Update on the S&P Trading Outlook

This is the chart I made quite recently with my near-term outlook on trading the S&P 500:



And here is an updated version, with an educated guess as to what may happen to the S&P 500 after the initial excitement of some earnings beats gets priced into the market:

Gold Bust

My dour gold trade hasn't worked out quite as planned:

Trading Outlook for the S&P 500 Next Week

Charts for Wednesday

Coeur de Pirate

Listening to the 200th CBC Radio 3 Podcast this afternoon, I heard the lovely lilt of Coeur de Pirate. Grab a plate of poutine and enjoy:

End of a Rangebound S&P 500?

Here is an up-to-date chart of the S&P 500 for the past three months:


The market has been trading within a 60-point range over the last two months. The S&P is currently heading toward the lower end of the range after last Thursday's 2.6% dump.

The questions for me are:

1. Does the convergence of the 200DMA line and the lower end of the recent trading range mean we'll see the S&P fall toward the ~880-level, fail to penetrate it, and perpetuate the rangebound trading action through the summer?

2. Or, on the other hand, if the ~880-level is convincingly broken, should I then pile into a healthy short position as the market breaks down yet again?

I'm waiting and watching, with a small amount of money currently engaged in the market.

With these questions in mind, I have a couple of other annotated charts in the back of my mind.

Here is a longer-term chart of the S&P showing an interesting trendline I found. The red line shows support in late-January and early-February became overhead resistance in May and June.

On the chart below, we see another recent, related trading channel broken to the downside:

Matt & Kim

Pitchfork pointed me to Brooklyn's Matt & Kim. My first impression is they've got that Beat Happening DIY-thing going, but with infectious energy. And they make good videos. Here are a couple:

Ed McMahon's Legacy

On a more tasteful, serious note, I bet Ed said "Here's Johnny" during the golden toilet scene. And the lawyers flushed that line. No, really.

Speaking of flushing, the price of gold is swirling down...

Tim Knight at the Slope of Hope convincingly made the technical argument for going short gold in several posts. Here's the post that caught my attention:

06/18/2009
I {Heart} GLD Short

Sorry to keep harping on this - - particularly to those who belong to the First Church of Precious Metals, but I'm just ga-ga over shorting GLD right here. It's (a) a clean trend break; (b) a terrific failed pattern; (c) has a clean-as-a-whistle stop; (d) a great risk/reward ratio.

Unfortunately, Tim closed out his GLD short just as I piled into some puts. I think he may have pulled the trigger too soon. Let's look at some charts (click on 'em to make 'em large and legible):







A fundamental reason for gold to fall is deflation.

Here's an updated annotated chart with my trading plan:

Innocence Mission on PRISM circa 1995

Below is the Innocence Mission's appearance on a PRISM show featuring performances from the Chameleon club in Lancaster, PA. The band had recently released Glow, my favorite record of theirs, so enjoy.

Throwing Back the Apple

This is Pale Saints, a shoegaze band signed to 4AD Records during the late-80's and early-90's. "Throwing Back the Apple" appeared on their 1992 record, In Ribbons.

Looking at AAPL, if I were long, I wouldn't be throwing back the apple just yet:

Golden Crosses

Bloomberg ran a premature piece yesterday by Julie Cruz on the golden cross. What is the golden cross? Here's an excerpt that explains the phenomenon:

The Standard & Poor’s 500 Index is approaching a so-called golden cross that’s considered a buy signal by analysts who make predictions based on patterns in price charts.

A golden cross occurs when the 50-day moving average, which is currently at 878.04 for the S&P 500, rises above the 200-day moving average, which is at 918.33, Bloomberg data show. The formation implies further gains for the stock market, according to this type of technical analysis.

“If the S&P can hold above its 200-day moving average, the potential for a golden cross increases,” Mary Ann Bartels and Stephen Suttmeier, technical analysts at Bank of America Corp., wrote in a report to clients yesterday.

