High Profile Municipal Defaults Can’t Sink the Muni ETF

Written By: DragonFly Capital

Harrisburg, Pennsylvania defaulting on their debt was a high profile situation. But despite that the Municipal Bond Market, as measured by the iShares S&P National Municipal Bond Fund, $ MUB, continues to to trend higher. In fact it looks pretty bullish. Take a look.

The chart above has many bullish features. First the price is trending higher in an ascending triangle. A move above the top rail at 107 would create a price target of 109.50. this is confirmed by the target from a Measured Move (MM) based on the previous move from 102.60 to 107 which has a target of 109.30. Support more upside is the rising Relative Strength Index (RSI). The RSI has actually never turned bearish since breaking the mid line higher in January. The Moving Average Convergence Divergence (MACD) indicator has been running near zero but is also starting to rise, which is bullish. And all of the Simple Moving Averages (SMA) are sloping and trending higher. Look to this to continue higher in the short term regardless of the default rate.

If you want to know how I would trade this names or for more ideas and deeper analysis, use the Get Premium button above. As always you can see details of individual charts and more on my StockTwits feed and on chartly.

Dragonfly Capital

Google+ Email Notifications Cannot be Controlled Per-Author

I have been getting spammed by a Google+ user. He seems to be some sort of political activist. As a Massachusetts resident, my vote counts for almost nothing on national issues so I would like to unsubscribe. Yet my only options are to unsubscribe from all Google+ email notifications (some of which might be useful or interesting) or none. In the 1980s USENET days it was possible to establish a “bozo filter” to screen out messages from posters with a track record of being uninteresting. Yet somehow we’ve lost this feature in Google+.

Philip Greenspun’s Weblog

Compressed Carbon

There are a lot of dumb maxims out there. For instance, the oft-cited “What is obvious is obviously wrong.” Not necessarily. I thought the topping patterns in 2008 were obvious. I thought the diamond pattern on the NQ this month was obvious. And they were obviously right.

Another is the tired old Nietzschian quote, “What doesn’t kill you makes you stronger.” Oh, really? Check with Steve Jobs on that, or anyone else suffering mental or physical duress. I think it’s an idiotic quote, offered as conciliatory pablum to those having problems. The things that hurt you, but don’t kill you, still suck, and they don’t necessarily make you a better person.

This all occurred to me when I woke up this morning. Yes, believe it or not, when my mind springs to consciousness at 5 in the morning, the first thing I think of is my beloved Slopers (especially those who have been courteous enough to either Donate or click some ads – – see the button in the upper-right corner?).

And this morning, the image of a lump of coal being compressed into a diamond came to mind. At first, I thought it would be an ingenious launching point for a post, but now that I’m truly awake, I recognize it’s little better than a clever metaphor. Thus, the Hall of Fame category has been unchecked.

The diamond I’m thinking about, of course, is the one I recognized forming in the NQ weeks ago. I wrote about it again on the 12th of this month (which actually would have been an amazing time to short it, since it was far from broken and was about 150 points higher than it is now!)

 

1121-nqtwo

But here’s the lesson about this…….being in the diamond sucked. It was horrible. No matter what anyone else tells you, the idea that one could successively have navigated all the eddies and currents of that pattern which lasted over an entire freaking month is complete fiction. Up, down, up, down, up, down. It was horrible beyond words, and “frustration” doesn’t even begin to approach an appropriate adjective for the experience.

But for those of us who have emerged on the other side of it with our sanity intact, we actually are better traders. Anyone who can work their way through the torturous and brutal agony of a pattern like that with their capital intact deserves a reward, and that “reward” is something we are enjoying right now – – the unraveling of prices.

Was it worth it? No, not really. I’d rather have a smooth trend. I was about to start strangling bishops when that pattern was grinding away. It’s enough to crush your spirit. But at least we’re out of the God-damned thing and have something real with which we can work.

I still think a goal of about 2150 or so is quite reasonable (more precisely, I’m looking for 2160 as a “get really light on shorts” point, which is only a little more than 2% from current levels), and the complete fumble by the morons in Congress might be just the catalyst we need. I mean did anyone – anyone at all – think these nitwits would actually put together something? Supercommittee, my ass. Not one of these guys could hold down a job at the Apple store.

So what happens if and when we get to 2160? Cover everything? I dunno. If the selling is strong, we could make it all the way back down to the ascending trendline whose touchpoint is about 2120 or so. As you can see, I’m not exactly forecasting doom yet. I think 2012 is going to be the Year of the Bear (and it’s going to be a hell of an interesting election year as well, provided the Republicans can find someone with a room-temperature IQ to go up against the Teleprompter-in-Chief). I still contend the Dow won’t bottom until it’s in the upper 5000s, and my target on that is February 2013. But for now, things are going to happen in steps.

