Traders Should Watch the Gap

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Anyone who rides a commuter rail in the United States is probably used to hearing a message to 'watch the gap'. The advice also holds for stock trading.

A gap is a price level on a chart where no trading took place from one time unit to the next time unit. This happens on daily charts when the opening price is above or below the previous closing price and the market continues to trade in the direction of the gap. Gaps in the stock market on the daily charts invariably show up on Nasdaq because all stocks open at a price determined by market conditions. Specialists try to balance the buys and sells on the NYSE and this can delay the opening of stocks there and smooth out the price. Since most Dow Industrial stocks trade on the NYSE and its stocks frequently open gradually over several minutes, gaps on the opening are rarely seen on the Dow. This also mutes the gaps on the S&P 500, which contains a significant number of NYSE stocks.

Markets move to fill gaps, or in other words trade at the price points that were missed when the gap was created. Most of the time, this happens anywhere from the next day to a few weeks later. It sometimes takes months or even years however to fill a gap. Short-term traders should be aware of all the gaps within the last few weeks on the indices, stocks, and even the ETFs they trade (even commodity ETFs fill their gaps on the U.S. charts even though these gaps are artificial because trading took place at the appropriate price points overnight). Traders with a longer term view should keep in mind gaps from the last couple of years that have remained unfilled.

Trading of U.S. stocks in the last six weeks can be viewed as an attempt to fill gaps. Nasdaq gapped up on August 1st and that gap was filled on August 6th. Nasdaq gapped down on August 12th and that gap still remains unfilled. Nasdaq gapped down again on August 24th and that gap was finally filled when Nasdaq gapped up on September 1st. The September 1st move however created a new gap. Nasdaq gapped up again on Friday, September 3rd and attempted to fill that gap in yesterday's trading, but didn't quite fall low enough to succeed. So Nasdaq has unfilled gaps both above and below where it is currently trading.

A market that gaps up and a down a lot is usually directionless, volatile, potentially unstable, and possibly manipulated. It can be a boon to short-term traders. It is not something however that a position trader or long-term investor should find attractive. Those with a longer view may wish to consider that Nasdaq has a large gap around 1800 that occurred in July 2009 and still remains unfilled.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Why Thursday's Market Crash Was Caused by Computer Failure or Errant Trades

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The trading pattern on the U.S. markets on Thursday, May 6th can be explained by only one of two things - a huge erant trade or a computer system failure.  Even after the market close, the NYSE was claiming that there were no technical problems with its trading system. Citi specifically issued a statement that it had nothing to do with implementing an errant trade. Nasdaq however said that it was investigating possible erroneous transactions executed between 2:40 and 3:00PM.

It wasn't so much the drop that was unprecedented. The waterfall decline that took place for approximately eight minutes somewhat after 2:30PM is common in crashes. Even during crashes however, numerous intra-period gaps on the one-minute chart aren't common. There were four such gaps yesterday in S&P 500 trading. Large market indices almost always trade continuously and the probability of this type of trading pattern is extremely small. Even less probable was the instantaneous recovery of the indices. The S&P 500 also has four gaps on the upside in only eight minutes, when it rose approximately 50 points.  During that same time the Dow Jones Industrial Average was rising around 500 points. None of this represents a normal trading pattern.

The major indices were damaged enough as is on the day.  The Dow was down 348 point of 3.2%. The S&P 500 dropped 38 points or 3.2%. Nasdaq gave up 83 points or 3.4% and the small cap Russell 2000 lost 28 points or 4.0%. Of all the major sectors, financial stocks were hit hardest closing 4.1% lower. The confusion caused the VIX, the volatility index, to spike above 40. It was in the mid-20s only two days ago. It closed at 33.19, up 41% on the day. This type of movement in the VIX is extreme and is likely to be reversed in short order. Gold rallied in the confusion.

Having looked at the charts as the sudden trading plunge and the subsequent recovery that took place during and after the market close, I noted the charts changed over time. Some of the gaps on the charts disappeared and a straight-line trading pattern the existed for a while before and just after 3:00 disappeared on later charts. The straight-line trading pattern only exists if trading has been halted or if there has been a break in the information feed from the exchanges so no data is forthcoming. Either way, traders and investors are entitled to an explanation of what really went took place. Otherwise, they might think there is either a cover-up of a serious technical glitch or collusion by the big players in manipulating the market.

Disclosure: Sold VXX.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bull Markets Climb a Wall of Worry

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

An old market adage from the 1800s is that bull markets climb a wall of worry. At almost every step of the way (except at the end), there is substantial hand wringing about stocks being over priced, overbought, overextended and ahead of themselves. You will hear and read over and over again how current prices are not justified and the rally has gone way too far. Despite all the numerous reasons cited, most of which seem quite reasonable, stock prices continue to go up and up. Based on these criteria, we are currently in major bull market.