The U.S. benchmark index’s 50-day moving average has been below the 200-day moving average since December 2007. The 40-day moving average already went above the 150-day moving average in May this year, forming a so-called silver cross, according to Bank of America.

As much as I enjoy playing with technical analysis, I find I'm still quite skeptical of its reliability and predictive capabilities. So I fired up charts of the S&P 500 since 1980 and picked out the twelve golden crosses over the past 30 years.

I have attached and annotated those twelve golden crosses in charts below. I have marked the date of the golden cross with a purple vertical line, the next day's open price with a red/green line, and charted the next six months-or-so to see if the trade was profitable or not. Please click on the image to make it large and legible.














Before considering the success rate of buying the index at the open following the golden cross event, one should note one significant caveat: the bull market of 1982-1999 encompasses nine of the twelve S&P 500 golden crosses since 1980. That means there's already a positive bias on these results. However, the most recent three golden cross trades were post-1999, and were all very profitable.

Taking into account upwards of a six-month holding period for the trade, my quick-and-dirty analysis says that golden cross trades numbered 1, 3, 8, 9, 10, and 12 provided excellent returns. Trades numbered 6 and 11 provided good returns. Trades 2 and 5 had their moments but were mediocre. And trades 4 and 7 were craptastic.

From this admittedly small sample size, the golden cross S&P 500 trade looks pretty good, but with a one-in-six chance for craptastic results, is far from foolproof. Golden crosses can engender golden blunders.

Kingdom of Rust/Ill-Placed Trust

One Great City

Health Net's Fit Chart

Over in the comments at Slope of Hope, Health Net (HNT) was mentioned as having a technician's dream chart.



I've annotated HNT's chart above. I question how dreamy it is, given the overhead resistance about $2.50 north of today's close. And speaking of today's close of $15.27, after hours trading brought HNT's price down to $14.90. So HNT has that going for it.

South Korea Trade - After the Initial Nuclear Threat from the North

I closed out the South Korea trade by selling my June $35 EWY calls for $1.90. That's a quick gain of 46% off of a cost basis of $1.30. Considering how craptastic my shorts have been over the last month, I am very pleased at this one-day result.

As I write this, the KOSPI is down about 0.25%, so it looks like I timed closing out this position better than when I opened it.

Even though the inspiration for this trade was buying in on overreaction to bad geopolitical news, the relative strength of the South Korean stock market and its strong upward trend may invite me back into buying more calls in the near-term. Here's the pictorial justification for such a trade:

Jay Bennett, R.I.P.

Some fine fellow uploaded this Wilco performance on Austin City Limits from 1999. This concert features my favorite Wilco incarnation from the late 90's, featuring the unfortunately late Jay Bennett on keys, guitar, and the motherfuckin' 12-string on "Nothing'severgonnastandinmyway(again)" sporting some serious dreadlocks.

W.R. Grace - A Potential Trade

One short idea from Tim Knight's Slope of Hope caught my attention this evening, the corporate star of A Civil Action, W.R. Grace:



I'm more comfortable with Stockcharts.com's charts, so here's an annotated daily chart of GRA:



And here's a compelling weekly chart, replete with how I'm considering entering into a GRA trade:

Calling Bullshit on North Korea By Buying EWY Calls

Totalitarian holdout North Korea attempted to scare its oppressed people into further submission by testing nukes. The South Korean stock market reacted accordingly:

May 27 (Bloomberg) -- South Korea’s won dropped 0.2 percent to 1,265.45 per dollar after North Korea threatened military action in response to the Seoul-based government joining a program to seize weapons shipments.

The benchmark Kospi stock index dropped 0.7 percent to 1,363.54.

Of course, this happened on a day when Japan climbed ~1+% and the Hang Seng rocketed up 4+%.

