Priceheadley's Blog

priceheadley — Thu, 16 Apr 2009 22:41:40 +0000

We also have real-time charts and indicators. http://www.bigtrends.com/tools-a-resources.html

priceheadley — Thu, 16 Apr 2009 22:39:52 +0000

Come check out free options trading articles. http://www.bigtrends.com/articles.html

priceheadley — Thu, 16 Apr 2009 22:38:51 +0000

We have launched our new site. http://www.bigtrends.com

Interesting Fibonacci Retracement

priceheadley — Wed, 01 Apr 2009 13:46:13 +0000

Is The Rally Over, or Just Starting?

It’s been a nice bounce off the “devil’s bottom” (666 on SPX, March 6), if it was indeed a bottom. We’ve been there before, so caution is warranted. However, some signs are there that this ‘could be different’ this time around. New lows seemed to have peaked at the November lows and while price made a dash lower, there is a positive divergence. Perhaps the situation may not improve but it’s may not get much worse, either. Fear is another factor, another positive divergence. A new high in the VIX was not seen at the recent lows in March. Many out there are non-believers in this rally, too…after being burned time and again. Finally, bond yields were lower on March than in November…another positive. While inflation is an issue to be reckoned with someday, the stimulation methods seem to be putting a stop to a deflationary cycle.

The following chart shows an interesting 50% retracement level we reached on Thursday’s close, which is based on previous 1000 highs and the 666 low in the S&P 500 Index (SPX). 50% is a Fibonacci Number, but also is a logical retracement point on rallies.

S&P 500 Index Daily Chart

Anecdotal Evidence

The complexities still exist around our economy and cannot be solved with a few Fed plans, banking or credit. However, some small ‘signs’ are out there, I’ll share with you what I am seeing. The house next door to us was a foreclosure last year and had been on the market for about eight months. It was recently sold, albeit for a big discount. In fact, I’ve seen more sold signs around the city than I’ve seen in years. In retail, stores are seeing traffic again, and it’s not just window shopping. Restaurants are starting to get patrons back, too. Finally, my parents bought a new car recently, first one in six years. Did they need one? No, but they got such a great deal that it was tough to pass up. A couple of other family members also bought new cars lately. Small but notable signs…we’ll see if they turn out to be meaningful.

Sentiment – Improving, but…

The economy and the stock market are all about sentiment. Good feelings tend to flow to positive action, and vice versa.
Let’s be honest, the economy was literally frozen for the last six months, and it wasn’t just credit. They say borrowing is the lifeblood of the economy, yet the savings rate has been on the rise, its largest increase in decades. Could it be this rise is due to the lack of confidence by the public in investment? Recent sentiment figures show a modest improvement but like any trend momentum is key here. Jobs are still being lost at an alarming rate and confidence, while on the rise is still fragile. It won’t take much bad news to get that turned back.

Bonds, Gold and the Greenback

I was completely stunned by the action of these three on March 18 following the Fed announcement. With Bernanke stating the Fed would be buying treasuries in a big hurry and in a big swoop, along with other programs…bonds rallied huge in about thirty minutes. Gold went higher by nearly $70 while the dollar plunged. Since then these markets have settled down somewhat. However, I can’t recall such a large move simultaneously. This was clearly the nuclear option by the Fed, going ‘all in’ attempting to pull the economy up from the bottom. Will it work? History shows that printing your way out of a problem, inflating the economy has never worked for any nation. Why would it work for the US in this instance? There is a high risk in this approach and consequences will be severe if it fails. A market reaction such as that seen on March 18 tells us so.

Bob Lang,
BigTrends.com

1930s Volatility is Here

priceheadley — Mon, 30 Mar 2009 20:45:22 +0000

If you are a long premium options trader, volatility is a necessary element to be successful. If volatility is lacking, time decay (Theta) will make this financial instrument a challenging (or even more challenging) one. These days, volatility is not lacking. In fact, volatility is thriving. For a long premium options trader, there is nothing like having market tailwinds to benefit your options strategy.