One “event” that I think has to happen for us to get really serious with the bear market is for the Facebook IPO to be done. That’s kind of the Last Great Company for IPO-land, and once they’re done, the market is toast. Take a look at red-hot IPOs like Zillow (Z) to see what fate awaits all the social networking firms. Zillow closed at a lifetime low today. Why people want to jump into these things is beyond my obviously-limited mental ability.

I will close by saying this – – – I pride myself on my charting abilities, and I used to boast that charts were all I needed. Over the past few months, I’ve come to understand that having a fairly deep knowledge of news, key events, and macroeconomic/currency trends does have real value. I don’t have to base trades off such things independently, but chart movement is not, after all, endogenous, and being able to grasp the world around you is a better place to be than blissful ignorance. So my charts are great for figuring out stop-loss levels and entry points, but I’m far more comfortable with a “macro” approach to decisions now that I’ve been doing this a while.

I’m kind of charted-out at this point, and having endured a day in which both my blogging platform (Typepad) and my trading platform (Realtick) barfed all over themselves, I’m going to get away from this computer for a while. Thanks for being here, the Slope of Hope, one of the few bastions of civility and decency in an otherwise swill-filled world of financial content.


Slope Of Hope with Tim Knight

The New Watchlist and Picking Your Own Columns

We love giving customers the features and functionality they want.

And today is one of those days. We have made some changes to our Watchlist feature that will allow you to interact with your Watchlists and other “list” components (Sector Monitor, Index Monitor, and Hotlist) in a different, more efficient, streamlined way.

From now on, you can trade directly from the Watchlist. Whether you’re trying to simply buy or sell stock or generate an advanced order, you can do so by simply clicking on the symbol in the Watchlist:

Not only that, you can send a quote for that symbol to the universal quote line at the top of the platform. If any components are linked to that top line (such as the option chain), then you’ll see an option chain load up for that symbol.

With these new changes, these components will have a cleaner feel that should make them easier to use.

But wait—there’s more!

We’re also bringing a new level of customization to the platform to the following components:

–          Positions

–          Orders

–          Watchlist

–          Hotlist

–          Index Monitor

–          Sector Monitor

We’re enabling a new feature that will make these components completely customizable. The new functionality includes:

–          The ability to pick from a variety of columns to display the data you want

–          Drag and drop columns where you want them

These features allow you to set up each component to show the exact data you want to see in the order you want to see it.

All you have to do is hover over the column headers and select the columns you want to see:

So if you want to see the high and low for a stock in your Watchlist, you can do that. Maybe you’d like to show the days to expiration of a position in your positions pane? You can do that too.

It’s all about exposing the information you want and hiding the rest.

Take a look at the new features, play around with them, and let us know what you think. Oh, and if you want to go back to the default column setting, you can always click on “Restore Defaults” and everything will go back to normal.

 

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  1. What do the column headings mean in my Watchlist and Positions pane?
  2. Android App Update!

OptionsHouse» blog

Open Table is Still Dying

Written By: DragonFly Capital

Whether it is that restaurants are not getting any real benefit, the advertising model for internet sales is broken or overloaded, or that people have realized it is not that big a deal to call a restaurant yourself, the stock of OpenTable, $ OPEN, continues its free fall now down over 70% from its peak. Where and when will it stop? Lets take a deep dive look.

OpenTable, $ OPEN – Monthly

There is not a lot of price history for OpenTable, but it is easy to spot the two major trends. First rising from 25 up to 120 over 14 months and now falling back to the 35 area over 7 months. A Fibonacci analysis shows that it is already retraced back beyond the 61.8% level and in fact the 76.4% level at 73.28. The Fibonacci Arcs have not provided any support or stall to date. With the Relative Strength Index (RSI) continuing to trend lower and now near 40 this time frame has as its next target support at 25 but then a full retracement to 20. Zooming in to the weekly chart below

OpenTable, $ OPEN – Weekly

paints an equally dismal picture. It has been stair stepping down with a stop at each Fibonacci retracement along the way. The RSI on this time frame is also pointing lower as it rides along the technically oversold line but without making an extreme move lower. The Moving Average Convergence Divergence (MACD) indicator Is negative and was trying to improve but is now stalling. Both support more downside. The next support on this timeframe shows up at about 28 in the lower left portion of the chart and there is a Measured move comparing to the last leg down from 65 to 45 that would take it to 30 this time. Finally coming in to the daily chart shows the true ugliness in all of its glory. The RSI continues to bounce along the 30 level while the MACD

OpenTable, $ OPEN – Daily

fluctuates near the zero line. But the downward price channel is very clearly defined. With the last support broken at 36 it now has support at the gap lower at 28.10. These charts tell of only one direction. The only problem I can see is that if you are trying to short it I cannot for the life of me see how anybody would be willing to buy it from you. Sure it is down 70% already but it looks like it still has a long way to go.

