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| NDX | 1734.88 | -11.24 |
| DJI | 9908.39 | -103.84 |
| SPX | 1056.74 | -9.45 |
MARKET COMMENTARY: for Monday, 08-Feb-2010
Commentary posted 07-Feb-2010 at 10:00 CT
Friday's Action:
Stocks engaged in a furious late-day rally, as major U.S. indices rebounded from significant losses and closed with modest gains for the session.Major world markets posted lower results for Friday. London's FTSE was down 1.53%, Frankfurt's DAX closed down 1.79%, and Paris' CAC finished down 3.40%. Japan's Nikkei was down 2.89%, Hong Kong's Hang Seng closed down 3.33%, and Sydney's All Ordinaries Index finished down 2.40%.
Market breadth was negative, with NYSE declining issues over advancing issues by 1.42, and up volume over down volume by 1.16; Nasdaq declining issues over advancing issues by 1.07, and up volume over down volume by 2.30.
Leading sectors were Gold, +5.35% and Semis, +2.39%. Laggards were Drugs, -0.85% and Oil Services, -0.72%. Nasdaq 100 futures closed 10.25 pts higher to settle at 1745.00, while the S&P's settled -1.90 pts lower at 1059.80.
Weekly Recap:
The stock market lost 0.7% for the week in volatile trade with selling driven by fears regarding the fiscal situation of several European countries, China tightening its monetary policy and the U.S. employment situation. The S&P 500 penetrated longer-term support before bouncing back on a positive volume reversal.
Construction spending dropped sharply in December to its lowest level in more than six years as new home building fell by the steepest amount in seven months, evidence that housing remains a weak spot in the economy. Spending on new homes, office buildings and highways fell by 1.2% to a seasonally adjusted annual rate of $902.5 billion, the lowest since August 2003. That's much worse than analysts' expectations of a 0.5% drop.
The ISM said its index of activity in the manufacturing sector jumped to 58.4 in January from 54.9 in December, with a reading above 50 indicating growth in the sector. The increase exceeded the expectations of economists, who had expected the index to edge up to a reading of 55.5.
Construction spending was flat in October following a revised a 1.6% decline in September, a sharp downward revision from the originally reported increase of 0.8%.
Pending home sales, a leading indicator of activity in the housing sector, rose by 1.0% in December following a revised 16.4% decrease in November. Economists had been expecting pending home sales to increase by about 1.1%.
Fourth quarter non-farm productivity rose at a 6.2% sequential rate. The productivity growth was helped by a 7.2% increase in output, partly offset by the 1% increase in hours worked. The hours worked increased for the first time since the second quarter of 2007. Meanwhile, unit labor costs fell 4.4%.
The U.S. economy lost 20,000 jobs in January, with the recent month’s job losses taking the total contraction in payroll employment since the recession started in December by 8.4 million. The change in total non-farm payroll employment for December was revised to –150,000 from the –85,000 estimated earlier. Job losses continued in the construction, transportation and warehousing sectors, while employment increased in temporary help services and retail trade.
The unemployment rate based on the household survey fell to 9.7% in January from 10% in December, belying expectations for the rate to have remained unchanged from the December level. Average hourly earnings rose 0.3% in January to result in a 2.5% year-over-year increase.
For the week the Dow lost -0.5%, the S&P finished -0.7% lower, while the Nasdaq shed -0.3%%. Next week the economic calendar is somewhat limited, with the key reports being Wholesale Inventories on Tuesday, the Trade Balance on Wednesday and Retail Sales on Thursday.
What Am I Missing?
The other day, we received the following email from one of our Peak Investing members:
Bob: "I'm signed up thru ThinkorSwim for 10 contracts with you. Yesterday they credited my account $200 for the iron condor we sold, then debited it $70.11 for their commissions. That leaves $129.89. Your service generates 4 trades a month and costs $99 a month ie $24.75 a trade. So my net on that trade which was also my maximum possible profit was $105.14. My maximum possible loss was $5000. Your website said the profit probability was 84% so presumably the loss probability was 16%. So the expected profit on that deal (for my 10 contracts) was $105.14 x.84 - $5000 x.16 = -$711.68. I know the math is oversimplified because the choices are not just 100% profit v 100% loss but its close enough to tell me that was a pretty dumb deal. What am I missing?"
Here's our response: (updated data)
"Well, lets see if the math makes any sense, maybe not. Its difficult to judge a system based on one trade, so we'll look at the year as a whole."
- So far this year, we've made 38 trades for a total gain of 137.8% (based on TOS auto-trade fills).
- That includes 4 loses averaging 25.3% (we use stops).
- Our winning percentage so far is (38 - 4)/38 = 89.5%.
- Since most of the trades were credit spreads, not iron condors, the average TOS commission is closer to $50 for 10 contracts.
- So, based on a $5,000 trading account and trading 10 spreads, our Total Gross Gain is $5,000 x 1.378 = $6,890 YTD.
- Commissions = 38 x $50 plus subscription fees of $99 x 11 months = $2,989 total deductions.
- Our Net Gain = $6,890 - $2,989 = $3,901 - for a 78.0% YTD return on our trading account.
- Of course, a larger account yields a higher return. A $10,000 trading account would return 88.9% in this example.
| For more information, please contact Kurt Christopher at kurt@thinkorswim.com. |
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The COT Report:
The latest Commitments of Traders report from the CFTC shows that Commercial Hedgers bought 18,995 S&P 500 futures contracts last week to bring their net short position to -5,917 contracts. Large traders were net short -37,040 contracts, with Small Traders net long the remaining 42,957, the so-called "weak hands". For the Nasdaq 100 futures, Commercials bought 6,686 contracts last week to bring their net long position to 4,655 contracts. Small Traders were net long 1,887 contracts in the Nasdaq. Commercial action in Dow futures saw the smart money sell 999 contracts to bring their net short position to -70 contracts.Commercial Hedgers were better buyers in the S&P's last week, while Small Traders were better sellers a short term bullish sign. Commercials remain net short in two of the three index futures, and that has been an intermediate term bearish sign historically.
The Short Term Outlook; 1-5 Days:
The Hourly Charts:
The OEX may encounter support around the RSI-50% level. We'll see......
Futures Market Focus:
Crude futures continued to backpedal Friday, with the front-month contract tumbling below the $70 level for the first time since mid-December 2009. Analysts attributed black gold's decline to technical selling after the commodity slipped below its January nadir of $72.43, noting that a wave of pre-programmed sell orders appeared to have been triggered by the move. The March contract fell to an intraday low of $69.50 per barrel before rebounding to finish on a deficit of $1.95, or 2.7%, at $71.19 per barrel. For the week, crude futures fell 2.3%.
Monday's Look-Ahead:
The 60-mn SPX chart below shows that the StochRSI indicator is in the SELL zone. For tomorrow, resistance for the S&P's comes in at 1084 and then 1073 and then 1066 and then 1064. Support lies at 1055 and then 1053 and then 1047 and then 1036.
Monday's Reports:
There are no reports due. Monday's earnings calendar can be found HERE.The Intermediate Term Outlook; 2-6 Weeks:
The Risk Aversion Index is trading below its 70-day ema, an intermediate-term bearish sign.