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Yesterday evening, a Sloper mentioned something to me that I didn't realize……in a video I did over three months ago, I mentioned that today – yes, today, August 5th – was the next "hit" on the time series (and, thus, a bottom). Watch the video at around the 7-minute mark. If, in retrospect, this turns out to be a bottom – – wow. Just wow.
You don't see a 99% down day very often but we saw one yesterday.SPX crashed through the very important support level in the 1220 area as though it wasn't there, and ES has traded as low as 1183.50 overnight. Wow.
We might see a bounce here. After a trend day you generally get at least a day or two of retracement. How far would that bounce go? Well a retest of the H&S necklines on SPX and RUT is starting to look like a long shot from here, and SPX might well now find that the 1220 S/R level that broke like tissue paper on the way down yesterday is now solid resistance today. I've been having a very careful look at the H&S patterns this morning and I'm happy that I have drawn the SPX H&S in the best way. That delivers a target at 1146 SPX, near the January 2010 SPX high at 1150:
The H&S target on RUT is more ambitious, and targets the 676 area, which was the key resistance area in the summer last year. I think that target will be made, though possibly not on this swing down:
As the strongest of these three equity indices there is no H&S on NDX, but there is a broadening top that I posted earlier this week. We have almost reached target on that, which I would put in the 2176 area. NQ is trading at 2190 as I write and I am wondering whether we'll see a hit of that trendline this morning. If so there is a decent chance of a bounce there:
I was watching in amazement yesterday as the bullish setup failure that I wrote about yesterday morning turned into yesterday's bull massacre. Vix finally filled the second gap from March that I've been watching since then and closed a long way above the bollinger bands:
NYMO is even more oversold now and what's worth noting on the NYMO chart is that there's almost always some positive divergence at a major low. The way that would generally work in EW terms is that you'd see positive divergence on the last wave down in a sequence. If we are looking at a 3 of 3 wave, and this sure looks like one, then waves 4 and 5 still lie ahead, once this current move can find a tradeable low. Would that wave 5 low be at the H&S targets? Maybe, though we're close enough now that it's hard to rule out the wave 3 low being there:
Looking at other charts this morning gold has almost reached the target I gave the other day. We've lost a lot of trendlines in recent days and this might well break too:
ZB has overshot the 133 IHS target I posted as a possibility last Friday when ZB was trading at 126'18. An amazing move in just a week:
The most puzzling thing this week has been the relative strength of EURUSD (and GBPUSD). The flight to safety plays this week have been gold, bonds, Yen but not USD. What gains USD has made have also been disproportionately due to the hammering that commodity currencies have taken. Whatever else, this is an interesting new development. I have a decent declining channel on EURUSD that is holding. Not perfect but reasonably good and it looks as though EURUSD should bounce a bit here today:
My feeling is that we should see a bit of retracement today. immediate resistance on ES is at 1201 and stronger resistance is in the 1215 area.
Hedging costs after Thursday's market meltdown
Last week, with the debt ceiling negotiations dragging on, we looked at the costs of hedging a handful of equity index, gold-, Treasury bond-, and dollar index-tracking ETFs. Below is a snap shot showing the current hedging costs of the same basket of ETFs after Thursday's market meltdown. Before that though, a look at how a couple sets of index ETF puts fared during Thursday's market meltdown.
SPY puts
For a Seeking Alpha post Wednesday, I used Portfolio Armor to pull up the optimal puts to hedge against a greater-than-20% drop in SPY over the next several months. Usually, I don't keep track of what the optimal puts are for these articles, I just post the costs. As it happened though, someone asked me what they were, so I made a note of them. They were the $104 strike, March 2012 puts. Here's what happened to them Thursday.
DIA puts
These puts I kept track of because I own them. In late June, I used Portfolio Armor to find the optimal put options to hedge against a greater-than-20% drop in DIA, which turned out to be the $98.75 strike, December puts. Here's what happened to those puts Thursday.
Current hedging costs: an update on last week's table
Hedging against a >30% correction in stocks
The table below shows the costs, as of Thursday's close, of hedging the same 5 equity index ETFs against greater-than-30% corrections over the next several months, using optimal puts.
Current Hedging against a >15% correction in bonds, gold, and the dollar
The table also shows the costs of hedging the same gold-, U.S. dollar-, and Treasury Bond-tracking ETFs against greater-than-15% declines over the next several months using optimal puts. First, a quick reminder about what optimal puts are, and a note about costs.