If you want to know how I would trade this names or for more ideas and deeper analysis, use the Get Premium button above. As always you can see details of individual charts and more on my StockTwits feed and on chartly.

Dragonfly Capital

How Keynesian Policy Led Economic Growth In the New Deal Era: Three Simple Graphs

In this post, I will show that during the New Deal era, changes in the real economic growth rate can be explained almost entirely by the earlier changes in federal government’s non-defense spending. There are going to be a lot of words at first – but if you’re the impatient type, feel free to jump ahead to the graphs. There are three of them.

The story I’m going to tell is a very Keynesian story. In broad strokes, when the Great Depression began in 1929, aggregate demand dropped a lot. People stopped buying things leading companies to reduce production and stop hiring, which in turn reduced how much people could buy and so on and so forth in a vicious cycle. Keynes’ approach, and one that FDR bought into, was that somebody had to step in and start buying stuff, and if nobody else would do it, the government would.

So an increase in this federal government spending would lead to an increase in economic growth. Even a relatively small boost in government spending, in theory, could have a big consequences through the multiplier effect – the government hires some construction companies to build a road, those companies in turn purchase material from third parties and hire people, and in the end, if the government spent X, that could lead to an effect on the economy exceeding X.

This increased spending by the Federal government typically came in the form of roads and dams, the CCC and the WPA and the Tennessee Valley Authority, in the Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) tables it falls under the category of nondefense federal spending.

Now, in a time and place like the US in the early 1930s, it could take a while for such nondefense spending by the federal government to work its way through the economy. Commerce moved more slowly back in the day. It was more difficult to spend money at the time than it is now, particularly if you were employed on building a road or a dam out in the boondocks. You might be able to spend some of your earnings at a company store, but presumably the bulk of what you made wouldn’t get spent until you get somewhere close to civilization again.

So let’s make a simple assumption – let’s say that according to this Keynesian theory we’re looking at, growth in any given year a function of nondefense spending in that year and the year before. Let’s keep it very simple and say the effect of nondefense spending in the current year is exactly twice the effect of nondefense spending in the previous year. Thus, restated,

(1) change in economic growth, t =
f[(2/3)*change in nondefense spending t,
(1/3)*change in nondefense spending t-1]

For the change in economic growth, we can simply use Growth Rate of Real GDP at time t less Growth Rate of Real GDP at time t-1. The growth rate of real GDP is provided by the BEA in an easy to use spreadsheet here.

Now, it would seem to make sense that nondefense spending could simply be adjusted for inflation as well. But it isn’t that simple. Our little Keynesian story assumes a multiplier, but we’re not going to estimate that multiplier or this is going to get too complicated very quickly, particularly given the large swing from deflation to inflation that occurred in the period. What we can say is that from the point of view of companies that have gotten a federal contract, or the point of view of people hired to work on that contract who saved what they didn’t spend in their workboots, or storekeepers serving those people, they would have spent more of their discretionary income if they felt richer and would have spent less if they felt poorer.

And an extra 100 million in nondefense spending (i.e., contracts coming down the pike) will seem like more money if its a larger percentage of the most recently observed GDP than if its a smaller percentage of the most recently observed GDP. Put another way, context for nondefense spending in a period of rapid swings in deflation and inflation can be provided by comparing it to last year’s GDP.

So let’s rewrite equation (1) as follows:

(2) Growth in Real GDP t – Growth in Real GDP t-1
f[(2/3)*change in {nondefense spending t / GDP t-1},
(1/3)*change in {nondefense spending t-1 / GDP t-2}]

Put another way… this simple story assumes that changes in the Growth Rate in Real GDP (i.e., the degree to which the growth rate accelerated or decelerated) can be explained by the rate at which nondefense spending as a perceived share of the economy accelerated or decelerated. Thus, when the government increased nondefense spending (as a percent of how big the people viewed the economy) quickly, that translated a rapid increase in real GDP growth rates. Conversely, when the government slowed down or shrunk nondefense spending, real GDP growth rates slowed down or even went negative.

