Q&A: How to Judge an Economic Data Point
Dear Michael, How can you call the jobs report ‘Meh’? NFP came in at +235K and beat the street expectations. How is that meh? -Randy Dear Randy, The 235K headline number was fine, but that’s not the totality of the report. Average hourly earnings grew by just 0.2% vs. the 0.3% consensus, which offset the impact of the headline number beat. Plus, you have the remember that expectations were running very high headed into the report. On Wednesday, the ADP employment number beat by a mile. In addition, bonds have been sinking while the US dollar has been rising, indicating that traders have been anticipating the type of strong economic data that has bolstered the Fed’s case for rate hikes. How to Look at Economic Data Points In isolation, economic data points are completely useless. To properly understand them, you must bring them into context by doing 2 things: Measure them against expectations as set by economists and the market itself. Measure them against expectations as set by the market itself. First, let’s look at expectations as set by economists. News and data providers like Bloomberg and Reuters collect forecasts from various economists to determine a consensus forecast, which is a rough approximation of the market’s expectations. With economic statistics, the consensus forecast is determined by taking a median of the data set. Now, for last Friday’s jobs report, the consensus forecast (the median) was 190K. So 235K was a beat. Had the consensus forecast been 300K, 235K would have been disappointment. However, we must also take the actual market’s behavior, because they also play into expectations. As I stated earlier, bonds were falling headed into the report. This is because a strong report would support the case for more Fed rate hikes, which would push down bonds. But what if bonds rallied ahead of the jobs numbers? That would indicate that traders expected a miss in the jobs number. Admittedly, this is more art than science, and it’s generally only applicable to major economic data points like NFP, GDP, CPI, etc. But by focusing on how economic data is reported relative to expectations, you can get a sense of just how ‘good’ that data actually is. And just so you don’t forget, I’ll say it again: In isolation, economic data points are completely useless. To properly understand them, you must bring them into context by doing 2 things: Measure them against expectations as set by economists and the market itself. Measure them against expectations as set by the market itself.
Continue Reading -->Chart Analysis: SPX
We have mixed markets to start the week. Europe is up a little and Asia had decent strength. The SPX futures are down 1. Last week we put a low in at 2354 right at the 21 day. Now we will see if that was the correction or do we take that out later this week with the Fed on Wednesday? 2376 is Friday’s high.
Continue Reading -->Shorts Gone Wild! How to Avoid Getting Crushed by Stocks Like MBLY
Mobileye (MBLY) is a name I cover in my Morning Note fairly regularly. Today, it’s up $14+ after getting taken over by Intel (INTC). Unfortunately, Citron put out a short report on it a few weeks ago, saying it was going to $35, and I got away from it. However, the MBLY action is teaching us a good lesson about shorting stocks. When a stock is still above the 8/21 day moving averages in the face of a negative report, then it’s showing strength. So even if we’re not getting long the stock, there’s no way we’re shorting it when it’s strong. If the stock action doesn’t confirm bad news, the bad news may not matter.
Continue Reading -->T3’s Take 3: The US Dollar Sinks on a ‘Meh’ Jobs Report
1) A ‘Meh’ Jobs Report This morning, the US Bureau of Labor Statistics said that 235,000 nonfarm payrolls were added in February, beating the 200,000 consensus. The unemployment rate was 4.7%, in-line with expectations. However, average hourly earnings grew by just 0.2%, missing the expected 0.3% reading. That drove profit-taking in the US dollar, which has been moving higher in anticipation of a March rate hike. That said, the headline number was still pretty good, and traders are unwavering in their belief that March is in play. The CME’s FedWatch Tool shows that markets are pricing a 91% probability of a rate increase this month. 2) The Big Yawn Market While I was hoping for some volatility on today’s jobs numbers, we didn’t it. Stocks once again traded in a very tight range, with the S&P 500 trading up 0.3%. The Russell 2000 and S&P 500 also made modest gains. Like the US dollar, bank stocks saw profit-taking on the disappointing hourly earnings number. Meanwhile, rate-sensitive groups like gold miners and utilities caught a bid. The brightest spot of the day was biotech, which rallied nicely in the afternoon on speculation that sector leader Gilead (GILD) is about to announce an acquisition. Plus, President Trump is expected to appoint Scott Gottlieb, a doctor with deep ties to the pharma industries, as FDA commissioner. Presumably, he’d create the friendlier regulatory environment that Trump has promised. 3) Neutrality Last week, various sentiment indicators showed that traders were getting very cocky. This week, the picture is quite mixed. The AAII Sentiment Survey showed that individual investors have become much more cautious, even though the major indices barely moved. Click here to read my full Weekly Sentiment Update.
Continue Reading -->Weekly Sentiment Update: Back to Neutral That Fast?
