AAPL: A Possible Short Trade?

Apple (AAPL) is currently on the high end of investors' line of attraction. A picture of Marketwatch's overview of the company is pretty clear: 

 

Almost everyone is more or less bulish on the stock. While I do admit this fuels growth of the stock price, this is not a sustainable condition. Such an overly bullish sentiment may come as a huge warning sign from a contrarian perspective.

Since the beginning of 2012 the stock's price experienced an interesting move. After going rapidly to about $640 it fell with almost $100 down to $540 level for about a month. Since the second half of May 2012 it is again on the rise and now trying to reach its previous high. 

What seems like a hope-fueling mode although, could prove to be nothing more than a normal reaction of a correction when all the people who have left the previous uptrend are getting on the train with renewed hopes. Hence this could be a false move given the newcommers are not strong enough to sustain the demand in near- to long-term perspective. It has happened before, in all kinds of markets and shares and since it's connected with human behavior, this type of market movements will continue to happen.

Let's look at the charts and some sentiment tools.

 

This is the daily chart of AAPL. What's noticeable here is the lower volume the recent upward movement relies on. This is especially true for the price increase since the dividend day. On theory a lower volume combined with a price increase speaks of exhausted buyers. This is a technical warning sign. The stock might still see some upward movement close to the previous high at $640 but the low volume suggest  there would not be enough demand to go much farther.

Schaeffer's Research website gives an insight on the option players' mood concerning AAPL. Put/Call open interest ratio is close to the highest value in one year so this suggest prevailing pessimism toward the stock. Viewed as a contrarian indicator this would suggest a further increase in the AAPL stock price might be possible because of an overly pessimistic mood.  Such a mood however might be present only inside the option players because of the price reaching the previous high and seems to not be supported by neither the analysts recommendations, nor the general market participants as shown by the picture in the beginning of this article.

The short interest on the stock however has been falling since the second half of June 2012 which would partly explain the increase in price experienced since then. What that falling short interest would suggest is that there would be a smaller possibility for a price increase due to short covering.

The open interest configuration shows there is a concentration of put options around the $640-670 level which could serve as a resistance. The calls are concentrated in the $500-640 range.

With all those remarks a further strong increase of the Apple's stock price like the one we witnessed till the April 2012 could not be so probable in near term. 

In any case a suitable stop loss order would limit the possible loss on either side of the trade.

40 bits of trading wisdom

Here is another post aimed at spreading practical wisdom about trading. Similarly to the 38 steps to becoming a trader one, I found this again in my remarks. After some google-ing the original source link seems to point to Traders-Talk forums at http://www.traders-talk.com/mb2/index.php?showtopic=17232

Most of the items below are really valuable. The point is they have to be followed in real to bring value. Any comments are welcomed.

Forty Bits of Trading Wisdom
Condensed from Capitulation's 40 posts.

1. If you want to stay in this business, leave "hope" at the door and stick to your stops.
2. When you get into a trade, start looking for signs right away that you are wrong. If you see them, then get out before your stop is hit.
3. Trading should be boring, like factory work. If there is one guarantee in trading, it is that "thrill seekers" get their accounts grinded into nothing.
4. It helps to just follow a handful of stocks on any given day. Don’t jump on the “next hot thing.” Develop your plan and stick to your plan.
5. You are trading other traders, not the actual stock. You have to be aware of the psychology and emotions behind trading.
6. Be very aware of your own emotions. Irrational behavior is every trader's downfall. If you are yelling at your computer screen, imploring your stocks to move in your direction, you have to ask yourself, "Is this rational?" Ease in. Ease out. Keep your stops. No yelling.
7. Watch yourself if you get too excited—excitement increases risk because it clouds judgment.
8. Don’t overtrade—be patient and wait for 3-5 good trades.
9. If you come into trading with the idea of making “big money,” you are doomed. This mindset is responsible for most accounts being blown out.
10. Don’t focus on the money. Focus on executing trades well. If you are getting in and out of trades rationally, the money will take care of itself.
11. If you focus on the money, you will start to impose your will upon the market in order to meet your financial needs. There is only one outcome to this scenario: you will hand over all of your money to traders who are focused on protecting their risk and letting their winners run.
12. The best way to minimize risk is to not trade. This is especially true during the low-volume “chop and slop” found during the afternoon trading session. If your stocks are not acting right, then don't trade them. Just sit and watch them and try to learn something. By doing this you are being pro-active in reducing your risk and protecting your capital.
13. There is no need to trade 5 days per week. Trade 4 days per week and you will be sharper during the actual time you are trading.
14. Refuse to damage your capital. This means sticking to your stops and sometimes staying out of the market.
15. Stay relaxed. Place a trade and set a stop. If you get stopped out, who really cares? You are doing your job. You are actively protecting your capital. Professional traders actively take small losses. Amateurs resort to hope and sometimes prayer to save their trade. In life, hope is a powerful and positive thing. In executing a trade, hope is a virus that can infect and destroy.
16. Be right on day one or get out. Don’t take a “red” position home overnight.
17. Keep winners as long as they are moving your way. Let the market take you out on a trailed stop.
18. Money management is the secret to success. Don’t overweight your trades. The more you overweight a trade, the more “hope” comes into play when it goes against you. Hope is to trading as acid is to skin. The longer you leave it in place, the more painful the outcome will be.
19. There is no logical reason to hesitate in taking a stop. Re-entry is only a commission away.
20. Professional traders take losses. Being wrong and not taking a loss does damage to your equity and your mind.
21. Once you take a loss you forget about the trade and move on anyway, especially if it is a small one. Do yourself a favor and take advantage of any opportunity to clear your head by taking a small loss.
22. Never let one position go against you by more than 2% of your account equity. The larger the position, the tighter the stop.
23. Use daily charts to get an idea of the 30-day trend, hourly charts to get an idea of the 1-day trend, and 5-minute charts to establish your entry points.
24. If you are hesitating to take a position, that indicates a lack of confidence that is not necessary. Just get into the position and place a stop. Traders lose money in positions everyday. Keep them small. The confidence you need is not in whether or not you are right, the confidence you need is in knowing you will stick to your stop no matter what. Therefore you can actually alleviate this hesitancy to “pull the trigger” by continually sticking to your stops and reinforcing this behavior.
25. Averaging down on a position is like a sinking ship deliberately taking on more water.
26. Build up to a full position as it goes your way.
27. Adrenaline is a sign that your ego and your emotions have reached a point where they are clouding your judgment. Realize this and immediately tighten your stop considerably to preserve profits or exit your position.
28. Look for opportunities not to trade.
29. Most of the time, you want to own the stock before it breaks out, then sell it to the momentum players after it breaks out. If you buy breakouts, realize that professional traders are handing off their positions to you in order to test the strength of the trend. They will typically buy it back below the breakout point—which is typically where you will set your stop when you buy a breakout. Greed comes into play when the stock breaks out again, and the momentum players are forced to chase it and “pay up” for the stock. Be aware of how trends are established and use that to your advantage to enter and exit positions.
30. Embracing your opinion leads to financial ruin. When you find yourself rationalizing or justifying a decline by saying things like, “They are just shaking out weak hands here,” or “The market makers are just dropping the bid here,” then you are embracing your opinion. Don’t hang onto a loser. Cut your losses. You can always get back in.
31. Unfortunately, discipline is typically not learned until you have wiped out a trading account. Until you have wiped out an account, you typically think it cannot happen to you. It is precisely that attitude that makes you hold onto losers and rationalize them all the way into the ground.
32. Siphoning out your trading profits each month and sticking them in a money market account is a good practice. This action helps to focus your attitude that this is a business, and your business should generate profits on a monthly basis.
33. "Professional traders only place a small portion of their assets into 1 position. Or if they take on a large position, then they strictly limit their risk to 1-2% of their current equity. Amateurs typically place a large portion of their assets into 1 position, and they give it "room to move" in case they are actually right. This type of situation creates emotions that ruin accounts, while professionals are able to make decisions and cut losses because they strictly define their risk."

