text:
I recently closed our open SQNM positions for a slight profit. With that, I am back to 100% cash and am once again scoping out various companies to analyze and invest in. For now, sit tight and breathe a sigh of relief that we were able to get back (and make a profit on) all of the paper losses accumulated on SQNM. The Model Portfolio has been updated. We are now +15.03% since inception!
A Dao Moment
The animals in the Forest don't think too much; they just Are. But with an overwhelming number of people, to misquote an old Western philosopher, it's a case of "I think, therefore I am Confused." If you compare the City with the Forest, you may begin to wonder why it's man who goes around classifying himself as The Superior Animal.
- From "The Tao of Pooh"
November 27 A Bit of Philosophy
My friend sent me the following response on a question on Quora. Unfortunately, I do not know the original question and can't link to it, but the below is a worthwhile read and worth pondering.
Posted by Alex Bützow
Here are my two cents, I apologize for the long post. The overarching idea behind this answer is a form of metacognition, or in other words, cognition about cognition, exemplified by my personal brand of Theory of Mind.
1. Introspection
Introspection is one of the most fundamental necessities of trying to understand who you are and what your place in the world is. It should be necessary to everyone to explain to themselves in a satisfactory manner a) why they believe in what they believe b) is there a possibility of them being completely and utterly wrong in their conclusions. In addition, being able to examine your own internal process from a non-involved vantage point while it's happening is extremely helpful in creating a complete idea of your self-identity.Wikipedia: Introspection
2. A Sense of Internal Pluralism
The mental landscape of the human mind is not a singular thing, it can be best described as a debate by an inconsistent committee of contradictory opinions. I dare say that most people don't realize that they have more than one internal voice, especially since it's considerably easier to go along with the conclusion of the most vocal one at any given time. Just recognizing the fact that you do indeed have, as it were, an angel on one shoulder and a devil on the other, helps to give you a sense of who you really are.Just for clarification, I'm not talking about hearing voices. I'm talking about the fact that there are different parts in a person's mental make-up, otherwise there wouldn't be much sense in the idiom "to argue with oneself" or in the concept of self-doubt. The non-involved vantage point that I mentioned earlier basically means that a part of you notices when you're arguing with yourself, and can observe the process.
3. Solipsism
For any of this to make sense, every adult person should have a satisfactory rational explanation as to why they can say that an external world beyond their own internal world exists in the first place. Without having done so, one's opinions on the external world seem rather pointless to begin with, so it is an essential foundation to build everything else on.Wikipedia: Solipsism
4. Fundamental Attribution Error / Introspection Illusion
We humans tend to trust our own introspection to a greater extent than that of anyone else, because we have no direct means of observing the latter. What this really means is that we tend to evaluate our own actions based on our underlying internal motives, and everybody else's based on the consequences of their actions. The net effect of this can be devastating, as thinking along these lines makes it impossible for us to appreciate the internal motives of anyone else. To give a prosaic example: if you slip on, say, a wet surface, you'd think to yourself "it wasn't my fault that I slipped, the conditions were surprising and unfavorable" but someone observing the incident might simply think "whoa, that dude is really clumsy". When you extend this to a confrontational situation, you end up with some of the bloodiest conflicts possible; people only realize their own justifiable motivations for aggression, misunderstanding or simply not caring about those of of the opposing party. This results in rhetoric like "we are simply trying to defend ourselves from an external threat (own internal introspection), which was originally instigated by Those Evil People because they're a bunch of Really Nasty Bastards (simplification of introspection of other party)". The results of this kind of thinking can be seen in every genocide that has ever befallen our species, because just observing the consequences makes it a lot easier to label someone evil. This mode of thought is endemic to being human, but at least you should have a mental warning signal going off in your head when you notice yourself doing something like that.One more example to illustrate the point; you lend your car to a friend, who ends up accidentally crashing it. He/she'll be saying how sorry they are and how they didn't mean it, but you'll still be angry, because f**k, you crashed my car. If the situation were reversed, you'd be exhorting how you didn't mean to do it, but the person from whom you lent the car would be pissed off, maybe even more so because of your 'excuses', and you'd wonder why he couldn't relent even a bit, because you really didn't mean to do it. The reason is quite simply because your explanation has to do with your motives, but his/her perspective is based solely on the consequences. You have fundamentally two completely different perspectives in that given exchange. Sounds quite familiar when put like that, doesn't it?
A strongly related concept is that of cognitive biases: List of cognitive biases
5. Relativism
Once you start with introspection, and realize the possible fallacy that you're unwittingly committing by downplaying those of other people, you quickly run into the possibility that everything you think and believe might be utterly and completely wrong, or at least not as absolute as you previously thought. This usually results in either taking a healthier perspective regarding your own opinions or a full-blown existential crisis.Wikipedia: Relativism
6. Existentialism
A friend of mine once said that you can't really call yourself an adult before having dealt with the idea of existentialism, and I agree completely. We humans have an unbelievable knack to ignore the abyss beneath the thin shell of our own psyche, and that can lead to acting out of sheer ignorance. What I mean by this is that if you never even give a moment's thought to the possibility that there are no absolute truths in anything, or worse yet, you get scared by the very notion of it and avoid the issue, you tend to cling to things which proclaim to be absolute truths. This is nothing short of sticking your head to the sand until the nasty thing goes away, and you're just as likely to get bitten in the ass if you do so. The Nietzschean version has been over-publicized to some extent, not giving enough room for various other thinkers. My personal favorite is a Norwegian philosopher by the name of Peter Wessel Zapffe, whose essay "The Last Messiah" encapsulates the concept of existentialism in a slightly "healthier" way than Nietzsche's body of work.Wikipedia: Existentialism
Nietzsche: Friedrich Nietzsche
Zapffe: Peter Wessel Zapffe / The Last Messiah7. Epicureanism
Epicurus was a rather amazing Greek philosopher, who, through sheer logic, could come to such fundamental conclusions that it took almost 2200 years for science to develop to prove them correct. The basic idea of Epicureanism can be encapsulated by the Tetrapharmakon: Don't fear god, don't fear death, what is good is easy to get and pain is easy to endure. Especially in light of the existential fear of death that we as human being tend to generally share, the idea is very simple: when you're alive, you're alive, so thinking about your own death is premature and pointless, and when you're dead, you tend to be too busy being dead to notice it at all. A lot of Epicureanism can be seen as a precursor of the aforementioned existentialism, which he, again, predated by more than 2000 years. Epicurus was highly influential in the imperial Roman period, but the Catholic church did an excellent job in getting pretty much everybody to either forget or completely misunderstand the school of thought, as it was in some respects diametrically opposed to certain tenets of the Catholic faith (especially the relativism inherent in Epicureanism doesn't really work with any strictly dogmatical system of belief).My choosing Epicureanism as an example serves to illustrate another point, which in all honesty would merit its own section in this answer. The point is essentially that a lot of the philosophical views we hold to be unique to this day and age are essentially the rehashing of old ideas. The inherent implication of this is that seemingly new philosophical ideas do not effectuate change, as most of them aren't actually new. So, the reason why people's view on the world changes, along with the general views and values in a societal context, are better described by other processes than that of ideological development. One view (prominently expounded by Hegel) on the matter is that society and its values change according to the relations of power of different societal groups. That is to say: democracy, egality, rule of law, humanitarianism etc. are prominent values today because they fundamentally serve the interests of the dominant parts of (at least Western) society. The conclusion of all this is that our society is certainly descriptively different from that of yesteryear, but it's considered a fallacy to say that we've objectively evolved to some sort of better form of society along the ages, because we anachronistically evaluate previous societies through our current value system.
