Stocks & Oil, Sat Jun 18th, 2005
Both the stock market and oil prices rallied recently, which seems to be a paradox, because high oil prices are negative for earnings (i.e. a higher production cost and a higher consumer tax). However, the stock market was worried about another “soft patch,” of slower economic growth, and the sharp rise in oil prices suggest the U.S. economy is still expanding at above trend growth.
The two charts below are same period daily charts of SPX and OIH. The short-term technical indicators suggest SPX is near a top, e.g. VIX closing at a multi-year low, VXN closing at an all-time low, and the NYSE Oscillator’s 20 day MA at an extreme level. Also, Nasdaq closed at 2,090 Fri, and 2,100 is major resistance. SPX rallied to 1,219.5 Fri, and 1,220 may be resistance. SPX may be creating a bearish head & shoulders pattern, with the left shoulder at 1,217.9, the head at 1,229.1, and the right shoulder at 1,220 (see chart). SPX may pullback, consolidate, and become more volatile next week. Major support is about 1,200, the current 20 day MA, which SPX held over the rally, and 1,200, in general, which is psychological support and a congestion area. Major resistance is at 1,220 and 1,229 (the recent high).
OIH closed at an all-time high and created a bearish hammer Fri. Major resistance is Fri’s high at 104. Major support is at 100.30 (previous highs), and the 10 day MA, currently at 99 1/4. There’s also an open gap at just below 95 1/2, and Jul Max Pain is still 95. OIH rose about 20 points, while oil rose from $47 to about $59 a barrel. Consequently, if oil falls to the low $50s, then OIH may retrace 50% of the 20 point rise. The steep rise (also, see MACD) suggests a consolidation period soon. Both the RSI and Oscillator (ULT) are severely overbought, particularly for an index.
Perhaps, the oil market has discounted future events that would influence oil prices, e.g. stonger than expected global growth, the start of hurricane season Jun 1st, which may affect oil platforms and refineries in the Gulf, end-of-the-quarter window dressing, and the 4th of July holiday, which is the start of the summer driving season. Also, I may add, the U.S. oil strategic reserve is filled up. So, the federal government isn’t draining oil from the market. Moreover, China’s economy is “overheating,” and it’s to China’s benefit to grow at a sustainable rate, to prevent inefficiencies.
Next week is a light economic and earnings data week. So, oil prices may have a more influencial effect on stock prices. Consequently, SPX puts, for example, may hedge OIH puts. Both SPX and OIH are at high levels. Economic reports next week are: Mon: Leading Economic Indicators, Thu: Unemployment Claims and Existing Home Sales, and Fri: Durable Goods Orders and New Home Sales. Also, the U.S. weekly oil inventory data Wed should move oil prices. I believe, the positive correlation in stocks and oil will decouple next week, because the longer oil prices stay high, the more negative it will affect earnings of non-energy stocks. Arthur Eckart, PeakTrader.com
See PeakTrader.com Market Overview section in Forum Index for charts.
Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.
Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time. This methodology has resulted in excellent returns with low risk over the past three years.
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Handling Stock Market Hardballs
As a market timer, the one thing we must always remember is that the markets can, and most definitely will, throw every possible hardball, curve ball, fast ball, knuckle ball, etc. at us.
The reason we invest in the stock market is because we recognize the huge potential for profits. But we are not in safe money market funds. We are timing in a freely traded market that is subject to the emotional whims of traders. And when money is involved, those emotions can, at times, be extreme.
We became market timers because we have realized that not only is there “no easy money” but also that the stock market will do all it can to “relieve us” of our money.
We are more than uncomfortable with the buy-and-hold approach to investing, and realize that although buy-and-hold may be fine if you are willing to wait 20-30 years, it can lead to huge losses over shorter time frames. The most current example being 2000-2002 when the S&P 500 gave up 50% and the Nasdaq Composite declined 80%. Huge losses.
The stock market is the ultimate of Big Leagues, and there are traders who understand the psychological warfare you are facing, and know how to use it to take your money.
Understanding those Big League rules, will put the winning odds back on your side. The timing strategies at FibTimer are designed to identify and follow trends. They allow profits to ride and cut losses short. This is what the professionals do, but most individuals have great difficulty doing.
Market Timing is Unique
Market timers face psychological battles that very few people ever face in their entire lives. There are so many differences between the emotions experienced in trading the financial markets, and what we experience in our lives, that it can easily interfere with our ability to trade.
If we can identify those emotions we can take steps to protect ourselves from them, stop them from influencing us, and become winning (profitable) market timers and traders.
For example, in the workplace, working hard and expecting to be justly rewarded for it are part of the American dream. Who would argue with the logic?
But in the stock market, work as hard as you can and the markets will still reverse on you and give you losses. Make the perfect trade and it can still go bad.
This is because timing the markets is not about our work ethic. It is not about genius or luck. It is about numbers and probability.
Numbers and Probability
Toss a coin 50 times and you can expect 25 times it will land heads up, and 25 times it will land tails up. But there is no rule that says the first 7 tosses will not all come up tails.
Once we realize that over time the numbers “always” add up in our favor, we can more easily endure the short term swings. The market “hardballs.”
Being prepared for all that the market can throw at us, helps us to stick with our trading strategy.
Once you face the fact that market timing isn’t easy money, or that you won’t become rich overnight, you will be able to prepare yourselves mentally for the long haul.
If you expect that at times there will be losing trades, you won’t be disappointed when they happen. You will have your eyes set on the big picture, which puts the odds in your favor over time.
Numbers And Probability
There are two important aspects of any successful market timing strategy or trading plan, and both need to be considered.
