inverse ETFs

In another thread I have indicated my expectation that the markets will have a pull back soon. Due to bond prices and current interest rates, I don't see much safety there either. So as I investigate ways to stay whole, or profit, in a down market, I came to the inverse ETFs. As the name implies, they move in the opposite direction of whatever they are tracking. So if that market goes down, the ETF will go up, thus representing a gain to the holder of the ETF.

I am looking at 3 inverse ETFs.

PSQ is the inverse of the NASDAQ.
DOG is the inverse of the DOW
SH is the inverse of the S&P 500.

I need to confirm, but I am pretty sure the way it works is on percentage basis. If the market moves 1%, then the ETF will change 1% in the opposite direction.

What are your thoughts on inverse ETFs?

as you know, I can't see doing much without a crystal ball in these things. I'd consider whatever I did in terms of hedging rather than making that hunch 'pay off, can't lose' type thing.

>I need to confirm, but I am pretty sure the way it works is on percentage basis

I don't know the answer to that

I think I am finding the hole in inverse ETFs.

http://news.morningstar.com/articlenet/article.aspx?id=271892

"In every leveraged ETF report that we write, we warn investors that the math behind daily compounding will not work because of compounding arithmetic and constant leverage, but I get the feeling that the message is not getting across. I'm visualizing many readers' eyes becoming glazed at the very thought of walking through the algebra, so I'll try to make it as exciting as algebra can get. But please stick with me."

I am still working through the article, but it appears the ETFs work as expected with day trading, but if you hold the ETF through multiple up and down days, and the market ends up back where it started, the ETF will not be at break even. You will have suffered a loss.

Here's another quote from this article,

"Another use for these funds is for short-term speculation. If you're inclined to bet--not invest, I said bet--as to what a sector or index is going to do over the course of a day or two, go ahead and use these funds. Good luck. I've never met an investor who can consistently execute this strategy (though I've met plenty who claim they can)."

I read that if the market is volatile (many ups and downs in a short time), then you make $ by buying BOTH the triple short and triple long of that fund.

I don't remember how or why tho.
it has to do w/the leverage math somehow.

Without a crystal ball, I'd leave this one to the would-be day-traders. By all means if you want to gamble, gamble. But look at it the same way as you would the casino, and don't risk any more money than you would at the craps table. That's the approach I took with my speculation on Marijuana stocks. I won, but it was speculation and gambling on a hunch, not investing.

Anyway, that article did a fine job of tearing them apart as anything more than one-shot gamble over one day. I also liked this quote:

Quote:

..so I'll try to make it as exciting as algebra can get.

Also I LOL'd at the ticker symbol DOG.

Quote: AcesAndEights

Also I LOL'd at the ticker symbol DOG.

Yeah, I found that quite amusing as well.

I have found mention of some monthly inverse ETFs. So these do their accounting the first of each month. I haven't found any for the major indexes yet, but I have not searched very hard. An inverse ETF based on monthly closes would make it less volatile to play for a market downturn, if I understand this correctly.

RaleighCraps -

Inverse products, whether leveraged 2x, 3x or not, suffer from "slippages" called contango and backwardation but the 2x and 3x products really suffer it.

Simply put, since these products are created with futures, they can not fully replicate the 1:1 behavior of the underlying index it is aimed at protecting for long periods. They often move with an equal inverse delta (negative 1) initially and during rapid price changes, but over time that delta contracts. The fact that futures contracts have to be rolled forward to new, later-expiry contracts is a main contributor. I have used them when needed in retirement accounts, for example - where you can't sell short or have a debit, but only on a short-term basis.

By "short-term," I mean from a few to several weeks. Never long-term.

An ideal hedge is to sell-short the SPY against a long position in the SPY. The perfect hedge is always going to be cash.

I have never been afraid to use the SPY - sold short - as an approximate hedge for a portfolio of stocks that generally replicates the market direction for extended periods. If I'm off a few percentage points, it's not a big deal. I only use high relative strength names that usually move up more than- and down less than the broad market.

As with most such decisions, you have to be correct twice.


Best,
Mark

I found some great articles that really showed exactly how the Inverse ETFs don't behave as one would expect. The problem arises because of the daily reset that the ETF does. I haven't done any math on it, but it looks like buying an inverse ETF, like DOG, I would only want to hold it for a week or so, and I would need the DOW to fall 4 of the 5 days to ensure a gain.

I have found that some funds are creating monthly ETFs. They reset the first of each month. These ETFs behave more like you would expect them too. So if I buy a monthly inverse ETF for the DOW, the DOW could be up for 18 days, but if it is lower at the end of the month than it was at the start of the month, my ETF would be a gain for me. Of course, if you hold the ETF for a full year, then the reset issue comes back. If the monthly reset showed the ETF up 9 months, and down for just 3 months, even though the DOW may be lower at the end of the year, the inverse ETF is probably also going to be lower, meaning you still lose money.