Wikipedia: Epicureanism
8. Logical fallacies
Especially in a democratic society, one should always have a critical mind regarding statements given by someone promoting any given solution or opinion. Logical fallacies, both formal and informal, are used as much today as they were in ancient Greece or Rome, where they were first codified. Just being able to spot a post hoc ergo propter hoc-argument or understanding the concept of onus probandi will give you a better view into the rationality of the opinions and arguments of others. This is simple enough with external views and opinions, but the really hard part is to apply the same rigorous and stringent standards to your own thinking. This is a part of the introspection mentioned in the beginning; to be able to do that properly means that you notice when you're taking the easy and intellectually dishonest way in an argument, and to preferably decide not to do so.Wikipedia: Fallacy
9. Hume's Guillotine
Be it due to lack of wont or that of capability, distinguishing between normative and descriptive statements is something people normally don't really do properly. This is the origin of a lot of rather awful argumentation, because people mix what ought to be and what actually is. This is important, because to be able to say that "this is the situation, it would be better if it were so" implies that you have an underlying rationale to evaluate the current situation and how the suggestion you're making would make it better. This further implies being able to understand the rationale behind how you formulate opinions in the first place, which requires introspective understanding of oneself on a level that a lot of people really can't be bothered with.Wikipedia: Is–ought problem
10. Utilitarianism
Jeremy Bentham, at least to me, was one of the greatest thinkers ever to have lived. His concept of utilitarianism gives a strong teleological argument how to evaluate and formulate normative statements, which is simply: maximize utility (i.e. as much good as possible for as many people as possible). This idea underlies all modern economics, and it is one way to answer the dilemma posed by Hume's guillotine. One should however understand that increased utility doesn't necessarily mean "more money", otherwise it'll be quite difficult to understand a lot of how the world actually works. In some ways, the forerunner of utilitarianism was, yet again, Epicurus.Wikipedia: Utilitarianism
(11.) The aim of all this is creating a logically consistent self-identity.
The point of pondering the aforementioned questions and finding a satisfactory personal answer to them is to link your thoughts and opinions (and the rationale behind them), be they philosophical, religious or political, into an internally consistent framework, which helps you deal with new questions and ideas and gives you a means to overcome the sense of cosmic terror that all people suffer from, but which most subconsciously ignore. After having done all this, you'll pretty much know exactly who you are.A strongly related concept: Metacognition
November 24
It has been four months since I last posted an entry. That time off from daily trading posts was absolutely necessary, given my trading missteps. I have done a lot of reading since and will be sharing my more careful and hedged approach to investing over the next few months. I trade much less now and am leaning towards longer-term horizons for my trades. Heck, I came across an article recently that argued for how well an investor can do simply putting the same dollar amount into an index fund every year on the same date for 20 years. For something close to $200k spread over 20 years, the expectation for 10% annual returns is not unreasonable. The article illustrated that over many time periods, an investor could expect a four- to ten-fold return of the total invested amount. This is a great return for how little work it actually takes (invest $10k once a year) to make that money! And you can ignore the daily oscillations and all the business news to boot! What will you do with all that free time?
As far as the trading goes that is tracked in the Excel link to the right, it is still up to date. In other words, I'm still holding a losing long position in SQNM and have done no trading in this portfolio since my previous post. Holding that long SQNM position has been nothing short of painful, but I am hoping the firm rights its ship (it started to last quarter) and finds its way back to making money again. Hope is all I can do at this point, unless I throw more money at SQNM to dollar-cost-average the position down. For now, I'm staying put and giving this beast another year to find its way to my purchase price.
July 29 TRADE ALERT
I am done having the SPY put position whip-sawed to death. Exiting it now:
Sell 2 SPY Aug 17 2013 168.0 Put @ $1.55. Limit, all-or-none order.
July 28 Weekend Report
Things have been a bit rough since SQNM reported, so in this Weekend Report, I will cover where we are exactly in our position and how to deal with them going forward. I will also discuss gold, miner and the markets in general.
CURRENT POSITIONS. With the disastrous earnings report from SQNM, we currently have 3 positions on the equity that are underwater. The positions are:
Bought 10 SQNM Aug 17 2013 5.5 Call @ $0.12 – these will likely expire worthless, a loss of $120 + commission.
Sold 50 SQNM Aug 17 2013 4 Put @ $0.12 – it is unlikely that SQNM will rise to $4.00 by August 17, which means that we will be purchasing 5000 shares of SQNM at $4.00, which will result in us owning an underwater position, with a net buy price at $3.88. The worry for this position and the next is that we can be assigned the shares at any time before options expiration since the options are in-the-money.
Sold 50 SQNM Sep 21 2013 4 Put @ $0.16 – everything that is true for the August put position is true for this September put position. There is a chance that SQNM could get up to $4.00 before September options expiration, however. Unlikely, but possible.
Once I am assigned the SQNM shares, I will start selling the calls against them to bring my cost per share down. If SQNM gets to $4, I will jettison these positions as fast as possible.
PRECIOUS METALS. Metals and their miners have held up well, regardless of what the dollar has done. I had intended to write a much longer section on the precious metals and miners, but since I am so late with this report already, I think I will save the write-up for another report.
MARKETS. Currently, all markets are being driving by liquidity provided by the Fed. We are seeing early morning sell-offs and low-volume afternoon ramps. Unless you day trade, there isn't much to do for the moment, but to step aside and wait for intraday volatility to ease, the market to choose a direction instead of whip-sawing everyone to death. Carefully chosen stock positions, both on the long and short side, if held for the right amount of time will still generate profit, but risk management is key at this point. Let's remember, despite all the liquidity provided, the market has been unable to break the 1700 barrier on the S&P.
