Tech Talk for Friday December 7th 2012

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(Editor’s Note: Mr. Vialoux is scheduled to appear on BNN Television on Monday at 4:50 PM EST)

Pre-opening Comments for Friday December 7th

U.S. equity index futures are higher this morning. S&P 500 futures are up 8 points in pre-opening trade.

Index futures moved higher following release of a better than expected November U.S. employment report. Consensus for November Non-farm payrolls was 80,000 versus 138,000 in October. Actual was 146,000. Consensus for Private Non-farm payrolls was 120,000. Actual was 147,000. Consensus for the November unemployment rate was an increase to 8.0% from 7.9% in October. Actual was a decline to 7.7%. Consensus for November Hourly Earnings was unchanged from October. Actual was a gain of 0.2%. Hurricane Sandy did not have a significant impact on the report.

Canada also had an encouraging November employment report. Consensus was an increase in employment of 10,000 from October. Actual was an increase to 58,300. Consensus for the November unemployment rate was unchanged from October at 7.4%. Actual was a decline to 7.2%.

CIBC adjusted its ratings on Canadian bank stocks. Toronto Dominion was downgraded from Outperform to Sector Perform. Royal Bank was upgraded from Sector Perform to Outperform.

Sun Trust initiated coverage on the U.S. financial services sector. Buy ratings were allocated to JP Morgan, PNC Financial and Citigroup. Neutral ratings were allocated to Goldman Sachs, Wells Fargo, US Bancorp, Huntington Bancshares and Bank of America.

McDonalds added $1.00 to $89.09 after Janney Capital upgraded the stock from Neutral to Buy.

Topeka launched coverage on the U.S. Homebuilder sector. Pulte Homes and Ryland Group were rated Buy. Toll Brothers, KB Homes, Lennar and DR Horton were rated Hold.

 

Interesting Charts

Airline stocks are “flying higher” on weakness in crude oil and refined product (i.e. jet fuel) prices.

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China “A” shares and their related funds continue to show strong technical patterns.

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Strength in precious metals yesterday was recorded despite an exceptional gain by the U.S. Dollar Index, an encouraging technical sign.

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An Update on Sector Seasonal Trades

The following sector seasonal trades remain in gear. All trades:

· Currently are profitable

· Have at least a short term uptrend

· Remain above their 20 day moving average

· Show short term momentum indicators in an uptrend (although many are overbought)

· Indicate positive strength relative to the market (S&P 500 Index: down 0.09% during the past week)

Gain during the past week: 1.32%

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Gain during the past week: 1.83%

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Gain during the past week: 1.53%

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Gain during the past week: 1.11%

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Gain during the past week: 0.11%

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Lost 0.53% during the past week

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Lost 0.34% during the past week.

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Lost 0.72% during the past week.

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Lost 3.98% during the past week

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Lost 0.71% during the past week.

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Lost 0.82% during the past week.

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Gained 1.09% during the past week.

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Lost 1.53% during the past week.

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The following sectors have shown technical deterioration during the past week despite their favourable seasonality. Both have broken below their 20 day moving average and are no longer outperforming the S&P 500 Index. They are giving technical early warning signs.

Loss during the past week: 2.51%

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Lost 2.70% last week

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Special Free Services available through www.equityclock.com

Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.

To login, simply go to http://www.equityclock.com/charts/

Following is an example:

 

Copper Futures (HG) Seasonal Chart

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Eric Wheatley’s Listed Options Column

Good morning,

I’ve been dealing with options only tangentially in this space for the past couple commentaries. This week, I’ll go in the opposite direction and dive into a rather hard-core concept which stumped me many years ago.

A good friend of mine from when I was at the Montréal Exchange named George threw a theoretical options question at me one day while we were outside smoking. George has a big math brain, though he had never traded options. At the time, I only had a cheap Bachelor’s of Finance from a school of little repute (and whatever repute it does have ain’t good), but I knew how options worked under the hood and could eyeball things in a manner which could only be learned in the pits. Our conversations were pretty fun and we could teach each other all sorts of interesting and mutually-fulfilling stuff.

He asked me: “if implied volatility rises to infinity, what’ll happen to a call’s delta? What about a put’s?”

Of course, I now have to explain a few things. This is the graph of a call’s delta:

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Source: http://www.theoptionsguide.com/delta.aspx

The intuitive definition of delta is “the probability of an option’s being in-the-money at its expiration”. A call with a strike price of $30 will be in-the-money if the stock’s price is above $30 at expiration. Therefore, in the graph, if the stock’s price is at $50, the 30-strike call will have a pretty darned good chance of being in-the-money and will therefore have a delta of close to 100%. Conversely, a call with a strike price of $70 has very little chance of being in-the-money at expiration, so its delta will be close to 0%.