I don't play with the 2x and 3x stuff. Way too much leverage for my comfort.

I am coming to the conclusion that just straight shorting the index is probably the way this needs to be played. I just hate having to pay the margin interest on the short. I just checked, and the margin rate is 7.25%. That would really chew into the gains. Certainly not a short that I would want to hold for a year. Timing would have to be exceptional.

ahh..
so avoid sco (2x short oil) and dwti (3x short oil) because it rebalances daily?

but dto (2x short oil) is ok because it rebalances monthly?

Quote: RaleighCraps

...

I am coming to the conclusion that just straight shorting the index is probably the way this needs to be played. I just hate having to pay the margin interest on the short. I just checked, and the margin rate is 7.25%. That would really chew into the gains. Certainly not a short that I would want to hold for a year. Timing would have to be exceptional.

Shorting can only be done in a margin account; that's why it can't be permitted in retirement plans - retirement plans can not carry a debit, hence no margin is available. That said, shorting a stock in a regular account - not a retirement account - CAN be done but it has to be in an account authorized for margin (the use of leverage). That is the only time you would incur interest expenses.

Selling short is actually going to be entered as a CREDIT into the (margin authorized) account. No debit is incurred, no interest is paid.

The only time interest is paid is if you were to buy, for example, $50,000 worth of securities with an available cash balance of something less than that cost... when you carry a DEBIT. Initial margin is 50%. Hope this helps.


Best,
Mark

Quote: 100xOdds

ahh..
so avoid sco (2x short oil) and dwti (3x short oil) because it rebalances daily?

but dto (2x short oil) is ok because it rebalances monthly?

Regardless of how they're constructed, neither should absolutely be avoided. Date them, sleep with them but - by god - don't marry them. A brief fling could be rewarding. It requires finesse.

Still, there are plenty other options - including options. The right choice is pretty circumstantial. It depends on the situation.

And for what it's worth, I wouldn't dream of shorting anything to do with oil at this time. The energy sector is pretty oversold right now and the ENER BPI that I referenced in another thread is showing signs of demand coming back in this past week. Shorting oil here is more risky than buying it... as far as the evidence currently suggests.

A rally in crude to 60-62 would not be unreasonable at all. 64-65 would even be a fair retracement of the decline. A weak 38.2% Fibonacci retracement from the June peak to the recent low sits at 68. Will that happen? I don't know. But the reward to risk ratio is much more favorable on the upside than it is to the downside.

Buying crude at ~48 gives:

the possibility of a <11% loss if stopped out at 43,
the possibility of a >25%+ gain if sold at 60 and above.


-5 points to a 43 sell stop, a violation of any near-term support, and

+12-14 points of upside to a 60-62 target...

That's 2.2x to 2.8x reward:risk for a DO bet. If a 68 target, then it's 4x up for every point risked/lost.

Betting oil DON'T gives, at best, a visible 1:2 or 1:3 reward/risk. Maybe only 1:4 gain:loss; I prefer at least 2-3 points of gain for every dollar I risk.

THIS ^^^ would compel me - as the dominating reason - to avoid shorting oil. But I'm not brave or quick enough to try catching falling daggers, either. When in doubt, there's no doubt. If you can't see your way clearly, do nothing.

But when you come to a fork in the road, take it. (Y. Berra.)



Best,
Mark

assuming it isn't a hedge for a long position, I just don't think the average Joe knows enough to go short, using funds or not. Now with oil, I can see playing around on a hunch with money you can afford to lose, but for the market generally, just thinking "we are due for a correction" ... that ain't good enough.

mdhovland,

Merril Lynch said that oil will hit $31/barrel by end of 1Q.

How often are major investment houses right?
and how often do they reprise their guidance?

Quote: mdhovland

Shorting can only be done in a margin account; that's why it can't be permitted in retirement plans - retirement plans can not carry a debit, hence no margin is available. That said, shorting a stock in a regular account - not a retirement account - CAN be done but it has to be in an account authorized for margin (the use of leverage). That is the only time you would incur interest expenses.

Selling short is actually going to be entered as a CREDIT into the (margin authorized) account. No debit is incurred, no interest is paid.

The only time interest is paid is if you were to buy, for example, $50,000 worth of securities with an available cash balance of something less than that cost... when you carry a DEBIT. Initial margin is 50%. Hope this helps.


Best,
Mark

Mark,
Thanks for your input and help!

I have a margin account, and as a past active day trader, I also have 4x margin. The account is also options enabled, although I have never completed an options trade, as of yet. I came close when I was looking at selling some covered calls, but in the end, decided I wanted to be able to sell the stock, if needed, more than I wanted to collect the call premiums.

