29/10: Markets rebound smartly, buoyed by strong Q3 US GDP data

Almighty Goldman yesterday forecast a US third quarter GDP reading of +2.5%, below the consensus forecast of +3.0%. Today, at precisely 8:30a Eastern, a serving of humble pie was delivered to 85 Broad Street. At this time, the wires lit up with the true number (granted, the initial estimate only) of +3.5%, and microseconds afterward, buy orders flooded the market. And some surely emanated from Goldman's HQ on Broad, too.

Humility was delivered to my workspace this morning, too. With the bullish GDP reading, my last-minute (literally) investment in AA puts during yesterday's market was proven to be a mistake. Yet, I can fall-back on buttressed logic in that decision, at least. What's worse, I still have the puts now. That's right; I did not sell. And I don't have a good reason -- besides, of course, for that common psychological impairment inherent to all humanity: reluctance to book a loss. Hope does indeed spring eternal.

Tomorrow I will surely examine my continuation of this long-short strategy; as a reminder, I continue to hold QQQQ calls alongside those AA puts. I see today's decisive rally continuing through tomorrow's open, but then it risks fading absent further stimulus. We may yet see a re-test early next week of Wednesday's lows. Thus, I may execute a strategy of selling the QQQQ calls if a short-term top appears to form and then hope for price deterioration to advantage my holding of puts.

Finally, here's a 10-day of QQQQ, which approximates for an overall market snapshot, too:

28/10: US Airways tries downsizing to profitability

In a departure from usual protocol, I'd like to offer a few words regarding US Airways' afternoon announcement that it would pare flights in a bid of finding superior profitability as a smaller airline.

First off, I am highly skeptical of the general strategy of shrinking towards profitability, particularly in an industry with the lengthy lead-times towards changes in output that is airlines; and this skepticism extends to the current US Airways strategy.

US has decided to eliminate several international routes from its Philadelphia hub, including Beijing, which was to be the airline's flagship route (it was yet to launch) but is now stillborn. The other international flying on the chopping block has all been in service, unlike PEK, though it mostly features second-tier European cities or airports (e.g. Birmingham, Shannon, Stockholm, London-Gatwick). Also suffering will be Las Vegas, once a proud hub (before the housing bust, to be sure) for pre-merger America West Airlines, that is now headed to only 36 US Airways daily flights from a current 64; several cities will lose nonstop US service to LAS, including my home airport of O'Hare. One cannot but observe (somewhat cynically) how US has incrementally decimated LAS in the manner that, earlier this decade, it cut-off hub services at Pittsburgh.

This move makes US easy to summarize in only a few bullet points.

• Focus on only four metropolitan areas: two, Charlotte and Washington, DC, are vibrant and recovering; one, Philadelphia, has an uncertain near-term fate and possibly decreasing relevance in the longer term; and the last, Phoenix, is on economic life support.
• Strength in the Shuttle product between LGA-BOS, LGA-DCA and DCA-BOS.
• Industry leading cost-cutting and de-bundling of services.

As a whole, US does not look like a particularly warm-and-fuzzy airline right about now. In fact, with its becoming ever-smaller, US does take on the appearance of a take-over target. Perhaps the Tempe, AZ management is just looking for a white knight to line their pockets (LCC stock, as always happens with airline shares in general, is in the pits). In any event, yet further cuts at US -- whether to the network, to the workforce number and/or compensation, or to the product -- make it even less likely that I would step onto a US aircraft by choice.

28/10: Markets lurch downward; NASDAQ suffers worst fate, down 2.67%

Markets today reminded traders of why the month of October has a brutal reputation for returns. The NASDAQ plunged 2.67% on heavy volume (2.65B), while the broad-based S&P500 surrendered 2% to 1042 and the DJIA slid 1.2% to 9763. The wide divergence in performance amongst these three indexes is striking, although not altogether unexpected: downward lurches are inherently accompanied by upticks in volatility, and NASDAQ components do have greater beta values than their DJIA counterparts. Also, the DJIA is a poor index due to inappropriate weighting of its components and its being based on only thirty stocks. One year charts, courtesy of Bigcharts, follow for the tech-heavy NAZ and for the trusty S&P, respectively:



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My own experience today was one I'd rather forget: sharp losses on the back of a significant long position in November $42 QQQQ calls. For those not in the know (and I qualified as recently as a month ago, I'm almost ashamed to admit), QQQQ is an ETF -- an exchange-traded fund -- that seeks to mirror the performance of the NASDAQ-100 stock market index. Curiously, however, the correlation is not a perfect 1.

