Tag Archives: S&P

News weighing down the markets.


Can we turn around and rally this market? We need to see much resolve in this hyper-sensitive time. Currently, the issues in the Middle East remain and daily there is some sort of new dramatic event occurring. There is a constant threat of a nuclear meltdown lingering and no one

bulls, bears, Japan, economy, nuclear power plant, S&P, Americans

Bulls vs Bears Who is going to win this fight?

knows what the future holds. The effects could be devestating.  We may see panic selling, drying up liquidity and snowballing into a massive sell off. Americans who entered the stock market post Lehman, did so because they felt it was finally safe again to test the waters. With the recent sell off, are we going to see them start to pull their money out, in fear that the economy is unstable once again?  We have seen a near 5% selloff since Friday and heard news that is a bit scary.  If Japan is able to contain this nuclear plant from a melt down, we should then see a rally to return to levels above 1300. However, that move higher will not sustain itself if we are unable to get any resolve from the Middle East. If we do not get any further movement on the unemployment front, it will be quite hard to make a recovery with out jobs.  We are a bit unsure, as Americans, where this economy is headed- still no budget passed, concerns of inflation are high and the decline of unemployment is slow moving.  These issues will put a huge resistance on any move forward.

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Has Fear in Japan setup an optimal buying opportunity?


Fear and panic usually comes across a traders screen with the look of a bloody massacre. Most of the symbols in your quote box are red along with P&L. Today, screens across the world are like something out of a horror film. The fear is that Japan, the world’s third largest economy, is facing a potential nuclear meltdown. Markets across the world have been declining rapidly. The Nikkei is down 16% and the

japan, panic selling, HD, LOW, SLB, S&P

Did today create an optimal buying opportunity?

S&P futures are down nearly 3.5% since Friday. Warren Buffet has said, “ Be fearful when others are greedy and greedy when others are fearful.” Does today bring to us, the buying opportunity we have been awaiting?

The S&P futures have grinded higher over the past 3 months reaching a high of 1344 on Feb. 18 and have since come in nearly 7%. Not to dismiss the tragedy in Japan, but has it in turn supplied us with a supreme buying opportunity? There were some names that have come into great levels to buy today. Names like SLB, which have been beaten up over the past few trading sessions. $82 was a great place to get long. Two other names in were HD and LOW, both came into great levels. For HD, 36.32 was supreme buying level and for LOWS, 26.30 was another great entry level.

What we are looking for today is a strong push off the bottom. With thoughts for at least the near term we have put in a bottom and will rally from there. Thoughts on the overall economy remain bullish short-term. Overall market view is seen as such: there is still geopolitical uncertainty, Japan may be headed for an economic meltdown, and here in the US we are still unsure of what they will do. With these issues still looming without any resolve near in sight, a long sustained bull market is not possible.


Tuesday Market Expectations 3/15/11 - Cover all your shorts and get long

HedgeFundLIVE — I have been bearish for weeks, but I never factored in a nuclear meltdown in a major city as a possible risk I needed to consider. Now I know I am going to sound crazy, but it is time to buy. Yes, you heard me right. It is time to start buying stocks! I would also take huge advantage of the dip in oil. The Middle East crisis is not going away. Up until yesterday, there were bulls all over evening business programming proclaiming how cheap stocks were, and bears like myself were criticized for not understanding how strong the fundamentals in the U.S. were. Then an Earthquake hits and we are reminded that we are but tiny and perhaps insignificant beings on this planet, pushing around paper in a giant confidence game that has been going on for a thousand years. Trading is no longer about fundamentals or perhaps even technicals. It is a game of confidence. Who will blink first. It is a game of emotions driven by exogenous events for at least the last three years. The S&P is now unchanged on the year and I believe we have corrected appropriately. Obviously, all bets are off if Tokyo is significantly exposed to radiation. But barring that extreme, we are in the midst of real panic selling.

22 years of experience has taught me to buy this market. I don’t like to trade off of other people’s misery, but this is the job of a trader. One is to ignore emotions and focus on appropriate risk. At some point today, I will lift my entire short leg and ride a large long book. No, I am not nuts. I am a trader. And although I am not investing for the long term, I will make a few predictions. Within 2 days we will have a resolution for the single most important issue: Does Tokyo survive? The answer is yes. Middle East issues are still at the forefront, therefore, buy Oil. Cover your shorts with tight stops and protect capital. However, if you are a swinger like me, don’t be afraid to take the trade. These moments come around once a year. They will make or break you. Good Luck.