More pro and amateur differences…


34. Professional traders focus on limiting risk and protecting capital. Amateur traders focus on how much money they can make on each trade. Professionals always take money away from amateurs."
35. Don't be a hero…
    In the stock market, heroes get crushed. Averaging down on a losing position is a “heroic move.” The stock market is not about blind courage. It is about finesse. Don't be a hero.
36. School of hard knocks in the only way...
    Sadly, traders never learn the importance of “the rules” until they have blown their account out of the water. Until you “lose it all” it never seems that important to have to follow the basics of professional trading. (Cut your losses, let your profits run, etc).
37. The market reinforces bad habits…
    The market reinforces bad habits. If early on you held onto a loser that went against you by 20%, and you were able to get out for breakeven, you are doomed. The market has reinforced a bad habit. The next time you let a stock go against you by 20%, you will hang on because you have been taught that you can get out for breakeven if you are just patient and hang on long enough. It doesn’t matter if the stock has just been upgraded or had a favorable write up in Forbes. You still need to protect your capital. In reality, today’s price is the true indication of the value of the stock, as it is the price people are willing to pay. Instead of rationalizing, control your risk by sticking to your stops.
38. Who is accountable for your trades?
    The true mark of an amateur trader who is never going to make it in this business is one who continually blames everything but his or herself for the outcome of a bad trade. This includes, but is not limited to, saying things like:
    
    • The analysts are crooks
    • The market makers were fishing for stops.
    • I was on the phone and it collapsed on me.
    • My neighbor gave me a bad tip.
    • The message boards caused this one to pump and dump.
    • The specialists are playing games.
    The mark of a professional, however, sounds like this:
    • It is my fault because I traded this position too large for my account size.
    • It is my fault because I didn’t stick to my own risk parameters.
    • It is my fault because I really don’t know how to trade.
    • It is my fault because I know the market makers can legally take some of my money, and I knew that going into this.
    • It is my fault because I know there are risks in trading, and I didn’t fully comprehend them when I took this trade.
    The obvious difference here is accountability. For amateurs, everything having to do with the market is “outside their control.” That is not reasonable thinking, and really just points to an individual who has, probably for the first time, had to confront their “real self” as opposed to the perfect self or idealized self they have constructed in their mind. This is also known as “living in a fog.” A person can drift around through life in their own private world, where they are pretty special and can do no wrong. Unfortunately, trading rips off this mask, because you cannot dispute what has happened to your account. This is also known as “confronting reality.” For many people, when they start trading they are suddenly confronting reality for the first time in their lives. Just to see the world as it really is requires a lifetime of training, and for many people trading the stock market is their first real step in this journey. Some people say that traders are born, not made. Not so. If you choose to see the world as it is, then you can start trading successfully tomorrow.
39. Pro vs. amateur trader difference…
    Amateur traders always think, “How much money can I make on this trade!” Professional traders always think, “How much money can I lose on this trade?” The trader who controls his or her risk takes money from the trader whose head is in the clouds.
    CONTROL YOUR RISK
40. Focus on controlling risk...
    At some point traders realize that no one can tell you exactly what is going to happen next in the market, and that you can never know how much you are going to make on a trade. Thus the only thing left to do is to determine how much risk you are willing to take in order to find out if you are right or not. The key to trading success is to focus on how much money is at risk, not how much you can make.

And yes folks, that concludes the 40 bits of trading wisdom. I hope everyone enjoyed them and most importantly, I hope one person out there has taken these bits to heart and that they have made a difference with someone.
To summarize the important points:

• Control your risk by setting your parameters BEFORE you get in the trade.
• Have a plan with each and every trade and stick to your plan.
• Stick to your stops.
• Don't blame others when a trade goes bad, but rather learn from it so it hopefully won't happy again.
• Don't bet the farm! Allocate only a small percentage of your capital to each trade.
• Set a stop with each and every trade.
• Leave hope at the door and stick to your stops.
• Never add to a losing position....averaging down is like a sinking ship deliberately taking on more water.
• Do not yell at your screen trying to "will" the markets in your direction. Be calm, ease in, ease out, no yelling.
• Trading should be boring like factory work. If you are looking for excitement then trading is not for you because you will wipe out your trading account.
• If you get stopped out, so what? Professional traders actively take small losses all the time...it's part of the game. Re-entry is only a commission away.
• Once you are in a trade, immediately begin looking for signs that you are wrong. If something doesn't look right or the reasons that you entered the trade have changed GET OUT before your stop is hit.