When IBM was at $191 last year at this time, I really wanted to buy a boatload of PUTS for $150 for Jan 2016, but I don't understand the pricing enough to feel comfortable entering that trade. Too bad because it is looking like my $150 price was a pretty good call. :-( If I remember correctly, it seemed like the premium I had to pay for the contracts was fairly large, so I was going to be shelling out more money than I wanted to risk on what was a long shot feeling in my gut.

I sold IBM short one time in the past, and made out well, but I was unaware I was holding it through the dividend period, so I had to pay the dividend. That stunk. Some learning experiences you get away cheaply. In the end, I was still profitable.

When I opened my Roth IRA it was a non margin account. If I recall correctly, I asked for margin and was told it was not possible in a retirement account. But last year, I was updating information on my accounts, and I am positive they let me add margin to my Roth IRA account. I just logged in and found the discrepancy.


"You may apply for margin in an IRA or qualified retirement plan for the purpose of trading qualified options spreads and for day trading. Borrowing funds and short selling are not allowed in a retirement account, even with margin approval."

If I am reading this right, I have margin available to me to day trade, but that means I cannot hold overnight. I have to close enough positions so I have no negative balance going into the daily close. This reminds me of the days when I was actively trading and had to sell off positions at the end of the day to avoid a Reg T call.

Thank you for making me look at this. This means I am really limited on how to play a downward direction. I can go with the inverse ETF, which I could hold since it is a Buy transaction, but the nature of the daily ETF is too scary to hold for too long, or I guess I could learn more about options and buy some PUTS. Although I am curious because the wording above says "trading qualified options spreads". So is this saying I have to take equal sides to create a spread, or am I allowed to take only one side, as long as my account equity never dips negative?

really wish I could find a monthly inverse ETF for the major indexes.

Inverse ETFs are only good for short term trading. They are crappy for long term investments. The daily reset/bleed kills your return.

Quote: RaleighCraps

Although I am curious because the wording above says "trading qualified options spreads". So is this saying I have to take equal sides to create a spread, or am I allowed to take only one side, as long as my account equity never dips negative?

You're welcome. This info reminds me how much the interpretation of rules have changed along with some of the rules themselves in the past 20+ years. Time was when NO options transactions could be facilitated in a retirement plan at all because they were a "wasting asset." Understandable. Delaware Charter Guarantee & Trust was one of the most respected and forward-thinking IRA custodians of their time because they were large, respected, knowledgeable and portable. Wirehouse platforms/accounts were not.

The reason for the quote in your post is still this, however; qualified option spreads work both sides of the trade, the long side and the short side. A credit spread will ensure a gain of some sort - the credit. There must be a "qualification," a hedge of some sort to keep it acceptable.

A put contract on an underlying long position won't wipe you out. A covered call sale (overwrite, against shares you own) won't wipe you out. A put sale backed up by cash available (married put) to accept assignment of the underlying on expiry is a prudent strategy. I can't see why a synthetic put would not be permitted, but it might not be. There are a number of ways things can go wrong outside of some of these rules.


I am confused about the "reset" a couple of you are referring to - monthly vs. daily. I wonder that it is the same thing on both types being stated differently, but in either case, futures contracts used in ETF's always need to be actively managed whether daily or monthly. It is the futures contracts which have finite lifespans and must be rolled forward. No other way to do it, and that is why they can lose parity with the underlying along the way. This is the slippage. It is also why they tend to carry higher operating expenses. Not for the uninformed. (The problem may be that some (many?) journalists are uninformed. Gawd knows many licensed registered representatives are pretty ignorant. I've seen it first-hand.)

I also see no need to avoid them without regard for their potential merits. It is a "just depends" situation. Clear as mud, right??

I'm reminded of an article written by Jared Dillian recently about the Volatility Index ETF on the Volatility Index ETF (yes - an ETF OF AN ETF...!). I'll see if I can't locate that article and post a link to it.


There is a lot of good discussion in many of these threads - I am enjoying them! Somebody stated there was a great deal of "collective IQ" within them.

I couldn't agree more.


Best,
Mark

Found it - The 10th Man, Nov. 6th, 2014


The Great Volatility Crush

Another commentary re: oil -

When the Market Moves Fast, Stuff Blows Up


I've been taking John Mauldin's research for more than 15 years and Stratfor as a result. I like it but a lot of it is fundamental and beyond my ability to articulate simply. I can assimilate it but just can't restate it.

Jared Dillion began contributing for Mauldin this past year and his background is interesting to me. I "get" what he writes - it is "in the trench" stuff. More about him here:

Jared Dillian


EDIT - Wonked up the links - trying again... success.



Best,
Mark

Quote: mdhovland

I am confused about the "reset" a couple of you are referring to - monthly vs. daily. I wonder that it is the same thing on both types being stated differently, but in either case, futures contracts used in ETF's always need to be actively managed whether daily or monthly. It is the futures contracts which have finite lifespans and must be rolled forward. No other way to do it, and that is why they can lose parity with the underlying along the way.

