Lessons From A Flash Crash

The last time the stock market flash crashed, I was way over extended with my call options.  I was not paying attention or did not have sufficient alerts set up.  Like many, I was riding the wave of complacency.  The market was in an uptrend and despite minor warning signs, like low volatility, investor over-confidence, and many extended stocks, I was enjoying the relaxing ride.

I lost a ton of money in one day.

This time, with the market in yet another uptrend and a rising peak tide of good sentiment, low volatility, I was mostly in cash.  I had very limited long positions with tight trailing stops and only one call option in play (NVDA}.  Purely a hype play and I sold both call options shortly after the open Friday morning for nearly a 300% gain.

My stops took care of the rest.

I made a nice little profit and managed to protect most of it too.

IBD had a very interesting and timely article regarding the VIX, you can read about it here.

Basically the VIX was at all-time lows and despite a less than favorable UK vote and the ever depressing saga of Trumpolitics, there seemed to be little to no fear in the markets.

That was when it happened.

The VIX  “flashed” an extremely bullish signal (hitting historic lows) shortly before the selloff began.

By the time it was all over the market was down a lot!  It seemed everything lost value Friday.  But then I started looking at some of my watch lists and reading daily recaps and low and behold, the financial sector was up.

With republicans pushing through the repeal of Dodd-Frank and the up-coming Fed meeting where analysts believe rates will go up, Is the tide shifting?

Again, some other timely recap articles mentioned that the financials were bucking the trend and actually showing signs of recovery.  But much of their gains were on low volume.  Other articles talked about how during a correction, certain stocks and certain sectors will hold up better than others.  When the market does recover, and start another uptrend, the new leaders of the rally are rarely the same as the old leaders.

Selected stocks from the sectors which hold up better than the rest during a correction are more likely to be the new leaders.

So the questions are . . .

Is today the beginning of the end for the bull market and the start of the bear?

Or, is it yet another flash crash to bring the high flying market back down to support trend lines?  After all, we have had three of these within the past six months and each time the market recovers.

At least 3 flash crashes in the past 6 months

It certainly looks like a ton of money left the market Friday.  Just look at the formally high flying tech sector.  Interestingly, visually it looks like each crash is progressively more dramatic with more volume.  IF the money left the high flying tech sector, where did it go?

During a correction or consolidation, money basically goes one of three places.

  1. Cash.
  2. Defensive Stocks (like gold or consumer goods, food products and tobacco).
  3. New Sectors.

So to try and answer this I took a look at some screeners.  One is FINVIZ top gainers.  Believe it or not, there were 153 stocks earning over 5% Friday.  That is a lot for such a bad day on the street.

Here is how the 153 broke down sector wise.

Sector Industry Sub-Total
Basic Materials Independent Oil & Gas 20
Basic Materials Oil & Gas Equipment & Services 12
Basic Materials Oil & Gas Drilling & Exploration 6
Basic Materials Oil & Gas Refining & Marketing 4
Basic Materials Gold 1
Basic Materials Industrial Metals & Minerals 1
Basic Materials Major Integrated Oil & Gas 1
Basic Materials Nonmetallic Mineral Mining 1
Basic Materials Oil & Gas Pipelines 1
Basic Materials Steel & Iron 1
48
Consumer Goods Personal Products 3
Consumer Goods Sporting Goods 2
Consumer Goods Textile – Apparel Clothing 2
Consumer Goods Beverages – Soft Drinks 1
Consumer Goods Cleaning Products 1
Consumer Goods Electronic Equipment 1
Consumer Goods Home Furnishings & Fixtures 1
Consumer Goods Textile – Apparel Footwear & Accessories 1
12
Financial Regional – Mid-Atlantic Banks 7
Financial Money Center Banks 2
Financial Regional – Midwest Banks 2
Financial Regional – Northeast Banks 2
Financial Savings & Loans 2
Financial Asset Management 1
Financial Credit Services 1
Financial Investment Brokerage – National 1
Financial Regional – Pacific Banks 1
Financial Regional – Southeast Banks 1
Financial REIT – Diversified 1
Financial REIT – Hotel/Motel 1
Financial REIT – Office 1
23
Healthcare Biotechnology 12
Healthcare Medical Appliances & Equipment 4
Healthcare Medical Instruments & Supplies 3
Healthcare Medical Laboratories & Research 3
Healthcare Drug Delivery 1
23
Industrial Goods Heavy Construction 4
Industrial Goods Industrial Electrical Equipment 2
Industrial Goods General Building Materials 1
7
Services Shipping 8
Services Apparel Stores 6
Services Specialty Retail, Other 5
Services Department Stores 3
Services Home Furnishing Stores 2
Services Air Services, Other 1
Services Business Services 1
Services Education & Training Services 1
Services Gaming Activities 1
Services Publishing – Books 1
Services Restaurants 1
Services Security & Protection Services 1
31
Technology Communication Equipment 2
Technology Semiconductor – Integrated Circuits 2
Technology Application Software 1
Technology Diversified Communication Services 1
Technology Networking & Communication Devices 1
Technology Wireless Communications 1
8
Utilities Diversified Utilities 1
Total                            153

 

Of course, one day does not a trend or correction make but it might be interesting to keep an eye on what the market does, and if it does correct, which sectors hold up better than the rest.