Originally posted by Capitulation

38 steps to becoming a trader

Following is a list of most of the steps every successful trader takes during their life. I recently found it in my remarks. I'm not sure of the author of the list so if any of my readers would know, please write me so respectful credits might be given. Happy reading, successful trading and don't forget that things always change! :)

38 steps to becoming a trader

They are as follows:

1. We accumulate information - buying books, going to seminars and researching.
2. We begin to trade with our 'new' knowledge.
3. We consistently 'donate' and then realize we may need more knowledge or information.
4. We accumulate more information.
5. We switch the commodities we are currently following.
6. We go back into the market and trade with our 'updated' knowledge.
7. We get 'beat up' again and begin to lose some of our confidence. Fear starts setting in.
8. We start to listen to 'outside news' and to other traders.
9. We go back into the market and continue to 'donate'.
10. We switch commodities again.
11. We search for more information.
12. We go back into the market and start to see a little progress.
13. We get 'over-confident' and the market humbles us.
14. We start to understand that trading successfully is going to take more time and more knowledge than we anticipated.
    
    MOST PEOPLE WILL GIVE UP AT THIS POINT, AS THEY REALIZE WORK IS INVOLVED.
    
    
15. We get serious and start concentrating on learning a 'real' methodology.
16. We trade our methodology with some success, but realize that something is missing.
17. We begin to understand the need for having rules to apply our methodology.
18. We take a sabbatical from trading to develop and research our trading rules.
19. We start trading again, this time with rules and find some success, but over all we still hesitate when we execute.
20. We add, subtract and modify rules as we see a need to be more proficient with our rules.
21. We feel we are very close to crossing that threshold of successful trading.
22. We start to take responsibility for our trading results as we understand that our success is in us, not the methodology.
23. We continue to trade and become more proficient with our methodology and our rules.
24. As we trade we still have a tendency to violate our rules and our results are still erratic.
25. We know we are close.
26. We go back and research our rules.
27. We build the confidence in our rules and go back into the market and trade.
28. Our trading results are getting better, but we are still hesitating in executing our rules.
29. We now see the importance of following our rules as we see the results of our trades when we don't follow the rules.
30. We begin to see that our lack of success is within us (a lack of discipline in following the rules because of some kind of fear) and we begin to work on knowing ourselves better.
31. We continue to trade and the market teaches us more and more about ourselves.
32. We master our methodology and our trading rules.
33. We begin to consistently make money.
34. We get a little over-confident and the market humbles us.
35. We continue to learn our lessons.
36. We stop thinking and allow our rules to trade for us (trading becomes boring, but successful) and our trading account continues to grow as we increase our contract size.
37. We are making more money than we ever dreamed possible.
38. We go on with our lives and accomplish many of the goals we had always dreamed of.

Investment Thoughts

"The most crucial out-of-sample test is future investment success. If the strategy becomes known to other investors, prices may adjust so that the strategy, however well tested, does not work in the future"
(Level I Volume 1 Ethical and Professional Standards and Quantitative Methods , 6th Edition. Pearson Learning Solutions p. 571)

But people always want a strategy that works best for everyone... The best strategies are kept secret not because of pure selfishness but simply because of common sense. Knowledge transforms reality and that knowledge may then become obsolete. Eventually everything slips away at some moment. That's why we live and work in a constantly developing environment.

Is CAPE of above 23 extraordinary for a bullish stock market?

In his article "Has the Nearly 2-Yr-Old Bull Market Topped Out?" the respected by me Mark Hulbert speaks about his concerns that the current bull market might be surpassing its sound valuation levels and it might be near its end.

The author uses a CAPE measure to prove his point. CAPE is a modified P/E ratio which was made popular by Robert Shiller, a Yale University professor who uses it in his book "Irrational Exuberance". CAPE stands for "Cyclically Adjusted Price Earnings" and it differs from the general P/E in that its denominator (the E) is average inflation-adjusted earnings over the trailing 10 years. The data the article cites could be found on the Mr. Shiller's website. It's a very complete data set in the Excel file format.

According to Mr. Hulbert's calculations the current CAPE of 23.7 (as of the date of his article) is considerably higher than the average CAPE of 18 for the bull markets of the last century which he examines. The conclusion is that it would be hard to argue that the market is undervalued or even fairly valued.

Now my remarks.

• What Mr. Hulbert is missing is that as a rule of thumb a bull market could surpass a lot its sound valuation levels especially in its extreme points before it tops out and converts to a bear market. And such a conversion doesn't happen overnight. We know a bull market will stop but we usually don't know exactly what time will pass ebfore it really happens. Exiting too early could save your money but also would mean a lot of unrealized profits. Usually choosing one over the other is a matter of personal preferences and attitude.
  
  
• Now as we stand on the understanding that a higher CAPE is a normal phenomenon for a bullish market, it would be nice if the article of Mr. Hulbert shows at what ratio the average CAPE the author calculated was overrun by the real CAPE for the years of the bull markets it discusses. But it doesn't. It just states the current CAPE is higher than the avegare one.
  
  If we dig the data from Mr. Shiller's file we see that the current month CAPE is 23.69 and it's indeed higher than the average 18 Mr. Hulbert calculated. But during 2007 there was noticed a CAPE of above 27 (50% above the average value of 18), during 2004 - above 26-27 (again about 50%), during 1999-2001 - above 40 (122%)! In all the period between the late 1995 to 1999 CAPE values were above 24 with an average value of about 31.5 (75%).
  
  So the current CAPE is 30% above the average of 18 but we've seen even higher differences during the past 15 years. Seen in that light a 23 CAPE doesn't seem so extraordinary.
  

If you are a strictly value oriented investor I understand that leaving your money in a market that you believe is overvalued is hard and against your logic. Not everyone in the market is such a type of investor though. That makes the market move and the imperfections present opportunities.