I wonder if we are talking about different types of ETFs?
As far as I can tell, and have read, the inverse ETFs I have been reading about work directly from the movement of the index, based on percentage move. So if the DOW goes down 1% today, then the DOG (inverse ETF) will go up 1%.
Here is one article
https://www.tradeking.com/education/etfs/leveraged-and-inverse-etfs

Quote: RaleighCraps

I wonder if we are talking about different types of ETFs?
As far as I can tell, and have read, the inverse ETFs I have been reading about work directly from the movement of the index, based on percentage move. So if the DOW goes down 1% today, then the DOG (inverse ETF) will go up 1%.
Here is one article
https://www.tradeking.com/education/etfs/leveraged-and-inverse-etfs

"If an ETF is both inverse and leveraged, this problem gets worse if the ETF is held longer than one day. If you’re looking for leveraged inverse exposure for longer than a day, you may be better off using other strategies to achieve this. "

What other strategies?
(I'm looking at oil.)

You can see first hand for the slippage of -2x leveraged oil stocks (1month time frame):

http://www.bigcharts.com/advchart/frames/frames.asp?show=&insttype=Stock&symb=szo&time=4&startdate=12%2F16%2F2014&enddate=1%2F16%2F2015&freq=1&compidx=aaaaa%3A0&comptemptext=dto&comp=dto&ma=0&maval=9&uf=0&lf=1&lf2=0&lf3=0&type=2&style=320&size=2&timeFrameToggle=false&compareToToggle=false&indicatorsToggle=false&chartStyleToggle=false&state=12&x=53&y=8



szo = 1x short for oil
dto = 2x short for oil (and it's rebalanced monthly)

if szo finished up +20%, then dto should have finished up +40%. it ended up only +33%.

interesting.. slippage isn't as great in the 3x oil short?



szo = 1x oil short (+20%)
dwti = 3x oil short (+55%). should be +60% if it's a true 3x.

And dwti is rebalanced daily!


edit:
ugg.. this post is on the next page so u cant easily compare the 2 charts (szo/dto, szo/dwti).

dto = 2x oil short (+33%) for the same 1month time period (dec 19, 2014 - Jan 16, 2015).
it should be +40% if it's a true 2x. and it is rebalanced MONTHLY.


so why does dwti have less slippage than dto?

I haven't tried to calculate it, but it has to be in how large of a daily move took place. A move down 20% and then back up 20% is going to leave the ETF decreased in value. Do that 10 times, and the difference should be much greater, than if the daily up and down was only 10%. In both cases, the fund ends up back where it started, but the ETF is decreased in value.

So, if the large moves happened for the positive on the 3x, I could see where there could be a different end result.

Yes, what I have taken out of all of this is a daily inverse ETF could be played, but I think one week max is about as long as it would be prudent to hold. And I would want to have a strong feeling that the index was extremely likely to be falling hard. If the index seesaws back and forth, the inverse ETF is going to lose value.

As to the monthly inverse ETF, I have seen it mentioned in quite a few articles, but I have not been able to find anyone who has a monthly inverse ETF for any of the four US indexes (Dow, NAS, S&P, Russell).

In MPT (Modern Portfolio Theory) and Efficient Frontier applications, "Beta" is a term used to describe the correlation a portfolio (or mutual fund/ETF) has to its underlying proxy. Most US equity mutual funds are judged basis the SPX. If a fund moves point for point in the same direction, it is said to have a Beta of 1. If it moves in unison 90% of the time, it's said to have a Beta of .90, and so on.

An inverse SPX ETF of 1x should (SHOULD) have a Beta of -1, 2x should be -2 and 3x should be -3. As time goes on with these products, the Beta will be reduced due to expenses and slippage.

This could be a much simpler way to understand your questions about these inverse ETFs.

I do NOT want to sound short or rude, but it really is pretty simple and an explanation might be sought where there is none. I say this respectfully. It's not really a big deal. They are useful tools but they require a particular application. I have no problem using them - where useful - and would never discourage their appropriate use. Sadly, I have no easy explanation.

In 2001 and 2002, I used the Rydex Ursa fund - an inverse SPX 1x fund - to hedge off a lot of risk after 9/11. I had already reduced equity exposure to accounts based on TA that I employ prior to 9/11 anyway, but was still around 60% invested overall. Rather than seeing additional stocks get stopped out and taken to cash, I left Ursa in place for nearly a year and finally lifted it/sold it after the October, 2002 bottom when my work showed demand coming into the market.

Ursa failed to keep a beta of -1 over that period but it didn't matter - it had done it's job well enough. Since it is a futures-based product, it had the exact slippage you can see in these other products being queried in this thread. And, all that activity adds expense to the operation of the product.

When most equity accounts were down 40-50%, it was nice to be down 20% on average. Also the exact reason these accounts were at new highs less than 4 months later in Q1 2003.


