Pre-opening Comments for Friday January 18th
U.S. equity index futures are mixed this morning. S&P 500 futures are up 1 point in pre-opening trade.
Asian markets surged on news that China’s GDP grew at a 7.9% annual rate in the fourth quarter, slightly higher than consensus at 7.8% and better than 7.4% in the third quarter. In addition December Industrial Output grew at a 10.3% rate and retail sales increased 15.2%. The Shanghai Composite Index gained 1.4%. The Nikkei Average jumped 3.0%
Fourth quarter earnings reports continue to pour in. Companies that reported overnight included General Electric, Morgan Stanley, Intel, SunTrust and Schlumberger.
Caterpillar gained $0.82 to $96.52 after Piper Jaffray upgraded the stock from Neutral to Overweight. Target was raised from $85 to $113.
Amazon.com added $2.16 to $272.64 after Pacific Crest upgraded the stock from Sector Perform to Outperform.
Research in Motion added $0.94 to $15.85 after Jefferies upgraded the stock from Hold to Buy.
Netflix gained $2.70 to $100.40 after Janney upgraded the stock to Buy.
CSX (CSX $20.86) is expected to open lower after Credit Suisse downgraded the stock from Outperform to Neutral.
Schlumberger Ltd. (NYSE:SLB) – $73.90 added 0.7% after reporting slightly better than consensus fourth quarter results. The stock has a positive technical profile. Intermediate trend recently turned up on a break above $73.51. The stock trades above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought. Strength relative to the S&P 500 Index has been positive since the end of December. Seasonal influences turned positive this week. Preferred strategy is to accumulate the stock at current or lower prices for a seasonal trade lasting until the end of April.
Schlumberger Limited (NYSE:SLB) Seasonal Chart
Technicals on gold are improving. Gold briefly moved above$1,695.40. Last week, gold moved above its 20 day moving average. Strength relative to the S&P 500 Index shows early signs of turning positive. Seasonal influences for gold are positive in January and February, but silver, platinum and palladium have a history of outperforming gold in these months.
Crude oil prices are moving higher on colder weather than last year, greater economic demand (particularly China) and concerns about growing political instability in the Middle East (particularly Algeria and Iran). Crude oil has an intermediate uptrend, trades above is 20, 50 and 200 day moving averages and is outperforming the S&P 500 Index. Seasonal influences usually bottom at this time of year and accelerated after mid-February.
Crude Oil Futures (CL) Seasonal Chart
Natural gas also has shown surprising strength recently mainly due to colder North American weather relative to the same period last year. Nice break above resistance yesterday at $3.50.
Energy stocks on both sides of the border are responding to higher crude oil and natural gas prices. The U.S. oil and gas exploration & production ETF briefly broke to a 5 month high on a move above $57.14. Strength relative to the S&P 500 Index is accelerating.
Ditto for the Energy SPDR!
The U.S. Homebuilders ETF responded strongly to higher than consensus December housing starts. The ETF closed at a 5 year high. Favourable seasonal influences remain positive until the first week in February.
Updates on Sector Seasonal Trades
Seasonal trades preferably have a score of 3 based on:
· At least a short term uptrend
· Trades above its 20 day moving average
· Outperform the S&P 500 (TSX Composite for Canadian sectors)
All three technical indicators are positive for WOOD (i.e. Technical score is 3). End of seasonal strength period is mid-February and (if extended) the first week in April.
Technical score has changed from 3 to 0 during the past few days. Period of seasonal strength ending mid-February has ended early this year.
Early warning signs on the Base Metals sector. Technical score has fallen from 3 to 1 after the Index moved below short term support and started to underperform the S&P 500. The sector has a history of underperformance between now and mid-February.
Technical score for Industrial SPDR remains 3. All time high close yesterday. Seasonal influences are positive until early May.
Technical score for Consumer Discretionary is 3. All time close high yesterday. Seasonal influences are positive until mid-April.
Technical score is 3. Favourable seasonal influences expired at the end of the first week in January. Hold until technical score starts to decline
Technical score is 2. Seasonal influences peak just after the Consumer Electronics Show. Strength relative to the S&P 500 already has turned negative. Take appropriate action.
Technical score returned to 3 recently. Seasonal influences are positive until the first week in March.
