Delusional Madness

Circus at the Capitol

2005-11-09T22:57:00.000-08:00

I watched with great amusement as Senators from the World's greatest capitalist nation starts grilling oil executives on oil pricing.

"Is somebody rigging the price of oil?" asked Senator Pete Domenici. Its time like this that I'm proud to call myself a speculator and felt like shouting back through the TV screen "We do senator!". While I'm at it, I like to add "The price is set by this little thing called supply/demand otherwise also known as economics 101".

On the trading side, I'm still short the S&P futures, has been since last thursday. Volatility seems to have gone out since then though.

Still On Interest Rates

2005-10-04T19:38:00.000-07:00

As a S&P futures trader, I don't like to rant about interest rates market all the time. But last couple of weeks that seems to be where all the action has been. Yields on 10 Year Treasuries ($TNX) has gone from 4.05% to 4.37%. That in my opinion is where the real action is as compared to the equities market.

Speaking of the equities market, apart from the post Rita relief rally plus some good old quarter ending window dressing, it hasn't managed to break out of a range which is hovering around the 50 day moving average

Tool for Trading Index Futures

2005-09-22T02:55:00.000-07:00

Found a really useful site called IndexArb. It has all the data required for computing the fair value of stock index futures plus (as the name suggest) how to conduct arbitrage if prices goes out of line.

The $200 Billion Bill

2005-09-18T21:46:00.000-07:00

The bond traders must have been reading my blog :) . Look at what happened to the 10 Yr Notes Yield (TYX) since my last post (the last 2 trading days) :

Note that Katrina hit the coast on August 29 when 10 Yr Yield is about 4.17%. The last 2 trading days it blasted through this level and reach 4.26%. Maybe the talk about $200b package for Katrina is spooking the market. They've been talking about it here on CNBC:

http://spaces.msn.com/members/squawkblog/Blog/cns!1p-PUKlKTyMV0J3SU8XbuxFQ!1528.entry

Seems the bond traders now are not too sure about the fed stopping raising interest rates. hmm..

Katrina's Interest Rate Conundrum

2005-09-14T17:44:00.000-07:00

I haven't been posting for a while as I've been pondering a bit about the economic impact of Katrina.

Here's the amazing thing, there are a bunch of 'experts' out there who believe that the fed have to stop raising rates due to Katrina induced economic slowdown. Another bunch of experts believed the that the fed should keep on raising interest rate since they'll be a federal budget deficit blowout and oil induced inflation. And now you know why they call economics a dismal science.

Fortunately, rather than the 'experts' opinion to make my living, I have the traders from the Chicago pits to rely upon. Their money-on-mouth bet is that rates are staying flat or down. A look at the Yield on the 10 Year Notes went from 4.44 pre Katrina to a low of 4.0 post Katrina, to about 4.16 as I write this.

So my bias for the S&P will still be on the upside. The moral of this whole episode? See what they do (with their money) not what they say.

The market as a guidepost

2005-08-30T03:13:00.000-07:00

Yesterday the market started off with a negative mood, obviously due to Katrina and oil. When the S&P futures opens at 1202 yesterday, I detect the overall sentiment was still negative although Katrina was downgraded to a category 4 as it hits land.

One of mechanical trading systems signaled a buy at 1207.50 level, and so I put in a buy stop order at that level thinking that it would probably have very little chance of getting filled. Within half an hour the order was filled as the S&P moved higher to around 1209.

I was looking around for any news that might have caused the mini rally but didn't find any. My thought was I have possibly bought the high of the day. Of course in the end the market just kept on moving higher throughout the day.

I am once again amazed by the predictive powers of the market. It seems that the market somehow always knows slightly beforehand.

Katrina

2005-08-28T23:54:00.000-07:00

I have been away since friday. On TV I saw crude oil trading at $70 in Asian hours. I was initially pleased as I went short the S&P on Friday and thought this is probably one of those 'scares' to oil supplies that traders are getting used to.