The rub here is that if the stock’s price is extremely volatile, there is less certainty as to the aforementioned probabilities. Sure, the stock is at $50, but a 70-strike call is a lottery ticket – with an extremely volatile stock, that lottery ticket may pay off. The graph therefore shows that delta is less extreme when volatility rises; that is, the curve will be flatter because out-of-the-money options become more likely to get into the money and in-the-money options are more likely to fall out-of-the-money.

SO, to get back to George’s question: what if volatility flies to infinity? The intuitive answer would be that the curve would be perfectly flat. All calls’ and all puts’ deltas would be 50%/-50%. This is the intuitive thought which comes to the mind of a non-big-brained options trader. George smiled and, darnit, told me: “nope.

“The math says that if volatility rises to infinity, all calls’ deltas will be 100% and all puts’ deltas will be 0%”. He explained the theoretical underpinnings and I was fascinated, but I couldn’t wrap my head around how this quantum physics-like stuff could be explained intuitively.

As is usually the case, I tried to understand the puzzle for a little bit, then I ctrl-alt-del-terminated the process in favour of using my frontal lobe for more pressing matters, such as Zooey Deschanel (or whomever her 2001 equivalent was. Probably Amanda Peet). The fun thing was, my subconscious kept working at it and later that evening, it hit on something.

If volatility is infinite, that means that the stock could, at any finite moment, be at any price from zero to infinity. An option must have at least one finite strike price. Even if the strike price is seven kajillion hundred million and thirty-eight, if volatility is infinite, the probability of the stock’s price being higher than seven kajillion hundred million and thirty-eight at expiration is infinitely close to 100%. Therefore, a call with a strike price of seven kajillion hundred million and thirty-eight WILL be in-the-money at expiration, so its delta is 100%. Conversely, a put with a strike price of seven kajillion hundred million and thirty-eight will NOT be in-the-money at expiration, so its delta is 0%.

Now, just as there is a tipping point between quantum and classical mechanics in physics which isn’t yet known, there has to be a threshold dividing “normal” volatility – where calls and puts tend towards 50% when it rises – and this “quantum” infinite volatility. I’ve no clue of how the math would work, so if a reader is much smarter than I*, please write.

(*Just the idea of “infinite” volatility doesn’t make much sense to me, considering that volatility is usually defined as the standard deviation of a sample. In order to calculate the standard deviation, you need the mean. How do you get the mean of infinity? This is why I’d make a pretty grumpy theoretician. If you can expose my ignorance, go right ahead).

*****************

An article from the Twitter feed from this week (‘twas a happily busy week and I saw few interesting articles):

· According to Goldman Sachs, the U.S. will be going through above-trend growth. Good news? Is it possible?

In this week’s French-language blog: I had spent a weekend with our good friends in Québec City debating, among other things, capitalism and globalisation. This was my considered response after a bit of cogitation.

Cheers!

Éric Wheatley, MBA, CIM

Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.

eric@jchood.com

514.604.2829;1.855.348.2829

Twitter: @jchood_eric_en

Blogue en français : gbsfinancier.blogspot.ca

*****************

Little known fact about John Charles Hood #53

John Charles Hood has been a strong proponent of globalisation since seeing a Gina Lollobrigida orgy scene when he was 12.image

 

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.

Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc

Horizons Seasonal Rotation ETF HAC December 6th 2012

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Sponsored By...



20 Responses to “Tech Talk for Friday December 7th 2012”

  1. rick Says:

    Hi Eric Wheatley ,

    Somebody on the net suggest to buy UVXY puts Jan 2015 and keep them until Jan 2014 , before the time decay will star to affect them ,then buy UVXY puts Jan 2016 and keep them until Jan 2015 and so on .
    UVXY because is designed to go to 0 .

    What do you think about this idea ? Is it good ?

  2. Ed Says:

    Hey Rick, looking at the one year chart for UVXY (http://ca.finance.yahoo.com/q/bc?s=UVXY&t=2y&l=on&z=l&q=l&c=) shows it does have a downward trend. Mind you, it’s only a years worth of data. Assuming it behaves like this always, then your PUT idea might be profitable… except during “black swan events” …

  3. Rol Lew Says:

    Hi Rick,

    UVXY – on Sept 15th it was @ 31.60
    and on Nov 15 it was again @ 31.50
    This was 2 months later. Flat.

