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John Murphy’s Misinterpretation of XLV:$SPX Ratio
billkat’s message is in response to my critique about John Murphy’s use of skewed ratios posted here and appropriately titled.
http://www.investorshub.com/boards/read_msg.asp?message_id=6288084
billkat wrote:
>>>.... fund managers constantly say healthcare is defensive. in 5 years of trading, i've just seen that as a trap- sharper moves in xlv, even oil sector, when greater market recovers..i appreciate your posts..bill.<<<
Thanks for taking the interest in this analysis as I thought any chartist would. I couldn’t agree with you more. And, I think you’re way ahead of the professionals when you’re able to see the truth.
John Murphy’s Misinterpretation of XLV:$SPX Ratio
This afternoon, I posted this question on my favorite Seasonality board http://www.investorshub.com/boards/read_msg.asp?message_id=6286409
John Murphy used this chart and the excerpted message after the chart to make a case for XLV as a counter trend play against the possible down market.
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Beginning of excerpt --- “(This Chart) puts that upturn into better perspective and helps us to draw some conclusions about the defensive qualities of healthcare. The weekly bars show the bull market in the S&P that started in October 2002. The green line is the relative strength ratio of the Healthcare SPDR (XLV) divided by the S&P. Notice their inverse correlation. The upturn in the S&P in the first quarter of 2003 started a two-year period of underperformance by healthcare. That's perfectly consistent with the tendency for defensive groups to underperform when the market is rising. A rising market favors offensive stock groups (like technology) and ignores defensive groups (like healthcare). To the bottom right of Chart 3, however, the ratio has broken its two-year down trendline. That tells us two things. The market has turned defensive. And healthcare stocks are back in favor. Let's go back even further in time. --- end of excerpt.
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I provided these 3 charts to show just how this ratio comparison was skewed. The first chart shows the use of the same ratio made this small 23-people operation of a commercial leasing service, Gladstone Commercial Corp. (GOOD), looked like a pretty good ”defensive” play too. BTW, GOOD had just IPO’d less than 2 years ago. So, please don’t even think about it as a defensive play whatsoever.
The Cisco to S&P Ratio sure made Cisco looked like having a pretty good inverse correlation with S&P as well.
And, of course US Dollar’s also looking good.
When we divide a stock by another stock, the quotient is the ratio of these 2 stocks. The only time this quotient will ever change is when either the dividend (XLV) or the divisor (S&P) changes. One simplistic way is to look at this as an exchange rate between the XLV and the S&P currencies.
The dynamics of this equation creates a divergence between the 2 by default. Comparing the quotient of this division against the divisor has the propensity to breed inverse correlation. This inverse correlation is therefore skewed.
The only way for this to project an accurate inverse correlation is to trade the derivative the equivalence of this quotient and NOT the equity XLV itself. And, due to the small value of this quotient (this XLV to S&P ratio is only about 0.0274), I’m not sure if it’s physically possible to set up such spread in actual trading.
I admire John Murphy’s accomplishment, and I’ve learned a lot from reading his technical text books. But, this one needs to be re-worked. I’m sorry.
The bottom line is that the Healthcare sector, or the XLV, does NOT have a consistent inverse correlation with the S&P.
John Murphy’s Ratio Chart Quiz
I’ll post the dissection on my Trade Journal as soon as I’m out of this appointment. But before it gets too late for you guys on the other coast, here’s something that I’d like to share with my fellow chartists.
This was the chart John Murphy used today in making his case for Healthcare sector.
This is the excerpt from his explanation.
==========================
Chart 3 (the chart as shown) puts that upturn into better perspective and helps us to draw some conclusions about the defensive qualities of healthcare. The weekly bars show the bull market in the S&P that started in October 2002. The green line is the relative strength ratio of the Healthcare SPDR (XLV) divided by the S&P. Notice their inverse correlation. The upturn in the S&P in the first quarter of 2003 started a two-year period of underperformance by healthcare. That's perfectly consistent with the tendency for defensive groups to underperform when the market is rising. A rising market favors offensive stock groups (like technology) and ignores defensive groups (like healthcare). To the bottom right of Chart 3, however, the ratio has broken its two-year down trendline. That tells us two things. The market has turned defensive. And healthcare stocks are back in favor. Let's go back even further in time.
===============================
These are 3 of the charts that I’ve created for your reference. Can anyone see what’s wrong with using John Murphy’s ratio?
Ken- You're always special. Remember now, you're my hero, and I mean it. I have a lot of respect for what you're doing considering what you have to go through in life.
