As always, RealMoney's bloggers were all over the market action this week, and we'd like to share the best of their recent commentary with readers of TheStreet.com. 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 the dangers of averaging down,
on finding the range and
on delinquent mortgages.
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, where you can see all the blogs -- and readers' comments -- in real time.
Rev Shark's Blog: Averaging Down Can Put You Down
Originally published on 6/13/2007 at 12:11 p.m. EDT
With the market recently starting to struggle a bit more, many market players are starting to average down into positions more aggressively. They take advantage of the weakness to lower their cost basis and to build up positions in stocks they like.
That can be a very good strategy if done in the right stocks in the right way, but it also is the approach that leads to the biggest losses. Most traders who blow up do so because they employed an averaging-down approach without some money management discipline to limit losses.
The problem that individual investors tend to have when averaging down is that they do it too fast and too big. They jump on the initial weakness in a stock like
in anticipation that it is going to bounce right back up.
When that doesn't happen, they add a little more and a little more and pretty soon find themselves with more shares than are comfortable. When the stock downticks yet again, they either can't handle the pain and take a healthy loss or they convince themselves the market is wrong and that they should just keep on buying.
The problems arise as the trade fails to work and the investor becomes increasingly emotional and less disciplined. When you start becoming angry at the market for not respecting an obviously great stock, you know you are getting in trouble.
If you employ an averaging-down approach to stocks, cultivate a high level of patience and make sure you have some sort of system in place to cut your losses at least partially so you don't get buried too deep. Ultimately, your No. 1 goal should be to stay in the game. Don't let one downtrending stock jeopardize that.
Steven Smith's Blog: Finding the Range
Originally published on 6/13/2007 at 5:45 p.m. EDT
Looks like if tomorrow's PPI inflation data comes in anywhere within the nine standard deviations of expectations, then both stocks and bonds will settle into a trading range for the remainder of the month. That means after today's action, in which once again the market turned green and bounded away, I expect the
to remain between 1480 and 1520, a 2.5% range for the next three weeks.
With the VIX, which declined 10% to 14.80 today, and the implied volatility of other index options still holding a nearly 35% premium above the 30-day historical volatility, I'm switching gears. I will be looking to establish net credit positions in July options against owning some longer-term options in what will amount to various forms of long calendar spreads. To look at IV vs. HV on the S&P 500 or any other equity product you can go to click on
this site and just type in the ticker.
Remember, aside from the belief that trading traditionally slows down during the summer, the fact is the July series has three weeks of data before second-quarter earnings start to flow. Plus, that includes the July 4 holiday week(end), essentially removing some trading days, causing traders to dial the clock forward to account for time decay.
The upshot is the past few days seem to confirm that the stock market, like most everything else, operates at an increasingly higher level of mechanical efficiency, and fundamental underpinnings that allow "corrections" to play out or are compressed into a few days rather than weeks or months. That means volatility spikes are fewer and further between, meaning option traders might need to make adjustments to their trading style or approach.
Until proven otherwise, it means being willing to make a contrary stand to catch the bulk of any big move. In the past, my rule of thumb when things looked overextended was take a deep breadth and wait for another 5% before standing in front of the train or trying to catch the knife. Now you only need to count to 10 or wait for a 3% move to feel confident about making a stand.
As discussed in
this article, volatility is a double-edged sword, and I'll admit I'm finding it challenging to determine what level of volatility is just right in providing trading opportunities within an environment or comfort zone that one doesn't fear getting their head handed to them on a daily basis.
This leads to one of the big reasons for the market resilience or contraction of time. Remember implied volatility is measured to express the artificial expansion or compression of time in the use of options. As hedge funds and institutional trading have come to dominate trading, their use of options as both a safety net and means of generating income has led to a low-volatility environment.
Individual investors, while not responsible for most of the daily volume, are crucial to the long-term health of the market. They have become more adept at using straightforward strategies, such as married puts or buying broad market protection by using options and ETFs, such as the
to gain low-cost downside protection. This has led to less panic and the ability to buy dips. This should not be confused with complacency or the fact that the economy, and most importantly the job market, is fundamentally sound.
Tony Crescenzi's Blog: Mortgage Lateness Not Terrible
Originally published on 6/14/2007 at 12:33 p.m. EDT
The Mortgage Bankers Association today released the results of its National Delinquency Survey, indicating that the mortgage delinquency rate for one-to-four-family units was 4.84% in the first quarter, down from 4.95% in the fourth quarter of 2006 and up from 4.41% a year ago.
The sequential decrease occurred despite an increase in delinquencies in the subprime sphere; highlighting the isolated nature of the problem to date, the delinquency rate for subprime loans increased 44 basis points (to 13.77% -- not a record). The rate of seriously-delinquent loans for one-to-four-family units increased just 2 basis points to 2.23%.
These figures seem low relative to recent market concerns over mortgage payments and might seem like a relief to some. The figures nonetheless are likely to worsen owing to tighter credit standards, higher market interest rates, weak home price trends and the resetting of rates for adjustable-rate mortgages.
Although delinquencies have not increased substantially, foreclosures and impending foreclosures increased sharply. A record percentage of mortgages foreclosed in the first quarter, 1.28%, up from 1.19% in the fourth quarter, a new record. The average since 1990 for this metric is 1.1%.
The percentage of loans entering foreclosure increased to 0.58% from 0.54% in the fourth quarter. The percentage of subprime mortgages entering foreclosure was 2.43% compared to 2.0% in the fourth quarter. Foreclosures of prime mortgages increased very slightly, to 0.25% from 0.24%, underscoring the idea that problems in the mortgage market have been heavily concentrated in the subprime mortgage sector.
According to the Mortgage Bankers Association, its National Delinquency Survey covers over 43.5 million first lien mortgages on one-to-four-unit residential properties, an increase of around 880,000 loans from the third quarter of 2006 and an increase of 2.2 million loans from a year ago.
The subprime sample of the survey now numbers a little less than 6 million loans, an increase of almost 200,000 from last quarter and it is up 440,000 loans from last year. These represent loan market growth as opposed to sample changes. The NDS now covers more than 80% of the approximate 50 million outstanding loans, including more than half of the outstanding nonprime market.