This type of opinion for stocks has been pervasive in the mainstream financial media from almost the beginning of the current rally (the oil market is even worse, with a constant barrage of negative headlines and news of impending price collapses that are supposedly going to take place any moment). It has however reached new heights in this rally with the CEO of NYSE Euronext giving a public interview stating the current rally is likely to run out of steam and stocks return to their previous lows. Considering the NYSE Euronext makes its money on the amount of trading that takes place, widely publicized comments from its CEO to talk down the market and discourage people from trading are a bit curious to say the least. There is definitely more to this story than meets the eye.

As we pointed out in the blog a few days ago, the big money in rallies like the current one is made by buying very low-priced stocks with good fundamentals. A case in point would be diamond company Harry Winston (HWD). While the media was telling you to stay out of the market, you could have almost doubled you money in this stock in less than two weeks. The stock is indeed now overextended, but should offer some opportunity for buying it on a drop later next week or even earlier the following week. While oil the commodity is moving sideways, a number of oil stocks are moving up. We mentioned in this blog drillers was the place to look, one the best deals seems to be Precision Drillers (PDS). A few shippers, also mentioned here as a place to look, have had explosive rallies in the last couple of days.

If you have a longer term perspective, media coverage can actually be very helpful. Just look for stocks that they are bashing. One of the best examples I have ever seen of this was in an article published in yesterday's IBD ("Bottom Fishing Can Land a Smelly Catch"). While every point made in this article applies to HWD (try to find an IBD stock that went up a 100% in the last two weeks - don't bother looking, there aren't any), the article is actually about MEMC Electronics (WFR). While most of the article bashes WFR as one of the worst stocks in the world, a careful reader would note that WFR had similar problems in 2001 to those that it has today and it was selling as low as $1.05 at that time. Within 6 years, WFR went up to $96.08. So you could have made 95 times (or 9500%) your investment by buying the stock when things looked worse. But don't worry, IBD is doing its best to make sure you don't fall into that trap again!

NEXT: Nasdaq Confirms Double Bottom - 200 MA Next

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Muriel Siebert Discusses the Credit Crisis

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

At the January 9, 2008 meeting of the New York Investing meetup, I had the pleasure of interviewing stock market legend Muriel Siebert. In 1967, Siebert became the first woman to have a seat on the New York Stock Exchange. In the mid-1970s, she was appointed Superintendent of Banking for New York State. No bank failed under her tenure. In her more than 50-year career on Wall Street, Muriel Siebert had personally witnessed almost the entire post World War II financial era. She had seen it all and had done it all.

Highlights of the this historical interview with Muriel Siebert have been condensed to three eight minute videos, which can be seen at:
http://www.youtube.com/watch?v=UHxRCNd0HSI
http://www.youtube.com/watch?v=bZLsD2DHvLw
http://www.youtube.com/watch?v=_tL2bOmkMwo

In the interview, Siebert indicated that things had changed considerably since the 1970s, the last period of high U.S. inflation. The U.S. had lost its dominant economic status and emerging economies around the globe were not as dependent on it as that had been previously. She also pointed out how their growth was creating a voracious demand for commodities and the wealth transfer from rising commodity prices enabled the takeover of major U.S. financial institutions by commodity producing countries like the Gulf states. She was not sanguine about the prospects for the U.S. dollar, pointing out that the U.S. needed to cut the deficit considerably to support it and the consequences of doing so would be severe.

Siebert said the she had seen nothing like the subprime crisis during her long career on Wall Street. She thought the abuses had been so extreme and damaging that some people involved in creating the problem should go to jail. Siebert asked, "Where were the regulators?; "Where were the rating agencies?"; and cited mortgage brokers as being key players in generating the large quantity of irresponsible loans. The subprime crisis wasn't the only thing she thought we had to worry about either. She mentioned the collapse of private equity and how this had helped juice the market up and that its loss would cause the stock market to fall.

Siebert pointed out the similarity between how Enron hid its financial activities and the banks had done so in the 2000s by pushing their subprime activities off-shore and off-balance sheet. She stated that under Sarbanes-Oxley that audits should be complete by March 31st and a clearer picture of just how extensive the damage was would begin to emerge. Her opinion was that no one really knew how big the problem was. Siebert mentioned the large amount of derivatives that now exist and the complete lack of regulation for them. She thought the we need global security regulation that should be instituted on a similar model as global banking regulations that are now in place. Siebert thought that there was too much leverage in the system and said this was what really scared her, although she concluded that she didn't see a 'total' collapse of the financial system.

NEXT: Central Bankers Gone Wild

Daryl Montgomery

Organizer, New York Investing meetup

For more about us, please go to: http://investing.meetup.com/21