Morning Rage 2.6.2012

Some key European events that traders will be watching this week are German factory orders(December) on Mon and will be listening to the Eurogroup finance minister meetings.  Tuesday, Bernanke will testify before the budget committee and Merkel will speak regarding Europe’s fiscal future.
 In early morning trading, after 5 weeks of positive trading/strong macro data and the Dow making fresh 3 year highs the DJIA is down by 45 points and the S&P is down around 5 points. The VIX traded under  17 on Fri but closed near its highs after investors wanted cheap protection. Perhaps investors were seeking some cheap protection against a “Lehman-like” event.
If the 10 yr yield can trade comfortably above 2% and the Vix can trade under 20 I think the tape is set to trade much higher. Crude oil is trading around the 97$ level with a lot of risk premium still built in. Look for crude oil to go much lower unless some crazy geo-political news comes out of the middle east.

Why You Should Invest Like Mark Cuban – By Ben Hoben

Buy & Hold Doesn’t Work Very Well Anymore
I used to be a die hard “buy & hold guy”. I worshipped at the altar of Warren Buffett and tried to buy only stocks that I thought I could hold forever. While I will hold a stock for a long time it is a rare occurrence. I reserve the buy & hold methodology for that rare company that is of the upmost quality. I currently hold two stocks in this category. Both are small caps and I’ve held one since 2001 and the other I’ve owned since 2006. They both share the same qualities. They are small, excellent management, absolutely no debt, have a nice chunk of cash, are growing at a decent clip, and aren’t self promotional. These kinds of companies are harder and harder to find every day.

Markets Are Manipulated
The most important thing I’ve learned from Mark Cuban is that the markets are highly manipulated. The investment game has grown so large that there is now so much “big money” sloshing around out there that the small investor is for the most part at a disadvantage. Peter Lynch used to say that the small investor had an edge because they could invest or do things the fund managers couldn’t. While this is true, nowadays the big money is out there manipulating the markets. Whether it’s the Federal Reserve pumping money into the system creating rising asset prices or the high frequency trading that is out there robbing investors with fake volume and bids, the markets are constantly being manipulated. With the government artificially suppressing interest rates, people are losing ground to inflation in their savings accounts and feel forced to participate in the market. This creates manias and bubbles by having people chasing the hot asset classes. It’s usually the small investor that hops on the bandwagon as the big money pulls the rug out from underneath them.

Pick Your Spots – Have a Specialty or an Angle
So what is the average investor to do? We’ve just spent over a decade where the stock market is below where it started. The “financial experts” who are “looking out for you” will tell you to just put as much into your 401k or mutual funds as you can each month and everything will be o.k. Funny thing is, is that they are only worried about their assets under management and gaining fees off of your account. Very few people in the financial industry have your best interests at heart. You have to have an angle or a specialty to trade this market. Figure out what it is and become an expert and be good at it. It could be trading on unusual options activity, investing in spin-off stocks, high yield dividend stocks, merger arbitrage, micro caps, sectors, or whatever you can find where you have an edge to protect yourself from the market manipulation. If you can be focused and knowledgeable you can trade this market.

Cash is an Asset Class
If you can learn one thing from Mark Cuban it is that cash is an asset class. You don’t have to be 100% invested in the market at all times. Cuban stresses that you have to have cash to take advantage of opportunities. The more cash and less debt you have the more likely you will be to take advantage of a tremendous opportunity that could come your way. While Cuban is a billionaire and doesn’t have to worry as much as the rest of us about getting a return on his money, what he says makes perfect sense. Sometime, whether it’s tomorrow or three years down the road, you will get an opportunity to deploy your cash. It could be a market crash or a stock specific crash that presents that opportunity to you. It could even be a business opportunity that comes along that had it not been for hold some cash, you would’ve missed out on. I’m not advocating sitting in all cash but just be mindful that cash is an asset class that could pay big dividends down the line when you need it the most. As Buffett says, wait for the right pitch and then swing. While Warren Buffett was the best investor of a past generation, Mark Cuban is one of the best of our generation. Read and listen to everything he has to say. You will be surprised at how much you learn.

