Will Stocks Continue to Rally After Quadruple Witch?

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.


Today is one of four days during the year when index futures, index options, stock options and stock futures all expire. The market has rallied throughout September into the quadruple witch, but will it continue to do so?

As has been the case with every rally since the bottom in 2009, volume this September has been below average on the Dow Industrials. Low volume is an indicator of lack of enthusiasm for a trend and indicates the trend is likely to reverse soon. Nevertheless, stocks have managed to defy the lack of buying support and hold up for almost a year and a half now. This is theoretically impossible in a free market. It is very possible in a manipulated market however where one or a few large players control the game. In such circumstances, some tip sheet on Federal Reserve liquidity pumping would be the best guide to be used for trading stocks.

The mainstream media has been giving the rally as much support as possible as well. Weekly unemployment claims which invariably fall around holiday weeks, not surprisingly went down the week before and after Labor Day. Instead of reporting this as business as usual, the cheerleading media claimed it was new evidence of an improving economy. Retail sales supposedly had a minor jump in August, although the report was not credible. The smoking gun was the auto component which barely declined over August 2009 when Cash for Clunkers was giving auto sales a huge boost. Independent industry sources showed a huge drop in sales year over year, but somehow government statisticians know nothing about it. Both reports were replete with missing data, so some component numbers were merely wishful thinking estimates. The mainstream media didn't manage to report this key information. A consumer confidence survey today indicated confidence dropped to its lowest level since August 2009. The cause for the drop was consumers getting really gloomy about the future prospects for the economy. Apparently they are increasingly tuning out the information they are getting from the government/media complex and believing what they see with their own eyes instead.

So even though the economy is continuing to deteriorate, government statisticians are doing their best to hide this from the public. The mainstream media is doing its best to help them out by not questioning any number they produce no matter how unreliable or unbelievable it is. The Fed and other central banks and treasuries (think the one trillion dollar euro-TARP program) are doing their best to keep the world financial system afloat in a sea of liquidity. The most obvious evidence for this is a range of assets - stocks, bonds, and commodities - are all rising at once. This happens if there is more money in the system, otherwise traders would need to sell one asset in order to get funds to buy another. When they can bid up every asset, there has to be more available money and less risk aversion, which makes no sense given all the problems that currently exist.

Given the current environment, stocks can certainly continue to go up. Investors should assume the Fed will do everything possible until at least the election on November 2nd to make the market look good. There is no free lunch however. While liquidity driven markets can go higher and last longer than anyone thinks possible, they can also drop faster and much further than anyone would imagine. And this can take place suddenly. Constantly keeping the liquidity trough full also risks massive and sudden inflation. Don't expect to hear about this from the mainstream media though because they will be too busy telling you not to worry because everyone knows that liquidity fattened pigs can fly - or at least that's what the latest government report said.

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.

Quadruple Witching Tops Off Weekly Trading

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.


Friday was a quarterly quadruple witching day with stock options, options on futures, single stock futures and index futures all expiring. While volatilty frequently takes place on expiration days, this one was uneventful. Expirations can move markets starting days before however, with prices tending to move in the opposite direction of their recent trends during the week of expiration.

The week of June 14th was bullish for U.S. stocks, the euro, oil and gold. The euro gained 2.7% on an oversold rebound. Gold hit a record high, with GLD closing up 2.5% on the week. There was little difference though between gold's performance and that of the major U.S. stock indices. The Dow rose 2.3% on the week, the S&P 500 2.4%, the tech heavy Nasdaq 3.0% and the small cap Russell 2000 3.2%. Oil was a much bigger winner than gold, gaining 5.2% from last Friday's close. The one notable loser was economically sensitive copper, which dropped 1.5% in the last five days.

The euro, stocks, gold, oil and copper have very different technical pictures. On the daily charts, the euro looks very bearish, with its simple 50-day moving average well below its 200-day. The euro is moving up because of 'regression toward the mean'. It went down too far in too short a period of time, so it is trying to return to a trendline. The trade-weighted U.S. dollar has a mirror image picture. It has gone up too far, too fast and is coming down for that reason. Many oil ETFs/ETNs, including OIL also have their 50-day trading below their 200-day, but it is not nearly as pronounced as is the case for the euro.

U.S. stock indices are still in a bullish pattern with their 50-days above their 200-days, but the 50-days have been fallen particularly for the Dow and the S&P 500. The Russell 2000 is in the best shape of the indices. All of the indices are trading above their 200-days, but below their 50-days. The Dow and S&P 500 spent 18 days in a row below their 200-days in the last month though. Stocks can be characterized as clinging to a bullish pattern. In contrast, Gold is unquestionably bullish, trading above both its 200-day and 50-day and its 50-day is well above its 200-day. Next week could be critical for whether or not gold's rally continues based on patterns forming in its technical indicators.

