Saturday, August 11, 2007

Timer Digest Commentary

Timer Digest CommentarySocialTwist Tell-a-Friend
Fari Hamzei

As we have mentioned in the past, each time that the market has faced a major financial debacle, we have witnessed a ramp-up in major indices' volatilities followed by a Volatility Re-Test, as measured by intensity (sigma levels). This is a must prerequisite for markets before they can resume their normal operations.

This Fed, led by the very able Dr. Ben Bernanke, has pumped in near $85 Bils in 3-day repos this week, buying MBS and Treasuries, in an effort to provide short term liquidity. We are still holding our Short SPX position from June 7th (1490.72). We do not think all the bad news is out yet. This week market actions reminds us of August '98 before the LTCM debacle with same pattern of massive volume on alternating large range days (positive and negative bars).

We have included two charts here. Timer Chart shows a short-term oversold condition with no immediate stabilization in sight as we enter August Options X week. The McClellan Oscillators for Advance/Decline and Up/Down Volume closed in negative territory on Friday even though indices closed mix.





The next chart shows the popular Vol Indices overlaid with sigma channels. This is the set-up part of the vol retest and we suspect the next 3 to 4 weeks will be very challenging trading environment till we go thru the vol retest. Our down-side target on the Dow is 12,500 and then 12,000.



We suspect the next shoe to drop won't be another sub-prime woe, rather it will be an exogenous news and if we had to pick it, it could be Perviz Musharraf getting booted out of Pakistan. That would give this market the badly needed wash out via a massive volatility retest and create for us a tradable low.

Do not buy dips -- rather SELL THE RALLIES..........

Wednesday, August 8, 2007

Rydex S&P

Rydex S&PSocialTwist Tell-a-Friend
Tim Ord

The following chart is the Cash flow ratio for the Rydex S&P. Since early 2003 bottoms have formed on the SPX when this ratio reached 1.10. Yesterday’s close came in at 1.11 and in bullish territory.



The next chart is the Trin 5 dating back for three years. The Trin or sometimes called ARMS index is the ratio of advancing issues divided by advancing volume then this ratio is divided by declining issues divided by declining volume. The Trin 5 is the closing Trin added up for five days. When the Trin 5 reaches past 7.5 the market is near an intermediate term low. We have marked on the chart with red arrows going back for three years when the Trin 5 reached 7.5 or higher. You can see the Trin 5 has a good history of picking out intermediate term lows. The Trin 5 closed yesterday at 8.18 and implies the NYSE is near or at a bottom now.





The next chart is the NYSE going back for three years with its McClellan Oscillator and Summation index. When McClellan Summation index reaches below -500 it implies the NYSE is very oversold and near an intermediate term low. We have marked on the Summation index with a red arrow when the Summation index reached the bullish -500 range. Once the Summation index turns up from below -500, it implies the NYSE has seen its low. The Summation index has not turned up yet but is in an area where bottom form.





The market is at an important junction and is about ready to start an intermediate term advance. We are long the SPX on 8/2/07 at 1472.20.

Editor's Note: watch for Tim Ord's upcoming book, "The Secret Science of Price and Volume", to be published by John Wiley & Sons, in February 2008.

Monday, August 6, 2007

Sovereign Wealth Funds, Volatility and Markets

Sovereign Wealth Funds, Volatility and MarketsSocialTwist Tell-a-Friend
Sally Limantour

The recent correction in the stock market has many worried that liquidity will dry up as private equity deals diminish from their torrid pace. While this may be true the new darlings of investment – the “sovereign wealth funds” may pick up the slack. Sovereign wealth funds (SWF) are basically pools of money derived from a country's reserves and set aside for investment purposes that will benefit the country's economy and citizens. The funding for SWF comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources.

Government investment funds have been rising and China’s recent investment of $3 billion into Blackstone and the purchase of Barclay’s by the CDB (which also came with a board seat) shows how they want to develop their economies and will give China access to operations in emerging markets.

The numbers are staggering. For perspective it was only five years ago governments were sitting on $1.9 trillion in foreign currency reserves. This has grown to $5.4 trillion which is more than triple the amount in the world’s hedge funds. This excess cash is being moved into sovereign wealth funds and will change the landscape going forward.

