as “narrow breadth”.

The Summation Index, shown below, is an intermediate-term measure of market breadth. A turn down in the Summation Index, all things being equal, increases the odds of a market correction. Markets can advance with a declining Summation Index, but it is a sign of waning participation.

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Managing Risk: Herbalife (HLF)

By Bob Lang | February 22, 2012 | 6:23 AM |  0 CommentsTweet This

Managing Risk in Herbalife (HLF)

I wanted to share how we carefully managed risk around an options trade for subscribers in Explosive Options today for Herbalife that left us with profits and a risk-free trade into earnings.

On Feb 2, we bought calls on Herbalife (HLF) as the technical picture had improved.  Knowing competitor Weight Wathcers (WTW) was due for earnings in two weeks and HLF was on tap for Feb 21 it seemed March was the best choice, so it was the March 57.5 call for 3 bucks.  From the outset, the stock started moving higher - slowly.

However, our option moved faster as the implied volatility pumped up prices.  On Feb 17 with a three-day weekend upon us, we decided to SELL an out of the money call, the Mar 65 strike for 1.60.  This gave us a credit to offset our cost on the earlier purchase of the March 57.5 strike, lowering our overall cost to 1.40.

If we had done nothing further, we would be looking at a risk of 1.40 per contract for a potential NET reward of 6.1 (difference of the short and long call strikes less the cost of the call spread - or a 435% return on risk).

But today, knowing the earnings would be out and could be a wildcard result - we decided to 'roll up' the 57.5 call to the 62.5 strike.  Simply put we sold the 57.5 for 6.50 and bought the 62.50 for 3.50, netting us another credit - this one being 3 bucks.

So, adding the two credits together we picked up 4.60 - completely taking out our cost and then some.  We took our risk in the trade down to zero and banked a 53% profit and stayed with the trade on a tighter spread.  Hence, if the stock were to drop sharply down below the long call (62.5) we STILL would have earned a 53% profit (that would be if the spread went to zero).

An elusive FREE trade with a profit kicker.  Alternatively, if the stock should rise past 65 and stay up there the spread would expand and give us an even greater profit when sold.  The cost being zero, anything up to 2.50 is pure profit!

Earnings are out tonight and they appear to have hit this one out of the park - again.  We'll see how it goes tomorrow of course, but for those who wonder how/why I like to play earnings, this is a great reason why.  Risk management of a trade is fundamental to success in trading options.  I can be found on twitter at @aztecs99.

 

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When Things Show Up, I Let You Know

By Gary Kaltbaum | February 17, 2012 | 8:09 AM |  0 CommentsTweet This

Apple

Yesterday, I told you there was a chance in that, in the near term, Apple had some climatic action. Today, Apple was down at one time about 12 bucks…and finished up 4. So I got emails asking me if the reversal to the upside today negate the reversal to the downside yesterday. Here’s my take:

I think by precedent, in the near term, Apple’s going to have trouble getting back to those highs. I’m going to thing, that Apples going to go into a trading range. Not because anything’s wrong. It’s normal. They’re doing a lot of biz. The stores are still packed. If you’re a long termer, close your ears.

If course, if it breaks above that high – it’s negated.

Setups

I have this line that goes, “If things show up, I will let you know.”

I gotta tell you, there’s a lot of setups happening right now. How do you get setups? You get them when things pullback or when they’re tight.

As I scanned today…man, some stuff showed up.

• Because when you look at the Russell 2000, it’s in a two-week tight little “whatever you want to call it.”
• When you look at the Small Cap 600, you see the same. And it looks like it’s going to come out of it to the upside.
• When you look at the S&P 500, you went above yesterday’s high.
• When you look at the Dow, you’re about to go above yesterday’s high.
• When you look at the Nasdaq, you’re above yesterday’s reversal high.
• When you look at the all-important Semiconductor Index, it broke above near -term resistance today. There was a lot of strength in the Semiconductors today.

Now those indices represent stocks. That means stocks are doing these same things.

I’ve got a bunch of names....

Editors Note: Gary covered these names in detail last night on his radio show. You can listen to it here. 

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Apple-sauced

By Michael Kahn | February 17, 2012 | 6:55 AM |  0 CommentsTweet This

Here we are a day removed from the biggest key reversal I've ever seen and like Apple yesterday, the analysis is sauced, too.

It started out lower on Thursday so it looked like the reversal was going to be confirmed. And then the upside reversal. This one just might be morphing into a giant triangle - and possibly of the continuation variety, too.

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Individual Investing Can Be Tough

By David Merkel | February 16, 2012 | 10:56 AM |  0 CommentsTweet This

I am glad I began investing 20+ years ago.  If I were considering starting now, I would likely not do it.  Why?

1) Too much data.  There are too many factors to consider in investing. That there is a wealth of data to consider is certain, but what are the right factors to look at?

2) Crowded.  More people and firms are investing.  The competition is higher.

3) There are more games in trading.  Makes it a lot harder to get good executions.  The low costs of transaction have created monsters.

4) ETFs affect the market as a whole.  They allow average people to speculate on broad trends, without telling most of them that they are noise traders, and are getting taken for a ride.  Dollar-weighted returns are far less than that for buy-and-holders in ETFs.  The traders are getting creamed.

5) Social media leads to groupthink, which lowers overall returns, at least for those that get there late.

6) ETFs allow investors to play well outside their circle of competence.  Beyond that, some ETFs don’t always do what they promise because of the derivatives that they use, roll, etc.

7) We are in a macroeconomic environment where we are delevering.  That is not the best environment for making money.

In general, I think most individual investors are cows for the institutions to milk.  But there are a few ways to immunize  yourself from this:

a) Hold very short or very long.  I lean toward the latter.  Don’t give up quickly on your investment ideas.  Buy and hold for years, not months.  Ignore the chatter, and read the data from the company and trusted third parties.

b) Use a value bias, and focus on companies where there is a margin of safety.  Buy the shares of companies with lesser growth prospects, that are selling cheaply.  Who cares if earnings aren’t growing if the earnings yield is over 15%.

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