five bloggers steered a course through the prolonged stress test that was the market this week, and once again this weekend, we'd like to share the "Best of the Blogs" with
readers. These posts best captured the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.
Now, let's take a look at
on a dynamic that's shaping this market,
on holding steady,
on Wall Street cannibalism,
on harnessing increased volatility and
on a factor that could influence the
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: This Market Action Isn't About the Companies
Originally published on 6/20/2006 at 9:37 AM EDT
Maximum oversold again. Now there is talk that, "If we don't bounce off the oversold, something is wrong."
I want to tell you that there are people who, when the market gets this oversold, tell you "Look out, it isn't bouncing," or, "It may not bounce."
Forget about it. This market is the mirror image of a market that is overbought with a lot of bulls. You know that it is due for a fall; it's only a matter of when.
I think that Monday's action would not have been so bad if it weren't for the fact that the margined players are still out there. Options expiration exacerbated it, but I simply don't think a lot of damage was done.
I think we do have a
problem these days, though, as defined by those who switch in and out of bull and bear funds at the end of the day. Yes, there are people who do this stuff, and they tend to reinforce the direction of whichever way we go. If we are down 40 points going into the last half hour, we go down 80 into the close. If we are up 40 in the last half hour, we go up 80 into the close. This peculiar pattern can be attributed, in part, to this kind of end-of-the-day fund-switching.
Once again, though, I point out, there is very little going on in this market that has to do with the fundamentals of the companies underneath. Check out the article on page 3 of the Money and Investing section of
The Wall Street Journal
, "Oil-Field Companies Hit a Gusher." Here we are with inventories as tight as a drum for the rigmakers and
National Oilwell Varco
, one of the only rigmakers, seems to go down almost every day. I think that's because of its inclusion in various sector indices.
This is a discouraging time for stock pickers because of this lack of variation among equities, which can be attributed to all of the indexing and the ETFing.
It won't last forever, but it is important to understand what is behind these quick rises and falls so you can be nimble, which is precisely what you need to be in these environments.
At the time of publication, Cramer had no positions in the stock mentioned.
Rev Shark's Blog: To Trade, Get Into Feast or Famine Mood
Originally published on 6/23/2006 at 8:47 AM EDT
"Consistency requires you to be as ignorant today as you were a year ago."
-- Bernard Berenson
Many market participants become frustrated and unhappy in poor market environments because they have unreasonable expectations about how they should profit from the market. Ideally it would be nice to extract regular and steady gains from the market. After all, we are putting in the same amount of effort, if not more, than we do in better market environments so why shouldn't we collect a "paycheck" of similar size at this time?
If you are looking for a steady paycheck that correlates directly with the amount of effort you put forth, the stock market is not place to find it. The vast majority of traders earn their profits in a very choppy manner. It is very easy to go weeks or months with little or nothing to show for it, but then see a large amount of gains come in a very short time.
I would guess that most traders reap more than 80% of their profits in less than 20% of the time. If that is the case, why don't we just go play golf or hang out on the beach during those times when the market isn't going to give us much? Why waste our time paying attention to the market when conditions are poor and profits will be tough to find?
The problem is that in many cases we simply don't know when the big profit-making opportunities will come. To capitalize on them generally requires proper planning and positioning during the poor times. We need to stay in touch with the pulse of the market so that we can move fast and decisively when the time is right. It is unrealistic to think that we can divorce ourselves completely from the market and then pop back in at exactly the right time to enjoy big gains. The market requires that we honor it constantly by paying attention to it even when it isn't in the mood to reward us.
We are in one of those times right now. However, we are in the process of setting the stage for some more dramatic action in the next week or so as we hear from the Fed and earnings start to roll out. Now is the time to plot our strategy and to identify those stocks that will pay off when times are better
We have a quiet start to a summer Friday and it is likely to stay that way. A merger in the oil and gas sector is receiving some attention but other than that there isn't a lot of news flow. Overseas markets are mixed and gold and oil are trading down.
Cody Willard's Blog: Break From the Herd
Originally published on 6/22/2006 at 2:04 PM EDT
Wall Street has always been a bunch of lemmings who copy whatever system has been working and attempt to further systemize it and then scale it for profit. And just like corporate group-think has all but
ruined the music business, it is also a major threat to the markets and our economy. As the monies at stake have scaled to historic proportions, the growth of systemized money management has been exponential.
In particular, there are the fund-of-funds that have systemized the management of hundreds of billions of dollars. These systems lead these fund-of-funds managers to select only those money managers thatwill put money to work in accordance to the fund-of-funds expectations,and that leaves no room for free-thinking or flexibility, two traits Ibelieve are valuable on Wall Street.
Running institutional money and want to change your approach because your analysis dictates such? Tough. Stick with the system that got you the money or the fund-of-funds will pull that money, regardless ofyour performance.
I've had systemic money in my fund before, and I kicked it out after they hounded me for being overly flexible. I'm serious. These system managers have no time and place for free-thinking and flexibility. In my approach to the market (and in my approach to life), I strive to be independent and free willed, and I have sacrificed size for flexibility.
Of course, the record-breaking decline in volatility over the past few years abetted the growth of many of these systems, and that cycle fed itself, delivering steady returns that appear to be "safe."