It was only when I turn on my PC that I discovered about Katrina. A hurricane with such a beautiful name but such a devastating effect. My thoughts go out to those who are stranded in New Orleans as the storm approaches. I hope they will all be safe.

Personal Oil Economics

2005-08-24T20:25:00.000-07:00

A friend asked me a real simple question the other day: 'Will oil prices continue its upward climb?'. This got me thinking a bit.

The current run up in oil, as far as I know, is demand induced (read China, India). The only way that oil prices can ease then is for demand to go down (rather than increasing supply which I think is unlikely)

What kind of individual behaviour would result in a reduction in demand? Or what does it mean for individual consumers like me to cut down on my oil demand? For demand to go down, I would have to use less gasoline, drive less, use public transport, walk to work etc. However that's not what I'm doing in reality. Yes I'm cursing and swearing everytime I'm at the pump but my petrol consumption level remain the same from 3 years ago when oil is half the price it is now. That extra is taken out obviously from discretionary spendings. For me that would be gadgets (ipods anyone?), fancy restaurants etc. What would it take me to reduce my consumption of petrol? I don't know but I guess it'll take a lot for me to change my commuting habits and we have not reached that 'uncle' point yet where I'll start walking to work.

On the supply side, I vaguely recall that OPEC made a statement with the effect that they will keep increasing supply of oil so as not destroy the consumer countries' recovering economy, this was way back when crude oil was around $40 a barrel. Have you noticed the conspicuous absence of statements from oil producers when oil hit a new highs recently? I guess even they can't believe their own luck but as long as demand is there, there is just no logical reason to flood the market with cheap oil.

Now, back to the question: 'Will oil prices continue its upward climb?'. My answer is a resounding Yes! It will go up as long as I see cars clogging up my town's highway during rush hour. It will only go down when you see me walking to work and trust me, I'm not ready to do that just yet.

Aftermath

2005-08-24T02:11:00.000-07:00

Yesterday's action was not very instructive. The S&P was down near the 1214 level before bouncing back in the afternoon. Is this cycle of correction done? I'm not too sure but I'm still bearish. I'll stay on the sideline for now.

Running out of steam ?

2005-08-23T04:28:00.000-07:00

ESU05 ~ 1222.75
NQU05 ~ 1579.50
Crude Oil Futures ~ 65.70

Looking at yesterdays intraday chart, I get a feeling that this market is running out of steam. Any slight up move early in the day will be greeted with a large wave of selling in the afternoon. This intraday pattern was also evident last Wednesday. The only thing was that the selling was not accompanied by a lot of volume yesterday.

Have a good trading day.

Pre Market

2005-08-22T05:23:00.000-07:00

ESU05 ~ 1226.00
NQU05 ~ 15.84

Crude Oil Futures ~ 65.875

The Japanese Nikkei index futures had an impressive run on monday trading, it gained 200 pts to 12485. In fact the Nikkei has been on quite a run since it broke through the 12000 pts level on the day when Japanese prime minister Koizumi decide to call a snap election.

Bullish sentiment in Japan notwithstanding, the S&P will open the week with crude oil hovering back to the high $65+ level.

Have a good trading week.

Quibbling

2005-08-19T20:12:00.000-07:00

A tight range sideway day in the S&P500. Trading volume was low. All in all a pretty quiet day.

I did not open a short position in the S&P futures since my trading setup did not pan out.

One of my long covered call options position went deeply in the money today while it had stayed at the money for most of the month that I had held it. Normally it might have helped me squeeze a bit more profit out of a covered call trade, but since it was expiry day it didn't help me much. Anyway since its a profitable trade, I should quit quibbling over a few cents and enjoy my weekend.

I hope you do too.

Options Expiry Day

2005-08-19T08:40:00.000-07:00

Another options expiry day.