Will it be Basic Materials?  Financials?  Healthcare? Or some yet to be determined sector?

What do you think?

Flash crash, beginning of the end, or market rotation?

Tracking The IBD 50

I love looking at data, discovering new trends, and finding hidden cause and effect relationships.  That is probably why I like spending hours analyzing computer event and security logs.   I also tend to do the same thing researching the stock market, especially when I notice a dramatic change.  In this case, I noticed a lot of new stocks listed on the weekly IBD 50 list.  So, I started something that I have been meaning to do for quite some time but never really got around to it.  Until now.

Tracking the IBD 50 list.

We all know the only state the market stays in is a constant state of change.  Prices fluctuate every day, every minute.  And it stands to reason that any watch list will do the same, though not necessarily on a daily basis.  My “gut” was telling me that the IBD50 list had been fairly stable and now quite a few new members had joined the list.  Conversely, this meant quite a few had fallen off of the list.  Of course I wanted to see the evidence for myself.  So I sat down and started plotting out the last two months or so of reports.

This is what I came up with.

Listed below is the stock symbol, IBD’s Group Classification, and the week the stock appeared / or not on the list.  If it appeared on the list the number is the ranking IBD gave it from 1 – 50 with 1 being the best of the best.  If it did not appear on the list then that week is left blank.

Now I have not had a chance, nor enough back testing evidence, to find out if these changes are due to quarterly reports, market conditions, changes in market cycles, investor/consumer sentiment, hype, fear, or some combination of all of the above.   But at least I seem to have enough proof that my gut was right.

Breaking it down into adds, drops, returns (on,off,back on again), and stay(remains on the list each and every week) and by sectors we get the following.  This was an attempt to see which sectors are strong and remain on the list, weak and dropping off, and gaining by being added to the list.

I’ll be tracking this further as time goes by and reposting any additional insights but I thought I would get it out there for those of you who might be interested.

Bargain Shopping

stockrally

For my first 2017 post, I could write about my 2016 watch list returns and how they once again beat all three averages or how my overall investment returns fared much better or how my option trading was a total mixed bag of results; but I won’t.

Instead, I am going to form this post around a question many folks are asking now a days regarding the Trump rally and some interesting “gossip” predictions for the coming year.

First: The Trump Rally:

Though I have been known to try and hop on the momentum bandwagon as the rally train seems to be gaining steam and leaving the station for a run, I generally don’t chase stocks or rallies – especially once they have left the station. 

Instead, I look for good quality stocks setting up in either a good pattern, nearing buy points, or for some reason, have been slow out of the gate and not participated in the rally.

The Trump rally has been in full steam ahead mode since the election and many high flying stocks are now looking tired or pulling back. 

In fact, out of all the current IBD 50 list of stocks, most have notations of “well extended past buy point” or “OK to take profits”. 

Most, but not all.

Some high fliers are forming good secondary buy points or are within buy range of break out points.

Here are the ones worth considering for a watch list – according to IBD.

SCHW – Charles Schwab nearing entry point with a four weeks tight pattern (a bullish consolidation pattern).

OZRK – Bank of the Ozarks is nearing a cup / handle buy point.

MSCC – Microsemi, currently in a three weeks tight pattern.

GS – Goldman Sachs has enjoyed the Trump rally and is in a four week tight pattern.

These next two are very intriguing to me because they are forming one of the strongest positive patterns and are NOT extended past buy points.

STMP – Stamps, is in a cup with handle pattern and near a breakout buy point.

AMN – AMN Healthcare, is also in a cup with handle pattern and near a buy point.

Of course, there are some other non-IBD50 stocks I am watching.  These include:

MLM – Martin Marietta Materis, is in a nice flat base on base pattern.

STZ – Constellation Brands, has been hit hard by the Trump election results because of “Mexico” and fears of tariffs and trade wars; however the stock is near support and in a nice reversal pattern.

CX – Cemex, is a Mexican Cement Company which also has been hit hard by the Trump foreign economic policy.  However, nearly one third of the company’s business comes from US infrastructure demand.  Wall or no Wall, the US is going to be building up infrastructure and needing cement.

And last but not least are some speculative and “rumor” stocks for a 2017 watch list.

