It's Logical

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.

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.

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!

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.