By the way, that wasn't my newsletter. That was just a simple website for my weekly stock market mumbo jumbo. My newsletter's on a more professional business website for my business clients. And, you should've gotten your May issue by now.
She Couldn't Get Away From You in Bed
Agree or not, this excerpt from a newsletter writer's comment today is quite funny. I'll conceal the name of the writer just to protect the "guilty". And, I didn't misspell "sweatheart". That was how it was written in the article.
===================
My bet is on inflation, it's easier to print more money and payoff debt with cheaper dollars than it is by tightening your belt. You can see it in the way various Fed governors and mainstream media are talking about and reporting inflation numbers. Everyone says inflation is still tame at about 3% to 4% per year.
Three percent is anything but tame. Let's take a physical example. You're in your early 20s and marry your college sweatheart; on your wedding day you weigh 175lbs. If you "inflate your weight" at just 3.5% per year, by your 20th anniversary you'll be right at 350lbs. Every night your wife will be snuggling up to you and you'll think it's "because you still got IT." When in reality it's because the dent in your side of the bed draws everything close to you just like a black hole. She couldn't get away from you in bed if she tried.
That's what's happening to our country right now, we're sucking up the world's savings like a black hole. Inflation is here to stay for the foreseeable future and that is (as almost all of my lengthier weekend notes point out) why I invest in stocks that will survive and thrive under these scenarios.
===========================
Weekly Market Chartmentary May 8, 2005
THE BIG PICTURE
QUESTION: So, David, you don't really know what you're talking about, do you? Look, our government had just reported that 274,000 jobs were added to the non-farm payroll in April. According to your tracking of The Conference Board's National Help Wanted Advertising Volume Index, the want ad volume in March was down by 2 points. How could we have added that many jobs with lower volume of help wanted advertising the month before?
ANSWER: We couldn't. One of them had to be incorrect, but let's check on the alternative source of help wanted ad first. Let's turn to one of the big job sites on the Internet.
The Monster.com 6-month chart below shows that its stock value had dropped more than 25%. It doesn't take a professional chartist to see how poorly the performance has been. So, nope, I don't think all those jobs were added through the Internet.
One problem with the BLS (Bureau of Labor Statistics) is its use of a technique known as Hedonic Adjustment. Among other issues, the Birth/Death Adjustment is mostly based on assumptions that new jobs are created by companies being born, and jobs are lost when companies go out of business. And, of course, collecting data from states that use their own different adjustments to compile the final national employment report makes it even less reliable.
In any case, I'd continue to call these jobs reports hypothetical. And I don't think I'm the only one that didn't take these jobs reports seriously. Take a look at how "excited" the broad market felt on Friday when these 274,000 hypothetical additional jobs were reported.
Take a look at this Friday intra-day chart of the broadest index, Wilshire 5000, which consists of over 6000 publicly traded companies headquartered in the US. It was so flat that it hardly showed any signs of excitement at all.
Good to know I wasn't the only nutcase. The entire market felt the same way I did.
I hate to sound like a broken record, but once again I'd like to have our attention focused on one thing and one thing only. That is the CONSUMPTION. Consumption is what carries our economy, and in turn, the world's economy. Please read my previous weeks' Chartmentary for more details.
As long as I don't see any sign of that improving, I'll continue to stick with the Recession Strategy and my Recession Portfolio. This is our own Recession Mutual Fund. And we're our own fund manager.
And, speaking of our Mutual Fund, based suggestion of my friend Ed B., I've set up the 2 sectors, Bankruptcy Law and Sleeping Pills, of our Recession Portfolio on ClearStation for you to log in and check the charts and info. I'm still waiting to hear from ClearStation as to why DLLR is still missing from ClearStation's database. I'll keep you posted on that. Meanwhile, here’s the log-in info.
URL: http://clearstation.etrade.com/
username: ihub
password: trade
Our portfolio has out-performed all benchmarks since we start setting them up. Here's the Bankruptcy Law sector that has gone up 7.91% in 3 weeks - since 4/15/2005. That's an annualized gain of 137%.
..............................................
And here's its cousin, Sleeping Pills sector that had gone up 3.64% in 2 weeks - since 4/21/2005. That's an annualized gain of 94.64%.
..............................................
QUESTION: But, David, is it too late to establish position in this Recession Mutual Fund?
ANSWER: Have we hit the bottom yet? We won't worry about it until we hit the trough of the recession. That's when we'd start looking for exit point. Incidentally, that's when I believe this Recession Portfolio would have its real big gain.
=================================================
THE MARKET
Do you think you really know 200-day (Exponential) Moving Average?
