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May 18, 2012

Staying cool under pressure can be a challenge for traders, here are a few tips (click here).

Browse Carley Garner's Trading Education Books

Sometimes we are just plain wrong...

A few weeks ago we were looking for a June 30-year bond rally into the 145 space, but have to admit this week was not what we had in mind.  In fact, we are surprised at the market's ability to run past record levels (set in the midst of a major economic collapse and then again post US debt downgrade). 

In our opinion, rather than reacting to reality, investors are reacting to "what if" scenarios.  That doesn't mean the market's aren't vulnerable to a self-full-filling prophecy...because they are.  We've seen it multiple times in the last few years; panic makes its way into asset prices long enough to force a majority of investors to the sidelines and then they reverse course without them.  Unfortunately, panic moves are seemingly limitless in regard to price or time. 

Ignoring emotion and fear of contagion in Europe, this week's news was overall neutral to bearish for Treasuries.  Inflation was stagnant, but measures of the economy such as retail sales, the Empire Manufacturing Index, housing data and leading indicators were all respectable.  At some point, fundamentals will come back into play and when they do Treasuries will have a difficult time holding their ground.  Next week will be a slow news week, but expectations for the data seem relatively low.  In theory, they should work against the rally but with Europe in the news the headwinds will be strong. 

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May 11, 2012  

Staying cool under pressure can be a challenge for traders, here are a few tips (click here).  

Browse Carley Garner's Trading Education Books

E-mini S&P's triple bottom is now a sexta-bottom...but is it a bottom (and is that a word)?  

The June ES futures contract spent the entire week trading in a 20 handle range between about 1340 and 1360.  Unfortunately, for those trying to trend trade, the market moves from one side of the price envelope to the other were swift and convincing.  As a result, we suspect that there were several traders on bad footing (ie. bulls repeatedly buying the highs and the bears selling into the lows).  It isn't difficult to image how quickly the losses can pile up, and most likely the frustration as well.  This is important because now that emotions are involved, and traders have substantial amounts of skin in the game, the break out (in either direction) will be all the more dramatic.   

It feels like this dip will eventually prove to be a buying opportunity, despite the "sell in May" mantra and what is becoming overwhelmingly bullish sentiment.  Nonetheless, the door is still open for one more slide into the low 1330s.  A print at this price would be sufficient to flush the sell stops out of the market and finally retest the March lows the technicians have been eying.   

There is little news to support (or force down) equities on Monday, but starting on Tuesday we'll get a plethora of economic news including CPI, manufacturing data and later in the week the latest in housing and the minutes of the latest FOMC meeting.  In our estimation, the week's data could be supportive to bullish but Monday is a wild card.   

If you are a bull, you might want to consider the low 1340s as a place to nibble, but save the big guns for a possible plunge into the low 1330s (or even the high 1320s).  If you are a bear, congratulations but in my opinion you want to be of the mindset of reducing risk and taking profits.   

From yesterday but still valid:  

Helping to aid our bullish tilt in equities is what we believe to  be a potential reversal in the currency markets.  The U.S. Dollar Index has made its way into the mid 80's which marks the upper end of the multi month trading range.  This time of year is typically directionless in currencies; accordingly, we are expecting resistance to hold for now.  If so, the weaker dollar could provide support to stocks.   

 

The market has made mid-day recoveries in each of the last three sessions but that doesn't necessarily mean the bulls are out of the woods.  We sure wouldn't want to be short this market, but we wouldn't recommend being blindly bullish either.  If ever there is a time to remember the simple rule...buy the dips and sell the rips, it is now.  You can't get too comfortable, or too greedy, in this market! 

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May 11, 2012

Staying cool under pressure can be a challenge for traders, here are a few tips (click here).

Browse Carley Garner's Trading Education Books 

Testing, testing, testing...Treasury futures

Had it not been for the JP Morgan surprise conference call last night, this newsletter might have gone in a completely different direction.  In fact, I think we likely could have witnessed the typical counter-trend Friday action that we are accustomed to seeing.  Instead, Friday's trade resulted in another retest of the upper limits (just over 145 in the June 30-year bond and just over 130 in the 10-year note). 