A number of ramifications will emerge from SWF and currently concerns from protectionist measures to financial stability are being discussed. The US government has stated that the spread of sovereign wealth funds could create new risks for the international financial system.

One theme running through the SWF story is the idea that countries are diversifying from US dollars and placing their funds in other more tangible higher yielding investments. They want to diversify their holdings and this is not bullish for the US dollar. This adds to the move by other countries that are beginning to accept other currencies for purchases of oil and other products.

I have long held the view that we will see increased volatility in many asset classes going forward. The growth of SWF could be a factor in this as Mr. Lowery of the US Treasury has warned that SWF could fuel financial protectionism and has said “little is known about their investment policies, so that minor comment or rumors will increasingly cause volatility in markets.”

We all know markets do not like uncertainty and we are entering a period where “deep opaque pockets” will be making bigger and more ambitious purchases through state owned companies such as Gazprom and the China Development Bank (CDB).

My focus with regards to SWF is the natural resource sector. It is well known that China is basically resource poor and needs to import many of commodities to feed, house and mobilize their 1.2 billion people. With China set to move up the food chain it is only natural that they would use the SWF to secure their commodity needs by directly buying into companies that produce natural resources.

In a recent interview Marc Faber was stating that China will have to import most of their commodities and he looks at the price of coffee as an example and says, “If the Chinese just go to the per capita consumption level of say the Taiwanese or South Korean, they will take up the entire coffee crop of the world.”

As both China and India grow the demand for commodities will increase. The voracious appetite for commodities should continue and I would expect the next 5-10 years will see continued advances in many of the natural resource prices and the related stocks.

Water stocks, food, timber, mining and oil should continue their bull market and look for these SWF to move in this direction as well to secure their commodity needs for the future. Remember, 1 billion people currently use 2/3 of the world’s natural resources.
5.6 billion people use the other third. Meanwhile 3 billion are discovering capitalism and want “stuff.”

During this time while the stock market is taking some heat I am gathering my list of names in each sector and will share these with you going forward each week.

Water, oil and energy, food and metals are still in bull markets and I expect another leg higher in many of these will occur sooner than later.

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Two weeks ago I was talking about how the market might stage and expiration related rally that would fuel it to new all-time highs. The basis for that prediction was strong earnings and a large open interest of in the money calls. When that rally failed to materialize, a warning shot was fired.

A warning shot was also fired last February when the S&P 500 dropped 50 points in one day. Liquidity and credit risk were perceived problems and traders headed for the exits at the first sign of trouble. The difference between then and now is reality. This week hard numbers were attached to the losses stemming from loose lending practices. Technically, this decline has caused serious damage. The SPY penetrated the 146 support level. That represents the breakout from last April and it also represents the 200-day moving average. This juncture is a pivot point. If the market continues to trade below this level, lower prices lie ahead. If the market can recover and rally above this level a bounce and recovery could materialize.







There is new information that needs to be digested by the market and that process will take a couple of months. In the meantime, there will be bullish and bearish opportunities. It will be critical to find relative strength and weakness within the market.
I still believe that a year-end rally is in the cards. The earnings growth rate is in the high single digits at this stage of the earnings season. That is considerably ahead of expectations. Interest rates have declined and that is also bullish for the market. Oil prices backed off from their highs when forecasters lowered their expectations for hurricane season. Foreign markets are holding up relatively well and global expansion should carry us through this soft patch.
Next week the economic releases are very light and I don't feel they will drive the market. These are some of next week’s earnings announcements: NILE,HET, DRQ, TXU, TYC, ATW, CSCO, FLR, MDR, WYNN, AUY, AGU, BIG, FWLT, FLS, GES, LVS, CRM, ZUMZ, GME, SHLD, BRCD, DELL, FMD, ANN


I am expecting another volatile week. As the market tries to determine its next direction, it makes sense to lay low. Many traders are taking time off and thin trading is adding to the intraday volatility. I will follow their lead and I will be taking the week off as well. I will not be producing a new report next week, but I will update the current positions.
I’ll be clearing my head and preparing for the opportunities that lie ahead the rest of the year. If you decided to trade next week, keep your size small, stay balanced and take advantage of the high implied volatilities by selling out of the money credit spreads.

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