We got so familiar with it that we forgot one very fundamental function of this (or the Simply Moving Average) indicator. Sure, it serves the important functions as supports and resistances depending on where it's located. We sometimes forget where it's headed is just as important.
Let's use Wilshire 5000 index again just to be consistent. This broad market index chart shows some very critical market pivot points wherever the trendline intersects with the 200-day moving average (red line). These pivot points marked the important change of directions of this 200-day exponential moving average and, consequently, the direction of the market.
Starting from the left, we see March 2004 marked the pivot point where the market topped out. The pivot point in the middle marked the trough in the beginning of August 2004, right in the midst of a heated presidential election. And, the pivot point on the right marked the market top of the post election rally in March 2005.
Further to the right, we see no sign of direction change. It's a "flatliner". Some bears called for the Fed DNR (Do Not Resuscitate) - Just let the market run its course.
And, before we see a new pivot point developed, I'd say it's safe to consider the market neutral, and deadly so, at this point. The market's hibernating and waiting for its next move.
You may also note that as the gap between the moving average (red line) and the trendline narrows, the trend seems to be coming to an end. The market then starts trading into a range before it makes its next move. And, this is exactly what's going on right now.
What's it gonna be? Up, down, or continue going sideways? The market is going to reveal itself in due time. Before that, no one knows, except for liars.
David's Weekly Market Chartmentary 5/8/2005
Since I've Knighted myself as the board's Chartmentator, you get the joy (or the agony) of reading the first draft of this week's market commentary.
I'll edit it and post the article in its entirety on my Trade Journal. For now, here's the link to the webpage.
http://www.davidyu.com/
The more we learn, the less we know...
Thanks so much, Fred. You're a gentleperson and a scholar.
The more I learn, the more I realize that I know a lot less – almost nothing. And, the more I know that I don’t’ know anything, the more I’m trying to learn, almost in a panic mode. At the same time, nothing seems capable of slowing down or mere interrupting time’s linear progression.
Let’s continue to make mistakes and to make a fool of ourselves together... I can't think of any better ways to learn, can you?
Happy Mother's Day to all!
Volatility and Risk – Trading and Investing
Hi Ken- I’m working on my monthly newsletter for my business in addition to my weekly stock market Chatmentary for my Trade Journal. And, I’ve put you on my email list. Thanks for your interest in my little publication. I can’t think of any reason for these 2 commitments other than pure Labor of Love. And, they are indeed commitments. When you don’t get paid for working yet you enjoy every moment of your work, I guess that’s called L-O-V-E.
Incidentally, I hope everyone knows that the volatility we’re talking about here is NOT the VIX volatility.
You’re correct in your assessment of these blue chips. I agree with you. However, the flip side of the rewards is risks - the higher the rewards the higher the risks. Volatility enhances rewards, but it also enhances risks. For investing purpose, risk aversion and capital preservation are 2 very important principles. And, portfolio diversification helps investors and fund mangers accomplish that. Blue chip stocks happen to serve this function quite appropriately. And, when most fund mangers portfolios consist of a portion of these stocks, they become the most popular stocks, by default. They have to make sure that they don’t lose (or minimize that probability) first and foremost.
As a side note, and this is nothing personal against ddfridd_007’s retired friend, the market seemed unimpressed with WMT’s 20 times P/E and measly 1.23% dividends. We’re merely talking about the stock here, not anyone’s investing styles or strategies.
This 3-year Wal-Mart to S&P ratio chart shows that WMT’s fading fast comparing to S&P performance. In addition to its PE and dividends, the market’s saying that its growth appeared to be limited for now. In essence, unless something else happens, WMT’s best days are behind it.
&r=4119>
Getting back to our topic… As far as trading or speculating (as opposed to investing) is concerned, volatility is our best friend. But, then because of the higher risks involved, it also becomes one fundamental contributing factor to so many traders losing their shirts. I happen to know quite a few of them in person. Wife of one of my friends insisted that we don’t engage in any conversation pertaining to stock market whenever we’re invited to their home.
Hence, the success in financial market is for those who are able to find good balance between the risks and the rewards.
Happy Mother's Day: Olive Garden + Red Lobster
Socioeconomics meaning well defined... Mother's Day, a very significant social event, happens to be THE busiest day for restaurants.
Nice pre-Mother's Day bounce towards the end of March for Darden Restaurants Inc., the largest restaurant chain holder that owns sit-down restaurants as Olive Garden and Red Lobster.
karlzuni- S&P 500 “normal” volatility ranges in the 8 – 14 area.