With a market that has gained 20% since March 9th bottoms and is down over 3% intra-day today (as of time of publish), 2009 has obviously been an extremely volatile year thus far. This year seems to be even more volatile than 2008, which by our calculations, was the highest level of consistent daily volatility in decades. In 2009, there have been a multitude of sessions that have seen stocks rally or fall by a significant percentage. It seems almost commonplace that the Dow Jones Industrial Average is up or down at least one percent.

Volatility can be defined in many ways (i.e. implied volatility, statistical volatility, etc.) – in this analysis we look at volatility by the number of occurrences the Dow Jones Industrial Average rallied or declined by one percent or more on a closing basis in a trading day. More specifically, we looked at the absolute return for the Dow Jones Industrial Average for each day going back to 1928. We then calculated the number of occurrences (and the percentage) that the Dow Jones Industrial Average finished up or down more than one percent in a given year.

Below is a graph of the percentage of days out of each year that saw a market move of one percent or more. Two items that stand out are (1) the increase in volatility has soared since 2006 (from 10% to 64%) and (2) the current level of volatility only rivals the early 1930′s when volatility peaked at 74%.

DJIA Daily 1% Move Graph (data as of 3/9/2009)

In 2008, there were 134 occurrences out of 253 trading dates (52.96% of days) that saw the Dow Jones Industrial Average finish up or down by one percent. This compares to the 2004 to 2007 period, which had a four-year average of 15.61%. This translates to only about 40 days per year in that four-year stretch that saw the Dow Jones Industrial Average fall or rise by one percent or more.

2009 has picked up where 2008 has left off. Our analysis was through March 9th 2009 – as of that date we were on pace for an astonishing rate of 64% of the time the DJIA moves 1% of more on a daily closing basis. If the volatility continues through the last nine months of the year, this would be the most consistently volatile market since 1932, when the Dow Jones Industrial Average was up or down by one percent 74% of the time. Since March 9th, there has been no letup in this trend as roughly 10 of the 14 days (or 71%) are moving at this rate (as of the March 27th close). So the % pace for 2009 is actually a bit higher than the 64% utilized in the above chart.

For long premium options players, this kind volatility can be a blessing. Buying calls, puts, straddles, and strangles can be advantageous in this environment. For the “buy and hold” stock and mutual fund investor, this volatility can only be digested with a six-pack of Dramamine and Pepto Bismol.

Another takeaway for long premium option players is that the level of volatility that we have seen will likely not last forever. Periods of high volatility will generally result in a lower one, as these periods tend to cycle in and out. This trend will likely go into a dormant stage with declining volatility and less price fluctuations (although the explosion in growth of ETFs, Options, Ultra-ETFs, etc, may lessen the decline in volatility somewhat).

Thus, having an arsenal of options strategies beyond long option premium (which is always useful) will be even more important when the volatility wanes. Learning how to trade vertical credit spreads, iron condors, shorting straddles, shorting strangles, writing puts and covered calls will be important to add to one’s repertoire.

A look at Elliott Wave Theory

priceheadley — Thu, 26 Mar 2009 16:57:37 +0000

Elliott Wave

The Elliott Wave Principle focuses on the behavior of humans and how that behavior impacts the stock market. Rather than acting in an unpredictable manner, Ralph Nelson Elliott (in the late 1920s) noticed that the market actually ran in repetitive cycles – which were a result of investors’ reactionary behavior to outside influences. The principle was published in Elliott’s books The Wave Principle and Nature’s Laws – The Secret of the Universe. Elliott believed that humans are rhythmical beings, so all human decisions and actions could be predicted in rhythms. So basically, we have a stock principle based on human behavior.

While Elliott’s Wave Principle is based partially on the Dow Theory, it expands on the belief thanks to individual wave aspects that Elliott uncovered. According to Elliott, an impulsive wave follows the main trend – and it is comprised of five other waves, a pattern that runs infinitely (these are wave degrees). Each impulse wave is followed by a corrective wave, which occurs in threes – creating a five/three pattern.

Basics Of Elliott Wave Chart

Robert Prechter et al are among the biggest proponents of Elliott Wave theory. The long-term record of such analysis is a bit spotty though — they have called some big market moves very well, yet also been on the wrong side of some gigantic long-term moves.

(Continued Below)

The monthly chart of the S&P 500 Index (SPX) below shows what could be considered a long-term Elliott Wave that preceded the 2007 stock market top.