Buyout Rumor Candidates:

NFLX:  Yes, believe it or not there is a rumor out there regarding some big entertainment conglomerate type of media company snatching up Netflix.  The front-runner appears to be DISNEY.  Speculation has it that CEO Iger, set to retire in 2018, is looking for one more big deal.  NFLX is also nearing a top level resistance and breakout point.  So the stars may be aligning for some excitement in 2017.

There are other rumored buyout stocks out there but NFLX is by far the biggest one of all.

Of course all these stocks plus my watchlists listed to the right are exactly that.  Stocks to watch and research.  It’s up to you to decide if and when to invest in them.  I look for good set ups and entry points based on IBD suggestions.

How do you look for bargain opportunities in the midst of a rally? 

Making Good Choices

Political Choices:

Well, there you have it.  Congratulations to the GOP, President Elect Trump and all their supporters.  They wanted change and they got it.

Not only have the republicans won the presidency but they also have control of both the house and senate.

A political trifecta.

Let’s hope the elected officials and their appointees make good choices for America and the world.

Investment Choices:

Switching to topics a little closer to this blog, my investment group held its monthly meeting the Monday before the elections.  Obviously the elections were the topic of discussion within our investment group as well as possible actions by the Fed.

If you look to the right, I have posted our groups stocks of interest for November.  My selections start about half way down with ACN .

Here is what I wrote in the newsletter:

For this month I ran a FINVIZ scan for quality dividend paying stocks. 

Why?

IMHO, no matter who wins the election I see the following happening.

  • Interest Rates are going up.
  • Inflation is going up.
  • The National Debt is going up.
  • And, most likely, stocks will be going down.

Other things that could happen that would do nothing except add uncertainty and volatility?

  • The election could be contested.
  • The Democrats could sweep all 3 branches of government
  • The GOP could sweep all 3 branches of government

People could end up flocking to dividend paying stocks for safety.

We will see if these ideas, stocks of interest, pan out to be good choices or not.

And finally, a topic a little closer to home but valuable none the less in how to approach making good choices.

A New Cell Phone:

My second oldest daughter, the artist, is growing up.  She graduated high school with honors, got accepted to all three colleges she applied to – including one considered to be in the top echelon of art schools in the country, got her first paying job this summer and just this past week, got her very own cell phone – on her very own plan – with her very own money.

Even though she still has a lot to learn, it is these last two accomplishments that have me quite interested and proud.

OK, getting accepted to SVA was awesome, but these last two offer some real world practicality and experience when it comes to everyday survival.  As a parent, it is particularly gratifying to see your children grow in practical, real world, skills and decision making.

First, some background.

Many years ago, my wife and I got a bargain 3rd party flip 2-3g phone for the kids.  It was listed in my contacts as “kids phone”.   We used it to give our kids a phone so they could keep in contact with us, send us texts when they needed to be picked up, and, thank god it never happened, had a phone in case of emergencies.

Now that our budding artist is becoming more independent, and actually saving some serious money – for a teenager, she started to think about graduating from that old flip phone.  Seriously, many of her college mates didn’t even know or realize that anybody still had one of “those” phones.  So, yes, there was a bit of a social stigma attached to an 18 year old college student owning a non-smart flip phone.

Besides, she really wanted to be able to play Pokémon Go.

She started out researching all the different choices in smart phones.  She looked at all the different features, reviews, and prices.  She looked at different providers and plans.

At this point, she started asking us questions.  She asked what all the different terms and conditions meant and why we had chosen the phone we had.   She was particularly surprised that service providers not only charged for plans but also for phones.

Her first initial foray into service providers was “gee, $25 / month is a good rate”.   To which I replied that is just for the phone.  You have not even gotten to the page with all the different rate plans for voice and data charges.

“Oh, I thought that was for everything…”

Nope.

–          At this point she probably realized why we chose the simple 2g flip phone

And remember, that is for a two year plan.  You are basically financing the cost of the phone over 24 months.  If you continue, renew your plan afterwards, even keeping the same phone, you will most likely keep paying the same monthly fee.

“Ohhhh…”

You might want to look at refurbished or used phones.

“ewww, why?”

She didn’t actually say ewww, but her expression did.

Well, having been in the technology field for over 20 years I can tell you that “refurbished” really means somebody did not like the interface or could not figure out how to use it.  I would say over 90% of returned, refurbished items are perfectly good.  You might want to also check out some of the resale sites out there such as eBay for used and refurbished phones and compare the prices and balance that against what you would pay a national cell phone provider to “rent” your phone.

We also discussed data plans.  I told her we had a family data plan that was capped at 3 gigs per month.

“Is that enough?” she asked.

Well between 3 phones, we very rarely go over that because, as you know, everyone is very cognizant of using Wi-Fi instead of the cellular service.

We also discussed coverage maps and roaming charges.  Never, not once did I try to influence her towards a specific phone, service provider.  I wanted her to ask the questions, gather the information, and make a decision she felt was right for her.