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, we saw sentiment climb to frothy territory. Now, let’s see if anything’s changed now that we’re seeing some signs of deterioration, most notably the relative weakness in the Russell 2000. 1) VIX Spread – Bullish The 3-month VIX spread is at +3.96, which indicates traders are still not concerned with volatility. This is a bullish reading. 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 66, down from 81 last week. F&G operates on a 1-100 scale, and 66 indicates moderate greed. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 30.0% of individual investors are bullish, which is well below the long-term average of 38.5%. It’s also slightly down from last week, which is a surprise to me. Bullish AAII Sentiment has been below the long-term average for 7 of the past 8 weeks. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.72 yesterday, which is a 2 week high. The 3-day moving average is 0.63. This is basically neutral. 5) ISE Sentiment – Neutral The ISE Sentiment Index is currently at 112 (112 calls for every 100 puts) at yesterday’s close, which is a bullish reading. And the 10-day moving average is 84.1. Even though the 10-day moving average indicates high demand for puts relative to calls, I’ll call this neutral because it’s moved up quite a bit, and for the past year or so, the number seems to be perpetually low. In fact, I may have to boot it from these Weekly Sentiment Updates. Conclusion Out of 5 sentiment indicators, we have 2 bullish, 2 neutral, and 2 bearish. So after two weeks of undeniably bullish readings, traders are back in neutral territory. It’s not exciting… but it’s the truth.
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Continue Reading -->9 Ways to Destroy Your Account with Options
Options trading is fun. Options trading is sexy. And options trading can destroy your account if you don’t know what you’re doing. Profitable options traders understand the principles of options pricing, order entry, and market mechanics. If you fail to understand these 3 critical elements of options trading, you are not actually investing. You are gambling! So before you hit the buy button on your first options trade, carefully read through this list to make sure you are avoiding these deadly mistakes. There’s a reason I know they’re deadly. I’ve made them all myself. Multiple times. So please, be smarter than I was! Mistake 1: Thinking the Guy on the Other Side of the Trade Is a Guy There is no such thing as easy money in options trading. Let me repeat: there is no such thing as easy money in options trading. As you start exploring options, you’re going to be be tempted by options that are low in price. Well, if the options are so cheap… why is somebody willing to sell them? Remember, the guy on the other side of an options trade isn’t even a guy. Or a woman. It’s a computerized algorithm developed by math and physics PhD’s that are way smarter than you or me. Those algorithms generate millions of dollars a day by selling overpriced options to overeager traders. If you think you see easy money, it’s usually a trap. Mistake 2: Trading Far Out of the Money Options An option is far out of the money when its strike prices is far away from the current stock price. Beginning options traders are often attracted to these options because they look cheap. We’ll Tesla Motors (TSLA) as an example. Let’s assume the stock is trading at $250. An at-the-money call option expiring in 3 months is priced at $19 (or $1900). But the $300 call is trading at just $4. Many beginning traders will be more attracted to the $300 call simply because it has a lower nominal price. However, far out of the money options require huge moves in short time frames to pay off. So you’re paying less money out of pocket, but your trade is much less likely to make money. Mistake 3: Trading Illiquid Options Options on major stocks like Amazon.com (AMZN) and Apple (AAPL) tend to trade with fairly tight bid-ask spreads, and it’s fairly easy to trade in and out of them at reasonable prices. However, you should be very careful with options on small and mid-cap stocks. They tend to have very wide spreads and do not have much trading volume. So odds are you’re going to have to overpay just to get into the trade, and get underpaid on the way out. And in some rare cases — particularly with very far out-of-the-money options, you may have an awful lot of trouble getting trades completed at all. Last year, I bought way, way out of the money put options on Ambarella (AMBA) puts and doubled my money. However, there was no market for the options, and I couldn’t get out at any price. I went from making over 100% on the trade to losing 100%! Mistake 4: Blindly Buying at the Bid and Selling at the Offer As I said earlier, algorithms generate millions of dollars a day by selling overpriced options to overeager beginners. How do they do this? They buy low and sell high. For example, right now I’m looking at April $17.50 calls on UnderArmour (UA). The bid is $1.30 and the offer is $1.65. That means the market maker will buy the option at $1.30 and sell it at $1.65. That gives them a tremendous profit margin. However, you don’t have to accept those prices. Try bidding and offering in the middle. For example, you could bid $1.48 (basically the midpoint) and still get filled. That would save you 17 cents, or $17 a contract. On a 10-contract trade, that’s $170! Mistake 5: Not Double-Checking Your Orders Before you hit send on your options order, double-check it. When dealing with options, you’re often looking at dozens or even hundreds of small numbers on a single computer screen, and it’s easy to make mistakes. Make sure you selected the right the expirations and strike prices. This is especially important if you’re entering an order with multiple legs. You may fool yourself into thinking you’ve found an especially attractive calendar or butterfly spread when in fact, you just got ripped off. Mistake 6: Selling Options While Naked Get your mind out the gutter! Selling naked options entails shorting calls or puts without any kind of hedge. This is what we call “picking up pennies in front of a steamroller.” Let’s talk about naked shorting of call options. This is a bearish trade because you will make money if the stock falls. But if the stock rises substantially, you’ll get destroyed. Let’s say we want to sell nVidia (NVDA) June $100 calls for $6.30. If NVDA is below $100 at expiration in June, I’ll have made a pure profit of $6.30, or $630, per lot sold. But if the stock was at $120 at expiration, the options would be worth $20 each, and I’d be out $13.70, or $1370, per lot. These are the types of trades where 1 bad trade can wipe out your last 10 good trades, so just don’t do them. Mistake 7: Ignoring the Calendar Events like earnings reports, FDA decisions, product announcements, dividend payments, conference appearances, and economic data releases can have a tremendous impact on options prices So before you place a trade, be aware of what’s on the calendar for the stock or ETF in question. For example, if Alphabet (GOOGL) is about to report earnings, its options will tend to be very expensive in the days before the report. Mistake 8: Not Understanding Options Pricing Basics Most options beginners think a $0.01 option is cheap and a $10.00 one is expensive. The reality is not that simple. An option’s
Continue Reading -->Q&A: Is the Russell 2000 Overbought?