    So UVXY can be flat for 2 months,
    even though it is in a downtrend longer term.

    All this time your long puts will be losing
    time value, how much? depends on the strike
    you choose. OTM strikes will lose more than ITM or ATM.

    So I am suggesting that you should hedge some or all of your long
    puts in some way, just in case UVXY starts off by going against you,
    Oct 18 = $26….Oct 23 = $32, for example.

    This can happen again, and you will get antsy, even with long
    dated Jan 2015 puts. Because the ULTRA’s do give ultra moves, up or down.

    The Jan 2015 $20 Put is today 13.90/14.20 open interest 1 contract.
    I will ignore the fact that this is a 30 cent spread, & with no liquidity.

    So if I would buy this, I could hedge by selling, say, the Jan 2015 $17 Put
    quoted today @ 11.40/11.70 OI = 10.

    So the spread would cost me 2.50
    This spread is $20 – $17 = $3.00 wide
    so the most you could make is 50 cents.
    .50 /3.00 = 16%, (only), over the next year.

    But this % can be increased, by selling a further
    otm PUT, if I wanted to.

    Another approach, would be to buy the Jan 15 put for 14.20,
    and to sell the Jan 2014 $20 Put for 3.30/ 3.40 OI = 12.66

    This would be a calendar spread. There is lots of info on it
    if you search. You will also find discussions on which strikes
    I should use, depending on my outlook for where UVXY will be by when.

    FD – I am currently doing the debit spread trade above, but using VXX because
    the options are more liquid than for UVXY, and the spreads are narrower.
    This is a 10% losing trade at the moment as VXX (& UVXY too) have gone
    sideways for 2 wks.

    If I want the three times more leverage that UVXY offers, I can always trade three times the number of VXX contracts. Hedged.

  4. Harry Says:

    Ranger——Any suggestions on oil? Thanks

  5. Paul-R Says:

    Canuck,

    Thanks for your updates to this blog.

    I was wondering about the interest paid by the Master Limited Partnerships.
    Does the US not hold back a percentage of the interest that is not returned to an RRSP account?
    Thanks

  6. Éric Wheatley Says:

    Hi Rick (#1),

    What Rol says. Long-term options may not have much immediate time erosion, but they barely react to moves in the underlying. Too bloated with time value.

    …however, could you specify why you assert that it’s “designed to go to 0″? I’m reading up on it and I don’t see why this would be true (caveat: I had never heard of this product before your post). I’d like to read the story you’re citing. Sounds like it’d be good for a laugh.

  7. Rol Lew Says:

    Hi Cannuck

    Thx for mentioning rnf as a fert candidate.

    This is a “nitrogen” stock, and while past performance
    is no indication of future behaviour, I keep thinking
    that nitrogen will do better than “potash” or “phosphorus”
    again in 2013. A google search will outline why. Whether
    this is so or not, it is likely that a period of seasonal
    strength is at hand for the ferts.

    http://seekingalpha.com/article/1025991-how-to-trade-agriculture-and-fertilizer-stocks-through-january

  8. Rol Lew Says:

    IF 2012 had any seasonality
    It showed itself in June & in January

    http://stockcharts.com/freecharts/candleglance.html?RNF,LXU,UAN,CF,TNH,AGU,MOS,POT,IPI,MON,GRA,SYT|D|A12,26,9

    Look at one year’s duration, ok?

    FD – no position (yet) :) As if I can move the market ;)
    But it does appear tha somebody has been buying, since mid Nov.

  9. Ranger Says:

    Harry – been a long time since I traded oil. Natgas is giving me enough highs (and lows) ;) Oil seems to be very less volatile although some day would like to do position trading on that. having said all these my bias is to the downside unless it can break and hold above 92level. And that is by the way on WTIC and not Brent. it has been in the downtrend since early 2011.
    that is all i can say at the moment.

  10. Ranger Says:

    Eric Wheatley – not an expert on these products unlike some on this board (reading those 100 plus page pdf documents is not exactly my cup of tea) but I have read it exactly what Rick has wrote, don’t know if it was on velocity or proshares site.

    here is one paragraph from velocity folks on one of their 3x etn

    Because the ETNs are linked to the daily performance of the applicable Index and include either leveraged inverse or leveraged long exposure, changes in the market price of the futures contracts included in the applicable Index will have a greater likelihood of causing such ETNs to be worth zero than if such ETNs were not linked to the leveraged inverse or leveraged long return of the applicable Index.