That's it for now. I will put up a Trade Alert post next.
July 24
The most important thing to talk about in tonight's Nightly Report is SQNM's earnings release. SQNM earned $0.07 less than expected and its revenues and tests accessioned (performed) came in lower than expected also. SQNM management made a bunch of excuses about why the results were as bad as they were, but bottom line is that SQNM failed to perform.
In the after-hours market, SQNM fell 40%, down to $3.20. This will be especially painful for the Model Portfolio because we are long 10000 shares at $4 through the put sales executed yesterday and today. The bought call will certainly expire worthless. Ouch. All we can do now is sit tight and see what happens tomorrow during the regular trading hours.
I will think about some loss mitigation strategies to employ once we are in possession of the 10000 shares, 5000 of which we will own at the latest at August options expiration and the other half at September options expiration.
Calling it a day. Until tomorrow!
July 24 TRADE ALERT #2
Changed this morning's order to hit the bid or ask:
Buy 10 SQNM Aug 17 2013 5.5 Call @ $0.12
Sell 50 SQNM Sep 21 2013 4.0 Put @ $0.16
A little more than I wanted to pay, but it's more important to be positioned than to worry about a $30 difference for the calls and a $100 difference on the puts.
July 24 TRADE ALERT
Two more orders for SQNM. If these don't take by noon, I may change them so that they do execute:
Buy 10 SQNM Aug 17 2013 5.5 Call @ $0.09
Sell 50 SQNM Sep 21 2013 4.0 Put @ $0.18
July 23
This will be a very quick update. Only one order from today's Trade Alert was executed. It was:
Sell 50 SQNM Aug 17 2013 4 Put @ $0.12
SQNM earnings are out tomorrow after market close, which means that if another set-up presents itself, I will put an order in for it.
Gold appears to be running into resistance at $1350. If it can get over $1425, there will be a big run up in gold prices as shorts run for cover.
That's it for tonight. See you tomorrow!
July 23 TRADE ALERT
Just put in the following order – all-or-none, limit order:
Sell 50 SQNM Aug 17 2013 4.0 Put @ $0.12
Sell 50 SQNM Sep 21 2013 4.0 Put @ $0.21
Buy 20 SQNM Sep 21 2013 5.5 Call @ $0.15
The latter two orders pair up as being a risk reversal trade, though more heavily weighted to the downside.
July 22
MARKET. I did not close the SPY puts today because I wanted to give them one more day to work out. Today's market strength was a little surprising, given how weak the earnings reports have been this quarter. NFLX reported after market close and while its top and bottom line numbers were fine, it forecast weakening subscriber growth and the stock is lower by ~4% after hours. One of the hardest things to do is to enter value shorts, such as our SPY puts, as they sometimes take a lot more time than you think to come to fruition. NFLX is another such a stock, with a forward PE >80. It looks like a great short, but it might hang at these lofty valuations longer than an short seller might have patience for. AMZN is also such a stock, with a forward PE of >95!
There are no cracks in SPY's facade just yet, unfortunately. My hope is some develop in short order.
PRECIOUS METALS. What follows below is a more detailed explanation for why I closed all my PM positions last Thursday. In hindsight, that was a terrible move, as I have missed all of the run up in the last two trading days.
GDX managed to hurdle over a resistance line that I thought would give it some serious pause. There are two charts below – one zoomed out and one zoomed in with a relatively more recent trend line.
The above chart has the Fib retracement lines from the 2008 lows to the 2011 peak. The $26.31 level is what GDX hopped over today. Score 1 for PM bulls.
Zoomed in, the following chart shows the declining trend line that GDX bumped up against almost perfectly today (maybe over by a penny or two). The trend line does have a caveat associated with it and that is highlighted in yellow. If we keep the candles in the yellow box under the trend line, then the line would intersect the GDX price axis at ~$30.
Today, GDX rose in the only way it could really have risen, which is to pole vault over the $26.31 Fib line. Will it do the same to the declining trend line? We will know tomorrow. If it does, I may take a long position until GDX hits ~$30. If it declines, I will wait until it hits $26.31 to take a position, depending on the strength of the decline. Right now, in the overnight market, gold is down $2, essentially flat. Let's see what tomorrow brings for the shiny yellow stuff.
SQNM. Today's order did not get filled. I have just tomorrow to get long SQNM and may do so by splitting the put sell orders at the $4 and $4.50 strike. My patience is wearing thin on getting the price I want on SQNM, though I will not do something emotional and anything haphazardly. I will be watching SQNM closely tomorrow.
See you tomorrow!
July 22 TRADE ALERT
About to place the following limit, all-or-none order for SQNM:
Sell 50 SQNM Aug 17 2013 4.0 Put @ $0.12
Aside note: GDX gapped above a big Fib resistance line this morning. I am still not done beating myself up for last Thursday's closed precious metals trades.
July 21 Weekend Report
This report is late in the making and I will be relatively brief. I will cover the market analog I've been following and talk a bit into the precious metals sector. I will also go over what I think about SQNM and how I may play the earnings volatility.
MARKET. Let's take a look at how our analog is holding up. Here is the chart, marked up with arrows of the same color servings as analogy markers.
I would have expected the past week of have ended flat to a little down. The market, however, made new highs on earnings reports that were pretty bad, which makes me think that the analog is done and broken. If this next week doesn't get a big swing to the down side – at which point I would exit our SPY puts – this analog is dead and done. At this point, in the overnight market, it looks like we will open up, implying that I can no longer use the analog to trade against. I may close our SPY puts sooner rather than later.
PRECIOUS METALS. When I closed the precious metals positions on Thursday, it appeared that gold was headed into resistance, both into Fib lines and well as short-term overbought conditions. I could not have been more wrong. The market moved entirely against the closing of the positions and in the overnight market, gold is up almost another 2%. Yes, I am kicking myself pretty hard right now. I may re-enter a PM trade tomorrow and see if I can ride the recent momentum in the PM space higher. This is pretty aggravating. No money lost, but I could have made much more than I did, which right now feels about as bad as actually losing money.
SQNM. There is an interesting patter developing in the SQNM daily chart, reproduced below.
The last three days were a retrace of the prior three-day up moves. Friday, SQNM did not go below Thursday's low, which leaves me to think that the retrace of the up move is either done or almost done. Both the RSI's are in neutral territory – no man's land. I tried on Friday to sell the puts against SQNM and will likely try again on Monday. Stay tuned for the usual Trade Alerts.