Optimal puts
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. As University of Maine finance professor Dr. Robert Strong, CFA has noted, picking the most economical puts can be a complicated task.
With Portfolio Armor (available on the web, and as an Apple iOS app), you just enter the symbol of the stock or ETF you're looking to hedge, the number of shares you own, and the maximum decline you're willing to risk (your threshold – you can enter any percentage you like, but the larger the percentage, the greater the chance there will be optimal puts available for the position). Then the app uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.
A note about costs
To be conservative, Portfolio Armor calculates hedging costs using the ask price of the optimal puts. In many cases, you may be able to buy the puts for a lower cost (between the bid and the ask prices).
Hedging Costs as of Thursday's Close
|
Symbol |
Name |
Cost of Protecting against >30% Decline, as % of position |
|
Equity Index ETFs |
||
|
QQQ |
PowerShares QQQ Trust |
1.50%* |
|
SPY |
SPDR S&P 500 |
1.78%* |
|
DIA |
SPDR Dow Jones Industrial Avg |
1.61%* |
| EFA | iShares MSCI EAFE Index | 2.65%* |
| EEM | iShares MSCI Emerging Markets | 2.80%* |
| Symbol | Name | Cost of Protecting against a >15% Decline, as % of position |
| U.S Dollar ETF | ||
| UUP | PowerShares DB US Dollar Index | 0.51%* |
| U.S. Treasury Bonds | ||
| TLT | iShares Barclays 20+ Yr Treas | 1.97%* |
|
Gold |
||
|
GLD |
SPDR Gold Trust |
1.77% |
*Based on optimal puts expiring in March, 2012.
Salutations from the Denver International Airport, where this reporter is very, very glad for his delayed flight.
After the (thrilling) close today, I rushed out to the airport to fly to Chicago by way of Denver. Well, the flight to Denver was badly delayed, and I was really concerned that I'd miss my flight to Chicago. I researched a variety of alternatives – – – even calculating how long it would take to drive there (20 hours; no thank you) – – – and was distressed to surmise that if I didn't make my flight, I was pretty well screwed.
Well, just as one good turn deserves another, one good delay deserves another, and I got it – – the flight from Denver to Chicago was delayed by three hours. Hurrah! So, for once, I was thrilled to get a delay.
I don't travel much – – regular readers know I am a notorious homebody and am away from my family probably 0.3% of any given year – – so I'm not an airport expert. But for such a huge airport as Denver's, a couple of things surprised me.
First, I was stunned to see the Admiral's Club, which is the United Airlines private lounge, closes at 9:30 p.m. What is this, Mayberry, USA? I'd figure they should be open to at least midnight, if not 24 hours a day.
And second, there appears to be one electrical outlet for every 100 people waiting at the airport. Since every single person here has at least one electrical device that needs charging, people have to scurry around like large game on the Serengheti seeking a watering hole. I managed to find one available outlet behind a security station. Below is my vantage point. You can see another poor soul seated on the carpet trying her best to get something done too. Ah, the joys of luxurious air travel.
WOW!
That is pretty much all I can say this month as we get a view of the monthly SNAP (Food stamps data for May 2011). Wasn't it just one month ago when I was gushing all over this recovery saying that this could potentially be the inflection point that we all had been looking for? Didn't the trustworthy data from the Ministry of Truth show a decline of SNAP costs in April? Wasn't the slowing pace of growth in January, February, and April the affirmation that our hopes had finally found a home? Well, clearly, the answer is NO!
RECORDS YOU DON'T WANT TO BREAK
SNAP data for May shows that plan enrollment increased by a whopping 1,105,217 people which is an increase of 2.4% over the preceding month. This is the second highest participant growth reading in my six years worth of data AND is the highest monthly percentage increase ever in that time frame! The greatest increase was in September of 2008.
LOW LIGHTS
THE BIG PARTY!
Apparently the government is inviting everyone to this awesome party. We've got 1.1 million new guests all decked out and ready to celebrate the greatness and largess of the good old USA. One out of every 7 people in the US! I guess the only question we have to ask ourselves now is who is this party for? Who could possibly mobilize so many people and create such excitement? The party is obviously for our wonderful President! He does turn 50 after all and no one wants to miss a beautiful occasion and an opportunity to fawn over our beloved leader. The guests just can't get enough of the party favors and goodies, it almost seems like they could do this party every month, and why not? It doesn't cost them anything? (Last rant here I promise. Are you kidding me, people really celebrate his birthday!? Are we done with the worship of him yet?)
GOATMUG
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