For what it is worth, I think MPT is a failed concept even if it won its creators a Nobel Prize. That is an area where I have a very strong opinion and can begin to sound like a prick! "(Pie-chart THIS, Mr. Markowitz!" "Frontier THAT, Mr. Sharpe...") MPT is impressive in that it is scientific and mathematical. It is "strategic." However, it is not - "tactical." This is where it falls short, IMO. I have seen believers blow up twice in the past 15 years, and it's tragic for those who had to postpone retirement for a few to several years as a result. Those who were actually forced out of work ended up as (figurative) greeters at Walmart. Or worse.

Rant off, now.
************


My week begins tomorrow, but I'll look in again later to see what's new. Glad I found these threads!

Cheers,
Mark

Quote: 100xOdds

mdhovland,

Merril Lynch said that oil will hit $31/barrel by end of 1Q.

How often are major investment houses right?
and how often do they reprise their guidance?

100xOdds -

One more post before the week begins. Follow this link:

DWA Anatomy of a Collapse



This firm provides technical research. They offer varying levels of subscription service. In their "Anatomy of a Collapse" commentaries, they illustrate stock price action with coincident wirehouse research recommendations. Dorsey Wright's periodic comments along the way are eye-opening, to say the least.

You should find each article very interesting, I think.


How often are wirehouse recommendations right? I really don't know the answer. Since I "got religion" in the early 90's, I stopped paying attention to their research almost completely. With technical analysis and an understanding of market psychology/behavioral finance, I need nothing else.

How often do wirehouses revise their guidance? Again, not sure. I can say that one firm can offer opposing guidance simultaneously or go from favorable to unfavorable then back to favorable with conspicuous frequency.

Fundamental research has two purposes but almost always one goal.

1) to provide their retail clients a "story" to better understand the security, and
2) articulate in writing their expectations of that security and the financial data related to the company.

The goal of the wirehouse is to make money. They most usually have an investment banking relationship with the company (insert ticker symbol here); they provide the company with needed funds to become or remain capitalized. Underwriting and investment banking fees are important to the Merrills of the world. Many if not most of the covering firms hold a company's stock in their own inventory for added liquidity for the company and for distribution to the investing public.

Knowing this, it's easy to see how a conflict of interest presents itself. More than one analyst has been excluded from company conference calls at earnings-release time for bucking the interest of a banking relationship. If Mr./Ms. Analyst wants information, he better damn well accommodate the company being covered in a favorable light or that banking relationship - not to mention his/her job with his hi-viz WS firm - can easily be flushed down the toilet. Access to company information is gold but comes at a price.

There is no such thing as a disinterested party in this industry. Google Henry Blodget/banned soon. He's the poster child of what is wrong with Wall Street. Wiki can pretty much sum it up, too.


As to your Merrill example of $31 oil by Q1-end, maybe you could provide a link to the story?


Best,
Mark

Quote: 100xOdds

"If an ETF is both inverse and leveraged, this problem gets worse if the ETF is held longer than one day. If you’re looking for leveraged inverse exposure for longer than a day, you may be better off using other strategies to achieve this. "

What other strategies?
(I'm looking at oil.)

It's been a few years, but when I was looking at ETFs, I saw that some of them didn't always track correctly when under stress. USO would've been one of the ETFs I was eying, though I'm not sure that it was the one with the sharp divergence. This is also the reason that I was never really interested in gold tracking ETFs. Things may have gotten better since.

mdhovland,

here's the link to $31/barrel oil:
http://www.reuters.com/article/2015/01/15/oil-price-baml-idUSL3N0UU4G520150115

and oil is down to 46.99 premarket.
I think oil closed around 48.70 on fri.

Quote: mdhovland

For what it is worth, I think MPT is a failed concept even if it won its creators a Nobel Prize. That is an area where I have a very strong opinion and can begin to sound like a prick! "(Pie-chart THIS, Mr. Markowitz!" "Frontier THAT, Mr. Sharpe...") MPT is impressive in that it is scientific and mathematical. It is "strategic." However, it is not - "tactical." This is where it falls short, IMO. I have seen believers blow up twice in the past 15 years, and it's tragic for those who had to postpone retirement for a few to several years as a result. Those who were actually forced out of work ended up as (figurative) greeters at Walmart. Or worse.

Rant off, now.
************

So your alternative to MPT is technical analysis? I disagree strongly, but I don't have the time now to state my case as elegantly as you. I with your comments on "wirehouses" though.

MPT is easily implemented with anyone who can read a book or too. Yes the last 15 years have seen two big ugly events. But over 10 year+ periods, the "market" always goes up.

i see what you mean by slippage.

dwti (triple oil short) hit $170 a couple of days ago when oil was ~46.70/barrel.
then oil went up the next day.

today dwti hit 170 again but oil was around 46.25/barrel.

Anyone know how wide was the contango when oil bottomed out in 2009?

