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

Dow 1930s versus Nasdaq in the New Millennium

When the market declined over 3% one day back on February 27, I mentioned that I thought that this was not the beginning of the end for the stock market….not just yet.

One of the reasons why I said this is the road map that I have been using to guide me to see the "big picture": an overlay of the DJIA from January 1, 1924 with that of the NASDAQ beginning on August 1, 1994.

As you can see from the chart, these patterns are similar, and the NASDAQ "crash" that occurred in 2000 was very similar to the stock market crash in 1929. Also, as you can see, so have the recoveries after the crashes. This roadmap shows continued strength for some time yet, and as I mentioned back in February, I do not see any significant downturn until this Fall. That is the time to start to be wary, and I would even lighten up or get entirely out of the stock market by the end of August. It used to be that Octobers were bad months for the stock market. However, in recent years, people have been conditioned to buy stocks in this month, and they have been duly rewarded for doing so.

I think that this year will be different.

Stock Market Lunacy - Have the Bulls Been Eclipsed?

If you watched the news over the weekend, there was a total lunar eclipse on Saturday evening. Since it was cloudy here in Chicago, I did not get a chance to see it.

Since the stock market crash in 1987, I have always been leery of full moons and aware that sometimes they coincide with large smashes in the market. But, I was quite surprised to learn over the weekend, playing around with my Market Information Machine, just how bearish a total lunar eclipse is, if preceded by a week of weakness in the DJIA similar to what we experienced last week.

Q: How has the Dow Jones Industrial Average (DJIA.A) performed in the past when it has seen a decline of 2.5% or more in the week preceding a total eclipse of the moon?

A: Although there are not many occurrences (6 prior ones) of the DJIA declining more than 2.5% in the week before a total lunar eclipse, in every single case, they are bearish for at least four months after this event, with the average decline being around 11%:

EventEdge indicates that DJIA.A has shown a very strong bearish edge that peaks 74 trading days after the event. DJIA.A declines in 100% of the cases (6 of 6) by an average of -11.8% relative to the close on the event date:

I actually do not think that the season is ripe for a super huge smash in the market as they usually occur in the Fall, and I had been expecting some significant weakness this Fall, not now. Also, if interest rates keep falling, then I will soon get a major buy signal based on this, and I will let you know when and if this happens. In any event, I still like HSY and owning the August 55 calls. If things do get ugly, it is good to be long a good defensive stock such as this one. Food stocks and utilities should hold up better than other stocks. People need to eat and they need electricity!

This trading idea is also published over on LIM's market history research website, MarketHistory.com. You can see more details about this trading idea there.

Cold Weather Freezes Orange Juice Demand?

Back in December, when we were experiencing super warm weather, I suggested a natural gas short trade for a 5 day period. This 5 day period saw one of the greatest declines in natural gas for the year.

Now, what to do when the weather is so very cold?

The answer is not obvious at all, but when you think about it, makes perfect sense: When you wake up like me on one of these frigid days in Chicago, where we have seen the temperatures below zero for many consecutive days, you may reach for a hot cup of coffee, but you may not even think about drinking an ice cold orange juice.

Sure enough, when I checked out the facts with my Market Information Machine, I saw that when it is super cold in Chicago in January or February (as defined by 5 consecutive days where the low temperature In Chicago is less than zero, then there is a high probability that orange juice will decline over the next four weeks. The average decline is almost 10%.

Looking out farther, we see the peak of the bearish edge occurs 53 trading days later. According to the 8 previous occurrences of this event, EventEdge indicates that JO has shown a very strong bearish edge that peaks 53 trading days after the event. JO declines in 100% of the cases (8 of 8) by an average of -14.1% relative to the close on the event date. This edge can be seen in this chart, which plots the return of the Orange Juice futures (rolling to the next contract in the series as needed) looking forward from the event date.

So, I’d go short the OJ futures outright, using the July series (the March contract will expire on Friday, February 16,  so I would stay away from playing this month) or buy the 180 July puts which are trading at around $8  (translates into about $1250 per option contract).

You can’t do anything about the weather, but you certainly can profit from it. For more history based trading ideas, and for the research tools you can use to find them, check out LIM's MarketHistory.com, which uses the Market Information Machine (MIM) to perform this sort of research.

Buy the Chocolate Dip

Hershey released earnings this morning, and The Street did not like what it heard. (65 cents versus an estimate of 71 cents). The stock is down over $1.87 at this writing to $50.50. I view this as a buying opportunity.

Both cocoa and sugar, especially sugar, have been coming down in price recently, and this bodes well for the future. Also, I like all the new product innovation that the company is showing.

The biggest reason of all for getting in today is that starting from the close today, the day that HSY reports first quarter EPS, to the close 16 trading days later (Feb 16 in this case.)  HSY has always been up since 1993. MarketHistory.com analyst Mickey Schoenhals featured this bullish tendency in Hershey in a trading idea published on that site this morning.

You can buy the stock with a stop loss of $47.79, and risk a few points, or if you want more leverage, I’d buy the August 55 calls, currently trading at $1.15. I think by August HSY could touch $60 and then these calls would be worth around $5. I really like the long term pattern that HSY has made, but it may take a while for the stock to gather steam. That is why I would not mess with any near term options, despite the good 16 day start that you may get.

If the stock does indeed pop up over the next 16 days and you can get near $3 for the calls, take the money and reload on yet another pullback. This stock trades in fits and starts, and it is good to take a very quick profit if you are fortunate to get one. 

IBM Earnings Analysis

IBM just came out with earnings, and the Street did not like the 11% increase in profits. IBM is trading in after hours at $93.70 right now, down around $6.

As I mentioned in my earlier IBM January 95 call buying strategy, I thought that IBM would not simply cruise through $100 on its first attempt, and that profits on your call purchase at $1 to $1.50 should have been taken at $4.40 level had you gotten into the trade. This chart shows what IBM has done since we made this call.

These calls went on to trade as high as $6; however it looks like these calls will expire worthless tomorrow. You have to know when to take profits, or POOF, you can lose your shirt!

For a look at how IBM performs after historical earnings releases, see the chart below. For a full analysis of IBM's performance leading up to and after earnings announcements, see MarketHistory.com's Earnings Edge analysis of the stock (subscription required.)

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.