  11. Ranger Says:

    post above – First para. pl. re-read it as:
    but I have read it exactly what Rick has WRITTEN, don’t know if it was on velocity or proshares site.

  12. Éric Wheatley Says:

    Sorry for the delay in responding.

    OK, Ranger says they CAN go to zero and Rick says they’re DESIGNED to. I read the product description and it doesn’t seem to be either, though I may be mistaken.

    My take: if you’re buying really illiquid long-term puts, you’re paying the market-maker. The market-maker is thinking that the stock isn’t going to go to zero. If there’s one thing I’ve learned, it’s that pro traders know their products and aren’t likely to give away really good puts for a pittance.

    …that’s my considered, half-assed, boring Friday-evening married-guy response.

  13. Muntazir Says:

    Rick,Eric,RolLew & Ranger
    Thought you might be interested in this article

    http://www.terrystips.com/blog/

  14. kam Says:

    Hi Eric,
    Technical it will never go to Zero as long as velocity keeps on reverse splitting it.
    Oct 2011 it was trading at the highest of $1656.00( counting all the back flips it did :) ) and a low of $18.56 this week. so it has not gone to zero but your $100 invested last year Oct. has turned into $1.12. Not Zero but close enough. So Rick is betting on that $1.12 will turn into 1.12 cent or so.Sounds good, can happen but who knows.What even the case it will never be $1.12 in Jan 2015. Lucky if it is 10 cents or so. NOW how will that work out into PUT/CALL I can’t tell. But contango will eat it alive regardless.
    We had a discussion this summer about HVU.to where I talked about short selling HVU.to at $2.95 or so and can’t lose over time. Well that $2.95 has turned into 53 cents today. Seams like as long as your short is not called back by your broker within couple of of months or so , the things falls so much that you can’t lose. One big reason might be the plunge protection team which is always there. Second I read on seeking alpha to the tune that all the etf”s of volatility that don’t allow $vix to increase too much before sellers show up. Sounds ok ,try buying and holding VXX/UVXY for couple of weeks where spx keep on going up and you will be in prayer room and will try to sell as soon as you get close/close enough to your buying price and get the hell out of dodge. Example:-
    Nov15/16 when SPX was dropping dead then uvxy was trading at $31.50. Today close at $19.38. If I haven’t gotten out then it need to go up 62% for me to get my money back.It can but as soon as it is over $30 I will be sitting on sell button.
    Kam

  15. Ranger Says:

    Eric Wheatley – Thanks for the reply and the chuckle at the end.

    Last para. in my post 10 is from the prospectus of velocity 3x etn – word to word. Essentially they clearly admit that it is the most likely scenario in the end. Now I don’t think the financial industry is that honest or open that they will write it in their product description outright. So if you dig deep into their detailed prospectus (200+ pages in this case), you will see series of disclosures. I know this is your field, job, expertise and interest so hope you won’t mind me pointing out this to you. Also, no offense to your field or profession either.

    These levered ETFs -especially the inverse ones- are a sure winning bet for the designer and a operator while a sure loss for sum of all buyers over a period of time. It is a simple math. They all inevitably grind their way to very very close to zero if not the actual 0. Makes one wonder why these garden variety inverse ETFs & ETNs are created every day. Now I would not go as far as calling them illegal as long as they are not being sold by the predatory brokers to their unsuspecting & unsophisticated clients for some juicy commission.

    The other nicer way for them to say is this – If you hold your ETN as a long term investment, it is likely that you will lose all or a substantial portion of your investment- also taken from their prospectus word to word.
    Slippage, along with this great human invention called “percentage” are the real culprits here. No wonder none of the Canadian banks led brokers would let you ‘short’ these products (especially 3 X inverse ETNs) cause, I think (and I have no proof or sure study done on this) once a client takes a long position in one of these they or their sister concern would lock a short against it.

    When they set out initially to do something (daily 2 or 3 X return) and the way it was tailored, brought out a different end result in the end for those who end up holding against the underlying trend or even during the daily chops.
    So I, along with Rick, consider it safe, true and honest to say that it WILL go to zero or in other words DESIGNED to go to zero. But then again, financial engineering won’t let it happen…so here comes another invention, Reverse Split!

    Then again Zombies out there preach & even get followed by when they say there are UNLIMITED risks. Jeeez, thank God there are stops out there as well.

    Can I end by saying this?
    Purrfect time to buy these inverse 3X levered is NOW, especially if one believes in Mayan Calendar. Only question is who is going to be out there to pay whom and with what? As for me, I did not buy into any of those Y2K scare products; neither a secret & safe bunker in Nevada desert nor a candle or matchstick.