Hi Mike, I’m a subscriber and I mostly follow Scott Redler’s Daily Recaps. I just noticed that wrote about sentiment. Anyway, I only trade TNA and TZA (3X Russell 2000 ETF’s). Don’t you think it’s way overbought? -Rolando The Russell 2000 has come 21% since its pre-election lows, so under the most basic rule of the market — what goes up must come down, eventually — it may be overbought. But let’s take a look at a chart of the Russell 2000 ETF (IWM). The Russell is pretty far above its 200 day moving average. However, prior to the last pop off the February lows, the Russell spent 2 months doing nothing. And now, IWM basically riding the 8 & 21 day moving averages and building a new trading range between $138 and $141. So from a big-picture perspective, the Russell may look a bit overbought — but that may not mean that it’s going to drop. It could very well drop into another low-volatility range which will allow it to work off the overbought condition. I’d watch to see if IWM tests the 50 day moving average, and how it behaves from there.
Continue Reading -->Weekly Sentiment Update: Bulls Are on Parade and Froth Is Setting In
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, we saw sentiment climb to undeniably bullish territory. Now, let’s see if anything’s changed following the market’s HUGE bull move off President Trump’s address to Congress. 1) VIX Spread – Bullish The 3-month VIX spread is at +3.88, which indicates traders are still not concerned with volatility. This is a bullish reading. 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 81, up from 75 last week. F&G operates on a 1-100 scale, and 81 is in extreme greed territory. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 37.9% of individual investors are bullish, which is right in-line with the long-term average of 38.5%. It’s also slightly down from last week, which is a surprise to me. This is Neutral. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio is at 0.51, which is near 3-month lows. There is a whiff of panic buying here. The 3-day moving average of 0.62. This indicates higher-than-average bullishness. 5) ISE Sentiment – Neutral The ISE Sentiment Index was 119 (92 calls for every 100 puts) at yesterday’s close, which is a bullish reading. And the 10-day moving average is 84.9. Even though the 10-day moving average indicates higher recent demand for puts, I’ll call this neutral because that moving average has moved up quite a bit, and the 119 reading is the highest we’ve seen since early December. Conclusion Out of 5 sentiment indicators, we have 3 bullish, 2 neutral, and 0 bearish. As I said last week, the ISE Sentiment Index seems to always read bearish no matter what’s going on in the market. So that neutral indicator actually doesn’t count for much. So for 2 weeks in a row, traders seem very bullish. That doesn’t necessarily mean we’ve topped out, but there is some frothiness to the action. I would get really worried if the VIX spread expanded to 5, because that would mean traders are pricing in basically no volatility at all following a 15% run off the pre-election lows. For now, I urge you to remember that market trends often go way longer than may seem reasonable. Many traders try to use sentiment indicators as buy/sell signals, but that is a very dangerous game.
Continue Reading -->Resistance and Support Ahead of Trump’s Big Speech
The Russell 2000 is popping 0.6% today while the major averages are only barely green. On Friday, it nearly tested that descending trendline from which the recent little rally erupted. Has resistance become support? I assume if the Russell can hold this 1380-1400 range, I assume the bears don’t stand much chance of finally breaking the bull. Looking ahead, the next major potential catalyst is President Trump’s address of Congress tomorrow. The big question is how much will he detail will he offer? Trump won the election on sweeping generalities, but there’s a lot of demand on him to get down to brass tacks. Since Trump is a typical CEO (long on broad visions, short on the details that get left to underlings), expectations are extraordinarily low in this regard. However, I would not be so quick to count him out completely. From about August 2016 until the election in November 2017, Trump cut through the competition like a hot chainsaw through butter. He was the hammer for a while… and now he’s the nail. For the past month or so, he’s been hammered relentlessly and is in need of a win. The bar is low. And perhaps by offering even minimal ‘real’ information on tax reform, infrastructure spending, and health care, markets may respond very favorably. Why? Because they’re not expecting much. It’s the equivalent of a company heading into earnings after getting a bunch of downgrades and estimate cuts — it doesn’t take much positive news to start a countertrend rally. There’s also the possibility that Trump offers significant details to confound his critics. And if indeed Trump does deliver, the Russell may really rip.
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