Quote: AcesAndEights

So your alternative to MPT is technical analysis? I disagree strongly, but I don't have the time now to state my case as elegantly as you.

Elegantly? Well, thank my mother for that. She was a university librarian (who occasionally watched over my knuckles with a ruler...).

MPT has many shortcomings, not the least of which Markowitz has tried to redress. Let's at least agree to save that for another discussion. I do welcome some independent thought, however.


Wirehouses have good features and bad ones, good representatives and bad ones. I simply disdain the fact that they could/would throw money at some of my top producers to lure them away only to find that it was a bad deal for all in the late 90’s. Less than two years later, things changed for them. 300-500k in mustard money can change a man’s stars, and not necessarily for the better.


TA vs. MPT; it is not only Technical Analysis that I use. Behavioral finance and market psychology is a meaningful component.


As for broad-market ten-year periods, I think you should consider the following:

Ten year S&P rolling average returns… dividends included, on a calendar year basis only.


1929-1938: -0.89%*
1930-1939: -0.05%*

1999-2008: -1.38%
2000-2009: -0.95%

* = S&P 90


Ten year rolling returns





A graphic example - price only, inflation adjusted, divs excluded…









Best,
Mark

100xOdds -

That may be a difficult fact to uncover. Some of these 2x and 3x ETFs are more recent creations. I'd sure like to know the result as well.


Best,
Mark

How does your investment advice compare with say, Bernie Madoff or John Corzine's?

The average stock is held less than 3 seconds and hft computers do the same amount of the trading. They are doing if because of the kickbacks from the trading houses. Fractions of a cent, billions of times a day. If you can beat that with fundamental stock analysis or charting, good on ya.

http://www.zerohedge.com/news/2014-08-26/retail-trader-lockout-todays-market-issues-were-worst-flash-crash

The components of the DOW: http://money.cnn.com/data/dow30/ out of the 30 included are Goldman Sachs, American Express, Visa, Travelors INS, and United Health. This is ridiculous, how could the Dow manufacturing index be made up of fire sector company's?

If it weren't for QE to infinity and fraud, the market would have collapsed so long ago now we would be healing already, as it stands the whole we are in is only getting deeper by the nano second. Adding digits to the debt clock.

Quote: petroglyph

How does your investment advice compare with say, Bernie Madoff or John Corzine's?
...

Me??


Best,
Mark

dumb question about daily contango and backwardation.
contango = bad
backwardation = good

triple short oil (dwti) resets daily.

oil closed at about $51.80/barrel today.
March futures are at $50.60/barrel.

since the futures is lower than spot (today's price), it is considered contango for long oil and backwardation for short oil?

Whats wrong with this theory?
at near the end of close (say at 3:59pm), if the futures contract is lower than the closing price, short oil and make a little $ off of backwardation?

Good morning. Not a dumb question at all.

This link might help articulate the response to your question better than I could:

Khan Academy - contango v backwardation

Other titles or subjects preceding that one are good, as well.

Now, I almost feel ashamed for introducing these two big words into this thread; they mean a lot to some but mean little (to me) in the future as I will almost always bank on what is real... now. What is, is. Futures markets only try to explain future pricings and/or speculation (slash) expectation, which is seldom dead-on.


Until a person has bagged three quail with one shot, they will never know the meaning of the adage "a bird in the hand...". I once did, and it was a seminal moment! Also, I played to a Royal Flush in a live qualifier in July, 2007 - it was a good pot - then backed that up with another one later that same month in an online game. I never expect to do these things again - my life is complete. If I only knew the future...

(And, I'm really not that good. My sister kicks my a$$ in home games. She's a frightening, formidable opponent in any numbers, dice or card game and won't let me stake her in a real game, but I wish she would...)


Here is a current point and figure chart of West Texas Intermediate Crude:

[D][F1!3!!!4!20]&pnf=y]WTIC


I was charting oil and other charts a few minutes ago, then thought to check out this forum. I have noticed retail gasoline prices have popped .25+ cents/gallon over the past couple weeks.

Glad to see your question. Keep thinking about the processes!


Best,
Mark

Quote: 100xOdds

mdhovland,

Merril Lynch said that oil will hit $31/barrel by end of 1Q.

How often are major investment houses right?
and how often do they reprise their guidance?

100xOdds,

Merrill may be right... time will tell. The bad news is getting worse:

Pink Slip #1: Houston-based Dresser-Rand isn’t a household name, but it is a very important part of the energy food chain. Dresser-Rand makes diesel engines and gas turbines that are used to drill for oil.

Dresser-Rand announced that it's laying off 8% of its 8,100 global workers.

And,

Pink Slip #2: Oil exploration company Apache Corporation reported its Q4 results last week, and they were awful. Apache lost a whopping $4.8 billion in the last 90 days of 2014.