    Happy and Productive weekend everyone.

  16. Ranger Says:

    Muntazir – Thanks for sharing the link. I will go through it.

  17. Tawny Says:

    Freddebuoy and others
    re low trading volumes lately (a point of view) from FinNews for December 7, 2012

    As fiscal cliff negotiations continue, the optimism that a deal would be made by the Jan. 1 deadline has dwindled, in spite of another proposal being put on the table. (1) With no clear conclusion to the debate in sight and the possibility of increased taxes on dividends, many investors are holding fast causing a lag in trading volume. The New York Stock Exchange reported 5.86 billion traded shares, which is a decline of the year’s daily average of 6.48 billion shares.

  18. Ranger Says:

    Tawny – another factor yesterday was a day before the start of Hanukkah…a lot of people in financial sector left early around the lunch hour.

  19. Muntazir Says:

    Hi RolLew,Rick & all interested in TZA/UVXY,

    Last week I decided to paper track put optons on above 2.Here are prices noted ( i did not buy – just for studying purpose:

    Date Price for TZA Price for Dec 15 put Price for Jan 15 put
    Nov 29 15.11 67/68 107/114
    Nov 30 15.17 64/65 109/112

    Dec 4 15.42 50/52 100/104
    Dec 6 15.14 57/59 107/110
    Dec 9 15.11 54/55 107/113

    All are closing prices except Dec 4 is 1pm price + its bid/ask

    uvxy same Jan 18 put
    Nov 29 18.91 300
    Nov 30 19.57 320/330

    Dec 4 21.18 205/220
    dec 6 20.80 210/225
    Dec 9 19.38 105/120

    All from TDW site. This week I realised should have tracked 19 strike for uvxy & 16 for tza.
    Please do your own DD

  20. Rol Lew Says:

    Thanks for the follow-up Muntazir.

    I did buy some March puts on VXX 2 wks ago.
    This has a similar trend to UVXY, but the vxx puts have more volume.

    As you can see from your figures,
    sometimes these things can remain “flat”
    for a whole week or more – so you just have to give
    them time, taking the leap of faith, that the longer term tend is down.
    …………………………….

    On nov 16th the uvxy dec 19 put was .30
    On nov 29 & 30the it was 2.25
    On Dec 6th it was 1.50

    So timing is everything.
    Also, in choosing the strike, you have two choices.

    1. Figure out (i.e., guess? ;) where it will end up, and buy that strike.
    As the GREAT Wayne Gretsky said, you have to skate to where the puck will be,
    not where it is now. Those ones are so cheap, and can go from .30 to 2.25 up 650%,
    or from .13 to .70 up 438%. If you look at the volumes on those options contracts
    you will have th conclude that a lot of people know this already, and are in up to
    the tush, at least.

    2. If the sob does not move your way, you stand to lose your whole stake,
    so better to buy the more expensive ITM Puts, which have some intrinsic value,
    and erode at a slower rate, if you screw up.
    ……………………………………

    On nov 16th the tza dec 15 put was .13
    On Nov 29, 30 & dec 3rd, it was .70
    On Dec 6th it was .54

    So timing is everything – timing & patience.
    ……………………………………….

    When you have a little time, see if you can go and open
    a free paper-trading account at wwww . trademonster . com.

    It will give you the charts for all options strikes. Very Nice.
    I think WAYNE was interested in these charts as well. Hopefully
    he would have found this out also. I just found out yesterday.

    But we will still need a timing system, to take a stab at turning points.
    Tony has a great timing system using 3 moving averages.
    Even so, if you look at a 2 mth chart of uvxy or tza, you will have
    to conclude that some skill/ luck is needed here, uvxy moreso than tza,
    to dance around the many whip-saws. A lot depends on your “conviction”
    (a.k.a. the leap of faith) & on the timeframes / moving averages
    you pick, yada, yada, yada. I like the 60 minute chart in freestockcharts . com
    with just one medium moving average, say 40-50, looking at 2 months data.
    I do not try to day trade these. Even so, sometimes I still lose.
    I think that it is difficult to do these options trades based on
    a daily chart. Look at uvxy. Unless you take Rick’s approach
    and go all the way out to the Jan 2015 Puts, it is a tough leap to make
    using /trading a daily chart.

    It seems that I have better luck if I do not chase the 1 wk to 3 wks moves,
    but instead, just try to get in / out at my “guessed” turning points
    on the 60 minute chart. Some people love the 30 minute or the 2 hr.
    So many approaches can & do work.

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