Note that GDP and nondefense spending figures are “midyear” figures. Note also that at the time, the fiscal year ran from July to June… so the amount of nondefense spending that showed up in any given calendar year would have been almost completely determined through the budget process a year earlier.

As an example… nondefense spending figures for 1935 were made up of nondefense spending through the first half of the year, which in turn were determined by the budget which had been drawn up in the first half of 1934. In other words, equation (2) explains changes in real GDP growth rates based on spending determined one and two years earlier. If there is any causality, it isn’t that growth rates in real GDP are moving the budget.

Since there stories are cheap, the question of relevance is this: how well does equation (2) fit the data? Well, I’ll start with a couple graphs. And then I’ll ramp things up a notch (below the fold).

Figure 1 below shows the right hand side of equation (2) on the left axis, and the left hand side of equation (2) on the right axis. (Sorry for reversing axes, but since the right hand side of the equation (2) leads it made sense to put it on the primary axis.)

Notice that the changes in nondefense spending growth and the changes in the rate of real GDP growth correlate very strongly, despite the fact that the former is essentially determined a year and two years in advance of the latter.

Here’s the same information with a scatterplot:

So far, it would seem that either the government’s changes to nondefense spending growth were a big determinant of real economic growth, or there’s one heck of a coincidence, particularly since I didn’t exactly “fit” the nondefense function.

But as I noted earlier in this post, after the first two graphs, I would step things up a notch. That means I’m going to show that the fit is even tighter than it looks based on the two graphs above. And I’m going to do so with a comment and a third graph.

Here’s the comment: 1933 figures do not provide information about how the New Deal programs worked. After all, the figures are midyear – so the real GDP growth would be growth from midyear 1932 to midyear 1933. But FDR didn’t become President until March of 1933.

So… here’s Figure 2 redrawn, to include only data from 1934 to 1938.

While I’m a firm believer in the importance of monetary policy, for a number of reasons I don’t believe it made much of a difference in the New Deal era. As Figure 3 shows, changes in nondefense spending – hiring people to build roads, dams, and the like, explain subsequent changes in real GDP growth rates exceptionally well from 1934 to 1938. This simple model explains more than 90% of the change in real GDP growth rates over that period.

Of course, after 1938, the relationship breaks down… but by then the economy was on the mend (despite the big downturn in 1938). More importantly (I believe – haven’t checked this yet!), defense spending began to become increasingly important. People who might have been employed building roads in 1935 might have found employment refurbishing ships going to the Great Britain in 1939.

As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (kimel – note only one “m”) at gmail.com.


Angry Bear

Student Training Program Webinar

Tomorrow, Friday November 18th, 2011 at 5:45PM EST, we will be hosting a webinar aimed at students looking to get a head start on their trading careers. We offer a unique opportunity for students to go through our professional training while in school! Additionally, Steve Spencer will be giving a presentation on stock selection. So tune in to hear some valuable advice and learn about an interesting opportunity.

Sign on to the webinar by clicking the following link:
https://smbcap.webex.com/smbcap/onstage/g.php?t=a&d=662730640

Student Training Program:

Trading has a certain learning curve, there is no hiding that. Our goal is to build relationships with students while they are still in school so that they are much farther ahead on this learning curve come graduation. After completion of our training program, students (at least 21 years old) may have the opportunity to trade with the broker-dealer that we use while still at school. This practice allows students to gain the screen time that they need to internalize trading plays that work for them. Come graduation, students have come a long way along the learning curve and have the opportunity to become professional traders. Students can take the program over winter/summer break at our NYC office or take it as a semester long course via the internet. Tune in tomorrow to gain an edge and jump start your career.

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SMB Capital – Day Trading Blog

Double and Triple Levered ETF Warning; Know What You’re Holding

MarketWatch had a great article Friday in which Howard Gold discusses what he calls the “Worst Investment Ever.”  He was talking about levered exchange-traded funds, the very popular segment of the ETF family.

These levered ETFs provide double and triple daily returns (or inverse returns) on the underlying index on which they are based. Investors have flocked to these instruments to the tune of $ 40 billion in assets.  In my opinion, the majority of these assets are being used very incorrectly and to the detriment of the user.

The reason is these products are designed to replicate a multiple of the DAILY movement of the index.  The ETFs themselves use futures to achieve the desired geared changes.  Therefore, in order to provide double and triple the returns (positive and negative) on a daily basis, they are required to sell more futures on days the market is down and buy more futures when the market moves higher.