To make the choice that was right for her.

She spent the next week or so researching cell phones, plans and prices on various sites and ultimately decided on a slightly older (n-1) generation smart phone which had all the performance and features she wanted.  The only thing left was finding one at a good price.  Which she did.

In the end, she got a smart phone, from eBay, for about a third of the price of a two year contract and a plan from a top national provider she felt comfortable with using and paying for.

The positive lessons of this story are:

–          Ask questions and others for their opinion.

o   There are three type of people in the world.

  • Those who truly want to help and will willingly give their advice
  • Those who are egotistical enough and feel the need to give their advice.
  • And those who aren’t really helpful at all and don’t care and will not give their advice.

o   So a 2 out of 3 batting average for people willingly giving their advice and wanting to be helpful is pretty darn good.

–          Gather as much information as reasonably possible

o   Don’t over analyze.

–          Go through the process of balancing needs vs. wants vs. desires

–          And even though it did not come into play here, make a decision and move on.

o   Don’t second guess.

Many hours of worry, stress and angst can be avoided by doing ones due diligence, networking, research and information gathering to make an informed decision and hopefully good choices.

An Implied Alternate Reality

2016-election

Earlier this year a fellow blogger emailed me with one brief question.
“Am I in an alternate universe?”
Despite the ambiguity of context, I knew exactly what he was talking about.
You see, at that time a highly unlikely GOP front-runner was emerging from the ranks and dominating the headlines.
There was also a highly unlikely Dem candidate making headway into the Dem front-runners lead.   It was a very strange time in American Politics.
And it still is.
After all, how many presidential candidates can get away with insulting just about every demographic group there is, brag about “playing the system” and not paying taxes, and throw temper tantrums and name call everybody he doesn’t like (including the Fed Chair) AND STILL be considered seriously to lead the United States of America.
Now don’t get me wrong, I don’t like the “other candidate” either. Having held a security clearance myself, I know very well that I and any other regular shmuck caught doing the things she has and saying the things, or not saying the things, she has would end up sending our sorry stupid butts right into the slammer. But not hers.
Yes, I am afraid we really do live in an alternative political universe unlike any we have ever witnessed before.
But back to my original email . . .
My response to the alternate universe question was this essentially this.
And I quote . . .

“People are either for or against Trump. He has a very vocal and loyal base but, I’m not sure how well that translates into growth potential.
In other words, as more republican candidates drop out, their supporters are primarily anti Trump and will go vote for whomever is left, thereby decreasing Trumps front runner status. My guess is that whomever is left standing against Trump will have the votes to win the nomination”

Well, we all know how that turned out now don’t we.

So, it is with great trepidation that I make the following points, and ultimate predictions . . .

But before I do, let me point out some interesting stats from a recent IBD article on trading the presidents.

  1. Democratic Presidents have enjoyed a 12% annual return in the S&P since 1981
  2. Republicans 4%
  3. The standard deviation of the S&P for Dems is 12%
  4. Republicans 18%
  5. You can’t time the market and there is often no way to determine exactly when a catastrophic event or crash can or will happen. If you move the 2008 crash out a few months, the differences in the above numbers essentially goes away.

So what about GDP?

  1. Annualize GDP during the same time period is about 5.31%
  2. Republicans enjoyed a 5.87% average annualized return
  3. Dems, 4.57%
  4. The GDP standard deviation for the GOP, 2.75%
  5. Dems, .75%

Does all this mean that there is a direct correlation to market performance and who happens to occupy the White House?
Perhaps, and perhaps not.
I still think you need to factor in other things like the fed, interest rates, the dollar, oil prices, economic data and corporate earnings. Built into all these things is another factor called uncertainty. And if there is one thing the market hates is uncertainty and unexpected events. This uncertainty is expressed as implied volatility.
The market is essentially a collective “opinion” of what might, or probably will, happen.
So as the election nears and the results come in, take a look at how the market is reacting by measuring the implied volatility.
IBD had the following suggestions:
If implied volatility is high:
– Bullish strategies > cash secured short puts, short put verticals and covered calls.
– Bearish strategies > short call verticals
– Neutral strategies > iron condors
If implied volatility is low:
– Bullish strategies > long call verticals
– Bearish strategies > long put verticals or long out of the money put calendar spreads
– Neutral strategies > at the money calendar spreads
And what about my predictions?
I predict one candidate will cause greater volatility than another.
I predict that should the high volatility candidate win, he will be in for a really big shock and hate his new job.
I predict that the fed will raise rates this year, after the election.

  • one quarter of a point for the non-harassing low volatility candidate
  • half a point for the high volatility harassing and personally insulting candidate.

And as tempting as it is to use this little gift of memorabilia, I predict that I never will. It just might be worth something some day.

trump-roll