Monday Market Expectations 3/14/11 - Jeremy Frommer vs Jeremy Klein, The Debate Continues


Dear Jeremy Klein:

I have waited since Monday, Feb 28th to respond to you, my old partner and dear friend.

First, I have covered all my shorts and started to build a small long book. The trade back through 1300 that I’d blogged about has occured. We had a nearly 5% correction from recent Highs on the S&P futures of 1343 to the Lows set in overnight of 1283. The next time I’ll attempt to short this market will be near the 1304 - 1308 level. I will be slowly buying speculative take out names as they have cheapened up significantly.

I will now respond to your points one at a time.

1. You recently made your perception clear that oil could soon return below 90, when you stated “crude was trading at 85 just prior to the Libyan crisis.” Well, its been 2 weeks, we are nowhere near 90, and I still believe it will be a while longer before we somehow find our way back to that level. We are far from out of the middle east oil crisis, and this could continue for the rest of the year.

2. You also believed that the revised GDP was not all that important as it was a look back of very old data, and more importantly thought the housing data is priced into market. Perhaps this is true, but the bottom line is that we have 5 years of inventory build up. So while I am long term Bullish and have been short term bearish, my bullish thesis is a slow and steady grind from here. Not the Hyper bull market we were in the last 6 months.

3. You’ve commented that the jobless claims have resumed their downward trend. However, most recently we were a little too close to 400,000 for my comfort. It is going to be an ongoing struggle for the labor environment to improve. Again this is why I look for a much slower grind up in the market than we have experienced recently.

4. Michigan sentiment came in a little lighter than expected. And while you importantly pointed out that it is near its 3 year highs, that is exactly why I think we needed a small correction, a pause, and a slower resumption of the bull market.

5. As far as the Index of out performing names, lets keep in mind that:

a. I trade names that may not be in the S&P 500; although I know you, my esteemed colleague, believe that outside of the S&P nothing else matters.

b. Often a handful of stocks are sustaining an Index due to extremely strong moves up, while the rest of the names in an index suffer.

6. In response to the market not being overbought;  I think the move below certainly shows us that we cannot expect a market to be up 4% every month, and we were in some need of a pull back, which is what came to fruition.

7. And finally, if you read the blog below, you’ve questioned my probability of an extreme event occurring in Saudi Arabia. Well, I think we know the answer to that now. Sauid Arabia has demonstrated that they will fire on protestors. And clearly the show of force on the streets of their major cities implies that the Kingdom is nervous.

Now I am no soothsayer. And I do wish I had taken your opinions more seriously last year as I would have saved hundreds of thousands of dollars. You saw the sell off in April and May of last year and warned me. I probably would have made a great deal of money. I have happily paid attention ever since. So I only felt it appropriate to give you a heads up on my bearishness, 4 - 5 percent higher than where we are today.

In addition, you do have an uncanny ability to pick the year end close of the S&P. Pay attention members. Klein is looking for an end of year 1435 close. And although I have to look over my previous blogs, I believe I was looking for 1425.

As usual my good friend, great minds think alike.

Best Regards,

Jeremy Frommer


——————————Below is my previous response to Jeremy Klein’s own response which is bolded———————————-

My old friend, partner, renowned economist, and all around great guy, Jeremy Klein, provided a counter point to my most recent blog “Stock Market Commentary 2/25/2011 – My Advice”

In all fairness and in the interest of thoughtful debate, it is only appropriate to publish it as its own blog.

Three other important points about the distinguished Jeremy Klein

  1. He is a wine connoisseur
  2. He is known at Goldman Sachs as “The one that got away”
  3. He is the winner of HFL pick the year end close on the S&P 2010

His response follows:

Hedge Fund Live - The Battle of The Jeremy's


“To my old friend Jeremy Frommer,

As you know I hold your opinion in the highest regard, you are by far one of the wisest and talented individuals I know, that said, I am not sure I agree with your view. First, crude traded at $85 just prior to Libya. It sold off there, after Egypt calmed down and may do the same when Libya reaches a resolution assuming another major oil producing nation doesn’t fall. Ironically, you argue that consumer is worse off than people think which would imply demand for oil would decrease which would also bring crude back down below $90.