So I picked up some June EWY $35 calls a bit prematurely for $1.30. My annotated chart below projects a price target of at least $38 by June options expiration. This assumes that EWY will continue on its trendline prior to this nuclear threat hiccup.

Real Estate Follow-Up

Here's an updated annotated chart of IYR:



Towards the end of today's melt-up, I bought some June $22 SRS calls for $1.65. Let's hope Wednesday's market makes some sense and reflects rationality. I'm not holding my breath--and I'm glad I have 18 trading days until June options expiration.

On the substantive side, the Times reported on the glut of Manhattan commercial real estate by focusing on one of the players in my industry:

At 1095 Avenue of the Americas, Dechert, a law firm with a lease for the 25th through 31st floors, is seeking to sublet two floors, each 37,000 square feet.

Brokers say that many sublandlords will probably need to bend over backward to sublease their space, given the sharp rise in vacancies.

In Midtown Manhattan, for example, 13 percent of prime, modern, well-located offices — which brokers often refer to as Class A space — was available in April, up from 6.5 percent a year earlier, according to Colliers ABR, a commercial real estate services company. And sublets now account for some 40 percent of the space available in Midtown, compared with 30 percent of the much smaller total that was available a year ago, the company said.

In some cases, the ink was barely dry on the original lease before the space went back on the market for sublet.

For example, Dechert, a global corporate law firm, has completed one year of a 15-year lease for the 25th through 31st floors at 1095 Avenue of the Americas, a 41-story office tower between 41st and 42nd Street, overlooking Bryant Park.

When the firm moved in last year, it intentionally took an extra floor, which it planned to use for future expansion, and from the start it has had a subtenant on the whole 31st floor. But that sublease expires in July, and the subtenant does not plan to renew. Since last year, the law firm has also had several rounds of layoffs, and it needs less space.

Judith B. Tellefsen, the director of real estate and purchasing for Dechert, said the firm would like to sublet two floors, preferably lower floors, which are each 37,000 square feet. “We are only partially occupying the 25th and 26th floors, and we could easily consolidate those lawyers on other floors,” she said. Ms. Tellefsen said that the firm would be flexible, though, if a subtenant wanted the 31st floor instead.

Trading the Woes of Commercial Real Estate

The real estate bubble is old news, priced into the market long ago. The focus has been on the housing side of things, but with the recent bankruptcy of General Growth Properties, the #2 mall operator, some media is starting to notice the shit's hit the fan in commercial real estate.

At the center of the worries is some $3.5 trillion in debt backed by everything from strip malls to offices and apartments across the nation -- the lion's share of which is badly underwater because this recession followed a five-year commercial property boom fueled by easy money and loose underwriting standards.

Now the owners of the less-than-full malls, apartment complexes and office buildings are succumbing to the worst economic collapse since the Great Depression -- because they can't refinance the debt.

The commercial debt securitization market is dead.

"Because there is no securitization the system cannot process the wave of maturities coming due," said Scott Latham, commercial property broker at Cushman & Wakefield.

"This is arguably the most important fact we're going to be dealing with. If there's no mortgage market that can feed the machine you're just not going to have deals," he said. "It's going to be years before we recover and even when that happens we're going to discover that we're in a new paradigm," Latham added.

About $1.4 trillion in real estate debt is set to mature over the next four years, with some $204 billion coming due this year alone.

The fundamental story is clear. Let's look at the technical side of things with an annotated chart of IYR, the iShares Dow Jones U.S. Real Estate ETF:

The nice upward channel recently ended. Now we're looking at a triangle formation with decreasing volume. It looks to me like this real estate rally has petered out.

How will I play this? I'll take a look at the 2X-levered short ETF, SRS. As you can see below, all of the cool kids are checking out SRS:

This chart of SRS shows that lots of money has evaporated during this bear-market rally. Shares of SRS have fallen from ~$111 down to ~$20.

My plan for this week is to look at picking up some shares of SRS, or at the very least, some June $25 calls.