In mid March few believed Treasuries could rally at all, let alone to this magnitude.  The current run has been the longest winning streak in government backed securities since 1998.  We aren't going to say that we were absolutely certain prices would rise from 135 to 145 in the span of about two months, but we had been pointing toward positive seasonals and the possibility of prolonged short covering (there were too many bears). 

Our models suggested resistance (and potential reversal areas) in bonds near 145'03 and the June bond failed to trade above it for long (the high of the day was 145'08).  If we are right about a change of heart, the market could make its way back to the mid 142 level in the coming sessions.  If we are wrong, the next resistance level will be 146'02 and then again near 146'20.  The downside in Treasuries could see notes trading back to 132ish with resistance near 133'27.

 It has been a relatively wild week thus far, and it is only Wednesday!  However, it feels like the markets have managed to work out most of the turmoil early in the week and we could be in store for a period of "risk on" trading.  In addition, in yesterday's newsletter we pointed out resistance in the DX futures near 80.50, and today that seemed to hold.  If so, this could be a key to a reversal in other financial markets such as Treasuries and equities.   

Don't forget, this time of year is overall bullish for bond and notes so betting the farm on a complete collapse probably isn't a good idea.  Instead, we believe the pullback will be rather modest in size and temporary in nature.  Judging by action in the option markets, it appears as though retail  traders (the small guy, harshly known as the dumb money) are eager to be long 30-year bond calls.  It was evident from the get go that moderately higher futures prices were translating into grossly overvalued call options (due to high demand for the instruments). 

Accordingly, this morning we were comfortable in recommending our clients sell the July bond 149 calls for about 30 ticks this morning.  Some fills were reported at 30, but most took 29 and were satisfied.  These exact options were trading under 10 ticks last Friday, so they have more than tripled in value in a matter of days and settled at 20 yesterday.  Being nearly 5 handles out of the money in an already extended market with 45 days to expiration, it seemed like a high probability trade to us...and so far so good, at the time of this writing these call options were trading near 21.  We hope to be able to buy them back in the next few days for a little less than half the premium collected. 

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April 27, 2012  Carley was recently interviewed on the nationally syndicated radio show, Your Money Matters...click here to listen (scroll to middle of page).  

Who left the barn door open? Stock index futures bulls are running!  

It has been a running of the bulls type of week on Wall Street despite a rocky start in early Monday morning futures trade.  Compliments of one of the best earnings seasons in history (at least based on low expectations coming in), the June S&P picked up about 1.7% and the NASDAQ well over 2%.   

First quarter earnings growth was originally forecasted to be around 3%, but with the earnings season well underway analysts are now calling for 7% growth.  Annual S&P earnings growth rate is expected to be about 9% for 2012.  As we all know, tech stocks have been leading the charge; stronger than expected earnings reports from Apple and Amazon have propelled prices higher as about 73% of all companies reporting have "beat the street".   

Seasonal patterns suggested the month of April would conclude with a rally; anybody that trusted history likely fared well this week.  Next week (and even next month) gets a little trickier.  After checking with multiple seasonal data sources, it seems there are some slight disagreements in regard to the timing of the infamous "sell in May and go away" trade.  Similarly, stock market performance during the month of May has been rather inconsistent.   

According to the Stock Trader's Almanac, 15 of 20 Mays between 1965 and 1984 were negative but between 1985 and 1997 May was the best month with 13 consecutive gains.  Since 1997, the market has been nearly split for the month of May, but since 1952, in years of a Presidential election Mays have underperformed.  With all of this in mind, we have to enter the month with a near-term bullish bias but will be looking for better prices to  be a bear.   

According to our sources, the first two days in May have a tendency to be positive and our chart work tells us Monday (April 30th) could see some follow through buying.  Accordingly, we are looking for the June S&P to see 1413ish in the coming sessions with a run to 1430 possible should we continue to get positive news. 

If we are wrong, first support comes in near 1381ish.  If you are day trading, look for support near 1388 and again near 1381; resistance lies near 1404 and then 1413.