Here’s a chart to provide you with the visual of the S&P’s 30-day Historic Volatility movement. As you may see, the red curve was a lot more volatile (swung higher) than usual in the recent weeks. However, as of Friday, it dropped down to about 13. This was one of the reasons prompted me to call this market to be quite “neutral” on my Before The Bell remark.
Ken’s correct in that volatility moves the stock and, of course, the market. Historic Volatility measures the actual movement of stock price over time. It’s a great indicator of trend reversals.
OBSERVATORY 011: GKIS
Hmmm... Chicken?
&r=4768>
AFTER THE BELL: 05/06/2005 S&P Intraday Chart
A down day, indeed...
And, here's the Wilshire 5000 Total Market Index, which is composed of more than 6000 of all public traded companies headquartered in the US.
&r=0467>
Dominion Resources (D) Trade Updaate
For those participated in this group trade project, here's the intraday chart. I went with wonderboy's suggestion of June $70 PUT instead of my original put and put spread play. Either way, it should work out well.
The pattern is forming right on target. Current spread on June $70 Put is $1.70 - $1.80. The last trade was at $1.60. Comparing the last trade with our entry price of $1.40, we're up 14.29% today.
Just hold on to it...
Fluor Corp (FLR) Position Closed
Closed FLR long position at $57.47 for a measly gain of only 0.75% or $86 less commission.
Well, no harm done, but there's no point of keeping the money in this stock that has not done anything for more than a month. It was not a long term hold to start with. Money could be better invested in other trades.
This intraday minute chart also didn't make me feel any better holding this over one more weekend.
We Are Indeed On Different Frequencies
Dear Fred,
I’m starting to doubt my ability to convey my thoughts clearly. And I’m sure it’s most likely my fault.
When I wrote the following statement, it was not meant for “politics”. So, we’ll need to take that word out of the parenthesis.
"(Politics) does not accomplish anything other than one group of 'citizens' trying to ‘convince' other groups that their 'beliefs and opinions' are superior. No one can convince anyone based on beliefs or opinions."
Instead, I meant the mere discussion of politics without the fundamental understanding of the economics is nothing but ideological debate. Any such debate based upon ideology, belief, and opinion does not accomplish anything. Unless someone’s taking the initiative to change, no one else can ever change someone else’s belief system. That belief system is the “BOX” that we’re in. And, no external influence is going to change our belief.
And, when I said Money, I did not mean just the narrow definition of money coming in and out of the political system. It’s the economics, Fred. One of the reasons that I started my Trade Journal on iHub was hoping to advance our understanding of the financial economy through mutual learning process. While I’m continuing to learn and document my learning process, I’m hoping that other people could learn through my personal experiences.
Understanding the fundamentals of the economics is an essential form of self empowerment. Economics is the backbone of the political system, and to an extent our evolution. And unless someone has done sufficient study and research on this subject, it’s hard to have meaningful discussion on the same level.
This, I believe, was the reason that we’re so out of sync in our discussion. We have such different viewpoint and understanding of how things really work that our continued discussion would only bring further frustration that may lead to animosity.
For this reason, I’d beg to be excused from any further discussion. I hope my limited writing on your board could be of some contribution to inspire different thought process. And even if just one person gave my writing a slight thought, I’d be pleased that my effort had not been completely in vain.
Here’s more empowerment to The People through their own diligent study of the economics.
Respectfully,
Dominion Resources(D) Trade Journal
Bought June $70 PUT at $1.40 as per my recommendation on Seasonality Board yesterday.
Yes, wonderboy, let's stay with the basics and experiment with the larger possible profits. So, June $70 Put it is.
http://www.investorshub.com/boards/read_msg.asp?message_id=6253103
Revlon (REV) Peculiar Pre-Earning Call Pattern
I wonder if someone had learned of the earning report ahead of today's conference call. That price spike at about 3:30 pm yesterday looked peculiar.
Incidentally, Revlon (REV) had clearly demonstrated a more reliable counter trend to the market than most major expensive consumer non-cyclicals. I'm adding this to our Recession Portfolio under the Non-Cyclical sector. I'll also set this up on ClearStation.com
What a nice find that had already gained 17% in less than 2 months. I think our "Recession Portfolio" is going to outperform every benchmark, including professional newsletter writers' portfolios that required hundreds or thousands of dollars of subscription fees.
We have our own little Mutual Fund set up for FREE because we do it by ourselves.
BEFORE THE BELL: 05/06/2005 A Down Day Ahead
This was what I saw yesterday. And I mentioned that in order for this week's rebound to continue, the uptrend of this Put/Call Ratio has to be broken below the X mark.
