It's Logical

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.

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

IBM was up over $1.00 per share on Thursday, and the January 95 calls that I recommended that you purchase at between $1 and 1.50 a while back traded at my recommended exit price of $4.40. If you took my advice, you have a tidy profit. Congrats!

Warm Weather Creates Natural Gas Trading Opportunity (UPDATED)

UPDATE - 4 January 2007

FOLLOW-UP ON HIGH PROBABILITY NATURAL GAS SHORT TRADE (see below)

In the original post, below, I relayed to you one of the surest bets in natural gas: to be short natural gas in the 12 to 17 day period after natural gas gaps down on the open two days in a row. As I mentioned, the fundamentals were also working in this trade's favor as we have had one of the warmest months of December ever.

This trade ended last week Thursday, with natural gas declining a whopping 13.6% during the 5 trading days called for to be short. This was one of the largest 5 day down moves in NG during all 2006, (NG was down 18.6% during the 5 days ending April 28, 2006 for the largest 5 day down move in 2006).

Obviously, this was a hugely profitable down move if you were short. It illustrates the power of the tool, the "Market Information Machine", ("MIM") that I used to find this trade. This is because, besides being able to formulate any situation that you can imagine, both technical (as was the case here) or fundamental, you can look out "what happens next" to many multiple slices of time periods after the technical or fundamental event happens to find the super "sweet spot". In this case, the super "sweet spot" happened to be the time period 12 to 17 days after the event. I know of no other machine or device that can help you easily find such super sweet spots after events. In the case of the MIM, it is a just a matter of setting up giant templates that automatically scour all time periods, and you can easily eyeball where to get in and out of a trade in order to maximize profits and keep risk at a minimum.

As in the case of this trade, not all events are followed right away with an extremely high probability of an up move or down move. In many cases, such as this one, there is a DELAYED REACTION. For example, if you looked out three weeks after this event , you would see that NG is only down 60% of the time, not something that you would want to necessarily bet the ranch on, or even consider putting a trade on for that matter. However, with the "Market Information Machine", you can see things more clearly, and with pin point accuracy, such that you don't miss great trades like this one.

If you would like to see me demonstrate how I can up with this trade, please send me an email and I will be glad to show you. However, the MIM is a very sophisticated product that has tons of data and events, and is priced at $5000 per month. Thus, it is only usually affordable to institutions. More reasonably priced, at $350 per month, is a subscription to Markethistory.com, a web site that we publish high probability trading ideas every day and give you a fair amount of the vast toolkit capabilities available with the MIM. Both are bargains! I know of no better tools to help one analyze the markets and take advantage of the historical odds that are many times hidden within the data.

Original idea posted on December 22nd:

It is a lot warmer than usual in most parts of the United States, and this is bearish for natural gas. Moreover, when natural gas gaps down two days in a row, as it did on December 4, then NG goes down 94% of the time within 12 to 17 days after this occurrence.

The average down move is 6%. Yesterday, the start of this trade, we saw natural gas decline 4% right off the bat. If we get a rally in natural gas, back to around $7 on the front month, I'd short some NG futures and cover on the close on Thursday next week, when the trade will be over.

To view a list of the 20 prior times that NG has gapped down two days in a row, click on this link to open a pdf file (78K). You can see that the average down move of 6% is almost double the one time that the trade did not work in 1998.  This is one of the highest probability trades in NG that I know of.

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.