The three major indices ended the week with a whimper, with market players unsure of whether we're seeing the beginning of a bear market or just a correction. Traders could find plenty to worry about, including the possibility that subprime mortgage problems will trigger a consumer meltdown. However, higher-than-expected inflation data probably lessens the likelihood of a Fed rate cut.
slipped 0.4% on Friday and 1.4% on the week to close at 12,110.41. The
fell 0.4% Friday and 1.1% on the week to close at 1386.95, while the
fell 0.3% Friday and 0.6% on the week.
bloggers were all over the market action, and we'd like to share the best of their commentary this week with readers of the
. These posts best capture the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.
Let's take a look at
on whether technical analysis helps much in this market,
on what a Blackstone IPO really means,
on how to properly interpret option volume and
on providing clarity on the subprime question.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Rev Shark's Blog: Will Stocks Play by the TA Rule Book?
Originally published on 3/12/2007 at 9:15 a.m.
"A retentive memory may be a good thing, but the ability to forget is the true token of greatness."
As we contemplate a strong Monday morning open, the question we face is whether market players are going to forget the nasty bout of selling we suffered a little over a week ago. The selling that occurred was not minor -- there was very heavy volume and we had a level of negative breadth not seen since the market crashed in 1987.
To simply shrug off such dramatic action as if nothing of importance occurred would be a bit surprising from a psychological standpoint. Market players tend to remember acute pain. When they suffer a shock like we had there is a tendency to cut exposure and reduce risk, which often leads to more selling pressure after a brief rebound.
The bullish argument is straight-forward: There really wasn't any good reason for us to sell off the way we did. Nothing has changed. The issues with excess speculation in China, the Japanese carry trade, and shaky subprime lending in the U.S. are just minor hiccups that can be overcome by steady economic growth, low inflation and a huge amount of liquid capital looking for an opportunity to snap up bargains. Goldilocks is alive and well so there is no reason we shouldn't just jump straight back up as if nothing occurred.
The bearish argument is that the sharp dip that we experienced was a warning shot and we'd be foolish to ignore it. The issues that caused the selling are not inconsequential and have not gone away. What we have is just a bunch of hopeful dip buyers who are so used to a market that immediately bounces back from any selling that they are playing that game once again despite a change in circumstances. The bears are convinced the other shoe will drop but the bulls have heard that story many times in the past few months and it has been a consistent loser.
The technical picture is making things particularly difficult for prudent investors. What we have is a classic low-volume dead-cat bounce after a massive technical breach. The TA "rule book" is clear on this type of action -- it should not be trusted to last. Trapped longs and aggressive shorts should drive the market back to test recent lows and only then will we have a potential buy point.
Of course, the TA rule book here is painfully obvious to many and as traders position for a further pullback they set up conditions for us to climb the "wall of worry." As we continue to ignore the TA rule book, overanxious shorts are forced to cover and underinvested longs add exposure as they worry about missing out on a run. The irony is that the longer we hold up and the quicker investors forget the recent dip, the less obvious the TA rule book becomes, and the more likely we will eventually see another pullback.
We are at a tricky juncture right now as finding good entry points is extremely difficult following a low-volume bounce over the past four days. On the other hand, the market is holding in a very stubborn way and if you have rushed to build short positions you are probably feeling some anxiety.
The key here is to stick to your discipline. Don't chase bad entry points because of concerns the market will go straight up and don't be overanxious about putting on short positions while this bounce remains so stubbornly sticky. Cash and very short-term trades aren't a bad choice at this juncture.
We have a strong open following strength overseas as the yen weakens and China stabilizes. Good economic data in the UK and Japan also seem to be helping matters. Futures are already off their early highs and we'll see if we are getting the standard Monday morning gap up and failure. A lot of bulls are feeling more optimistic now and that may set up the conditions for the TA playbook to finally work as it's suppose to.
Cody Willard's Blog: Steer Clear of Blackstone
Originally published on 3/16/2007 at 12:10 p.m.
The topic is Blackstone Group. I'm just thinking out loud here, and would love a lot of feedback via comments below and
. Here goes:
files to go public, although nobody knows yet if the IPO will represent shares of the Blackstone Group itself or a Blackstone-managed fund. I think it's brilliant timing. Blackstone is taking something off the table and spreading its risk to the public while the trumpets of private equity are sounding.
What's really mind-blowing here is that the public is sucker enough to buy this stock from these guys, who obviously are smarter about when to buy and sell than the public is, given their outsized ownership of capital vs. the average Joe who'll buy their stock. More to the point, how about the fact that bankers are allowing these guys to use OPM (other people's money, including the bank's own money) as leverage to take these companies private though debt?