A revised reading on Q4 GDP is not all too relevant as it looks back at chunks of data 5 months old. New Home Sales was disappointing, but much of that was the snap back from the CA tax credit expiring last month. More importantly, the housing sector remains depressed which most everyone agrees with and is priced into market.

Jobless Claims has resumed its downtrend and Thursday’s print was without any seasonal adjustments, so it’s clean. Most

Hedge Fund Live - Frommer Vs Klein



importantly, you ignore the University Michigan number, which now sits on 3-year highs and clearly shows that consumer sentiment is important.

I am also not sure how stocks in general have underperformed the S&P 500 when the latter is an index average.

I am not sure the market is overbought let alone leveraged overbought. The TICK information and open interest in the futures actually imply managers are very nervous and looking to hedge aggressively and quickly at the first sign of trouble. Therefore, we will continue to get sharp 1-3 day sell off such as the one on Jan 28 and this week before grinding back higher as the managers scramble to cover. The increase we have seen in open interest on these sharp down days contradicts greatly what one would expect when coming off 2 1/2 year highs such that we saw panic selling through Thursday afternoon.

Hedge Fund Live - Economist vs Entrepreneur



Finally, what percentage would you put on Saudi Arabia falling into same malaise as Egypt, Libya, and Tunisia? I am no expert on Middle East, but given monarchy is liked much more than Gadaffi, proactively trying to reform, and the U.S. will do anything in its power to aid the nation in keeping pumps flowing, I would put it at 10%. Earnings on the SPX for 2012 are $110. I think that’s a bit of stretch and will use $105. If oil prices continue to rise, I will use $85 as an estimate as energy names (12% of index and rising) will see solid increases. I will use a 14x forward multiple for the former and a 13x for the latter given additional risk premium for geopolitical uncertainty. Using my aforementioned, yet understandably arbitrary, probabilities yield a year-end level of 1435.

Been tuning in a great deal lately, as Hedge Fund Live has become the top ten go to destinations for a real time look at the markets. I really enjoy the content.

I look forward to hearing your response.

All the Best

Jeremy Klein”

Well J. Klein, you will hear from me soon as I have quite a bit to say. For now I hope our members, readers and listeners enjoy our debate




First of the month: 3 theories why they are usually positive days.


With February behind us and a new trading month beginning. I wanted to put some credence into the belief that the first trading day of the month is positive. From the start of last year, the first trading day of the month for the S&P 500 has closed higher 12 out of 14 times,  9 of those days with gains higher than 1%. Since the start of 2010, the S&P has risen 18.3%.  If you were to exclude the first trading days, it would only be up 2.3%. Given this short-term analysis, we can see how important the first trading day of the month has been. Through reading other blogs and studies, the consensus seems to be that this day is usually a positive one and I will list some theories why:

first trading day, portfolio managers, S&P, investment, studies, assets

Portfolio managers rebalancing their assets.

1. Deposits from 401k come in, which the portfolio managers are able to put to work.

2. From the psychological aspect, as traders we all know how much of a mental game this can be. A devastating loss can crush your confidence, while a great investment can make you ecstatic. The first trading day brings on a fresh start allowing us to leave behind a bad month or continue riding the high tides of the month prior.

3.This comes from an article I read in USA Today, the “Window Dressing Affect”. This affect in essence is what allows portfolio managers to take off any investments that might be risky while adding to the positions that are working. One may call this fudging the books.

As we all know there is no sure thing in the markets, but we can see that there is some evidence to support first trading days as being positive ones. Although they are only theories why this might occur, it does add some support to the belief. There was also some chatter about this on our member chat today.  Some members stated they have had their biggest gains on the first of the month.

If tomorrow ends up a positive day that is 13 out of 15 and I might be a believer in this theory.



Technically And Figuratively Speaking

Technically, the S&P is overbought based on RSI and Stochastics.

Figuratively, nobody gives a damn.