SPX Monthly Chart

There are waves inside the waves – you can notice that in each of the uptrends (1, 3, and 5). Waves 2 and 4 are the corrective waves, completing the cycle. Each of those impulsive waves is made of other five/three patterns, as this pattern occurs infinitely. An Elliott Wave is fractal – meaning that each wave can be broken into parts in an infinite manner.

For those who utilize these techniques, they break down waves into degrees of the pattern, each with its own name. These degrees are not classified by their form; not by their size or duration. Therefore, waves of the same degree may have different sizes or durations. The waves are named:

o Grand Supercycle (the longest)
o Supercycle
o Cycle
o Primary
o Intermediate
o Minor
o Minute
o Minuette
o Subminuette (the shortest)

The Grand Supercycle can take years to complete while the subminuette can take mere minutes to run its course.

Bottom Line: Elliott Wave (and Wave Theory in general) is fairly hard to quantify and utilize as a practical trading technique. Certainly there is a logical basis to the fact that “waves” occur both in nature and the stock market — and the psychological implications of various waves/trends from investor behavior are important, as well. Wave Theory technical analysis practitioners tend to be “true believers”, but testing and measuring indicators for short-term active investing based on these theories/methods can be difficult.

Breakout or Fakeout

priceheadley — Tue, 24 Mar 2009 16:52:10 +0000

From a very oversold condition markets have rallied furiously since Mar 9 to post gains nearly 20%. Certainly the size is robust and auger nicely for a big bear market rally. Volume has been suspect all the way though and while the attack on the moving averages is has been steady; there really is a sense of ‘missing the trade’ here. Sentiment has turned rather bullish…a stunning move considering the bears were boasting the majority just a couple short weeks ago. Is there an ‘all clear’? Not so fast!

Financials are ‘the bomb’…and it’s ticking

We found out more information on Mar 23 of the Fed/treasury plan for the toxic assets. In a nutshell, private investors are encouraged to borrow and invest alongside the gov’t with guarantees against huge losses. Sounds like a sweet deal for the investor, maybe not so much for the gov’t as we continue to push out this recovery at the expense of the taxpayer. The one ‘rub’ is with the banks, who may/may not accept the bids from investors on toxic assets. If pricing is good, why not wait longer? Is there enough to satisfy banks to sell there toxic assets and move along?

Fed Takes the Nuclear Option

Last week’s Fed meeting put a jolt into the markets. But are the desperate? Is the panic evident, or is this something that should have been done/considered some time ago? I find the move in bonds, gold and the dollar quite stunning. And, the language from the Fed in terms of ‘doing whatever it takes’ smells of a panic. I suppose the frustration of assets not selling propelled this plan to move forward. The cost is going to be huge for our country, the currency is already suffering and inflation is going to be on the horizon.

It’s Still a Bear Market

Bear market rallies are common. We saw a huge one in late Nov that lasted nearly six weeks, this one here is about half that long. Remember, sellers appear when you least expect it, but with the market so oversold in the short term we are likely to see a pullback very soon. This recovery is basically a V-shaped bottom, and there really are no long term recoveries without a retest of the bottom (let’s say 670-700). Until some semblance of higher highs and higher lows, I won’t be convinced it’s more than a bear market rally.

Know Your ETF’s Holdings

priceheadley — Mon, 23 Mar 2009 19:50:06 +0000

Exchange Traded Funds (ETFs) and options on ETFs have exploded in popularity in recent years. They offer securities that trade like stocks but are micro-focused in almost every sector in the markets (including international, commodity, short, ultra short, etc.). But there can be a great difference in the holdings, diversification and trade strategy of ETFs, even within one particular sector.

For example, let’s take a look at ETFs in the Financial Sector. There are many ETFs that track this group, not even including the short and ultra short ones. Among the group of Financial ETFs include iShares S&P Global Financials (IXG), iShares Dow Jones U.S. Financial (IYF), iShares Dow Jones U.S. Financial Services (IYG), Financial Select Sector SPDR (XLF), Vanguard Financials (VFH), Rydex S&P Equal Weight Financials (RYF), PowerShares FTSE Rafi Financials (PRFF), First Trust Financials AlphaDEX (FXO), and PowerShares Dynamic Financials (PFI).