Macro analysis on the US Dollar value - May, 2010

The current uptrend of the Dollar made many people talk about the possible failure of the EU zone, the parity between the Euro and the US Dollar and even brought ideas of Euro disappearing as a common European currency.
Let's see some figures.
The Trade balance of USA for the last 3 years (since the crisis began) shows that the periods of US Dollar gaining value are accompanied by decreases in the country's import and export of goods and services.

Plot this into the current Forex market conditions and the macro economic data from USA. Consider the following table of quarterly US GDP and EUR/USD (Euro/Dollar) graph (click on the graph for a better view).

Table 1 - USA GDP

14	Net exports of goods and services	2009 I	2009 II	2009 III	2009 IV	2010 I
15	Exports	-29.9	-4.1	17.8	22.8	5.8
16	Goods	-36.9	-6.3	24.6	34.1	6.7
17	Services	-13.6	0.1	5.6	2.6	3.8
18	Imports	-36.4	-14.7	21.3	15.8	8.9
19	Goods	-41.0	-16.5	25.1	20.3	9.0
20	Services	-11.5	-7.5	7.0	-1.9	8.7

EUR/USD graph

The US Dollar for the last 5 months got near its highest levels since the start of the crisis and for the first quarter of 2010 the USA trade balance from the GDP table shows a lesser increase than the one marked for the previous quarter (in which the US Dollar was near its lowest level since the crisis start). Following this logic, the second quarter could prove identical or worse results.
An interesting conclusion from this comparison is that even with the higher value of the dollar the US economy was not able to achieve a higher growth of the money inflow to the country from foreign trade compared to the last quarter. So generally a weaker Dollar works better for the export/import businesses. Especially in a situation where the domestic consumption is not as strong as desirable.

Surely the strong Dollar is not the only obstacle in front of the USA sustainable growth. But in the current US economic policy of "easy money" it doesn't seem to please anyone but maybe the big petroleum companies which could have gained from both the increase of crude oil price and the increase of the Dollar value.

The current policy of FED has proved to be actively in favor of using monetary measures to expand consumer spending. There are no signs it will be changed in the near future. Basically this means pouring more money in order to stimulate spending relying mostly on the Keynes multiplier.

With all that said the current stock market and Forex market situation seems perfectly fit. A possible direction would be an increase of the available US Dollars on the market which will achieve two goals - stimulate (even if considered as being an artificial stimulation) domestic spending and bringing down the US Dollar value against the Euro (which happens to be the major currency it values against). The lesser value of the US Dollar would again increase the activities in foreign trades area and in turn would increase its share in the US GDP. As most of the major companies traded on the US stock exchanges are doing an international business this would reflect in possible increase of their financial results.

Financial Wisdom

It's a good thing to learn from other people's experience and wisdom. Often it's not so easy though. In investing and finances as in almost every other area of life we all learn best from our own mistakes. Unfortunately sometimes the price is too high.
Here is a collection of smart quotes we could learn from. The list will be updated from time to time.

• "I often remind our analysts that 100% of the information you have about a company represents the past, and 100% of a stock's valuation depends on the future." Bill Miller


• "Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." Warren Buffet


• It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. J. Livermore


• The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. J. Livermore

All the above Livermore quotations are from the book "Reminiscences of A Stock Operator".

Hedging with options - a simple explanation

Hedging simply means an attempt to protect your investments from a loss.

There are cases in which you might want to stay in the market (or in your stock positions) even if you expect a short-term market movement against your holdings. In such times you might need to hedge your positions in order to protect your money (or investments). The reasons could vary - be it the simple will to escape taxation on short-term investments or if you are not sure enough if the profitable movement will continue and you want to lock some profit in.

Options are one of the most widely known tools for hedging. To put it simply the options give you ability to lock in the current price level of your holdings. For that protection you pay a price which usually is the current market price of the particular option.

• If you own some stock and expect its price to decline for some time you can buy a PUT option. This strategy is known as "protective put" or "married put". Such PUT option will give you the right to sell the stock to the writer (seller) of the option at particular price (called the Strike price). In the case of hedging the point is that the strike price would be around the particular price that you want to hedge. Options are standardized contracts which trade by 100, i.e. one put option gives you right to sell 100 shares.
  
  An example:
  
  Let's say you own 500 shares of company XYZ. Their current market price is $15. You bought them at $10. So till now you have an unrealized profit of $2500 (not counting any commissions, etc). You can look at the options available for your stock and choose the PUT option whose strike price is closest to $15. Sometimes there could be only options for different prices - above and below your hedging price (the current market price of the stock). The option whose strike is above the stock market price (that option is called In-The-Money) will be more expensive than the PUT whose strike is below the current market price (the Out-Of-The-Money option). In that case you should choose what you prefer - to pay more and get even a better price than the current market price or pay less and wait for the option to get in the money. Let's say you get the out of the money Put whose strike is at $14 and is sold for $0.5 per option. As you own 500 shares of XYZ you would like to get 5 Put contracts which give you the right to sell 500 shares at $14. Those 5 options would cost you $250. So you give $250 and lock the $14 price level for your stock holdings. In the worst case (when the price goes below $14) you would limit your profit to 500 x 4 - 250 = $1750 and for a definite time (the time till the expiration date of the option) you will eliminate the risk of loss from a further decline in the stock price.
  
• There is an exotic and more aggressive hedging against a short-term drop in the price of the underlying stock - shorting the Call options of the stock. The point is that usually (but not always!) the price of the In the Money Call whose strike is close to the current market price of the underlying stock tends to drop sharply if it goes out of the money.
  The possible profit (which will compensate your loss from the underlying stock) from such a strategy is limited by the price at which the call option is sold short minus the price at which you cover your short options position at a later time. A speculator could also profit from the leverage which options provide compared to the price of the stock itself.
  The loss on the other hand in this strategy could be unlimited if the price of the underlying stock starts to grow and you still have the short calls position opened. All that makes this a complicated and a risky strategy and thus not always suitable for simple hedging purposes.
  