This is what happened today.
With the momentum of Dow's 4 straight positive trading sessions in a row dating back to last Friday, CBOE Total Put/Call Ratio still did not move lower to break the uptrend. So, as I said yesterday, Friday (today) will be better spent away from the trading monitors.
Yes, there should be opportunities for scalping – shorting in particular. However, one thing to keep in mind is that the market is actually in a neutral mode. Here’s a nice chart forwarded to me from Ed (xe2dy) that I’d like to post here. I guess one can interpret this chart as bearish. To me, it's as neutral as it can be.
On a short term daily basis, no one can say with certainty which way the market's headed. Actually, I would even go as far as saying that even the longer term trend seems to be just as neutral right now.
Bearish Put Spread for $2,000
O.K. I'll just put one up quickly, then I'll have to get going. I'll check back a little later tonight though.
One thing you can do is to set up the "Bearish Put Spread" assuming that you're investing $2,000 in this trade.
You'd Buy 4 June $80 Put at $6 for debit of $2,400
You'd Sell 4 June $70 Put at $1.40 for credit of $560
Your total initial investment would be $1,840, and that's your total investment risk.
This way, if the price moves anywhere under $70, you'd profit $2,160. You'd only start losing if it moves above $75.40. This is your break even point. That's not too bad, is it? I'll probably set this up on the real trade on my Trade Journal. I kinda like it too myself. I'll have to look into it more.
See you later, wonderboy. Love your signature...
June $70 Put on Dominion Resources should work as well. I think it’s priced at $1.30-$1.40. I’ll have to check to verify that.
The target gain for this option should be $1-$2, which would mean much larger percentage gains that could range from 80% to 150%. Of course, the downside is that it’s so much riskier. You'd really want to keep it on a very tight leash.
That’s perhaps something that I’d experiment tomorrow. You can also put on options spreads, but there’s no need to get too complicated in this instance.
willian2112- Perhaps we should have your mom post her trading techniques here so that we can all learn from her wisdom.
Now, that would be a real treat.
Thank you for your kind word...
willian2112- This is the toughest part of trading – dealing with emotions of the shareholders. I hope you wouldn’t take offense of my trade talk for I’m too quite fond of you.
Trading for me is just a business transaction. I don’t really feel anything personal about any stocks. I personally couldn’t care less whether someone’s shorting the stocks I own. The market decides what comes next. Some companies blame shorts for their failure. Eron’s CEO was most critical of the shorts right before it collapsed.
Just a footnote here – Trading strategy, on the other hand, is personal. And, attacking someone’s trading strategy could be taken as personal attack. I’ve seen so many trades posted on iHub and other places (including this board) that did NOT make sense to me, but I’ve never argued or attacked those people’s trading strategies. The next best thing I might’ve done is to “analyze” the technical aspect of the stocks, and only the stocks.
I don’t know you and neither do I know your mom, but investing in solid companies that pay dividends is always a smart move. In that regard, I believe your mom is a smart woman. I’ve been doing that personally. I’m still holding some double-digit dividend paying shares regardless of the price fluctuations. Additionally, whoever told her broker to take a hike can’t be dumb.
Some of those dividend paying long-term holdings of mine have actually paid for themselves already. My initial cost has already been recouped. Anything I get either on the equity or the dividends from now on is simply bonus. And, this is made possible because of the compounding effect of these dividend reinvestment.
Getting back to Dominion Resources Trade… This is a very short-term scalp trade just to take advantage of what the market’s given us. As I’ve mentioned this H&S pattern is not a massive pattern. Therefore, the downside is very limited.
What happened with Dominion technically was that it went way ahead of itself. No stocks go up forever. When this occurred, certain degrees of correction are inevitable. Fundamentally, its earnings did not meet the expectation due to termination of some of the power purchase contracts it no longer deemed economical. This of course would affect its dividend distribution.
I think setting stops to take some profits is always prudent. Dominion really does not look very good technically right now. In particular, it had fallen below that $72.50 support today. In addition, the recent all-time high of $76.87 was not confirmed by RSI. RSI did not go over 70. And neither was it confirmed by MACD when MACD formed a lower high.
If I own this stock, I would be quite concerned about this recent breakdown. The next support left is the 200-day MA at about $68. Coincidentally, this happens to be the price target for its recent Head and Shoulder formation. So, in that sense, it would seem possible that the next move for D is to test this 200-day MA.
Thus, in conclusion, yes, I would’ve taken some profits personally. This is just the way the market feels about this company. There’s nothing anyone can do about it.