Technical score is 3, but strength relative to the S&P 500 Index is showing early signs of underperformance. Seasonal influences briefly are negative between mid- January and mid- Feb.
Technical score is 3. Period of seasonal strength end in the first week in February
Technical score is 2 after a move yesterday above its 20 day moving average. Rough start for its period of seasonal strength from early January to at least May!
Technical score turned to 3 this week. Period of seasonal strength from January 1st to the first week in March is off to a good start.
Ditto for Platinum! Technical score is 3
Ditto for Palladium. Technical score is 3
Period of seasonal strength is from January 18th to the first week in May with a possible extension to June 15th. Technical score is 2/3 (Strength relative to the TSX is not clear)
Period of seasonal strength is from January 30th to the end of April. Technical score is 3
Period of seasonal strength is from January 15th to May 9th. Technical score is 3
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:
Gold Futures (GC) Seasonal Chart
Eric Wheatley’s Options Column
I got a few emails after last week’s commentary asking about what had happened on December 31st in the options markets. Besides it always being fun to get emails, I found that I needed to address something about the exotic mystique of options and how they are traded.
Theoretical constructs are great. Some weird Dane came up with a probabilistic view of quantum-level physics which, to all right-thinking laypeople, should have landed him in an asylum or jail on psychotropic drug charges. As it turns out, a few years later, Niels Bohr was proven right in the laboratory, and particles do dance around based upon spooky action at a distance. The problem with theoretical constructs however is that they are only as good as the models upon which they are built. Also, if there is greater entropy in a system, models become increasingly less reliable.
Nate Silver, the media darling statistician who uncannily predicted the last two American presidential elections to quasi-perfection, boldly predicted that the New York Jets would defeat the Seattle Seahawks on November 11th. Needless to say for any semi-conscious football fan, the Jets got clobbered (and writing that makes me giddy). In this example, I don’t fault Mr. Silver – he IS a remarkable prognosticator and deserves immense respect for his work on signals and noise – the problem simply is that there is less predictive data (signals) and more entropy (noise) on a football field than in a comprehensively measured election.
Why am I going through these examples? Because there is a facedesking belief still held by many that one can “model” the markets. Indeed, a whole industry is beholden to the idea that a particularly astute hedge fund manager can trade based off of a complex computer model and consistently make free money! Of course, there are very good hedge funds which DO generate good returns and can be an interesting addition to some portfolios. That said, no credible manager will ever trust a model under all market circumstances. Some less-than-credible people do, and they may make money for a while, but faith is an unsuitable replacement for rational decision-making.
Beyond exotic hedge fund strategies which bedazzle the credulous, options seem to have a weird aura which attracts those who wish to believe in magic.
On December 31st, the markets went wacky. Options prices spiked because options are priced in terms of uncertainty (mathematically defined as volatility). I’ve known a WHOLE heck of a lot of very knowledgeable finance people who sincerely believe that options are simply priced with models. Better models, this logic holds, will lead to better traders and more money coming in to geeky PhDs offhandedly and somewhat derisively titled “quants” by the jocks on the trading desk. The reality is that, no matter how good your model may be, it simply measures that which is already known and spits out completely arcane data.
Options prices are set in the market by the same animal spirits that regulate all securities prices. If a call is priced at $2.00 through transparent buying and selling by unfettered market participants, that is its price. The only thing that models do is take this price, put it through a mathematical blender with some other data-ingredients and, voilà, you distill it down to its essence: the volatility implied in the call’s price and all of the (Greek) numbers which tells an options trader where his or her risks lie and how to hedge them off.
The spike in options prices weren’t an anomaly in the same way that obnoxious moves in stock prices are; they reflected market sentiment at a time of great uncertainty. If a stock’s price crashes, one can credibly state that the stock either was or is mispriced (or both). Options are traded off of stocks and simply reflect sentiment. In our case, I took that panicky-type sentiment and took advantage of it. Now that volatilities have crashed back to their earlier Lilliputian levels, I think we can confidently say that it was a good decision.
In this week’s French-language blog: illegal cigarettes, illegal downloads and perfectly legal tax evasion.
Éric Wheatley, MBA, CIM
Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.
Blogue en français : gbsfinancier.blogspot.ca
John Charles Hood appreciates models on a whole deeper level than I.
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 January 17th 2013
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