Of course, experiences like that of today are what ultimately lead to improvement in trading judgment and skill. Battle-wounds educate about the risks inherent to the market, reveal areas of theoretical weakness, and sharpen resolve (after one recovers from the chagrin and disappointment). Here's a 10-day of QQQQ; due to the strong, positive correlation between QQQQ and the NASDAQ and S&P500 indices, the chart is also an approximation of overall market activity during the time-frame:



After bearing the full brunt of QQQQ decline throughout the session, I did liquidate a part of my investment for the joint purposes of limiting risk and financing a new position in November $11 AA puts. This is a risky strategy to be sure. AA -- Alcoa, the behemoth aluminum firm -- closed today at $11.92 after a very significant decline of over six percent, on very strong volume to boot. Here's a 10-day of AA:



Yet, the move was soundly thought-through. After today's sharp decline, further deterioration at tomorrow's market open is a distinct possibility on 'technicals' alone -- that is to say, based on the dubious insight of only technical analysis. Quite simply, markets often extend the dominant trend of the prior session into the opening minutes of the new day, and this is particularly pronounced during sharp price movements that are accompanied by significant volume. Furthermore, tomorrow morning (pre-market) shall bring the release of U.S. 3rd quarter GDP growth, a critical value for the markets. Any disappointment will certainly exert tremendous downward pressure on stocks and may incite an immediate drop of 1 or 2 percent. Without the AA puts, I'd face a further precipitous decline in my account value (due to those ill-timed QQQQ calls) in the event of a poor GDP value (say, anything under +2.5%). Note, dear reader, that the market consensus is between +3.0% (many) and +2.5% (Goldman Sachs, as revealed today).

That said, the puts can certainly back-fire, and in a particularly acute manner to boot, given they're already fairly deeply OTM (out-of-the-money). After a decline of today's manner and magnitude (i.e. a decline where both the first and second derivatives of price are both negative, and where the decline occurs on sharply increased volume), in both AA and the general market, the risk of a reversal to the upside is considerable. Any upward reversal will bring sharp deterioration in any OTM, near-dated puts. Which are precisely what I now hold.

But, on the plus side, my overnight position is fairly well leveraged, with QQQQ calls providing upside gain and AA puts offering downside profit. My ideal move for tomorrow's session would be disappointing GDP figures leading to a sharply lower open, which would provide a handsomely profitable exit for the AA puts; followed by an appreciation of the market over the next one or two sessions from highly oversold levels, which would nurture recovery in the value of my QQQQ calls.

Good luck on tomorrow's markets!

19/10: S&P500 breaks 1100 in bouyant intra-day trade

Apologies to the devoted regular reader -- all zero of you -- for the absence of posts within the last week, and for a dearth within the last fortnight. I've been abuzz with various tangential activities, not least being business with Georgetown that required a trip for various meetings in Washington and New York. Now firmly back in Chicago, however, I take up the task of trading with greater fervour than before. Here, in the fertile lake-side lands of the CBOE and the Merc, near the hallowed corridors and libraries of the eponymous (vis-a-vis the city) University, within the milieu of former stockyards and current derivatives houses, all greased by the utilitarian surroundings of transport, weather and sports teams (with regards to any of these, nothing over which to get terribly poetic, but yet they all 'work'); here, I cast my net.

On a personal note, I've recently upgraded my technological capabilities relating to work. The proud father of a netbook (really, it's quite revolutionary, v/v value and mobile opportunities), I now work on three screens at once, armed with streaming information everywhere from the invisible glow of a newly established wifi network. I'm also better armed for mobile blog posts from the road (in my case, generally Buckies, er, Starbucks).