For reasons I can’t explain, I want to short this market with every fiber of my being.  And I do early on every day, until around 3pm.  Then I buy futures and cover some of my shorts.  I also sprinkle in a few long oil names like HAL or XOM.  And every day that trades pays off.  I don’t know why, and I don’t care.  I ask Dean, my partner and PM, as well as every trader on our desk the same thing each day.  Why shouldn’t I make this trade?  Has the market done anything differently in the last 2 weeks?  The answer is in the positive P&L during that period. 

I have not made any substantial money during these last 2 weeks.  It took me a while to figure out just how little this market cares about being overbought.  It took me a while to take the path of least resistance.  Its never too late to make the right trade.

So Who Is Actually Bullish?

Ok, so we know why we should be bearish on the market, but what is the case for the bulls?  Here are a few reason why one could be bullish right now:

- Not much technical resistance ahead
- The VIX moved lower last week, even in the face of the turmoil in Egypt (dropped 20.5% following a 30% spike)
- Oversold indicators on the S&P have started moving lower
- Growth sectors Energy, Industrials, and Tech have pulled back in recent weeks, alleviating some selling pressure
- Little catalyst this week to get in the way of the rally as the economic calendar is light
- Reassurance from the Fed may induce further investor buying (note that Bernanke’s speech regarding the prospects of the economy was moderately more optimistic)

Egypt, the Stock Market and……Yoga

Mubarak before getting into his disguise

Mubarak in disguise as he slips out of the country

I feel compelled to write a blog about the events of the day. I assume I will be one of the multitudes of individual’s blogging about Egypt, the stock market, and yoga in a single blog. Let us begin with Egypt. Incredible, Fascinating, Mesmerizing. Look I am actually loving the fact that we are on the verge of real change in the middle east. But here is the crazy thing. It wasn’t Hillary Clinton, President Obama, Former president George Bush or 2009 senate maj. Leader George Mitchell who brought about this monumental change. Who do we have to thank for what seems to be the beginning of the end of Islamic fundamentalism? Not very surprising, Jack Dorsey – Twitter founder, a St. Louis Missouri kid who went to NYU and has changed how we communicate. Not very surprising, Mark Zuckerberg – A Jewish kid from White Plains, NY who went to Harvard, created Facebook and changed how we socialize. Definitely not surprising, Steve Jobs, the da Vinci of our generation for creating the tools by which we communicate and socialize. And yes, let us not forget to thank Al Gore for inventing the Internet. These are the true revolutionaries, sans Al Gore, who when all

Tapas in the Stock Market

the dust settles and a real democracy exists in Egypt, deserve Nobel peace prizes. Al Gore already has one. The Internet has changed our lives forever; we are still at the beginning stage of understanding just what that means. Yoga has taught me to live in the moment, to be present. As we watch these momentous days unfold, it is best not to fear the future, but to embrace the change optimistically. While he was not a yogi to the best of my knowledge, our 16th president Abraham Lincoln wisely said, “The best thing about the future is that it comes one day at a time.” Now I am not suggesting that violence and rioting are good things, but change very often is a great thing. Real change such as we are hearing in the voices of the Egyptian populous is revolutionary, it is evolutionary. And it has been driven by the genius of the aforementioned innovators. The most devastating blow the Mubarak government has thrown was not tear gas and rubber bullets; it was shutting down the Internet. It was also the final nail in their coffin. A starving man will kill to eat. A repressed society will revolt for enlightenment.  No revolutionary moment has come without a price to be paid; Without a price paid, without sacrifice, there is no success.

Yogic scripture refers to this sacrifice as Tapas. It is the suffering and pain we must go through for self-purification. Today was a Tapas day for the stock market. There may be a few more to come or not. We will have to wait for Monday to see if there is more Tapas to come. But what we saw today was healthy. We had approached a psychological level in the market. 1300 on the S&P is not a level to be taken lightly. Nor is 12000 on the Dow. We were not going to just glide through these levels. We need to blast through them when the time comes. And we needed a catalyst to sell off from the levels. But now is a time to breathe. Perhaps we need to pull back a bit more. But not much. What we need to do is rest. Observe the world around us and take stock of our current situation. Monday is month end. I do not expect much as funds will neither want to paint the tape to inflate returns, nor will they want to see much more damage done to the strong returns of the opening month of 2011. As the saying goes in the market “So goes January, so goes the year”. We are still in a bull market, but that doesn’t mean you have to be net

Breath of a Trader

long. It does not mean you buy every pull back. I expect a couple of weeks of stagnation and then a real attempt at breaking the psychological barriers in the market. Make sure you are long the market when that moment arrives. Until then, remember what Andrea Boydston famously said, “If you woke up breathing, congratulations! You have another chance.”