That's it for me for tonight. See you all at the start of the a new week!
July 19 TRADE ALERT #2
Trying for the SQNM put sale a second time:
Sell 50 SQNM Aug 17 2013 4.0 Put @ $0.13. Limit, all-or-none order.
Update on previous trade alert: order executed.
July 19 TRADE ALERT
Entered the following order just now:
Buy 2 SPY Aug 17 2013 168.0 Put @ $2.08. All-or-none, limit order.
A very risky position as we may lose all of the money invested.
July 18
MODEL PORTFOLIO. What a busy day in the markets today. All but one of the trade orders entered today executed. Here's a summary of what happened to today's Trade Alert orders:
DUST put sale – executed
HL sale – executed
SQNM sale – executed
SQNM put sale – not executed
In total, the closed positions erased the losses from earlier this month and made about $1100 on top of that. I feel quite nervous about having closed the SQNM position, as we might miss a big run up after earnings. At the same time, I did not want to be nakedly exposed to an earnings miss and plunge in the stock, despite what the financial modeling exercise forecast. Closing the SQNM position was an exercise in greed restraint; an attempt at opening the long SQNM (put) position was my attempt at leveraging earnings volatility while managing risk. I will likely try for the SQNM put sale again tomorrow.
Now that we have no open positions and are entirely in cash, the Model Portfolio has been updated at the link to the right. Since February 11th, the portfolio is up 13.6%. I have not yet caught up to the S&P500, however.
From last night's report, I chose not to enter the SPY put position today, though the reasons for entering such a position remain the same as discussed in the previous report. If tomorrow closes almost flat to up, I will consider entering the SPY short position. It will be a small position because it is high risk and keeping it small is how I will manage the riskiness. At this moment, however, I wish I had entered the SPY short position, as today's earnings disappointments (GOOG, MSFT, etc) are sure to drive the market lower tomorrow.
MARKETS. Not much new to add about the markets. They levitated to new highs and are now, after-hours, falling off quite a bit. According to our SPY analog, markets should end narrowly down this week and should get a hard swing down next week, of which they should recover most of it. I will try to enter the SPY put position on a ramp up off the lows tomorrow.
PRECIOUS METALS. I closed all of the PM positions as I did not see gold making it back to $1300. The bounce in this sector has stalled. PMs look like they will give back some of their gains before they take another step higher. I wanted to lock in some of the gains we had ahead of a possible draw down. I will certainly look to enter the same positions again at better prices, provided the market gives them to me. In the after-hours market, gold is trading up from where it closed, which may mean that I closed our PM positions too soon. I hope doing so does not come back to bite me in the rear. Time will tell.
That's all for tonight. Have a nice evening!
July 18 TRADE ALERTS
Placed the following four orders just now; they are all limit, all-or-none orders:
Sell 5000 SQNM @ $4.72
Sell 1 DUST Dec 21 2013 120.0 Put @ $46.90
Sell 1000 HL @ $2.97
Sell 100 SQNM Aug 17 2013 4.0 Put @ $0.11
None of these have triggered yet.
July 17
It has only been four trading days since I last posted, but it feels like a month has gone by. So much as happened in our positions and the markets have done little this week, as expected. Let's dive in.
MARKETS. First, I'd like to review where we are with our 2011 analog. The SPY weekly chart below has been marked up with analog-corresponding arrows and points to what lies ahead.
The light green arrows pointing up mark the bottoms in the 2011 and 2013 corrections, the dark green arrows pointing down mark where we are this week and light blue bars mark the tops before the two+ month churn cycle before the plunge. If the analog holds up, I don't expect the market to top for another month before entering 6 weeks of downward movement.
According to the analog and as it is bearing out, this week promises to be a narrow range week, followed by a week which will be down a little, though should experience one or two big down days, on the order of -30 points on the S&P. Tomorrow, I will be looking to take a short position on SPY though buying puts expiring in August. This will be a HIGH RISK trade and my plan is to be out of it next week, on the day that we get a big swing down in the market. What makes this a high risk trade is that there is a good chance that the puts may lose significant value if the market continues to ramp higher. To mitigate the risk in this position, I will choose a relatively small position size, damping the effect on the performance portfolio. Stay tuned for a possible Trade Alert on this tomorrow.
PRECIOUS METALS / HL / DUST. It appears that gold walked into a wall at $1300 today. As soon as it touched the $1300 level, there was a huge sell off and took gold down. Since this is OpEx week, the $1300 mark is probably being guarded quite strongly by PM bears. It will be up to PM bulls to push back on the take down, but I suspect that bulls will not step in and gold will get taken down further. Below is a weekly chart of GLD showing how it smashed into a Fib line and was thrown back.
If GLD doesn't break through the ~$126.00 mark tomorrow, it looks like it will be pushed down to the $114-$111 area of Fib lines. I have no faith that gold will manage to push up tomorrow, so I will likely close the HL and DUST positions. We may get better entry points on these securities again. Once again, watch out for a Trade Alert on HL and DUST in the morning.
SQNM. This position has been a very interesting ride. Despite today's correction, it has been making steady gains for a few days. What worries me is the upcoming earnings release next Wednesday. Ahead of that, depending how the stock fares tomorrow, I will look into selling some of it and possibly selling the calls against the portion of the position I retain. Given how far it has come in the last week, it seems like SQNM will be taken down unless the earnings are out-of-this-world amazing. Take a look at the daily and weekly charts below:
The 5-day RSI is as overbought as it has been in the last six months. The draw down was due any day. On a longer-term chart, it appears as though the 200-day sma has acted like a strong resistance line since the '09 plunge. Currently, the 200-day sma is at ~$5.20.
It seems to me that SQNM will experience strong resistance around $5.20 and is unlikely to make it past that level on its first attempt this year. Since we are nicely positive on SQNM, I will likely take some money off the table and contemplate selling the calls on what I keep, or I may sell the calls against the entire position. The course of action will depend on how SQNM performs tomorrow. Please stay tuned for a Trade Alert on SQNM as well.
MODEL PORTFOLIO. I had meant to update the Model Portfolio before I left for my trip last week, but ran out of time. It has now been updated and the link to download it is below. We are now up only 11.98% since February. The losses in the SLV and SPY puts put a dent in my returns. Let's see if I can recover those loses through some good trading in the next couple of weeks.
That's all for tonight. Tomorrow promises to be an active day!
July 15 TRADE ALERT CANCEL
Canceling the SQNM Trade Alert from moments ago. Going to wait to see where SQNM closes today before selling the calls.