This process of chasing the market, buying high and selling low, causes a negative drift over time for the asset when the overall market is volatile.    The problem is, investors are holding these for multiple days and even months.

Over time, with the ups and downs in the market, these products are designed to underperform.  When looking at the pair of three-times levered ETFs on the financial sector over the past three months, many investors would expect if the bearish ETF (Direxion Daily Financial Bear 3x Shares – FAZ) were lower, the bullish ETF (Direxion Daily Financial Bull 3x Shares – FAS) would be higher.  Not the case.  FAZ is down over 20% and FAS is down over 30%!

Those investors who have held either of these ETFs have lost a significant percentage of their investment.

It is imperative for traders to remember these are designed to be intraday trading instruments, not a longer-term (or even shorter-term) hedge.  The problem is the market can gap lower on the open, making it tempting to hold the inverse Bear ETF overnight in your position as part of a hedged position.  Using put and put-spread strategies may be much more effective over time relative to owning a triple levered Bear ETF.

The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.

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SPY Trends and Influencers – November 19, 2011

Written By: DragonFly Capital

Last week’s review of the macro market indicators looked once again for Gold ($ GLD) and Crude Oil ($ USO) to head higher with the US Dollar Index ($ UUP) and US Treasuries ($ TLT) looking to consolidate, with the Dollar biased higher and Treasuries lower on a break. The Shanghai Composite ($ SSEC) and Emerging Markets ($ EEM) both were poised to head lower. Volatility ($ VIX) looked to remain in a lower range with a bias to the downside supporting movement in the Equity Index ETF’s, $ SPY, $ IWM and $ QQQ to the upside. Again a violent move from either Treasuries or the US Dollar Index is likely to overwhelm the drift higher seen in the charts and force Equities in the opposite direction of the move. Watch and be prepared for it.

The week began with Gold and Crude consolidating their gains before Gold fell and Crude pulled a pop and drop. The US Dollar Index broke its consolidation higher while Treasuries headed to the top of their range. The Shanghai Composite headed to the top of its range before following Emerging Markets lower and Volatility held in the lower range. The Dollar Index and Treasuries ruled the week and drove all of the US Equity Index ETF’s lower, with the aid of falling commodities. What does this mean for the coming week? Lets look at some charts.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

SPY Daily, $ SPY

SPY Weekly, $ SPY

The SPY fell from a symmetrical triangle this week, finding support near the 100 day Simple Moving Average (SMA). The target move from this break down is about 116. The Relative Strength Index (RSI) on the daily chart shows a trending lower and breaking through the mid line while the Moving Average Convergence Divergence (MACD) indicator became increasingly more negative, both supporting further downside. The weekly chart puts the move in perspective. It is still within the consolidation range of the past 4 weeks. The RSI on the weekly timeframe continued to move lower under the mid line while the MACD continued its fade. As it tests the bottom of the range, the volume on the weekly basis has been falling off. It is set up for more downside. Support below 122 comes at 118.50 and then 115.88 and 112. It gets very bearish under there. Resistance on a bounce comes at 125 and 129. Above 130 the uptrend continues.

As we head into a Holiday shortened week, the market looks poised to move lower. Gold is set up to continue lower while Crude Oil remains in an uptrend but looks ready to continue its pullback. The US Dollar Index and US Treasuries both look strong, and the foreign markets followed, the Shanghai Composite and Emerging Markets both look to continue lower. Volatility looks to remain in the 30-36 range. Everything is aligned against Equities and in fact support the chart views that the Equity Index ETF’s, SPY, IWM and QQQ are all set to move lower but at support on the weekly charts. The Strong US Dollar Index and Treasuries will continue to be the key as they look to reinforce the negative view on Equities. If either or both move strongly against the chart set ups, US Equities could benefit and move higher. Use this information as you prepare for the coming week and trade’m well.

If you like what you see sign up for more ideas and deeper analysis using the Get Premium button above. The you can view the Full Version with 20 detailed charts and analysis: Macro Week in Review/Preview November 19, 2011

Dragonfly Capital

Obama’s relatives love Massachusetts

A friend pointed me to this Boston Globe story about Barack Obama’s uncle, who apparently lives in Framingham, Massachusetts despite having been ordered deported in 1992. Mr. Obama made the news after his arrest for drunk driving. With  http://en.wikipedia.org/wiki/Zeituni_Onyango (also previously deported), that makes at least two Obama relatives who have chosen Massachusetts as their home.

Philip Greenspun’s Weblog