Enter the Dragon Rally

Now that the Santa Clause rally is over, perhaps we are now approaching the, wait for it, Dragon rally.

Dragon Rally

What the hell is a Dragon rally?  If the month of December typically is a rally month in the U.S. due to performance chasing as well as pscyhological/behavioral market patterns, the same type of action might be observed with the approach of the end of the Lunar calendar in China (and other Asian countries that follow the Lunar calendar such as Taiwan and Singapore).  There are only a few articles/blogs that I found on this topic through a quick search.  Observations are mixed actually on whether the rally occurs before or after the Lunar New Year.  I took a look at the data from the past decade (since Jan. 2000) and used the Shanghai Composite index to gauge the performance of the Chinese market while sticking to the S&P index, as usual, for U.S. market performance.  Below are the Shanghai and S&P average and median returns for the 10, 20, and 30 days leading up to and following the Lunar New Year:

Shanghai Lunar New Year Effect

The above data shows that on average the Shanghai Comp does rally into year end, according to the Lunar calendar, particularly in the 20 and 10 days leading up to the New Year.  There is not a sell off following the New Year, however, the move does slow in the subsequent 10, 20, and 30 days.

S&P Lunar New Year Effect

The Shanghai index has been outperforming the S&P over the past decade around this Jan/Feb time period.  In fact, the average returns in the S&P in the three time periods leading up to the Lunar New Year are all negative.  Given this added context, the rally in the Shanghai in the days prior to the Lunar New Year is validated further, i.e., the strong returns are not just part of a wider global rally during these times of the year.

This end of year rally according to the Lunar calendar is what I am dubbing the Dragon rally.  Yes, a little lame, but that’s what you get at Hedge Fund LIVE quite often.  Anyway, in light of this rally that I am expecting in the Chinese market in the month or so leading up to the their New Year, which falls on Feb. 3 next year, here are lists of strong Chinese stocks that have rallied this year along with the beaten up names.  Among the top performers include SPRD, FFHL, JOBS, BIDU, and MPEL (in descending YTD return order).  The five worst performers this year are VISN, FUQI, NED, YTEC, and JST (in ascending YTD return order).  I would browse through the beaten up names more closely to select names that are still down, but don’t look too shitty to buy.  Maybe YGE, for instance, which is sitting on some good support levels on the daily.  I’ll caveat by saying I do not know about the outlook for the solar names though.  SUTR just had a breakout today in the Basic Materials space.  A name that I know Tynik has traded several times, NTES, looks like it’s rounding up, although it faces resistance after today around the 200d SMA.  I don’t know the fundamental story here, but a breakout above the 200d SMA will be a healthy sign for the stock and a lower risk buying opportunity.

Spike in Fear Index Not So Fearful?

There has been a lot of talk around the VIX ever since the “fear index” closed up 6.6% right before the markets closed for Christmas Eve (on the 23rd of December, last Thursday).  Couple this move higher with the broader market closing down (albeit small) for the first time in a while and we get talking heads directing their attention to the VIX.

VIX Daily Chart

To recap, the VIX index was up 6.6% on Thursday the 23rd and up 7.3% on Monday.  Two consecutive days of strength is not a frequent occurrence.  For instance, the VIX has closed up more than 6.5% two days in a row 37 times since January 2000, or in other words, about 1.3% of the time since then.  Below displays what is likely to occur in the S&P in the subsequent 5, 10, and 20 days when the VIX closes up over 6.5% for two consecutive sessions:

Spike in the VIX

The so called “fear index” appears to not have such a worrisome effect on the broader market after all.  The odds slightly favor the market moving higher in the next 5, 10, and 20 days.  The odds of the market closing down more than just 50bps are no more than 30% for any of the three time frames.  The average and median returns point to the upside as well, although averages are not all that valuable to look at for these types of studies as they may be skewed and paint an inaccurate picture.

I would like to expand on this study to incorporate other market factors.  This preliminary analysis does not yield any actionable trading strategies so I will be looking to see if I can include another factor into the model presented here.