Dominion Resources(D) H&S Pattern Trade Recommendation
So, why just do the Chart Talk? Let's short this thing here. Look at the negative divergence between today's price action and the OBV and Accumulation/Distribution on this intraday 1-minute chart.
Just like any trade, there are many many different ways to play this. One suggestion is to buy Octover $75 Put option at under $6.
With the H&S formation completed (see my previous threaded message), the target profit for this game plan would amount to approx. $2-$3 or 33%-50% gains. Since this is not a massive type of H&S pattern, I'd be happy just to set my profit traget and not get too greedy.
One last important thing is to set your stop or close this position once the price goes over $75.
Hi Fred- I'd like to stay away from the politics. To me, these are discussions in futility. The best way to understand politics is to understand the economics- Money. And, that's where the efforts should've been devoted.
Most people do not have true understanding of the economics. Therefore, they do not have true understanding of the backbone and the motives of the politics. And, without this understanding, all discussions of politics are exercises in futility.
It does not accomplish anything other than one group of "citizens" trying to "convince" other groups that their beliefs and opinions are superior. No one can convince anyone based on beliefs or opinions. Life's just too short for that.
Thanx.
(TSM) Taiwan Semiconductor Mfg
I hope some of you had gotten in when the Aroon UP crossed above 50 while Aroon DOWN crossed below 50 at the same time. To me, this was one of the "Golden" Crosses. It had gone up about 16% since then. That was just last week.
Ken, Juststock, xe2dy- Thanks for your kind word.
Yeah, Ken, that $2.75 for LU is going to be a tough battle right there. Once LU breaks that, it would (1) break out of the Double Bottom confirmation high of $2.70 with some extra margin, and (2) cross above the 50-day MA.
That would clearly demonstrate LU’s strength of this trend reversal momentum.
Ed (xe2dy), and I thank you for suggesting that ClearStation.com idea for keeping track of the portfolio.
Is The Majority Always Right or "Virtuous"?
Fred wrote: "You asked, "And, whose virtues are they anyway?" In a democracy, wouldn't they be the virtues of the majority of the people?"
So, according to you, the virtues imposed by "the majority" of the people are the "right" virtues for everyone to follow?
Now I can see why you were confused by my previous reply. I thought I had made my point clearly in that reply. It would be nice if you'd re-read it and see if you'd feel differently.
But, before you can understand that or to think out side of the box, there's really not much I could add to my previous post.
Finally, I don’t necessarily believe that men are naturally good or villainous.
Good Day!
BEFORE THE BELL: 05/05/2005 Dow Rally Continues
It would appear to be another day of rally for Dow Jones Industrial. As I had pointed out yesterday before the bell, Dow looked ready to come back to test its 200-day moving average overhead resistance, and it did do just that.
Dow closed above the 200-day MA with good volume and looking to reclaim the 10,400 resistance territory today.
Meanwhile, after taking out the 20-day MA (1160) convincingly yesterday, S&P seemed poised to take it up another notch. However, I do have my concerns about S&P’s momentum at this point. In order for it to have a meaningful rally, the 10-day moving average of the CBOE Total Options Put/Call Ratio would have to break below the current uptrend – see red X mark. The trendline is pointing at about 0.9. It may happen today. We’ll see. If that didn’t happen today, Friday may be better spent taking the time off of trading.
Chart Talk: Lucent (LU) Head & Shoulder?
wonderboy- This only serves as an interesting take on chart patterns. It’s nothing personal about your pick. Please don’t take this the wrong way. I think LU has possibilities.
Head & Shoulder Pattern is a strong trend reversal pattern. And it’s imperative to be able to confirm the diminishing momentum of the current trend. Two of the indicators that can be used for the confirmation are RSI and Volume.
A declining RSI and a diminishing volume serve as excellent confirmations. Here the chart of Dominion Resources (D) demonstrated just that - a typical H&S pattern.
Sometimes the best way to take a look at an inverted H&S pattern is to simply flip it vertically. And I did just that on this LU chart below.
Here we can see clearly that (1) volume peaked instead of diminished on the second peak, which was the Head, and (2) RSI in the bottom pane was ascending when it should’ve been declining. This chart is saying to us that the second peak (the Head) shows NO weaknesses. In addition, the Neckline was not broken yet.
Now, let’s look at this chart in its “natural” form. Instead of being an inverted H&S pattern, it would appear more like a Mini Double Bottom pattern. It has some of the classic Double Bottom characteristics.
1> Sharp 1st bottom and round 2nd bottom.