I once heard this interesting hypothesis from an options market maker about options expiry day. He told me most options market maker are short options (both puts & calls) going into options expiry day. Of course during the life of the options, their short positions are hedged using the underlying stock to achieve delta neutrality and also to gain from the time decay.

Now here's the interesting part, on expiry day itself, they will deploy their substantial leverage (I was told they have very low margins as market makers) and move the stock close to a significant strike price of the options they are short of. The purpose of this is to make their short option position expire at the money or slightly in the money. Note that slightly in the money options will still expire worthless as the slight profit gained from exercising is not enough to cover the cost of exercising the option.

If this hypothesis holds water, then the expected price action on an expiry day would be stock hovering and closing around the strike prices of options with significant open interest.

Aftermath

2005-08-19T01:26:00.000-07:00

S&P futures had a more or less flat day, volume was also lower. Some of my long stocks position did get stopped out, might as well since I have turn bearish for now

Pre Market

2005-08-18T05:26:00.000-07:00

S&P Futures (ESU5) ~1219.00
Nasdaq Futures (NQU5) ~ 1580.50
Crude Oil Futures ~ 63.225

Economic Data:
August 13 Initial Jobless Claims, August 6 Continuing Claims, July Leading Indicators fcst 0.2%, US August Philadelphia Fed fcst 12.3

Note the larger than $3 drop in crude oil from yesterday did not help the stock market much. I'm expecting a down day and for one of my long stock plays to be stopped out. As mentioned before, with 3 distribution days in the last 10 trading days, I'll avoid long stock plays for a while and would probably look for opportunities shorting futures.

Have a good trading day.

Aftermath

2005-08-17T23:44:00.000-07:00

I thought the S&P 500 was going to move lower today until the mini crash in crude oil came to the rescue. Despite the fact that the S&P reach an intraday high of 1225.50, it did not hold on to this gain. Volume was higher from the previous trading day. I would call this a distribution day which is the third in 10 trading days.

Pre Market

2005-08-17T19:32:00.000-07:00

S&P Futures (ESU5) ~1222.00
Nasdaq Futures (NQU5) ~ 1582.50
Crude Oil Futures ~ 66.025

Economic Data:
July producer price index.

Market still hugging the lows from yesterday. I'm still in the opinion that yesterday sell off was not oil induced, if it was market should have reacted last week when oil broke $65 around 8 August.

Is this the start of a correction that was similar to the one we had earlier this year? That's when the S&P 500 went from a high of 1229.12 on 7th March to a low of 1136.15 on 20 April. Its still a bit early to tell but I personally would hold off adding to long stock trades and look to play the S&P futures from the short side.

Dynamic Yield Curve

2005-08-17T09:09:00.000-07:00

I found this great tool called the Dynamic Yield Curve. It shows the yield curve on the left with the S&P 500 chart on the right. The yield curve chart will change dynamically as you move a vertical slider bar on the S&P chart through time. The time period covered is between september 1997 to the present.

Its well documented that a flat or inverting yield curve will signal market decline ahead. This can be seen in the decline following market tops in July 1998 (flattening yield curve) and August 2000 (inverted yield curve).

What's more interesting is during periods of steep yield curve such as throughout year 2000 to early 2003, the market did not respond to the easing of short term credit until a year later. Moral of the story? The Fed can use the short term rate to curb an overheating economy fairly efficiently without much lead time but to reflate it might take a longer time.

Also note the yield curve has been flattening since middle 2004 to the present.

You can find the dynamic yield curve here:

http://stockcharts.com/charts/YieldCurve.html

Aftermath

2005-08-16T22:03:00.000-07:00

Ah alas the market showed its hand. I was caught long at 1236.50 and stopped myself out at 1231.50.

The S&P 500 broke through its short term low of 1222.67 and stayed below it till the close. Volume increased from the last 2 days which qualify today as a distribution day, the second in the last 10 trading days.