  An example:
  
  If the current underlying price is $13, the price of a $12 strike call option could be $1.05. If you have 1000 shares you could sell short 10 such calls. That would get you $1050. On the next day or two the price of the underlying goes below the $12 limit and stops at $11.80. The loss from the underlying is $1200. The calls could be priced at $0.15. If you close the short position your profit from it would be $900. The whole loss on your investment goes to $1200 - $900 = $300. So by shorting the calls in this example your loss could be $300 and not $1200.
  On the other hand one could short a bigger amount of calls and thus even collect a profit at the end.
  
  Often the choice whether to use protective Puts or to short the Calls depends on the option's delta - that is how much the option's price would change if the price of the underlying stock experiences a change of $1. The deltas are constantly changing and could be checked on the CBOE site.
• A nice strategy in which one could profit from a possible upward movement of a stock while still locking the current price level of the underlying is to simply buy an ATM Call and sell the shares owned. The money from the sell could be put in a risk-free investment. That way the current profit is "locked in" but the investor still would profit from a possible upward movement. The potential loss is limited to the amount of the premium paid for the option while the profit could equal the profit from the rise of the stock price plus the income from the risk-free investment.
  

Hedging with options is not so complicated as trading the options themselves but it still contains a higher level of risk and complexity. Options are not suitable for everyone and as they are more risky tool you should know what you do when you use them even if it's only for hedging of your current stock holdings. You are warned! :)

Below are some links about options:
Wikipedia
Shaeffer's Research
Options Basics: Introduction
Equity Option Strategies at CBOE

S&P 500 technical review

Financial markets could present us a series of sideway movements...

The S&P 500 index presents some interesting movements now. On the daily graph at the end of January there was a bullish divergence formed (the red lines on the graph below) that drove the value of the index to its current level. Now the index continues to climb. Still a break above its previous resistance level around 1150 (the horizontal blue line) doesn't seem very likely. There is a chance that we have a day or more of climbing but a bearish divergence starts to be appearing.

Apart from the possible bearish divergence the weekly graph shows that Stochastic has some more time to go north so this also supports the view that we might see some higher levels ahead. The other indicators keep the warning sign on and limit a possible upward movement as it can be seen on the graph below.

The monthly graph is the most interesting one today. What can be seen there is the nowadays situation looks very much like the one the index experienced in 2003. Even the indicators have quite similar form.

There's pretty much a chance for the things to repeat. That would mean a hard year filled with ups and downs with a breakage on the upside at the end. Although for the whole year we might see a retreat to at least 1068/60 where are the EMA30 and EMA9. Next level are around 1025/30. To put it simple - a range between 1025 - 1150 could be expected for the year ahead.

Citigroup (C) stock is with a positive risk/reward profile

A notice on the Fly on the Wall website from today reads that Deutsche Bank believes the risk/reward ratio on the shares of Citigroup is positive. The bank reiterated its Buy rating on the Citigroup stock with a price target set at $5.50. Deutsche Bank expects that when the government releases its shares in Citigroup there will be a renewed interest in the bank stock.

This seems logical as when you expect there is a big seller ahead you don't rush in and buy. Especially if you don't see many more big enough like you to do it. But as the time passes by, some of your competitors get in. As the chances of a complete loss of your investment become lesser, you are more willing to put some money on a positive risk/reward ratio. Which could be somewhat confusing as even a ratio of 3/1 is still positive. But the meaning of the "positive risk/reward ratio" in investing is slightly different than the maths formulas.

A positive risk/reward ratio means that the amount you are expecting to win is more than or equal to the amount you are willing to lose on a single deal. So a positive risk/reward and a price target of $5.5 means that the maximum loss Deutsche Bank sees in the Citi stock is about $2.05 (according to current prices). So basically they don't believe the stock will fall below $1.4. Which still is quite a fall. Such a big fall does not seem to be supported by the graphs of the stock though.
On the other hand this could also be interpreted as they don't expect the bank to fail as an institution and default which were the main fears which brought the price to the current levels in the midst of the crisis.

Time will tell but the fact stays that after Goldman Sachs initiated their coverage of Citi (even with a neutral rating) earlier in the month another big analyst speaks aloud about the Citi stock.

Downloading Financial Data

This is a bit more technical post but I hope it will be helpful to someone.

Downloading raw financial and market data for the stocks you follow to your own computer gives you ability to manipulate it in any way you'd like and to create your own unique trading systems. It could give you a chance to test systems and trading methods with historical data and choose the one that best suits your style and vision toward the financial market.
The data could be downloaded from the web as a comma separated file (.csv) and then imported in your application, be it excel or any other of similar kind. The usual problem with the download link the websites offer is that the file you download will contain only the types of data the website decided to put in. As with the data you could download from the Quotes section of finance.yahoo.com - the download link gives you a file with the company stock symbol, the price of the last deal, the time of the last deal, the change (in percent), open price, high,low and volume. These data types are determined by the values sent to the server through the link which in this case are "sl1d1t1c1ohgv". The result would be a row similar to the following one:

"A",29.17,"1/22/2010","4:00pm",-1.35,30.30,30.35,29.09,3049371

The Yahoo interface however has a much wider capabilities and it could be useful to know them. Below is a table with variables which could be sent to the website and each of them will result in different type of data to be returned to you or your application.