Copper is changing from a bullish to bearish trading pattern. It's 50-day is touching its 200-day and will fall below it on Monday. This is a classic bear signal. Since copper trades with the economy, its behavior is supporting the possibility of a global slowdown and a double-dip recession in the United. Investors should watch copper closely. If it continues its bearish trading pattern, assume a recession could show up as early as this fall.

 Disclosure: None

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.

U.S. Stock Market in the First Quarter of 2010

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.


Today is quadruple witching, a once every quarter event that takes place on the third Friday of March, June, September and December. On these dates, contracts for stock index options, stock index futures, stock options and single stock futures all expire. While media reports usually focus on volatility during the expiration date, far more important is the trading that takes place in the proceeding weeks. Prices will tend to move to minimize the value of outstanding options due to hedging, if not for other reasons. A negative outlook in February seems to have led to a nice rally in U.S. stocks during March.

Stocks started the year off with a mildly bullish tone and hit a peak in mid-January. The Nasdaq and Dow Transports hit a high on January 11th, the Dow Jones Industrial Average on January 14th and the S&P 500 and Russell 2000 on January 19th. All the indices sold off into February on news of reductions in liquidity from the U.S. Fed and restrictions on bank lending in China. The moves withdrew very little money from the global financial system however. The world's markets are still awash in liquidity. The U.S. dollar was also rallying during this time and since the stock market rally began in March 2009, the dollar and stocks have tended to move in opposite directions.

Stocks then started rallying off their February lows in a stronger dollar environment. This pattern first became evident recently in December 2009 when the trade-weighted dollar rallied strongly and so did stocks during the month. It would perhaps be more accurate to say the euro experienced significant weakness during these periods because of the crisis in Greece (the euro represents over half of the trade-weighted dollar). December represented a shift in trading patterns for the U.S. dollar and stocks for the current the rally.  Investors should note if the strong-dollar strong-stock pattern continues. While it was common in the 1990s, the opposite has been the case for much of the 2000s.

All the major indices hit new current year price highs recently. The Russell 2000 was the first on March 2nd, followed by the Nasdaq on March 5th, and the S&P 500 on March 12th. The Dow Transports hit a new high on March 10th before the Industrials hit a new high on March 17th. New highs are of course generally bullish.  Small caps have been doing best in the rally. This indicates higher risk tolerance on the part of investors and is also something that happens in inflationary environments. Small caps outperformed during the second half of the high-inflation 1970s following the deep recession of 1973 to 1975.

U.S. stocks can continue to do well as long as liquidity is being pumped into the financial system. Liquidity is the driver of prices and not the economy as the mainstream media constantly reports. Liquidity shows up first in the markets and later on in the economy if everything works according to plan. The Japanese in the 1990s and 2000s found that this Keynesian style plan didn't always work however. If things get too bad because too many excesses have built up in the financial system, the liquidity fix is no longer effective. U.S. investors also need to realize that money has flowed out of Europe and into the U.S. and a resolution of the Greek crisis will cause funds to flow out of the U.S. and back into Europe. Moreover, actions the Chinese take can also impact U.S. stock prices. China raising interest rates would be a negative for U.S. markets. Revaluing its currency upward would also shake things up.

Disclosure: None

NEXT: Who Really Benefits From the U.S. Healthcare Bill

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.

Gold Rally Still Holding Up

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.


Gold had a horrendous day on Thursday, December 17th. The price dropped below $1100 for the first time in many weeks. In mid-day trading in New York, there was a sudden vertical drop that was bound to give most investors pause. While gold went up almost every day in November, it has been mostly on a downward path since the beginning of December. Does this mean the gold rally is over? No, not at all. It just means that gold doesn't go up every day.

The cause of the recent volatility is Friday, December 18th's quadruple witching. Stock index futures, stock index options, stock options and single stock futures all expire on the same day in a quadruple witch and this only happens once every three months. The impact of the expiration can frequently be seen a day or two before and that is what investors were witnessing on Thursday. Prices will tend to move to minimize the value of the outstanding options. The big trading houses are major options sellers and they lose a lot of money otherwise if this doesn't happen. This has been an important factor lately in driving gold down and the U.S. dollar up.

The bears of course have been claiming the gold rally is over. They started doing so the first day gold dropped. The price action we are seeing now is reminiscent of the pull-back in December 2007. GLD, the major gold ETF, broke the 50-day moving average line then, just as it did now on December 17th. Gold had trouble rallying for four weeks during the month, but then the second phase of the rally followed. This took GLD up to much higher highs before it peaked in March. January and February are traditionally two of the strongest months for gold.

Spot gold hit key support which is around $1100 on the 17th. The 61.8% Fibonacci retracement for the rally that started in early October is in that area. That rally is still in effect until there is a significant break of that level. Just as gold was overbought on the daily charts before the recent sell off began, it is now oversold. The U.S. trade-weighted dollar was oversold and it is now overbought. Gold and the dollar usually move in opposite directions. Oversold conditions in bull markets are more important than overbought conditions and the opposite is true for bear markets. Therefore a good possibility exists that there will be some price reversal in both bullish gold and the bearish U.S. dollar soon.