And so it is tonight. But now down to an abridged report on today's markets.

Euphoria reins supreme, the markets are heading upward with little hesitation and even less volatility, and 52-week highs are noted as easily as major psychological resistance levels (i.e. round numbers vis-a-vis the benchmarks) are neared and broken. In short, the need for vigilance is higher than ever. A pull-back -- possibly sharp -- is a real possibility; but in the meantime, profits from long positions may yet be plentiful.

The main story today was the S&P500. The index, after an open at 1088 and an intra-day low near 1086, reached an intra-day high around midday of 1100.17 before pulling-back marginally to close at 1098. Very bullish, needless to say. Yet the bear case cannot be ignored, as presented with a broad-stroke in the above paragraph. Worth adding: some analysts were going on record during the summer, when the rally was far more nascent, that the upward thrust may vault the S&P to the vicinity of 1100 or 1150. Caveat emptor. From the usual source:



I shall cut the analysis short and halt here. For one, I am seeing the Coen brothers' newest release, "A Serious Man," in a mere 10 minutes, and the cinema is about a dozen miles from my present location (Highland Park, IL versus Skokie, respectively). Furthermore, I sat out today's market and hence lack personal trading anecdotes which I could relate. Subsequent updates shall touch upon last week's trading -- the good, the bad, and the ugly. You deserve all the meat, dear reader.

09/10: Markets close near YTD highs

U.S. markets positively closed out an impressive week that has brought indexes to just below their intraday highs for 2009. The S&P500 closed at 1071, with an intraday high and low, respectively, of 1072 and 1063. As indicated by these numbers, there was little volatility during today's session, as might be expected with the markets edging up to major resistance. For reference, the Dow closed today at 9865, with I-D H/L values of 9865 (as with the close) and 9765, respectively. A 10-day'er of the more comprehensive benchmark follows:



My own trading today has been extraordinarily unremarkable. I did, in fact, not give a cent of commission to my broker today, and I am holding into the weekend the same GS calls ($190, Nov) that I owned at market open.

Goldman Sachs has consolidated today within a tight range. This action appears cautiously bullish, particularly as the stock price has clearly broken out of yesterday's downtrend. GS is no longer completely over-extended from its advance from $176 (which began a week ago, on Friday, October 2) and instead has a floor from which to attack the $198-205 range. Critically, the upper end of this range represents significant resistance off the 2-year chart. Perhaps next week might see a capitulation rally to the upper end of that range? In any event, Goldman Sachs will release its third quarter earnings report on Thursday, October 15, which may spur buying in the lead-up (and appreciation of options due to an uptick in implied volatility). A 10-D of GS:



This will wrap up tonight's post. On a personal note, I'm rather exhausted after a trying week, although I am heartened to be ending it on an upswing. I'm also still under the melancholy, introspective influence of a terrific film that I saw this evening: "The Boys are Back."

Best of luck this weekend! I have a stack of books on derivatives & technical analysis and am hoping to make progress on at least one or two; this is in addition to obligatory savouring of the Weekend FT and weekend NYT editions.

06/10: Bulls continue the charge; 52-week high for bellweather Goldman Sachs

Markets today extended their impassioned reversal from the pullback of last week, with the S&P500 crossing back above 1050. The intra-day low, high and close for the index were, respectively: 1042, 1061 and 1055. Here's a ten-day chart from bigcharts.com:



Stepping back for a moment, the story of the markets for the past few sessions has been one of uncertainty. Is the economy really in a V-shaped recovery? Are we headed instead for a double-dip recession? Or where in between those opposing diagnoses do we really lie?

Last week, of course, witnessed the publication of several disappointing economic indicators, including poor numbers on Midwest manufacturing activity, in the general ISM manufacturing sentiment index and, finally on Friday, with the September unemployment figure.

This week, in contrast, the mood has been more buoyant, and chiefly due to Monday's release of an upbeat services sector ISM reading, at 50.9 (where values over 50.0 indicate expansion). From a technical perspective, bulls may be headed for a capitulation rally, which would take the Dow to 10,000 or just a hair shy thereof -- at the very least. While I prefer the S&P500 for my daily market snapshots, there is no denying the immense symbolic value of the Dow's approach to and touching of 10k.