a	Ask	a2	Average Daily Volume	a5	Ask Size
b	Bid	b2	Ask (Real-time)	b3	Bid (Real-time)
b4	Book Value	b6	Bid Size	c	Change & Percent Change
c1	Change	c3	Commission	c6	Change (Real-time)
c8	After Hours Change (Real-time)	d	Dividend/Share	d1	Last Trade Date
d2	Trade Date	e	Earnings/Share	e1	Error Indication (returned for symbol changed / invalid)
e7	EPS Estimate Current Year	e8	EPS Estimate Next Year	e9	EPS Estimate Next Quarter
f6	Float Shares	g	Day’s Low	h	Day’s High
j	52-week Low	k	52-week High	g1	Holdings Gain Percent
g3	Annualized Gain	g4	Holdings Gain	g5	Holdings Gain Percent (Real-time)
g6	Holdings Gain (Real-time)	i	More Info	i5	Order Book (Real-time)
j1	Market Capitalization	j3	Market Cap (Real-time)	j4	EBITDA
j5	Change From 52-week Low	j6	Percent Change From 52-week Low	k1	Last Trade (Real-time) With Time
k2	Change Percent (Real-time)	k3	Last Trade Size	k4	Change From 52-week High
k5	Percebt Change From 52-week High	l	Last Trade (With Time)	l1	Last Trade (Price Only)
l2	High Limit	l3	Low Limit	m	Day’s Range
m2	Day’s Range (Real-time)	m3	50-day Moving Average	m4	200-day Moving Average
m5	Change From 200-day Moving Average	m6	Percent Change From 200-day Moving Average	m7	Change From 50-day Moving Average
m8	Percent Change From 50-day Moving Average	n	Name	n4	Notes
o	Open	p	Previous Close	p1	Price Paid
p2	Change in Percent	p5	Price/Sales	p6	Price/Book
q	Ex-Dividend Date	r	P/E Ratio	r1	Dividend Pay Date
r2	P/E Ratio (Real-time)	r5	PEG Ratio	r6	Price/EPS Estimate Current Year
r7	Price/EPS Estimate Next Year	s	Symbol	s1	Shares Owned
s7	Short Ratio	t1	Last Trade Time	t6	Trade Links
t7	Ticker Trend	t8	1 yr Target Price	v	Volume
v1	Holdings Value	v7	Holdings Value (Real-time)	w	52-week Range
w1	Day’s Value Change	w4	Day’s Value Change (Real-time)	x	Stock Exchange
y	Dividend Yield

So a request to an url like http://download.finance.yahoo.com/d/quotes.csv?s=A+AA+AAPL&f=sohgl1v&e=.csv will give you a .csv file with the following content:

"A",30.30,30.35,29.09,29.17,3049371
"AA",14.18,14.18,13.33,13.40,84478416
"AAPL",206.78,207.50,197.16,197.75,31491696

Notice how the particular companies whose stock you would like to get the data for are written with a plus sign between them. That way you can get data for almost any stock you want. You can also download data for all companies in indexes such as S&P500 - the symbol for that would be "@%5EGSPC" which is to be put instead of the companies symbols in the URL. Yahoo has some limitations to the number of companies you can download data at once so you should respect that number.

The data could be downloaded directly to your favorite application. On the net there are some already prepared .xls files like those on gummy-stuff site. If you know how to make your own macros in .xls or similar files you can perfectly organize your own system and track the data you want.

Several ways to extend your exposure to the market

In bear markets no one wants to have much exposure to the markets. That is if you don't feel comfortable in taking short positions. If you like them, it's better to be as much exposed as you could. But even in that case you  usually don't need extra cash but just enough shares from which you could borrow.

In a bull market the more money you put in it, the more you could gain. The problem is that sometimes you don't have enough free cash to input. In times like this one option you may choose is to extend your leverage. A good thing about today's economic world is you don't have always to use your own money to get more share of the market.

N.B. An important notice about leverage is that along with the ability to extend your long positions without adding your own extra cash, leveraging increases the risk of losing all your money. So it should be used carefully and only by persons who know what they are doing.

Leveraging basically means to extend your buying power by some additional cash. A leverage level of 2 to 1 would mean that you operate with twice the money you own and half of that money is yours while the other one is borrowed. For that borrowed part you usually pay interest rate but it gives you the ability to own twice as more quantity of the shares or other type equity as you would own without the additional money. Respectively a leverage level of zero or 1 would mean that you operate only with your own money.

The simplest way to increase your leverage is to use borrowed money. Apart from the any obvious ways to borrow money you could find any of your local banks offering a special deal called "repo deal". You can check some definition of repo deals but basically these deals present a contract on the basis of which you get money that is secured by the shares you own. That way in any case you fail to make your payments the bank could sell your shares in order to return the money it gave you. So in a bear market this could present a very significant risk to your holdings. This could not be the case in a bull market though. Repo deals could be used for short term financing as well as for a long term one. They are a common tool for many corporations, banks or investment vehicles but in some countries and markets could be offered also to individuals.

A more common way to increase your leverage on a developed market is to arrange some level of margin with your broker. According to the level your broker offers you you could be able to extend your buying power significantly. The level vary and you may see a 10% leverage as well as 100% and more. A 10% margin means that your broker would allow you to buy shares for 10% more than the equity you have in your account with them. Respectively a 100% level would increase your buying power by 100%. Usually you pay a little interest on that borrowed money which is quite normal but you should keep it in mind when you calculate your results.

A relatively new way to get an extended exposure to the markets is by trading CFDs. The name comes from "contract for difference" and when you trade them you don't actually buy the underlying stock. A good explanation on what are CFDs will inform you about their nature, what risks and abilities they present and how they could be used. Usually the companies that offer CFD trading will give you access to not only the stock markets but also to Foreign Exchange market (FOREX). With CFDs you could normally get a leverage of 5 to 100 times your initial capital. This means that you could have a buying power of 100 times your own cash, i.e. if you put $1000 in a CFD account you could buy for $100000. This could increase your profits but increases your risk accordingly.

With every type of leverage one should be aware of the higher risk level they all present. The bank credit and the repo deals could present a lower risk than the margin account or CDF trading but there is still a risk. Simply put the risk in leveraging is that you could lose more than you have! On the other hand is the possibility to significantly speed up your profits.

Citi (C) price-volume relation, 2nd edition

At the previous post on Citi stock price volume relation the price of $3.66 was mentioned as possible. The next day (Jan 06, '10) that price was achieved as you may seen on the graph on the left. Comparing the close prices that makes 3.39% gain for a day. That $3.66 price was on the EMA 30 and not surprisingly the next day the price didn't advance more. It made only $0.01 advance on the close price but still the volume was the same as the previous days. During that day (Jan 07, '10) there were prices as high as $3.70 so that was a good time to sell if aiming at a very short time trades. For the two days the gain would be 5.11% which is not bad for the short period of 2 days.