No matter how you cut it, losing $4.8 billion in just three months is a monumental feat.

Oil, Divorce, and Bear Markets


The article also states "And don’t make the mistake of thinking that the only people getting laid off are blue-collar roughnecks. These layoffs affect everyone from secretaries to roughnecks to IT professionals.

In fact, according to staffing expert Swift Worldwide Resources, the number of energy jobs lost this year has climbed to well above 100,000 around the world."


A member in a different thread acknowledged being personally affected - laid off a month ago. Sadly, there are hundreds of thousands who will be impacted. Real Estate Redux v.2008? Hard to say.

West Texas Intermediate Crude - after a feeble pop to 54 - now has a bearish PnF chart count projecting $41 per barrel. These counts are reliable but not perfect.

WTIC


Undoubtedly, more bad news will surface. Where there's one cockroach, there are usually many more. Interestingly, situations with news like this can be the best time to buy (or prepare to buy)... when "there's blood in the streets."

Until (hopefully) a higher low price comes on heavy, heavy volume, prices won't stabilize. That is when the smart money will be seen to be accumulating oil and oil-related names. For now, price support for oil is evidenced at 44. Price will often firm up before all the bad news is over.




Best,
Mark

I've never understood the energy market pricing, although I have to admit, I've never really tried hard to learn about it.

In my simplistic view, it should be a supply and demand scenario. As far as I know, the demand for oil has not been dropping, so it must be supply is high. But for years they talked about the oil shortage, as the price rode to $100 / barrel. Then, since oil was so high, that made it profitable to extract oil from other sources (like the sands in Canada).
So do we now have a glut, and that is causing the price to drop? If so, laying off production workers is going to create a shortage again, which of course will cause the prices to go back up. But we have OPEC who has refused to cut production, so theoretically, we should still have plenty of oil available, at current prices.

Well, time for me to go. Baaaaaaaaaa.
With apologies to Ray Charles (actually Buck Owens).....

It is shearing time again, I know you're scheming, I can see that greedy look in your eyes

mdhovland,

thx.

going to put a short when oil reaches $50/barrel again

Quote: RaleighCraps

I've never understood the energy market pricing, although I have to admit, I've never really tried hard to learn about it.

In my simplistic view, it should be a supply and demand scenario.

My view is also simplistic, Raleigh, and I agree. I don't pretend to understand (much as I'd like to). I'm a visual sort, I need my charts.

I read something within the past few days I found interesting; it is the application of Moore's Law to the oil industry.

What used to be bandied about and is true in the technology industry is true anywhere - that information and capability DO double far faster than in the past. This article stated that it used to take 10-12 months for oil (industry) to ramp up production once a shutdown had taken place such as we are now seeing. The author of this piece convincingly stated it could now take only 30-45 DAYS to resume production. The implications of this boggle my mind.

I'm not sure whether that lends to or takes from the volatility in that resource. To me, one thing is sure... this industry is far from certain.


Sidebar - the youngest son of the founder of Apache Corp., mentioned in that "Oil, Divorce, and Bear Markets" link (well, the youngest son of the founder's first of four wives), was the best man in my wedding.

We were co-workers, friends and hunting partners. It is amazing to see how the other side lives. Imagine taking a long weekend to Argentina first-class in a 747 to get a bag limit of geese within 4 hours, then shooting hundreds of parrots because there were still two days left in the trip. The stories I heard were practically unbelievable... except that I experienced some of it first-hand (but not the Argentina trip...).



100x-

Selling short at limit-$50, be certain to place a buy-stop at 55 to cover. If WTIC takes out the recent overhead resistance at 54, a wild short-squeeze much, much higher could ensue.



Best,
Mark

sigh.. oil at $46 now.

did I miss the boat or can still jump in to short?

Quote: 100xOdds

sigh.. oil at $46 now.

did I miss the boat or can still jump in to short?

Risky, as although we may eventually drop to $30/barrel, in the meantime the price has found a floor. Maybe there are termites in the floor, but you still have to know when it is going to give way.

Wouldn't mind a huge stock market crash right now. I've got 10+ years of buying before I need to start selling. The young should always hope for a bear market...but I'm a buy and hold index funds guy, so what do I know.

We keep getting a day or two of big drops, which looks like it might be the start of the big correction, and then the next day the market rebounds in a huge way.
Personally, I believe this is just more manipulation trying to get people accustomed to the churn, so the decision to pull out of the market will be delayed for a few days, expecting the market to recover. I am expecting a rapid drop to the 16500-17000 level, with a continued slide possibly to 15,000 or lower. I am 80% in cash equivalents. which is too far overdone, but I have already missed the nice return of 2014. Getting into the market now will just compound my mistake if my market decline comes to fruition.
When that first interest rate rise is put in place, all hell is going to break loose.

so what caused the spike in oil today?

missed the boat to short when oil was a $50. :(

Quote: 100xOdds

so what caused the spike in oil today?

missed the boat to short when oil was a $50. :(

too weird to understand. If you took a short position today you took a bath, while everybody still thinks it will go lower?

was there some news about allowing US oil to be exported?