This list does not even include International, Bank, Insurance, Preferred, Short, Ultra and other types of Financial related ETFs.

(Continued Below)

Let’s examine the diversification and top holdings of the above mentioned ETFs (all data from Yahoo Finance).

IXG – Top 10 Holdings are 24.44% of assets.
Top 3 Holdings:
JPM – 4.3%
HSBC – 4.25%
WFC – 2.58%

IYF – Top 10 Holdings are 37.91% of assets.
Top 3 Holdings:
JPM – 10%
WFC - 5.58%
GS - 4.28%

IYG – Top 10 Holdings are 57.68% of assets.
Top 3 Holdings:
JPM - 15.7%
WFC - 8.76%
GS - 6.72%

XLF - Top 10 Holdings are 51.15% of assets.
Top 3 Holdings:
JPM – 12.34%
WFC - 10.34%
BAC - 5.45%

VFH - Top 10 Holdings are 36.86% of assets.
Top 3 Holdings:
JPM – 8.2%
WFC - 7.26%
BAC - 5.02%

RYF - Top 10 Holdings are 17.01% of assets.
Top 3 Holdings:
SLM – 2.15%
MS - 1.92%
FII - 1.78%

PRFF - Top 10 Holdings are 48.19% of assets.
Top 3 Holdings:
JPM – 11.15%
WFC - 8.59%
BRK/B - 6.34%

FXO- Top 10 Holdings are 14.51% of assets.
Top 3 Holdings:
WRB - 1.85%
AWH - 1.6%
PRE – 1.47%

PFI - Top 10 Holdings are 25.73% of assets.
Top 3 Holdings:
AMP - 3.12%
MET - 2.85%
UNM - 2.71%

Now, all ETFs have different rules regarding re-balancing of holdings, discretion of holdings, focus, etc — and some are more liquid than others, both in stock and option volume. Recent massive market capitalization changes in individual stocks have certainly made an impact of the relative weightings of holdings in this sector, as well.

But certainly the active investor would be wise to know what they are buying when they invest or trade in one of these ETFs or the options on them. For example, the likes of IYG, XLF, and PRFF have around 50% of their holdings in their Top 10 Assets — meaning they are not very diversified. In addition on IYG for example, around 25% of the holdings are in JPM and WFC alone (based on the data utilized above) … so the performance of that ETF will be greatly affected by just 2 securities. In one way you could say that is much more risky, but from another perspective you could view that as getting more “bang for the buck”.

Then there are the very diversified ETFs, some of which attempt to equal-weight — such as RYF and FXO, where the Top Holdings comprise about 15% of assets and the top holdings are around 2% of assets.

In the current market environment, we have seen many sectors move “en masse” quite a bit — more than what is normally the case. So these ETFs may also move as a group — and also remember that supply & demand is a big factor in ETF performance, because they trade as stocks, not on the actual value of their assets. But as the market settles down into more of a “stock picking” environment and if arbitrage-type discrepancies are seen in various ETFs vs. individual stocks, etc (as has been seen recently in preferred vs. common, closed-end funds, etc) … then you may begin to see more price performance disparity in ETFs based on their holdings and diversification.

The bottom line is that when one is looking at investing in or trading an ETF or options on an ETF, you should examine the holdings, structure, and goals of the ETF to see which one most matches the expectations (short or long term) you have for that sector.

BigTrends NCAA Final Four Picks

priceheadley — Fri, 20 Mar 2009 12:46:29 +0000

As many of you know, we at BigTrends are located very close to the University of Kentucky so we tend to be big college basketball fans here. Obviously, we are a bit disappointed that UK is not in the NCAA tourney this year for the first time in 17 years. In addition, there are 3 Kentucky teams in the tourney; Louisville, Western Kentucky, and Morehead St — but not UK, which is bittersweet.

However, BigTrends Founder and President Price Headley is a graduate of Duke, who is a #2 seed. Also, Moby Waller attended American Univ., who is in the tourney for only the second time as a #14 seed. Bob Lang attended San Diego St, who was a “bubble” team that was left out. Our other alumni schools did not make the tourney.