Date	Price Change	Traded Volume
04.01.2010	+ $0.10	406m
05.01.2010	+ $0.13	602m
06.01.2010	+ $0.12	674m
07.01.2010	+ $0.1	672m
08.01.2010	- $0.07	624m

What could be expected next? Yesterday the price fell in accordance with the gloomy mood of the market. Still after touching the $3.50 level it managed to cover most of the loses and closed only 7 cents below the previous close. The volume was slightly lower. With that said there is a chance to see a recovery of the price soon.

Citi (C) price-volume relation

The first two trading days for 2010 presented an interesting picture of Citi trading. After lingering between $3.20 - $3.40 for several weeks, the stock seem to making an attempt to head on north. Still on the daily graph the Moving Averages are not positively crossed so the upward movement is not confirmed. But...

Consider the following data:

Date	Price Change	Traded Volume
04.01.2010	+ $0.10	406m
05.01.2010	+ $0.13	602m

The simple rule is:

When there is an increase in the price supported by an increase in the traded volume, the price will continue to go higher.

Having this in mind it wouldn't be a surprise to see another increase of Citi stock price tomorrow. At least to the Moving Average which is at $3.66. The traded volume could give an idea if that increase will continue.

Ford (F) Technical View - a Warning Sign?

The graphs of Ford (F) take quite a different shape than that of other major companies. Take a look at the monthly graph:

The highest levels of Ford stock price were achieved during 1999-2000 while for the majority of other stocks the highest levels occured before the last bump at 2007. What I see interesting at this graph is that now the price is on an important level - the one that played resistance twice back at 1988-1990 and again at 2007-2008. There lies the Moving average (100) too.

It's no secret the company has its strong sides like innovative auto lines, good management, nice public reviews, etc. There could be issues with the debt levels but as the Macro conditions improve those should not lead to any significant problems.Still this level of $10-12 could play the role of strong resistance for a while.

The reasons for such thinking might be seen in the next graphs although they might need some time to develope more sure patterns.

On the weekly graph we see the price making new highs while the MACD fails to make such. The Stochastic is in its overbought area but still hasn't turned down. So there might be some more time for goind up but the MACD divergence should be weighting even more. This view is supported by the fact that on the daily graph the situation looks pretty the same.

Having all that said it might not be a bad idea to watch the graphs in the next few days to see if they will develop any clearer patterns.

Citi daily review

The news about paying back the TARP money unleashed the selling pressure on the bank stock and the price fell bellow the support level of 3.80-84. One of the questions now is if the stocks being sold are from the 5 billion the government decided to sell. Still the government officials said they expect 13-14 billions profit from their investment in Citi. With about 7.7 billions of stocks such profit comes to an average increase in the price between $1.68 and $1.81 from the initial conversion price which was $3.25. If we accept that the government selling started after the news about paying the TARP was published this makes the best selling price at about $3.80. If the whole number of shares were to be sold at that price, which they were not because the total turnover volume didn't exceed a billion, the profit would be about $2.75 billions. So the gap of about $10 billions between that figure and the whole profit the government expects shoud be filled from somewhere. Or they could be possibly wrong in their expectations... With the government being left with about $2 billions of stocks, a profit of $10 billions goes to a price increase of about $5 from their initial price. So continuing this line of thought they could be expecting in the next 6 to 12 months a price of about $8 for the Citi stocks.
An interesting thing to mention is that Citi hasn't issued yet a price at which it will try to get its new shares sold in order to pay the remaining part of TARP. A reasonable thinking is that it waits to see where the price will be after the government ended with their selling. Another reasonable thinking might be that Citi needs a price as high as available because this will let it sell less shares. On the other hand the bank might not be in position to be able to "negotiate" a price at that deep level.

The above are just some thoughts derived from the movements and news on the market.. A hypothesis which could be right or wrong, the time will tell.

The technical daily view of the stock.

The price fell bellow the support level of $3.80. The volume of the last two days grows and the price falls accordingly. MACD points downward, Stochastic also. Today we could witness another fall. The next support level is around 3.30-20.

Citi technical overview

The short interest shares of Citi as of Nov 30 2009 are 215,990,623. At Nov 13 2009 they were 194,829,624. The average daily volume for the both dates are 236,804,540 and 340,175,866. We see an increase in the shorts as well as a bigger decrease in the average daily volume of the stock. So the sentiment towards the stock turns to be more negative.
The significant jump in the share's price that took place at August comes just after the Sold short shares thumbled from more than 1.2 billions to just about 300 millions.
Now we don't see so big amount of short sales so the fuel for a price advance (if any) should come from somewhere else.

As it is seen on this daily graph the recent news flow about the company is more intense than anytime in the past 3 months. The price falls. An interesting thing is the price is on a short-term support level and Stochastic is in the oversold area. But it is still pointing down. So the negative sentiment might be growing but soon we could see its end. At least in a short term.

 

On the weekly graph however we see a sort of sideway motion. Around the support line and currently beneath it. Still MACD is around zero and Stochastic pointing downward. The best scenario for bulls could be the price to form some positive MACD divergence but such one could take several weeks to arrive.

Stocks and the Dollar - will the negative correlation break?

I think it's quite possible.
The time of this breakage is questionable though. But all the ingredients seem to be in place. The government officials speak more often about a stronger dollar. The last Bernanke remarks are just in line. About half a month ago the president Obama spoke on a meeting with an advisory board about the fact that America has to find a way to sustain growth without so much debt. Last week US Treasury Secretary spoke about the same strong dollar topic in Japan.

But the officials are just the surface, I believe. They prepare the public and the markets. The real reasons could be drilled down to a simple "demand & supply".

The more quantity you have of something, the more cheaper it is. With all those trillions of Dollars poured into the system (mainly as M1 money! which means the real amount of money expected to reach the public is multiplied by some figure) it's no suprise the dollar is cheap. Yes, there are more complicated connections in the market but the bottom line stays the same. Remember the times when Central banks occasionally were starting to buy their own currencies in order to lift their price? Things might have not changed so much...

There are at least two ways to decrease the supply of dollars - increasing the base interest rate of FED and getting back at least a part of the dollars put in the system. Leave aside all the demand for dollars that might be generated from the market.