1. Probability – We know that over time, that if we flip that coin enough times, it will land 50% heads up, and 50% tails up. We can count on this. A string of tosses that have the same outcome mean little, as long as we keep tossing the coin.
2. Risk vs. Reward – Potential rewards (profits) must be greater than risk (losses).
Knowing that the laws of probability are on our side over time, if we can establish that risk vs. reward is in our favor, we can use these odds to create a trading strategy.
By looking at the history of the stock market over many years, we see that most of the time it is either trending up, or it is trending down. The “fact” that trending markets are the norm, is our market timing “trading edge.”
If each toss of the coin has even odds, but some tosses remain “profitable” for long periods of time, while those tosses that are unprofitable are of short duration and limited un profitability (losses kept small), we know that we will win over time as long as we make all the tosses.
At FibTimer we trade all trends. No one knows ahead of time which trend is the one that will continue for many months and make the big profits. All we know for certain is that the markets will spend more time “trending” than they will spend in trendless sideways trading.
The RISK is that trading all trends produces some losses if the trend does not follow through.
By trading “all” trends, we keep losses small because we do not stay with a losing trend. If the trend changes, we reverse position or go to cash according to the strategy used.
The REWARD is that we will never miss a trend, and since the markets are in trends more than they are not, and we make larger profits when the markets trend than the small losses from trend failures, we are profitable more often than not.
It is the in between times (trendless markets) that require market timers to understand this logic. Stay the course, make all the coin tosses, and over time, you win.
Conclusion
Scary ideas are no longer frightening after you’ve acknowledged them and know not only to expect them, but that they are will not harm you if you hold true to your course.
The more you can identify the scary aspects of market timing (or any trading), and prepare for every possibility, the more likely you’ll be able to persist in the face of adversity.
Market timing is challenging. Many who start fall by the wayside after they realize that it is not going to make them rich in days or weeks (amazing, but some really do expect that), or after one or two small losses.
Remember, there are many timers out there who have met the challenge and have the winning track record to show for it.
Look at FibTimer’s historical trading numbers. No emotion is involved so they look great over the years. But in the short term, there were many small losses.
Focus on the war, not the small battles along the way. Stick with the trading plan and you will be successful.
Editor FibTimer.com market timing services.
[tags]market timing,market timers,Stock Market,buy and hold,buy-and-hold,timing the markets[/tags]
Stock Portfolios
Stock portfolio is a complete combination of securities as well as investments that are held by an individual or institution. A portfolio comprises of an array of government and company bonds, common stocks from various business establishments and many other forms of securities and assets. There are many different stocks available in the market such as common stock, preferred stock, original issue stock, penny stock, story stock, synthetic stock, treasury stock and widow-and-orphan stock. It is very important to understand the risk factors associated with each type of stock before choosing one. Stock trading brokers can help investors select an investment product that has the probability of giving them the best returns.
The practice of creating stock portfolios for profitable investment is not new. As the stock market is very volatile, stock market traders depend on various information resources so that they can purchase the shares of the corporation with the potential for maximum appreciation in a given time frame. This information is usually available for free and traders put in place a set of rules that have been tried and tested by other successful traders. It is possible to trade stocks online and the Internet allows traders to share and discuss their experiences with various methods of speculation.
Traders have to correctly identify the direction in which stock prices are moving, especially in a volatile market. It is equally vital to anticipate the timing of price fluctuations. The reason for this is that an unfavorable price change can result in a huge loss in the short run while the trader can get a profit eventually. Conversely, a trader might buy a stock whose price may rise after the purchase but he might not sell in the anticipation of an even higher price rise. In this case, if the price falls suddenly, the trader is bound to suffer a huge loss. Therefore, timing is considered vital in online stock trading, which makes many new investors apprehensive while taking up trading.
Portfolios provides detailed information on Portfolios, Portfolio Management, Stock Portfolios, Leather Portfolios and more. Portfolios is affiliated with Project Portfolio Management.
[tags]Stock Portfolios[/tags]
Are You Looking to Buy Stocks
Investing for the future is important if you ever plan to retire. One form of investment is buying stocks in corporations. Stocks represent a portion of a company, so when you buy stocks, you are essentially buying into the company. You can benefit from any profits it makes, but you can also lose money if the company’s performance, or the market as a whole, goes down.
When you look at investing in stocks, you may want to consult a financial advisor who works with stocks and mutual funds for a living. He or she will have knowledge of which stocks you should buy and which ones you should avoid. If you wish to choose the companies you will invest in, look for companies that are growing and offer some stability. Also, if sales in, say, electronics are very high, you may want to invest in a company that manufactures electronics. Take some time to research the stock market before you make your investment decisions.
Once you have decided on some stocks you would like to purchase, you’ll need to pay attention to what the market is doing. In order to benefit the most from your investments, you’ll need to time when you buy, and when you sell, your stocks. If you choose some stable companies and buy stocks in them while prices are low, because of the market or because of a period of time where the company is not bringing in large profits, it is most likely that your stocks will increase in value.
When you are looking to sell your stocks, it is good to set a price for yourself and decide that when your stocks reach that price, you will sell them. Often, people hang on to their stocks, wanting to get the most out of them that they can, and then the market drops and they lose money.
You can see that there is frequent decision making in the process of buying and selling stocks. If you are willing to put some time and effort into your investments, you will be pleased to see how much you will profit from your stocks.
Learn more about the stock market and trading at http://www.theexecutivetrainer.com/stockmarket/.
[tags]buy, sell, stocks, market, investments, time, profit, companies[/tags]