So let me get this straight: The private-equity guys have been whining to the press and hiring lobbyists to help change their image of being bad for the world. But they're now about to offload their equity onto the public, enriching themselves by using the multiple at which the market will value their earnings and assets to really become richer than most any individual on this planet could ever conceive.
And all the while, they're going to borrow a bunch of other people's money to put to work generating those earnings and assets. Borrow OPM to buy companies even as you sell your own assets to take money off the table.
the other day that I believe private equity is a sell here. Apparently the guys at Blackstone agree with me. They're selling to the public, right?
When the smartest guys in the room are selling to you, it's probably not the best time to buy. Put it this way: If the Blackstone gang really thought that their equity was a great investment here, do you think they'd want to sell? This isn't a tech company trying to raise assets to grow. These are some whiny rich dudes trying to cash out on the public while the cashing out is good.
The worst part is that they'll still whine about their poor perception among the public when this boom cycle finally reverses and the public realizes it has been had by Wall Street and its cronies again. People can and will explain how this is a great opportunity for the public to participate in private equity and so on, and certainly I do agree that more options for the public and more participation in capital markets is always a good thing -- in the long run. In the intermediate-term, though, I'm not sure this is anything but a bad setup.
Like I said though, selling equity in private equity is a great idea here. If Blackstone's selling, shouldn't you be?
Steven Smith's Blog: Decoding Corning's Calls
Originally published on 3/15/2007 at 3:36 p.m.
I'm seeing a large call option transaction in
, in which the $20 and $30 calls with the in the January 2008 expiration each traded 20,000 contracts. The trade was done as a spread in a block transaction in which someone bought the $20 calls and sold the $30 strike for a $3.50 net debit for the spread. This would appear to be someone establishing a very bullish position.
Readers often ask what criteria to use to determine the nature of reported option volume -- rightly pointing out that for every buyer there must be a seller -- or what identifies a trade as a spread or multi-strike transaction. Granted, unless you are the person executing the trade, it's hard to know for sure; you can only make an educated guess based on certain assumptions. I discuss some of the clues to use reading option action recently
Start checking a transaction by looking at prior open interest. Pay attention to time and sales to see when things transpired, the contract size and at what price the volume occurred. If there was little prior open interest and most of the volume occurred at the offer price in one large block trade, the transaction was probably an opening purchase, that is, someone initiating a new position. The people taking the other side or selling the options most likely are market makers who are simply facilitating the transaction, and usually they hedge immediately with the underlying stock.
In the Corning example above, if someone was indeed buying the call $20/$30 spread 20,000 times, that would equate to a net delta equivalent of being long approximately 900,000 shares. That means the market makers need to buy about 900,000 shares to have a delta-neutral hedge.
Today's volume in Corning is just more than 11 million shares, which actually are running slightly below the 15-million-share daily average volume. Of course, some of the hedging might occur through the purchase of other call options or through the sale of puts, but you see how a large call option purchase creates buying pressure on the stock.
As far as identifying this as a spread, again, checking the time and sales reveals that the volume in both strikes occurred at the same time and as single 20,000-contract trade.
On a related note,
CyberTrader platform will soon offer a feature that identifies trades as spread transactions. That will be a great tool because it will save the time of checking time and sales.
It also will clear up the confusion and aggravation when it appears that a trade has "printed" though your order. That is, spread transactions are executed at a net value, but may use prices from the individual strikes that are above or below the best bid or offer in one of the strikes. By identifying the volume as a spread, retail traders will have a clearer picture of why one of their single-strike orders was not filled, despite what appears to be massive volume at their price limit.
Tony Crescenzi's Blog: Clarity Builds on Subprime
Originally published on 3/15/2007 at 12:33 p.m.
The most important point that I would make with respect to the subprime dilemma is that investors everywhere are engaged in a discovery process, a process that is helping to restore calm to the financial markets.
When the subprime problems became front-page news, enormous uncertainties existed with respect to five key questions:
1. How big is the subprime market?
2. How much of the subprime market is at risk?
3. What amount of subprime loans are likely to default?
4. Who is left holding the bag -- which lenders will have to take writedowns?
5. Will the problems of the subprime spill over?
Answers to these questions are slowly being answered and a consensus is developing on most of them. Savvy investors are looking for the winners in the current dilemma.
Every major firm is trying to answer these questions for their clientele, and a wealth of information is pouring out and aiding the discovery process.
The consensus answers seem to be:
1. About 15% of the mortgage market, or about $1.5 trillion.
2. Several hundred billion dollars.
3. Between $50 billion and $100 billion.
4. Many names and they are nonbanks.
5. Still open for debate but not much yet.