Understanding Options 101

I bought 10 Feb weekly 30 Straddles for $3.50. I bought 10 Feb 30 Calls for $2.25 and 10 Feb 30 Puts for $1.25.  So my breakeven on this trade is $26.50 or $33.50.  So if the stock sells off under $26.50 I will be profitable, but I can either buy stock against my position to lock in the Feb 30 Puts that will expire into short stock after today or I could sell the Puts out.  Since options close at 3PM and stock trades until 7PM CST I bought stock against my spread.  So, last night I bought 30% of my stock back, or 300 shares at $26.50.  As the learning process is, when I buy Puts and buy Stock I create a Call.  So, I converted 3 on my Feb 30 Puts to Calls by buying stock.  So, going into today I am long 13 Feb 30 Calls and long 7 Puts.  Today, APKT was off to the races and I sold stock against my Calls on the averaged price of $32.  So, lets look at a breakdown on expiration:

Bought 10 Feb 30 Calls for $2.25, Selling Stock at $32 is the same as selling the Calls at $2 after expiration, so $.25 loser 10 times= Loss of $250

Bought 10 Feb 30 Puts for $1.25, these will expire worthless= Loss of $1250

Bought 300 shares of Stock at $26.50 and sold it at $32= +$1650

This trade ended up as a $100 winner for a 10 lot, by “scalping” stock in afterhours made this trade from a loser to a winner.  Hope this helps for Options 101 

Morning Rage 2.3.2012

 Chart of the Day – Gold Here is an excerpt of the The “A Game” Market Intelligence Report which came out Sunday evening: I initially wrote about the high probability bounce, within 3 points, in gold to end a precipitous fall here:  http://northingtontrading.com/2011/12/30/gold%E2%80%99s-connecting-flight-it-just-landed/ Since then, Gold has rallied over 10% and has now reached a significant multi time framed level of resistance. Significant volume is also confirming large players are acting in concert at this level. This will be an important level to watch. The take-aways are:•The trend outlook is mixed and choppy•Multi time framed resistance is being tested oThis will be very bullish and serve as support if broken.•Trend compensated momentum is neither extremely overbought nor oversold•If this MTF level holds, you could see significant more downsideoFirst down to 1600 which is volatility-based support (daily), then down to 1500 which is transactional and volatility based support (weekly). This is interesting because it would have direct effects on many other markets, including ours, just as in the case of the USD scenario aboveTo find out more about The A Game Trading Letter click here http://metaswing.com/site/a-game-trade-letter/

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Cam at the Close 2.2.12

Orange_Black_ChartIt was a very choppy day in the markets today with no clear direction. Gold and Silver continue to show signs of strength. GLD closed up another 0.87% to $171.05 while its crazy cousin silver closed up 2% to $33.41. It appears as though Natural Gas (UNG) has made a short-term bottom around $5.00. UNG closed up 7.32% to $5.42. It carried many names up with it. Alpha Natural Resources (ANR) broke its 20-dma and closed up over 7% to $21.66. The most explosive natural gas play today was GMX Resources (GMXR). The stock gapped up 10% to $1.10 in the morning and then EXPLODED 50% higher to $1.54 by the end of the close. The stock traded 13 million shares, which is 13-15x normal volume.  Watch this name closely for tomorrow; there could be a continuation. Over the last two days, the SPY has failed to rally into the close. This is a shift from the normal behavior that we have seen so far in 2012.

Earnings Trade of the Day (WYNN) 2.2.2012

Reason I like this Trade: WYNN is a stock that has not moved that much on earnings within the past couple of quarters.  As I talked about on Bloomberg during my Interview, it is a sloppy chart and it will not break through the 100 Day Moving Average at $120, I wanted to make a play that it will not have much movement, so I am making an even money bet that this stock will not move the implied 5% move.  If you have any questions please email me at [email protected].

UPDATE 2.6.2012 On Friday this trade expired and WYNN closed right at $115 even.  I decided to buy the Feb 115 Puts I was short for $.10, so I did not have to determine if I was going to be assigned on those Puts over the weekend or not.  When I am short an option and it expires right at the strike, it is a guessing game to know if I get “assigned” on the option over the weekend.  If I am LONG the option and it closes at the strike, I determine if I want to exercise the option or not.  So, I turned $.10 into $2.45 and the trade is over.  Time to move on to the next trade.