So what does Wall Street, in its endless greed and systemization of everything go and do? Rather than adjust, these managers try to juice those returns by levering up. And not just at the money manager level, but at the fund-of-funds level. So levered up money gets levered up, and the "safe systems" feed on themselves, further juicing those returns and "proving" the value of those systems.
In a similar vein, just this morning several new ETFs were launched that are double levered up, as Roger Nusbaum noted earlier. I often write about the virtues that the democratization of, well, everything, that the Internet and cheap computing brings about. But it's not all virtuous. These levered ETFs formally mark the introduction of levered systems to the masses.
Maybe this all works out smoothly and maybe even if it does get ugly itwon't be for years to come. But music provides a case study here. Record labels spent millions convincing the public that the Simpson girls have a place in music. But they have since been reminded --and harshly! -- that the public will only accept systemized groupthink until it doesn't. And then it gets ugly indeed. I worry that Wall Street's current trends, at the institutional and retail level, have our markets headed down this same path. As Dylan wrote: "Live by no man's code, And hold your judgment for yourself, Lest you wind up on this road."
I would love to get a dialogue about all of this going in our town hallof blog commentary. Are you running money? Are you part of thesystemization of running money? Are you sure that issomething that will pay off in the long run?
Steven Smith's Blog: Real Volatility Options
Originally published on 6/19/2006 at 3:18 PM EDT
A number of readers emailed asking about which strategies work best or can be used to take advantage of increased volatility, both actual and implied. There are a couple of options:
Buying a strangle or straddle -- that is, purchasing both puts and calls -- would be the most straightforward way to get long volatility. The drawback to this is it is very negatively affected by any decline in IV, and by time decay. The position requires a fairly substantial increase in IV or some nimble "gamma" scalping, which in itself is dependent on the market or stock offering frequent and sufficient price swings, to profitably offset the time decay.
Backspreads are a good and lower-cost strategy for betting on a substantial price move or increase in IV. A backspread is a ratio in which one sells an in-the-money or expensive option and buys a greater number of less expensive or further-out-of-the-money options.
The ratio is usually determined by trying to create a position for even money or only slight net debit. The goal is to create the highest possible ratio, that is, a greater number of long options, for as low a cost as possible. The limited risk/unlimited reward profile and the flexibility to "fade" large price swings in a volatile market are the main attractions of the backspread.
For example, with the
trading around $38.15, you could sell one July $38 put at 85 cents and buy three July $36 puts at 30 cents each for a net debit of a nickel.
The position, which starts off basically delta neutral, becomes outright long two puts (meaning short the QQQQs) as the price drops below $36. But, depending on the time remaining, it would begin to show a profit if the QQQQs hit $37 and IV increases. If the QQQQs stay above $38, the position loses the nickel of original cost. The drawback is if the QQQQs settle into the "dead zone" between $36 and $38. The maximum loss would be $1.95 if the QQQQ is at $36 on expiration.
Given the current market conditions, it's no surprise that a similar position on the call side, selling the $38 call and buying the $40, can be done at a 1x4 ratio. That could be a good way to play a snapback rally, but understand such a move would likely be accompanied by a decline in IV.
Long calendar spreads also benefit from an increase in IV. A calendar spread consists of selling a near-term option and simultaneously buying a longer-dated option. The position is down for a net debit and therefore will have a positive vega, which means it benefits from an increase in IV. But conversely, it also is negatively affected by a decline in IV. The effect of time decay is mostly mitigated by the fact that the short option's time value will erode at a faster rate than the long option.
To reduce the risk of calendar spreads, consider using out-of-the-money options. This will lower the net debit and make profitability more dependent on a directional move toward the strike price.
Another variation would be to create a diagonal spread, using different strike prices for the purchase and sale. For example, one could sell a near-term at-the-money option and buy a later-dated option one strike out-of-the-money. This will reduce the net debit of the position and somewhat lessen the impact of a decline in IV. The potential loss is theoretically equal to the difference between the strikes; but unless the position goes deep into-the-money, it would likely be less, because the longer-dated calls will retain more time premium.
Tony Crescenzi's Blog: Fed Will See One More Jobless Report
Originally published on 6/22/2006 at 9:17 AM EDT
It is very rare for the
to deliver its policy statement on a Thursday, which will be the case next week. The importance of this relates to the jobless claims data, which the Fed will get another glance at before it makes its policy decision. With claims at a low level for three weeks straight, a fourth low reading could influence somewhat the decision to tilt toward a more hawkish policy statement. A low reading also would lead some to speculate that the Fed might deliver a 50 basis-point hike at the meeting; the market is now puts the odds of that prospect around 10%.
Jobless claims being low in the latest week was important, because any influence from the Memorial Day holiday has now been completely washed out. With claims reaching as high as 344,000 in May and then as low as 297,000 in the week ended June 10, there was a sense that the ups and downs were due to problems with seasonal adjustment. The continuation of low readings suggests that the current level of claims accurately reflects the job situation. Offsetting this good news is an uptick in the continuing claims figure, which measures the number of people still receiving jobless benefits. That figure rose to a seven-week high, but remained near a five-year low.
George Moriarty is managing editor of RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
to send him an email.