It's Logical

Nasdaq-Dow Analog - The Top Has Been Reached

I firmly believe that the U.S. Equities market top last week on Thursday is of a long term nature and that we are about to enter a one to two year bear market in U.S. equities.

I have been closely following the zig-zags of the recent Nasdaq market compared to the Dow during the period from 1924-1937, as you can see in the chart below, and last week it appears that the ultimate top in 1937 lined up with what could be a major top for quite some time. As you can see from the charts, if history repeats, or even rhymes, we will have a rough road ahead.

Here's an updated chart of the analog between the Dow in the 1930s, with the peak of the 1929 high synchronized with the 2000 peak in the Nasdaq Composite Index:

You can also read this trading idea on MarketHistory.com

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.

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.