July 15 TRADE ALERTS
A quick post for a couple of Trade Alerts. All orders are all-or-none, limit orders.
Sell 50 SQNM Jul 20 2013 4.5 Call @ $0.15.
July 14 NOTE
Hello everyone. Had to start a trip on Saturday; will be back Tuesday and will write a full report on Wednesday. It's OpEx week, so I will post Trade Alerts as appropriate.
Washington is hot and humid!
July 12 TRADE ALERT #2
There is a gap to be filled right at $4 for AMD and over the last six weeks it has traded between $3.80-4.00. Given time value decay and next week projected to be a narrow range week, I feel comfortable putting the following long order in:
Sell 100 AMD Jul 20 2013 4.0 Put @ $0.10. All-or-none, limit order.
July 12 TRADE ALERT
Trying again on SQNM. This morning's little move up is nice. Going to put in the following order:
Sell 50 SQNM Jul 20 2013 4.5 Call @ $0.10. Limit, all-or-none order.
Earnings don't come out until after OpEx, so I feel comfortable being able to re-enter a SQNM position, even if mine get called away.
July 11
MARKETS. New highs. The market will likely take a breather tomorrow after a hard up day like today. I closed out the SPY put at an almost $300 loss. Not pleased about that one bit. The 2011 analogy is still in full force so far. I will do a longer post this weekend and illustrate via charts. We will have a lot of ground to cover again this weekend, given last weekend's thought experiments and where we are with that as mapped to reality.
MODEL PORTFOLIO. Covering the SPY put just cost the model portfolio ~$300, or ~0.3%. I will post the update to it in the Weekend Report as well.
PRECIOUS METALS. Gold and miners were a thing of beauty today. DUST got crushed and we are in the money on that. I think it has a bit more to go in the collapse of its parabola, so I will stay put on this position.
After today's mayhem, I am keeping this very short and will see you in the morning. Good night!
July 11 TRADE ALERT #5
Closing the losing SPY put position. Feel much better about it now that we are in the money on DUST. Putting the following order in now:
Sell 1 SPY Dec 21 2013 162.0 Put @ $5.05
July 11 TRADE ALERT #4
Last SQNM adjustment – back down a little, leaving it here for the remainder of the day:
Sell 50 SQNM Jul 20 2013 4.5 Call @ $0.10. All-or-none order.
July 11 TRADE ALERT #3
Adjusting SQNM order up:
Sell 50 SQNM Jul 20 2013 4.5 Call @ $0.12. All-or-none order.
July 11 TRADE ALERT #2
Trying again with SQNM today:
Sell 50 SQNM Jul 20 2013 4.5 Call @ $0.09. All-or-none order.
July 11 TRADE ALERT
Sell 1 SPY Dec 21 2013 162.0 Put @ $5.80.
Market looks like it will ramp higher. Taking a loss on this SPY put and hopefully more than making up for it on the DUST put.
July 10
MARKETS. Well, today turned out to be a nothing burger. The last time Bernanke was slated to speak, the market did nothing all day and then proceeded to tank the following few days. That was my thought when I decided not to close the SPY put during trading hours today. Boy was I wrong about that. After market close, Bernanke gave a talk where he essentially said that he would continue to print money for as long as the unemployment rate stayed above ~7% and inflation was tepid. The after-hours market felt pretty comfortable in assuming that the unemployment rate would not drop to that level anytime soon and the market rocketed higher after-hours. We should see a big gap up tomorrow, which will likely push any short positions to run for cover hard and fast. This is what I will do and I will actually put the trade on this evening, before market open:
Sell 1 SPY Dec 21 2013 162.0 Put @ $5.80.
I will enter a SPY put position again after the S&P has run up past ~1700 and where the 2011 analog shows headwinds coming up, likely not till next week, if that early. I will tweet this TRADE ALERT out and put up a TRADE ALERT post after this nightly report.
PRECIOUS METALS. The dollar is turning lower quite hard and levitating everything, including gold. This bodes well for our DUST put. The gap up tomorrow may just be the leg up we need to catch all the gold shorts on the wrong side of the move, having to scramble hard to cover their positions, driving gold fiercely higher. The miners should follow gold's move higher, crushing DUST. It is possible that the money we have lost in the last couple of trades are more than made up tomorrow through the DUST put position we are holding. I will be up before market open, anxiously watch what gold does in pre-market. Right now, it is $25 higher from where it closed today. I hope the gain holds through the open tomorrow, ramps GDX higher and does some real damage to DUST.
SQNM. The covered call sale order did not execute today. If the ramp in equities in the morning pushed SQNM a bit higher, I will place another covered call order and patiently await its execution. I like to have trades execute at a price I like or not at all. That is a riskier way to trade, but that is my style. And that style has made me ~12% since February.
Tomorrow promises to contain fireworks. Stay tuned for TRADE ALERTS!
July 10 TRADE ALERT
Entered the following order and will leave it open for the day:
Sell 50 SQNM Jul 20 2013 4.5 Call @ $0.10
More orders to follow, depending on how the market performs before the FOMC minutes are released.
July 9
MARKETS. The possibility that the declining short-term trendline would give the S&P rise a pause has been blasted away. The chart below and the analogy now seem to be in full control of where the market is headed, which means that our SPY will continue to lose value. I will likely close it out at a loss tomorrow. Bummer. I do not like having my profit nickle-and-dime'd away.
As unpalatable as it feels at these heights, there is a good chance that I will flip long on the S&P tomorrow. We should be able to ride the long side till at least 1680, if not through 1700.
PRECIOUS METALS. Two days in a row now PMs have moved a little higher. Their miners have barely followed suit. This is a week bounce that I do not like one bit. ZeroHedge published an article about Go Forward Offered Rates turning negative, however. The last time this happened was in November 2008, when PM prices exploded higher. Given the beating in the PM space, it seems difficult to imagine that we will see any sort of significant rise in prices. So, what to do with our HL and DUST positions, both of which are in the red? Since PM bears have been able to knock gold and silver prices down almost at will, I am inclined to close the DUST position and ride out the long HL position. Between the closing of the SPY put and the DUST put, the Model Portfolio will suffer a ~0.8% loss. Not enormous, but nothing about a loss is pleasurable.
SQNM. After my mention of using any up swing today as a mechanism to hedge or partially exit this position, SQNM fail to provide an opportunity to do either. Pretty much from the first few minutes of trading, it trade down and never looked back. I tried to sell the covered calls and that trade did not execute. After a couple of days of gains the retrace today was inevitable; what was surprising about it was the strength and volume with which it moved down. I am going to try again tomorrow to sell the July $4.50 calls, or sell a portion of the position if it bounced back up with decent strength, or both.