For the last several years the stronger the dollar went, the lower the US stocks fell. This has something to do with the notion that the cheaper the dollar is, the more U.S. export there is and that stimulates the U.S. companies. But this might no longer be the case. Because no matter how cheap you sell, you have to sell to anyone. And when the world demand simply vanished, the cheaper you sell, the more you lose.

Add to this the prices of oil which closely reflects the movement of the dollar. Since March 2009 the dollar has lost about 18% of its value against the Euro. The crude oil more than doubled for the same period. This could be one of the main reason why the US officials want a stronger dollar. No matter how big are their oil companies and how much they export, they can't fill the gap and the damage the high oil price does to the America's economy.

The macro needs seem to come first and before the needs of the financial system now. Especially when that system is sort of stabilized. That explains all the talks about alternative energy sources and the eco economy. But to develop such economy takes time. The one thing that could give America the needed time happens to be a stronger dollar. Yes, maybe most of the near-time future profits of export oriented companies (which happens to be most of the big companies on U.S. stock exchanges) will suffer a decrease but this could be a sacrifice needed.

The last point is when the stocks and the dollar start to move more or less in the same direction. Or at least in not so heavy negative correlation. Aroung and above zero could be the best :) But this seems to be a tough task. It will take time for sure.

An interesting month..

October was an interesting month for the Bulgarian Stock Exchange. Volatile and struggling.. At the beginning of the month the values of SOFIX on the monthly and weekly graphs flew away and above the Bollinger Bands. Stochastic indicator showed the index was overbought. So normally things /the growth/ started to slow down. The first shot was a big red candle on the daily graph. The next day it was followed by a huge gap and the index closed about 4% down from its absolute height formed the previous day. This was unexpected from some of the participants in the market /as usual/ and the index started to go up again as the buyers got more active. After a week it attacked its previous highest point but didn't succeed. At that time MACD crossed from the above the MACD trigger line. So on the daily graph the trend started to show negative attitude. From then till the end of the month there were two more upward movements. After the last one followed a sharp decline again. The fear spreads wider... :)

The weekly and monthly graphs still show positive trend /the MACD line is still above the trigger line/. Till these graphs are positive there are still chances for the bulls to try to stop a deeper decline. Will this be just an opportunity to sell at a higher levels? Time will show....

The month was full of interesting news from the investment market also. The IPO of the construction holding /the company works on infrastructure projects/ TRACE PLC. was 1480 times oversubscriben /!!! - a record for the Bulgarian Stock Market and maybe amoung the first 3 or 5 biggest in the world./ The shares are expected to be listed for trading in the midst of December. The money for that IPO was not to be deposited when giving orders for participating in the IPO so many people gave orders for sums that enormously exceeded the money they realy had. The players on the market expected the money released for taking part in the IPO to be poured back on the market. But according the conditions of the IPO there were not so much money drawn from the market and obviously not so much money to be put back in it. That could be one of the reason for the sharp declines that happened.

There were publications from some of the main investment intermediaries about the high prices /according the fundament/ at the market that stirred the spirits also. Some considered them as a manipulation of the market while others said it was fine that at last someone is brave enough to say it loud.

But as a famous person said "As one seeks the reasons, another one eats the fruits"... :)) Sometimes the reasons remain unknown. Or uncertain.. A newspaper says something, persons give interviews... The strugle is on its way.. :) The mind has to be free.

How to trade on the Bulgarian Stock Exchange

This is supposed to be some practical post about the things a foreigner has to do in order to trade Bulgarian stocks. I'm not going to cover the process in details, just give you some hints and links.

The first thing is that you need to sign a contract with an Investment Intermediary that is allowed to trade on the Bulgarian stock exchange. Here are two lists of such Investment intermediaries:

http://www.csd-bg.bg/EN_site/index.php?menu=4lenove
http://www.bse-sofia.bg/?page=List+of+BSE

The first one is from the Central Depository and the second one is from the Bulgarian Stock Exchange itself. There should'n be any diferences between them anyway...

You could ask any of the members about their specific conditions. One could prefer a bank ( like Raiffeisenbank (Bulgaria) EAD or UBB /a Member of NBG group/ , etc. ) or chose some of the Bulgarian Investment Companies ( like Karoll, Elana, First Financial Brokerage House/FFBH/, etc. ) Statistics show that banks make the biggers turnover while the investment houses take the prize for the number of trades. FFBH is known to have the biggest number of foreing clients through the investment houses but don't take this as granted.

After the contract is signed one has 3 options in order to trade on Bulgarian Stock Exchange.

The first is every time he or she decides to trade to give a call to the intermediary and to place the order. For someone this could be an unconvinient way...

So here comes the second one - the online trading platform /COBOS/ provided by the stock exchange. Ask your intermediary to make you a client of this platform and you can see in real time what trades are taking place, the quantity and the prices of the deals. Moreover you can place your own order electronically by this platform and they go streight to the stock floor. It's a flash application so one should be able to access it everywhere there is Internet. The stock exchange issues to you a certificate that identifies you as the person that made the contract and secures the connection between you and the stock floor so it's considerably safe.
One of the many advantages of this is the ability to do day-trading. If you place your orders by phone and not using COBOS you should wait the 3 days period for the settlement of the shares to be done. By COBOS this obstacle is gone.

The third option is to place your money in one of the many fast growing mutual funds offered by the asset managing companies in Bulgaria. The theme of mutual funds in this emerging market is a vast one and it deserves a separate post but to make it short - this is the fastest growing financial industry nowadays here. For only the last month it accumulated almost 150 mln leva and its assets are expected to surpass 1 bln till the end of the year. Still this makes only about 3 percent of the savings in banks. In Europe the figures are about 50-60%, and in Eastern Europe - about 30%. So imagine the growth it has ahead...
The main nonbanking financial institutions tha strive here are again Elana and Karoll - both managing more than 250mln assets in their mutual funds.

These are the main ways a foreign person could take part in this fast growing market. The last week Bulgarian Stock Exchange bought a new trading platform from Deutsche Boerse so we could expect new and easier ways for anyone willing to participate. So keep following the news.. :)