Looking at the futures intraday chart, the volume is clumped towards the final hour of the trading day (day traders stop?). I have been talking about watching crude prices but I do not think that the decline can be attributed to any extraordinary intraday movement in crude oil prices. It probably is something else.

Good Trading.

Pre Market

2005-08-16T06:42:00.000-07:00

S&P Futures (ESU5) ~1236.25
Nasdaq Futures (NQU5) ~ 1604.50
Crude Oil Futures ~ 65.85

Economic Data:
July CPI yoy fcst 3.0%, July Building Permits fcst 2110k, July Housing Starts fcst 2035K, July Capacity Utilization fcst 80.3%, July Industrial Production fcst 0.5%.

Market looks slightly perky with lower oil prices. Look out for trading volume which is thin and declining the last few days.

Have a good trading day.

Lacking Direction

2005-08-15T23:40:00.000-07:00

The S&P closed right smack in the middle of 1222-1246 range that it has hovered around for the past 2 weeks. The daily volatility in terms of 14 days ATR (Average True Range) that I tracked has edged up a bit from about 9 pts to 9.8. What's more significant to me is not the price action but the declining volume (summer doldrums?) so I'm not reading too much into the price action.

I guess short term traders are looking at oil absent of any significant news. Also a friendly reminder that options expiry is upon us again this friday.

Good Trading.

Pre Market

2005-08-15T08:09:00.000-07:00

S&P Futures (ESU05) ~ 1231.00
Nasdaq Future (NQU05) ~ 1593.00
Crude Oil Futures ~ 66.575

Economic Data:
August Empire Manufacturing, forecast 17.0
June Net Foreign Security Purchases, forecast $60B
August NAHB Housing Market Index, forecast 70.

Market is moving sideways awaiting the economic data. Somehow I got a feeling that all eyes will still be on oil.

Have a good trading day.

Weekend Thoughts: Market Resilience

2005-08-14T21:27:00.000-07:00

The S&P is resilient. I know Friday was a big sell off but the S&P500 sold off to a low 1225.87 and recovered a lot of lost ground after that.

Despite high oil prices, widening trade deficits, falling dollar, the S&P is holding its ground. It is above its recent low of around 1223 which it touched last monday (8 Aug).

Looking at the S&P daily chart, I can see that the uptrend that started in the middle of May is still in place. The S&P is also still comfortably above its 50 and 200 day moving averages. The rising crude oil price seems to only have a dampening effect to this uptrend. The chart seems to be confirming the talk that the US economy is growing at brisk enough pace as to shake off any adverse effect of high fuel prices. However if oil prices keep surging, surely at a certain point it will overwhelms any healthy growing (and very oil dependent) economy. Another thing to ponder on is whether the Fed still has the elixir of lowering interest rate if things come to pass that there is an oil induced slowdown.

As I write this, Nymex crude oil futures is trading around $66+. A CNBC report last Friday was showing gasoline retailing at the US$3/gallon level around gas pumps in California. But as I can see from the chart, the market is just not too worried yet. Time will tell.

Have a good trading week.

Pre Market

2005-08-12T21:14:00.000-07:00

S&P e-mini Sep Futures (ESU5) ~ 1235.5
Crude Oil ~ $66.1

U.S. trade deficit widened by 6.1% in June to $58.8 billion.

Looks like a lot of headwind. Another market that's been moving for the past week or so and have not receive a lot of media coverage is the US$. It's been losing ground against the Euro (~1.241), the GBP(~1.81) and the JPY(109.85). Maybe the forex traders have been anticipating the trade deficit to widen.

Have a good trading day.

Money Creation

2005-07-11T12:11:00.000-07:00

Money is the world greatest derivative. I found it amazing that I have spent most of my life not knowing how money came about. That is until I read 'Creature from Jekyll Island'. For those of you who are not familiar with this process, you can read it here. I'm not enamored by the conspiracy theories in the book but the process of money creation is very accurate as I can ascertained.