11 am today, Dow was down 227. Closed up 178. What the hell happened in 5 hours to cause a +400 position (all numbers approximate)?

Quote: beachbumbabs

11 am today, Dow was down 227. Closed up 178. What the hell happened in 5 hours to cause a +400 position (all numbers approximate)?

News from The Fed.

Quote: AcesAndEights

News from The Fed.

so what does the fed rate hike (or lack thereof) have to do w/oil spiking $3 a barrel (~7%) today?!

Quote: 100xOdds

so what does the fed rate hike (or lack thereof) have to do w/oil spiking $3 a barrel (~7%) today?!

Check the value of the dollar against the renminbi, euro, yen, Swiss franc, etc.

Quote: 100xOdds

Quote: AcesAndEights

News from The Fed.

so what does the fed rate hike (or lack thereof) have to do w/oil spiking $3 a barrel (~7%) today?!

Almost everything moved higher today.

Talk earlier was that how the Fed might phrase the (anticipated removal of the) word "patient" in their language was important. I don't know about that. It seems to me that it was a simple market move based on released tension or pressure - kind of like a satisfying orgasm after a long, drawn out, slow screw.

I suppose the truth is that the herd needed a reason to move, and "predictable interest rate advances" may have been the catalyst. Again, I don't know - and it's why I typically avoid acting or trading on news. But that's just me.

25 of 25 International ETF's popped smartly higher in Stockcharts.com's Market Summary page today, as well (none gained less than .84 bps - that was Italy). Is it an "all clear" for Russia or the TSX? Not to me, but there are lots of asset classes that are resuming nice uptrends.

"Risk is on." I have no idea who first coined that buzz-phrase, but it fits.

Seriously, if we look briefly at the common market indexes, industry groups and asset classes, all of them** moved smartly higher today. This week, Friday, is also expiry on stock options, stock futures , index options and index futures. Formerly known as "triple witching," it's now called quadruple. It's becoming a historically and statistically valid bullish period or trading phenomena. Last week, this week was forecast to be "good" (by those who follow such things). (I don't.)

** Banks, Broker-dealers, Biotech and Sugar are the only apparent markets/groups to not participate today.



As for oil, much less downside weekly volume so far with a meaningful lower low AND a close at/near the high - on USO, in the daily plus weekly timeframe on much higher volume... smells like a bottom. (That didn't sound right, I know.)

Selling pressure may be getting exhausted in that group. A simple glance at charts of the past several week hints at this climactic activity. Volume is huge and price is not responding in the manner most casual observers would think it should. Accumulation is the likely cause... by "smart money" since late Jan./early Feb., in my opinion.

There is no clear short-sale on oil until rallies to nearer 50 on the $WTIC chart and ~$20 on the USO... and then both have to fail and also reverse down just to get an entry and a chance at a 20% gain (with hard stops at levels above those numbers mentioned). A 100% gain may be had - if it only goes to zero.

On the other hand, I see no reason to buy it either. Yet.

The four strongest groups I like for appreciation and which have quantifiable merits in both bullish and bearish phases of a trend are:

Consumer Discretionary
Industrials
Consumer Staples
Healthcare

Oil is one of the weakest groups at this time. Weak names and groups go down more than the market in sell-offs and rise less than the market in rallies.


As for the market, around 60% of the stocks listed on the NYSE and electronically exchanged on the NASDAQ are presently controlled by demand with no real change in the gaining momentum of that trend since last fall. Volatility? Yes. Change in trend? No, not a meaningful one.

These levels of demand are UP from 40% last October. More stocks have more money moving INTO them right now. I don't get nervous until this percentage of "bullishness" approaches or exceeds ~70-80% and then reverses into a column of "O's."

[D][F1!3!2!!2!20]&pref=G/]NYSE Bullish Percent Index

Note: use the link, scroll down to fields titles Chart Scale > Scaling Method (change to "User Defined")>Box Size (change to 2.0)... then click the "Update Chart" tab.

This chart now reflects data back to early 1999 showing excessive levels of bullishness and bearishness; when risk was high and when it was low.


Finally-

1969, Booth School, Univ. of Chicago

~50% of an investment result is due to the market direction
~30% of an investment result is due to the industry group (sector) direction, and
~20% of an investment result is due to the specific investment chosen.

Interested investors spend:
~80% of their time evaluating the specific investment chosen, and
~20% of their time evaluating the risk or opportunity of the market and sector.

(A girlfriend of mine is an UNinterested investor - she receives American Funds updates quarterly and ignores them completely all while admitting she knows her IRA is not worth what it once was. She'd rather focus on building airplanes and rockets. Go figure...)



Best,
Mark