WARNING. Tomorrow is going to be a volatile day: the Fed's minutes will be released and I'm certain traders will use that as an opportunity to whipsaw the market a few times. Moreover, tomorrow will also be tough because I will take losses on a couple of positions (and possibly enter a new position – long the SPY). Nothing to do but to grit and bear it – remember that we are still >10% since February.
July 9 TRADE ALERT
It's not my favorite thing to do – to sell calls on a down day for SQNM – but I think the hedge is still worth it if we can get it at our ask price. Put the following trade in seconds ago:
Sell 50 SQNM Jul 20 2013 4.5 Call @ $0.08. All-or-none, limit order.
July 8
MARKETS. The S&P analogy discussed in the most recent Weekend Report is continuing to hold true as the stock market goes higher this week. I have nothing new to add here, except to say that we will need to grit our teeth for this week before we start to see downside in the market for the next two weeks and can potentially exit the SPY put position for a profit. We will then be able to re-enter when the S&P is making new yearly / lifetime highs.
METALS AND MINERS. To say that I am annoyed at today's divergence between PMs and miners would be an understatement. Gold and silver climbed higher while their miners went the other way. There was a report out from Citi arguing that not one single miner would be cash-flow positive this year (I think they were talking about the large-cap miners). Not a good day for HL and DUST. I would like to see them re-couple higher with PMs and use that as an opportunity to jettison both positions – one likely for a loss and one potentially for a gain. Perhaps they gains / losses will come close to offsetting one another.
SQNM. This stock has been trickling higher without a significant punch-down move. The short squeeze that I had hoped for might finally be happening, but not without a fight as the stock is pushed down from the highs of the day almost daily. The July options expire at the close of the last trading day before earnings and I may use the next push higher to sell the calls on a portion of our position, while keeping the other portion un-hedged. Below is the daily chart and it shows the near-daily reversal candles that SQNM is experiencing – a big tug-of-war between bulls and bears.
All of the technical indicators in the chart above are either in or creeping up to overbought levels. It would be prudent to use a push higher to hedge or even sell a portion of the position, or both.
Have a nice evening!
July 5 Weekend Report
This is going to be a long report, as we have a lot of ground to cover. I will break this weekend's report down into the following sections: (1) Model Portfolio update & summary of positions; (2) thought experiments / investing hypotheses; (3) the dollar / currencies; (4) the market and (5) precious metals & miners.
MODEL PORTFOLIO & SUMMARY OF POSITIONS. From here on out, when the Model Portfolio needs updating on a particular position before all open positions have been closed out, I will start attaching the Model Portfolio to the Reports. Today's closing trade is one such example – we still have three open positions and one that we closed today. The Model Portfolio link on the right will be updated less regularly, though I will track the % return with every closed trade. The updated Model Portfolio is attached below.
Our current open positions are in SQNM (5000 shares @ $4.50), the December 21 SPY put (1 @ $7.80) and the December 21 DUST put (1 @ $42). While SQNM had a nice pop towards the close of the day, the SPY and DUST puts are currently both suffering losses, albeit relatively small ones.
I closed the SLV put position today because I did not want to be in possession of 1000 shares of SLV come Monday. While there is potential the dollar may turn down again, boosting precious metals (PMs) prices, there is also a decent risk that PMs could continue to move down on Monday. I did not want to take the risk of a $18500 position losing 3-5% through a gap-down opening on Monday – similar to what happened this morning. I'd rather take a ~$200 loss than risk owning a potentially much bigger (by $ value) losing position.
THOUGHT EXPERIMENTS. I wanted to step back and think about the news and bigger trends on which to base potential new positions or think through existing ones. What follows is my attempt to understand how the forces of money printing and bonds interplay and affect various other asset classes.
(1) For the first experiment, let's start with the assumption that the Fed will actually start curtailing its bond purchases and eventually cease altogether. If the Fed stops buying bonds – I include in this category treasury notes of various duration and mortgage backed securities – then there will be a greater supply of these in the open market that will need to bought by investors. A supply increase implies a price decrease, which implies a coupon rate increase. The US government will need to keep issuing treasury notes to finance its deficit, unless it miraculously figures out a way to cut it, which is about as likely as me growing another two feet. The Fed has controlled the rates on treasuries by creating money out of thin air (electronically) and buying treasuries, setting up the signal that there was an overabundance of demand, which drove up bond prices and lowered their rates. If the Fed stopped buying bonds, I would expect all of this to reverse, resulting in less demand for the notes/bonds, lower prices, higher rates. Higher rates, in turn, will put the brakes on home price increases, decrease number of mortgage applications and slow demand and returns in the housing market. Over the last two months, we have seen treasury rates rise in response to the bond buying tapering discussions issued by the Fed. So far most, including Goldman Sachs, believe that the Fed will start cutting back its bond purchases in September, which perhaps explains why rates are rising in anticipation of the beginning of the Fed's wind-down. Take a look at the 10-year treasury note's chart below:
What are the follow-on effects of higher rates? Generally, rates creep up when inflation is on the rise and the rise in rates counteracts or tempers inflation. Stock markets rise with outright inflation. Inflation and precious metals prices also tend to correlate positively, but since PM prices have been declining hard, the message being broadcast by the market is that inflation is not really present (leaving aside the calls for extended manipulation in the PM space). Deflation tends to be the nemesis of higher PM prices. Rates, then, may be going higher not as a result of inflation, but because of the de-repression that the Fed has induced through the tapering discussions; rates may be starting to represent the risks contained in the notes themselves, on the basis of the steep increase in government debt (and the debt to GDP ratio), reflecting the risk of default in treasury notes (we are nowhere near defaulting on an interest payment on outstanding treasury notes, but that number is also no longer 0).
What should we invest in if the Fed is preparing to exit the bond purchase program of the last four years? PMs are not the place to be long if the market's projection of deflation is true. Bonds are also not the place to be long as rising yields will kill prices. A deflationary environment (which is what the Fed has been trying to fight – see Japan the last 30 years) with rising treasury rates means that defensive stocks will do well – an example sector would be healthcare (people get sick no matter what the economy is like). Each of these sectors have their own risks, but the risks are quite company specific instead of cyclical for healthcare stocks. Aggregate consumer spending is expected to decrease in such an environment and the stock market, overall, would be expected to decline, making stock picking (in the healthcare sector, for example) a delicate and difficult task. The best investing strategy in such an economy would either be to stand aside or to be short the aggregate market, with carefully chosen long positions in certain companies in specific, counter-cyclical sectors.