Below are the Final Four picks of some members of the BigTrends team (the games have started today, but no final results are in yet as of time of publish).

Price Headley

Final Four: Wake Forest, UConn, Duke, North Carolina
Championship: UConn over UNC

Bob Lang

Final Four: Louisville, Missouri, Pitt, Arizona St.
Championship: Pitt over Louisville Andrew Hart

Final Four: Kansas, UConn, Pitt, Oklahoma
Championship: Pitt over Kansas

Moby Waller

Final Four: Louisville, Memphis, Pitt, North Carolina
Championship: UNC over Louisville

Scott Downing

Final Four: Louisville, Memphis, Pitt, Oklahoma
Championship: Pitt over Louisville

Shawn Wise

Final Four: Louisville, Memphis, Pitt, North Carolina
Championship: UNC over Louisville

Last season was extremely rare in that all 4 #1 seeds made the Final Four. As contrarians, we would tend to think this is very unlikely to occur again. The “sleepers” in our picks include Wake Forest, Missouri, Arizona State, and Kansas.

A Look at the Short-Sale Uptick Rule

priceheadley — Thu, 19 Mar 2009 13:33:32 +0000

A Look at the Short-Sale Uptick Rule

There has been quite a bit of discussion lately about short selling and the “uptick rule.” In fact, some believe that the steps towards reinstating these rules have helped bolster stocks of late. What is the uptick rule and why is the mere mention of doing away with said rule possibly creating a rally? Let’s take a look.

First, a brief refresher on short selling. The textbook definition is when an investor sells a stock that he/she doesn’t own. The seller’s investor loans the stock in order for the investor to sell it. At some point, the seller has to buy the same number of shares they sold short (known as “covering”) in order to return them to the broker. Money is made when the stock that was sold short falls and is bought back at a lower price.

For most normal “retail” investors, in order to short-sell a stock, they must have a margin account and their broker must “borrow” the stock from another one of its clients long margin account — so in some cases, no stock is available to short and the retail trader is basically unable to do so. Many Institutions / Professionals / Hedge Funds etc have not had to adhere to this method of “borrowing” in many cases in recent years, but that is a matter for a future article. Let’s now turn our attention to the uptick rule.
(Continued Below)

The uptick rule was instituted back in 1938 (as part of the reforms following the 1927 Crash and Great Depression), stating that a stock may not be sold short unless the trade before the short sale was at a lower price than the price where the short sale is executed. Simply put, selling short is only permissible if the stock ticks higher. The goal of the uptick rule was to keep short sellers from compounding and accelerating a stock’s downtrend. Note that the uptick rule does not apply to certain types of investing vehicles, including: market exchange-traded funds (ETFs), currencies, single-stock futures, and futures (but futures do have limit-down rules — circuit breakers and limit-down rules will also be the topic of a future article).

In July 2007, the Securities and Exchange Commission (SEC) eliminated the uptick rule. What happened to the market? Take a look at the S&P 500 (SPX) Chart below:

SPX Weekly Chart

Why did the SEC repeal the rule? The rationale for lifting the rule was apparently a “test” by the SEC to see the effectiveness of the uptick rule. One would also likely assume there was some lobbying by major financial firms to have it lifted. And general de-regulation of the SEC and its powers over the past years likely contributed as well. Based on the above chart, one could conclude the “test” didn’t work very well. Many have attributed the incredibly rapid declines that many stocks in the Financial Sector have seen to the lack of an uptick rule — but this is a fairly complicated issue with other factors involved.

Nonetheless, recently Fed. Chairman Bernanke proposed examining re-instituting the rule, and Congress has recently acted (on March 10th, no less) to have the rule re-instated very quickly. See the following chart for these news events in relation to the market.

S&P 500 Index Daily Chart

Bottom Line: Regardless of the actual effectiveness of the short-sale uptick rule (and whether it can be manipulated and/or ignored by many traders), the market performance after both the 2007 repeal and since the March 10th plans to reinstate are quite striking. Also remember that as a retail investor, you can participate in down-side speculation and hedging without short-selling stock through the use of Put Options, Short ETFs, and various Option Strategies.

Scott Downing,
BigTrends.com
1-800-244-8736