Spot gold was around $1110 at the end of floor trading in New York on Friday. As long as it closes at or above $1100, especially at the end of the week, claims that the current rally is over are premature. Even if there is some pause to the rally, nothing has changed in the longer term picture. As long as there is easy money from the Fed - and raising interest rates from zero to a half a point or even a point or more - is still easy money and the federal government continues its spending spree, the backdrop for a gold rally is still in place. Don't expect this to change any time soon.

Disclosure: Long gold.

NEXT: The Three Big Economic Lies of 2009

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.

Quadruple Witching Today; Market Update

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:

Once every three months there is a quadruple witching day. This is when market index futures, market index options, stock options, and stock futures all expire on the same day. Volatility can result, but that is more likely to take place a few days before. In general, prices will move to minimize the profits of the buyers of most outstanding options. Reversals of price movements can take place the following week or two and you need to watch out for these.

The trade-weighted U.S. dollar is the key to many market movements currently. It has been selling off as U.S. stocks have rallied since March. A dollar rally should cause market weakness at this point. This dollar/stock relationship is abnormal and would make much more sense for gold. The dollar/gold relationship has actually been much weaker than might be expected. The trade-weighted dollar ETF DXY traded as low as 76.01 yesterday. There is chart support at this level, since there is a sharp low at 75.89 that was made almost exactly one year ago from today. Any break of last years low could cause the dollar to test its all time low of 71.50. A short term rally might be in the offering first however because the dollar is well below its falling 50-day moving average and it tends to move back toward that line when it gets too extended.

A dollar rise could affect both stocks and gold. Spot gold closed at $1013.30 yesterday, its fifth day above the key breakout point of $1004. Gold has made three all time closing highs in the last 5 trading days and this is very bullish. It still needs to break the $1033 intraday high before a longer term rise to the $1200/$1300 area is possible. Gold stocks have been selling off the last two days and may be volatile for several more. Large drops should be considered buying opportunities. Look for gaps to be touched or filled. The most profitable buying is done either on major breakouts or at bottoms (buying after a long run up is a good way to lose your money). Gold is at the cusp of a major breakout.

The current bottoms in the inflation trade are in natural gas, food commodities and possibly long-term interest rates. Buying natural gas on any day with a big drop looks like a good strategy. Food commodities have been trading around their lows since last December, which is a long time. The chart for RJA is quite bullish and it looks like it wants to rally soon. I have started buying it. The food related ETFs are generally much less volatile than precious metal and energy ETFs, so you are not likely to make money as quickly from them. Long term interest rates bottomed last December,with the 10-year bond hitting 2%. The 10-year rate was around 4% in June. Since then, long-term rates have declined. TBT, the leveraged short ETF for bonds of 20+ years duration has sold off a third since June. I have started slowly accumulating it. Long-term rates may not have bottomed just yet, but they are likely to be going much, much higher in the future.

NEXT: IMF Selling Gold to Dampen Rally

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.

Quadruple Witching Today; Fraud Update

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:

Today is quadruple witching, the once every quarter event when equity options, index options, single stock futures and index futures expire. The market will tend to move either up or down to minimize the value of the expiring options. Reversals to undo those moves frequently take place early the next week. After four days of closing below its 200-day moving average, the Dow jumped above this resistance line this morning and it needs to close there today and stay above it next week for the market to be healthy. The US dollar is steady at 80.46 this morning, gold, silver and oil are up slightly.

The big news today is that Texas billionaire Allen Stanford had been indicted and arrested. Stanford is accused of running an $8 billion Ponzi scheme. The SEC first received complaints against Stanford in 2001. The ever on the ball SEC only took four years to launch an investigation. After 'only' four years after the investigation began in 2005, the SEC filed civil fraud charges against Stanford four months ago. It is rumored that Stanford has connections to the CIA.

While Stanford was being indicted, uber fraudster Bernie Madoff settled civil fraud charges with the SEC in his $65 billion Ponzi scheme (something the SEC supposedly failed to notice for a few decades). Even though Madoff has admitted guilt in criminal proceedings, the SEC allowed him to settle its charges against without admitting any wrongdoing! Legal experts were reported as being 'dumbfounded' by this move. Indeed it doesn't make any sense unless the SEC is trying to protect itself and its own involvement in the Madoff scam. Madoff sat on SEC committees. He will be sentenced on June 29th.

If the SEC doesn't find major frauds that can damage the entire financial system, what does it do? It spends its time catching dentists in New Jersey who get tips from their clients and buy a few thousand dollars in options. These small one time transgressions are essentially irrelevant, but make great publicity. The massive ongoing crimes are ignored. It also looks like the SEC may be participating in the criminal activities that it's supposed to be stopping. If it was closed down tomorrow, would investors be any less safe?

NEXT: The Simple Arithmetic of Hyperinflation

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.