(2) For the second thought experiment, let's assume that the taper talk by the Fed is BS and that when the economy is assessed accurately as barely limping along, the Fed will do the opposite of tapering and crank the QE printing press higher than it currently is. What would induce the Fed to do so? Spiking treasury interest rates, at a level high enough to make interest payments painful, possibly threatening default; plunging market; economy grinding down almost to a stand-still; dollar screaming higher against all other major floating currencies; and probably a number of other things I am not thinking of. Those would be the broad indicators to watch.
What do we invest in if we see turmoil ahead and then another QE printing spree? In the near-term, a number of specific short positions seem worthwhile to establish. When the Double Down QE (DoubleD QE) is announced, going long all the usual suspects might work initially, until the market realizes that DoubleD QE is actually a bad sign. Before DoubleD QE, bonds will have gotten crushed, along with the market and the economy. Currency directions will flip the day of a DoubleD QE announcement, the market will likely scream higher and rates will collapse, as the Fed hurries to sop up all the paper that it can get its hands on. Things will seemingly be returning to "normal," but the places that were hot before the plunge and DoubleD QE will lose their bubbliness as investors go in search of the next bubble to blow. My guess is that it will be in the precious metals sector, healthcare and food.
(3) CONCLUSIONS. At the moment we have a market that is surging higher, bond rates going higher and precious metals continuing their collapse. Here's what I think these components may be telling us: market surging higher – more QE anticipated; bonds plunging – QE done; PMs going down – QE done (although this did not hold true for QE4). The last shoe to drop for a QE done consensus appears to be the market taking a plunge (which will probably be the cue for DoubleD QE). Once we have everything making a strong move down, the conditions will be set up for a no-QE to DoubleD QE transition. From a trading perspective, so long as stringent risk management is applied, going short and then flipping long is possible, but needs to be timed correctly. Alternatively, you can choose one or both sides, QE ending vs DoubleD QE, position accordingly over a longer horizon and let winning positions prosper.
THE DOLLAR. The usual correlations between the dollar, market and PMs seems to have been broken. It used to be the case that a higher dollar pushed the market and PMs lower; whereas the converse resulted in a lift in both. The three currently seem to be moving nearly independently of each other, but there is still some influence of the dollar on PMs, albeit a small influence. The next two charts illustrate the lack of correlations:
The above chart shows the dollar in candles and a black line behind it for the S&P. In 2010 and through most of 2011, when the dollar moved up, the market responded by moving down. This correlation flipped in November 2011, when global currency devaluation wars got underway or intensified. We now have surging markets alongside a surging dollar.
For gold, the correlation with the dollar seems to have decoupled after the start of QE4 in October 2012. Since then, the PMs have cratered regardless of the dollar. Take a look at the chart below to confirm the decoupling observation:
Thus, it seems the dollar is playing little role in affecting the PMs (quite unusual), while it is showing positive correlation to the market. Strange times.
For us, a rising dollar will do well for (or at least keep steady) our SQNM position. Our PM positions (HL and DUST) will continue to be unaffected, but will likely experience further deterioration, at least until gold bottoms. Lucky for us, HL has held steady in the face of declining silver value. DUST, as expected, is screaming up with every step lower of the gold miners, which are magnifying the gold move. The DUST position is one which I may take a loss on and re-enter at a better price. At the moment, I will watch it closely.
THE MARKET. Let's review the market analogy we have been tracking recently. Here is its chart, marked up with green arrows for where I think the market turned and labeled with how much longer we have until the serious plunge happens. Provided the analogy continues to hold, that is.
We are one week past the green arrow, which means we have another up week ahead of us, then two down weeks, before we push higher for the following couple of weeks, then hit a peak and start grinding down from there, never to hit those peaks again before the Big Plunge. If this analogy is correct, I have bought the SPY put too soon and it will be a losing position for the next couple of weeks. I bought it, of course, in case the analogy fails and we get our big plunge before making new highs in the market. After all, we can buy another put to dollar-cost-average the position. For now, it's an inexpensive enough hedge to the analogy and with enough time past the time of the plunge for the position to pay off handsomely, even if it stays in the red for a little while.
PRECIOUS METALS SECTOR. With the discussion in the Thought Experiments section in mind, let's see if we can make sense of the PMs. If some form of deflation is ahead with QE ending, then PMs will continue to decline in value; if we get DoubleD QE, then (forced liquidation notwithstanding), we should see PM prices rebound and possibly launch much higher. Where do our HL and DUST positions sit relative to the no QE / DoubleD QE alternatives? Simply put, I have positioned for a DoubleD QE / increased inflation scenario, despite the market arguing otherwise. This is a problem. It is a painful proposition to trade against the market. I may jettison our higher risk DUST position if it continues to move aggressively against me and buy back in at another date. It's unfortunate, but it is better to take a small loss earlier than a much bigger loss later. The DUST position is one I will be watching closely over the next week or two.
Despite this being a very late Weekend Report, I think it's worthwhile to be thinking through the market forces discussed and continue to refine our positions based on the messages the market is projecting. We have markers to assess the thought experiments by; we should be able to adjust positions quickly by the guidance provided by the indicators.
That's all I have for now. Happy Monday!
July 5 TRADE ALERT
The way that PMs are moving on the strong dollar, despite the dollar being near a resistance zone (will show this in tonight's report), make me a bit nervous to be long PMs for the near future. We are already long PMs via HL and DUST, so having another long position in SLV makes the portfolio a bit unbalanced. With that in mind, I am going to close the SLV puts that we sold by buying them back at a loss. Here is the order I am placing:
Sell to close 10 SLV Jul 05 2013 18.5 Put @ $0.40
This will result in a $200 loss on the position (excluding commissions, which I will include in the Model Portfolio).
July 2
MODEL PORTFOLIO. I only update the Model Portfolio once the trade has round tripped – not on opening a trade, but on closing of that trade. I do this because the Model Portfolio is available for download by anyone, even folks not registered. Don't want to give the trades away, after all.
