It's Logical

Using Platts Energy Data to Find "Trading Rules"

LIM has long had an excellent relationship with Platts, the world’s premier provider of energy data. Platt’s provides you with energy data history for every energy product, from A to Z. Using LIM’s Market Information Machine, or MIM, you can find knowledge hidden within this sea of data, and extract highly profitable energy trades.

For example, we have found that jet fuel invariably underperforms NYMEX Crude Oil futures over the next week when the heat crack crosses above 7. This has happened 32 times in energy trading history, and this trade worked a whopping 97% of the time!

You’ll find this trade, plus others in our TOP 10 JET FUEL TRADING RULE booklet. Click here to download a copy (240kb).

I point out the heat crack example because these conditions are usually met in January and February. This is almost a sure bet, and if you trade energy, you will not want to miss this trade shaping up to occur in early 2007.  You’ll want to get your MIM and Platt’s data now so that you can take advantage of this “NO BRAINER”.

I’d be happy to further discuss this trade or any aspect of energy trading using Platt’s data. Click on this link to send me an email.

IBM option trade followup

On November 3rd, I mentioned that I expected IBM to close around $95 on option expiration day (it actually traded as high as $94.05 on Friday, expiration day) and recommended that the IBM November 90 call options be bought on a "pullback", ideally at $1 if possible. IBM did make a pullback, but not as big as I was hoping for.  These options got as low as $1.75.  They traded at a high of $4 on Friday.

IBM still a buy

I still like IBM as a buy. (We posted another bullish story on IBM on markethistory.com on November 13). I would look for yet another pullback in IBM and try to buy the January 95 calls (symbol is IBM AS and which closed trading on Friday at $2.20) as close to the $1 to $1.50 area as possible. I think that IBM will now take a run at $100, and that these options will be then worth at least $5. I'd want to go a little further out than the December option series, because I'd want to capture any strong money flow into the market at the beginning of the year. Also, there may be a run up in IBM stock in anticipation of a good fourth quarter earnings release.

But don't get greedy . . .

I still am concerned about the open gap in IBM's price chart, at the $88-89 level, and that is why I would tread carefully and try to buy the calls as close to the $1 to $1.50 range as possible. If you are indeed fortunate to pick up the calls this cheaply, do not hesitate to unload them as IBM gets near $100. I do not believe that IBM will cruise through "par" quickly or easily on its first attempt, so it will suit you well to bag a profit immediately upon this first attempt at IBM getting through $100. As a matter of fact, if you do get into this trade, I'd immediately put a good until cancelled sell order to unload the calls at $4.40. It is sometimes good, in cases like these, to have a sell order sitting, ready to be executed, so you do not get caught up in greed or the moment.

Also, if you get busy  and IBM does take a run at $100, you wont miss getting out as your order will already be in.

Veterans' Day in El Nino Years, and Soybean Prices 6 Months Later

The US Weather Service has made it official: We are now in an El Nino year. These years, in which the temperature over the Pacific Ocean is warmer than usual, can wreak havoc with the weather during the upcoming growing season.

Dramatic Impact of El Nino Weather Patterns

Since 1970, we have seen El Nino years in 1972, 1976, 1982, 1987, 1991, 1996 and 2002. In every single case, Soybeans were higher from the close on Veteran’s Day in these years to the close of Soybeans 6 months later.

Remember the drought in 1988? The average up move was a whopping 42%!

Soybeans have been on a tear lately. I’d use any significant pullback to load up  on July Soybean futures and/or buy some  out of the money vertical call spreads. Again, I’d use the July series and would  go long, for example, the 7.00 calls and short the 7.60 calls.

Soybeans are one commodity that has not really participated yet in the commodity boom. Their time is nigh!

The Soybean's time is nigh!

IBM option trade

International Business Machines (IBM), was up on October 17, the day that it released earnings, as well as the day after. Since 1990, IBM has acted this way in 22 prior eps releases. One month later, IBM has been up 86% of the time, with an average gain of 7.68%. When the earnings were released, the stock "gapped up"on October 18, and it was trading around 91.80 as I wrote this post. I would wait and see if IBM pulls back to fill the open gap in the 88-89 chart area, and if it does, purchase the November 90 calls. At that time, the calls may be trading for $1 or so, and if IBM performs what it usually does, on average, the stock would be trading around $95 around the time of option expiration on November 17.

In order to run this query on your Market Information Machine, here is the syntax that you will need:

SHOW

1: percent_move from 1 day later to 1 month later

WHEN

IBM is up repeated for the current and the next day

AND

EPS_date (IBM)

AND

Date is after 1989

Accuracy has its rewards

UBS Interest Rate analysis gets boost

The LIM community is a community of professionals who pride themselves on solid thinking and high quality analysis, and I love it when I can bring you real life examples of how the Market Information Machine supports better and more precise analysis, and helps our clients do quality research faster than any other technique or tool available today. Hats off to (UBS) interest rate strategist, William O'Donnell, who correctly speculated that the convergence of the 200 day moving average for 2 year and 10 year bonds (which recently happened at 4.83%) was an extremely rare event likely to result in 2y-10y yield curve that is sharply steeper six months later.

With the assistance of LIM's help desk and a query to XMIM, he was able to confirm the rarity of this event, noting in his October 19 morning commentary that it has happened only 5 times in 20 years, and each time it has happened, yield curves did indeed rise sharply over the following six months. Based on this result, Bill was able to confidently offer his customers trading advice backed by the facts and tied to specific events to watch for. Bill was so impressed, he gave LIM a shout out in the UBS Investment Research letter, for which we are extremely grateful, and we also compliment Bill for this creative use of XMIM to improve his client advice.

The following is an excerpt from the UBS Global Fixed Income Research, US Rates Perspective report:

"We mentioned how the 200 day moving averages in 2yrs and 10yrs have converged (at 4.83%) which we thought as a rare event. The folks at Logical Information Machines (LIM) ran their data and found that we’ve had five instances in the last 20 years (yesterday included) where the two moving averages have closed within 1bp or so of each other. The last time this occurred was back on April 4, 2001 and in each of the four previous instances, history showed that the 2y-10y yield curve (cash) was invariably steeper six months after the convergence (no surprise). We do model for a steeper curve going into next year’s expected rate cuts but would not enter the trade until  . . . "

I've redacted the specific advice that Bill gave to protect UBS's copyright interests, but if you subscribe to UBS research, you can read the rest of what he had to say in the October 19 bulletin.  When you need to confirm a hunch and predict likely future outcomes based on historical data patterns, XMIM clearly  leads the market. Thanks to Bill for sharing this real world idea and example with us.