Much hinges on the upcoming earnings period, which will kick into high gear later this month. Here, focus will be particularly sharp on companies' reported revenue figures.

My own trading of the past few days has been spotty, although my most recent transaction, entered on Monday and unwound today, has been positive. This particular position was a long in Oct $185 GS puts. And I was the definite beneficiary of a long-odds GS collapse in midday (earlier in the day, GS was busy setting fresh intra-day 52-week highs). I exited the puts near the intra-day low for GS on a gain of about 6 percent on the derivatives -- far better than the unrealized double-digit percentage losses that I faced immediately after the open. As the session wore on, GS rallied anew and I re-entered the puts position, paying $4.10 per contract. Going into the overnight, I'm sitting on a slight gain, although everything obviously depends on the sentiment of tomorrow's early trade. I'm looking to exit the puts expeditiously, as they are out-of-the-money (OTM) -- i.e. all time value -- with but two weeks until expiry of the contract. Aren't I a reckless one! :)

Here's a 10D of GS:



Good luck tomorrow!

01/10: Distribution day; apprehension ahead of tomorrow's unemployment number

Markets took a dive today, with the S&P500 down just over 2.5%.

Since I last wrote, about 72 hours ago, the markets have experienced a tightly range-bound session on Tuesday and a steep decline on Wednesday (caused by a significant miss on the Chicago-area ISM index, which came both below expectations and also well below 50%, indicating contraction), though followed by near-complete recovery later in the session. And, of course, today's sharply negative session is the most recent data-point.

For today, then, the S&P500 opened at 1055 -- itself a point below yesterday's close -- and continued to drop, closing at its low of 1030. Here's a 10-day snapshot:



Since Monday's posting, I have had some unfortunate experiences with regards to my market positions. My GS straddle went nowhere, and I unceremoniously unwound the position. I also had overnight positions in Oct HOT and X calls, both of which proved ill-timed; I entered the former late on Tuesday and the latter into Wednesday's decline, but by the time I waited for the obligatory overnight period (distinct with regards to each respective position), each was underwater and I decided to unwind rather than risk further loss. At present, I am holding Oct $37.5 CTSH puts, which I acquired today, though well into the market sell-off; at present, these are showing a slight gain. Much rides, of course, on the sentiment unleashed by the Bureau of Labor Statistics employment report, due at 7:30a CDT tomorrow.

Here's a 6-month and a 10-day of CTSH, courtesy of bigcharts.com, of course:



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Interesting to note is that I identified CTSH and entered my derivative position in rapid succession. Identification occurred on a screen of stocks with RSI values that dipped below 70 in the last prior session, with input of 2 sessions; beta values greater than 1.2; market capitalization in excess of $500M; daily volume over 400k; and price at or above $10. As such, the trade was rather impulsive; bear in mind, reader, that I was desperately looking for a suitable put candidate in the midst of intensifying market decline, while all the while holding a deteriorating position in X calls.

From a technical analysis perspective, CTSH looks prime for further pullback. On the 6-month and 10-day charts, it's clear that critical support in the vicinity $37.6-37.7 has been violated. The next support levels appear around $36.95 and $36.00. And, if markets should pull-back more aggressively -- which everyone is forecasting for quite some time already -- then support at $35, $33.9 and $32.75 might even be in play. But waiting for any of those outcomes would be very risky, indeed, and I'd probably be well-served to sell at the first or second support level approached, even if just to re-purchase the puts after the unavoidable pullbacks towards the upside. The only scenario in which it'd be advisable to hold would be a complete market meltdown following the BLS number, which is unlikely.

And a final critical point worth mentioning: if the BLS number surprises towards the upside, the markets remain well-positioned to make a run at their highs of two weeks ago. As such, I should sell the puts at a loss and enter calls in one or two leading stocks that are likely to lead the market higher, such as GS, metals/materials or technology.

Good luck tomorrow!