2> 15% distance between the 1st bottom and the “confirmation” point
3> Larger volume on the 1st bottom
However, this pattern has not been completed yet because the new high has not exceeded the $2.70 “confirmation” point high. So, we’ll have to wait for this confirmation before we turn bullish on this stock.
In addition, since time between the 2 bottoms was quite short, this should not be considered as strong a trend reversal as a classic Double Bottom formation that spans over weeks or even months.
Now, David, what the heck is the big deal whether it’s H&S or a Double Bottom?
There are many differences and fine points. One of the significant points is that about 70% of the double bottom patterns would experience a Pullback after the breakout. The price could get thrown back to the breakout point.
Animals We Are Not, Unfortunately.
Fred- You wrote: “Animals do not have concepts of "integrity" or "honesty", and, to the extent that we are animals, neither do we.”
First of all, that’s not what I meant. It’s correct that animals do not have the concepts of integrity or honesty, but we are not animals. We are humans. And what distinguishes us from the animals, ironically, is that we do have the concepts of integrity and honesty. However, merely having the concepts does not equal having the possession.
The reason animals do not know the “concepts” of integrity or honesty is because it’s unnecessary. And, it’s unnecessary for animals because they are never DISHONEST. They are what they are in their own perfect forms and perfect eco system. And so are we except that we’ve been victimized by the “concept of virtues”.
Civilization originated from the Latin word civis, which means citizen. In this sense, this “citizenization” simply means citizens dwelling in a city or a settlement to form a society. And animals have been doing that much longer than us.
And this “civilization” serves no purpose as far as the conscience is concerned. It merely makes it easier for humans to hunt and to survive. We then build the infrastructure of this society on the foundation of hunting (working) and surviving (safety). Along this logic, civilization is simply an extension of our basic needs. It has nothing to do with the meaning you’re referring to.
I’m not saying learning to behave in a civil way is not possible. In fact, it’s necessary in our society. It’s necessary because our hunting and surviving are dependent on our ability to do so, and do it well. It’s just that having the skill does not equal having these “true virtues”.
And, whose virtues are they anyway?
How often have we thought of eating a bloody piece of steak is sacrilegious? How often have we thought of patriarchal familial hierarchy was the right way of life when in fact the matriarchal hierarchy seems to be superior and more natural?
I’ll have to stop here as I’ve got quite a few option spread trades today to sort out. I’ll check back later this evening.
Enjoy the discussion...
DOW INDUSTRIAL READY TO BOUNCE BACK
DJIA looks ready to come back and test its 200-day moving average resistance.
Tuesday Portfolio Check-up: Recession Portfolio
Thanks to xe2dy (Ed) for his suggestion. I’ve just set up both the Bankruptcy Law & Sleeping Pills sectors of our Recession Portfolio on Clear Station for everyone to have access to charts, analysis, and all the latest info on everyone of these stocks.
There’s one symbol missing - DLLR, and I’ve already emailed this problem to Clear Station. Hopefully, I can add this back to our portfolio soon.
Here’s the link to clearstation.com.
http://clearstation.etrade.com/cgi-bin/content_stox?next=/cgi-bin/focus
And here’s the access info:
Username: ihub
Password: trade
Just log in, and check on the performance of this portfolio anytime. I’ll continue to add to our Recession Portfolio as soon as I have some free moments. But, for now, let’s check up on the ones we’ve already had.
Our Bankruptcy Portfolio is doing quite well so far. It has gained 4.57% since I set it up on 4/15/2005. At this pace, we’ll have the annualized gain of about 80%.
The Sleeping Pills sector has not done as well mainly due to NBIX performance. Otherwise, we could’ve been up over 2% since we set it up on 4/21/2005. We’ll determine whether we should continue to keep NBIX in due time.
I Perceive Everything I Say as Absolutely True....
"And so, to sum it all up, I perceive everything I say as absolutely true, and deficient in nothing whatever, and paint it all in my mind exactly as I want it to be." --- Don Quixote.
Hello Fred,
Your charging of the windmill reminded me of Do Quixote’s courage. I’m glad you liked that quote from one of my most favorite books. I remembered the discussion sessions we used to have in the literature classes a long time ago. It got very heated from time to time as everyone interpreted the deed of Don Quixote so differently.
Yes, I understand what you meant when you referred to the phrase, Integrity is a Dependent Virtue. In your view, “…whether one is able to maintain one's integrity depends on the extent and intensity of ones needs. It's easy to maintain integrity when it doesn't cost anything. It's not as easy when there's a price attached. I think personal integrity is invisible to the public.”
The underlying problem with that definition is that human beings can NOT have integrity because we just do NOT have it. Integrity and Honesty are 2 of the virtues we do NOT possess. These are the innate characteristics that made it possible for our ancestors to survive.
Thus, it’s not a question of ease or cost. It’s simply not possible to “maintain” something we never possess in the first place. In essence, there’s no such thing as personal integrity. Furthermore, if integrity and honesty were TRUE virtues, then the external contingencies would make no difference and no interference. They would not make it more or less easily for us to “maintain” our integrity or honesty. Truths bound by nothing. Truth is the ultimate freedom.
The only thing that we are “maintaining” is the perception of integrity and honesty. It’s only a perception because we do NOT have them. This is why I’ve replied to you that the dependent virtue is also known as Perception is Reality.
Trade Talk: July-October Sugar Spread
For those trading commodities, it’s time to establish long position in July-October sugar spread. The spread had just turned positive. Another way to play it is simply buying Sugar outright.
The seasonal trend in sugar is at its best. Technically, with the recent move to the 868, it had completed a Head and Shoulder bottoming process. This gives us a target move up to the 910-920 area.
Verizon Communications (VZ) Trade Notes
I apologize for the delay in providing the trade details. I was simply exhausted last night after a very busy day.
First of all, with P/E at 12 and a 4.63% dividend yield, Verizon is a good company to own anyway for the long term.
The negatives on Verizon’s MCI acquisition are mostly short term as VZ revenue growth may be slowed down by MCI’s declining revenue. The acquisition related earning reduction could take out about $0.30 of VZ earnings.
And, so the drop in Verizon stock price has been anticipated. I’ve been keeping an eye on VZ, but I wouldn’t want to commit until the MCI deal is determined.
I like the long term outlook of this acquisition, and so do several of MCI’s most important business customers. They’ve indicated that they’d terminate arrangements with MCI in the event of a Quest transaction. MCI holds large value of contracts with the US government.
I believe the next wave of technological advance is going to be based on wireless and broadband infrastructure. The internet of the past dot com era and the current wireless communications are only the beginning. We ain’t seen nothing yet. I think Verizon is going to be the leader in this charge forward.
Onto the acquisition, one lesser known fact is that MCI does have a pile of cash - approx. $7 billion, with relatively low debt load. In addition, MCI has extensive global reach with one of the world's largest Internet networks, comprising about 60,000 large corporate customers in 150 countries.
Right now Verizon is the biggest local phone company in the U.S. The combined Verizon and MCI will be the nation's second-largest phone company by revenue. SBC ranks the largest because of its acquisition of AT&T.
This is the intraday 10-minute chart that shows some positive signs even after the selloff yesterday.
Still, in a choppy market that’s awaiting Fed’s announcement today, I’d set a tight stop just in case. The stop price was set at its recent bottom of around $33.70, which happens to be about a 3% loss if it’s hit.
Bullwinkle- I did trade commodities as well, but I closed out all my positions in March. I noticed that hedge funds started backing out of the commodities market in droves. I missed the coffee play, but I’ve no regrets. The commodities market is going to go through a correction period, and that’s a little too choppy for my taste.
Even the usual “sweet” play of sugar futures spreads were simply no longer profitable enough to take on the risks. And, that’s in the face of International Sugar Organization’s forecast of a sugar deficit for 2005.
For long term investment, it may be O.K.. Personally, I wouldn’t be holding any commodities right now. You can see from these 3 charts that none of these 3 examples look good at all.
I would still consider the energy and natural resource sectors for the long haul, but only with quality companies (or trusts that yield high dividends). I like good Canadian energy companies.
And, yes, news may not matter in the long run, but it matters for short term traders. And, I think that's the audience Mr. Headley had in mind.
Verizon Communications (VZ) Trade Journal
Bought Verizon (VZ) at $34.78, after the panic selling.
More technical and fundamental notes to follow this evening.
March 2005 Construction Spending - Transportation
In the March Construction Spending report just released this morning, one peculiar item on the total non-residential spending that I've been watching is the Transportation Spending.
Although the $24.38 billion in March was approx. 1.6% above February's $23.99 billion, the downtrend in Transportation Construction Spending seemed to be at a faster rate than the others.
These are the things that makes you wonder why. Something to think about...
The tricky part here is figuring out whether bad news is actually good, or the other way around. --- Price Headley.
I've always enjoyed reading Price Headley's commentary. And, for people who are technically inclined, I'd recommend his book, "Big Trends in Trading".
Again, no strategy seems to be the best strategy, and keeping cash is the wise move for now.