MARKETS / SPY PUT POSITION. The SPY put buy from today's TRADE ALERT executed at $7.80. I only bought 1 put because this is a position that I will have time to build up. Plus, there is plenty of time to work out – all they way to December. Why did I buy today? There was a second rejection of the S&P500 at the 50-dma. A technical play, along with the character and behavioral change in the market. There's a clear mark for knowing if this position is going against me: a violation (and close) above the 50-dma. The last couple of days the market has started strongly in the morning and has sold off into that strength. Looks to me like the smart money is selling to the sheep. Let's review the chart:
Over the last four trading sessions, the market has tried to get above the 50-dma and been rejected every time. Today's punch through was weaker than yesterday's – it didn't reach the same level as yesterday. If it closes above that 50-dma on decent volume, then I'll know to exit the SPY put position at a loss. What I actually expect is a resolution to the downside. I think there are a number of factors that could trigger a tumble – Egypt, oil spiking (more on this below), currency crisis in any number of countries. There is still an expectation in the market place that the Fed can print its way out of any malaise; what is not really recognized by the general population is at what cost that money printing is supporting the markets – Japanese-style deflation, '70′s-style stagflation, big inflation and hyperinflation. All of these are possible and they all lead to a sizable correction in the markets and lots of volatility, with the exception of hyperinflation, which can actually blow markets sky high. The put position I took today was a bet that something in the next six months is going to cause a significant correction in the markets.
Does this imply that the analogy to 2011 that I have been drawing is out of the picture? Not yet. We won't really know until the end of the week. The 2011 analogy is a longer-term assessment of market direction that also points to a sizable correction happening in the next few months. It's simply a matter of timing.
PRECIOUS METALS / DUST PUT POSITION / SLV PUT POSITION. With the problems brewing in Egypt causing oil to spike, I believe that some of that nervousness will push money into all commodities in the near-term and put downward pressure on the markets in general. Hence the TRADE ALERT today to buy a put in DUST and sell puts in SLV. Both of those trades triggered. Boy did DUST go against us quickly. The SLV weekly put held steady and if SLV stays fairly steady, the time value premium on those should wear off a bit more and perhaps leave us in the green.
The second TRADE ALERT I issued today to jettison the SLV put position was because I saw no rest or reversal in the selling in the PMs. This could bode poorly for us on both PM sector positions. I may have been too hasty to jump into both DUST short and SLV long. We'll know quickly if we should discard those positions.
SQNM. I stared at this position of ours for an hour today, trying to decide whether to sell the $4.50 calls or to stay put. In the end, I decided to hold off on selling the calls. With good reason (though it remains to be seen whether that was the correct decision):
As you can see from the daily chart of SQNM above, the stock has tried to get over $4.40 a few times and not managed to close above that level. What it has managed is to stay in the $4.30s for a couple of days without getting smashed down. We will see what tomorrow brings. I will probably stare at it again for an hour trying to get a sense for whether to sell the calls. Keep your eyes out for a TRADE ALERT.
That was enough excitement for me today. The Nightly Reports this week may be a little late and somewhat abbreviated. It's the calm before the earnings storm next week. See you all tomorrow!
July 2 TRADE ALERT #2
I don't like the price action in SLV at all. This was meant to be a quick play and I thought SLV would remain somewhat steady. Looks like the PMs are heading into the wood chipper again. Although this means that our DUST put is and will be under water, I am going to wait another couple of days to see if some whipsaw will let us exit for less of a loss. For now, this is the trade to put in:
Sell 10 SLV Jul 05 2013 18.5 Put @ $0.18.
If the trade does not execute, we will try again tomorrow and possibly with DUST as well. Timing, timing, timing…so hard to hit perfectly.
July 2 Trade Alert
Put in the following limit orders just now. It is not clear whether any of them will execute, but giving it a shot today:
Sell 10 SLV Jul 05 2013 18.5 Put @ $0.20
Buy 1 SPY Dec 21 2013 162.0 Put @ $7.80
Buy 1 DUST Dec 21 2013 120.0 Put @ $42.00
Now we sit and wait and watch and wait…
July 1
Market. Sorry this report is late in coming this evening; I was reading about power laws and how they can be used to determine when a shift in a market is about due. The market was not terribly eventful today. What was noteworthy is that rips are getting sold hard, as opposed to being lifted ever higher. The character of this market has completely changed in the last month. At some point later this year, I fully believe we will have a pretty significant correction, on the order of 15-25%.
Trade Alert Recap. Neither of the trades posted on the Trade Alert today executed for me today. Not unexpected, but I thought the SLV put sale order might have hit. The good thing about the market is that there will be another opportunity, whether it's the same equity or a different one. We have the luxury of being able to wait for good opportunities (outcome tilted in our favor) to come along.
Positions. I like the move on SQNM today; let's see if there is any continuation tomorrow. I've seen SQNM get to this level a few times and beat a hard path back down. Unless we get some decent follow-through tomorrow, it is going to take a monumental effort to push SQNM past $4.60. HL moved up nicely as well today, though once it had made its move, it just meandered. Not a strong trend. I am content staying in both positions as-is and seeing what develops over the next couple of day.
I have nothing new to add that I didn't already discuss in the most recent Weekend Report, with the exception that I am now starting to watch AIG more closely.
Good night and see you all tomorrow!
July 1 TRADE ALERT
Having a hard time going long the miners with gusto; price action feels week – perhaps just a breather. Put in the following limit, all-or-none orders. Let's see if any of them are executed:
Buy 1 DUST Dec 21 2013 115 Put @ $41.20 (very unlikely that this will execute today).
Sell 10 SLV (Weekly) Jul 5 2013 18.5 Put @ $0.25 (also unlikely that this will execute today).
Regardless of these orders being unlikely to execute, I would rather get them at these prices than chase a run. At some point soon, there will be a day when the run up will retrace and we will have another opportunity to enter positions (famous last words!).
June 30 Weekend Report
AN ADMISSION. It has been nearly 100F the past few days and the heat has added greatly to how hot and bothered I've been about a trade I didn't take. Recently, I mentioned in a post or two how I love going against leveraged (3x) ETFs that experience parabolic rises and how DUST was a prime example of that. My thought was that Friday would be a breather / down day for miners, as it was the last day of the quarter to jettison such positions for hedge funds and the like, and that I would take a short position in it. DUST opened down and never looked back. The entire day I was convinced that it would experience a bounce and allow me to get in – no such luck. A $40 decline later and the meat of the broken parabola play is gone. I have spend the last two days beating myself up about this lost opportunity and I am still not over it. Oh well…
PRECIOUS METALS / MINERS. Thursday gold went down while miners gained on the day. In that day's Nightly Report, I mentioned how a divergence was forming and could signal a bottom in both gold and miners. Boy I wish I had acted on that hunch (hindsight, I know, but I need to beat myself up just a little more apparently). We saw strong up moves across the PM space on Friday and we may not see a down move Monday, however much I would like that to be the case. My only consolation is that, at least, we have a little position in HL to take advantage of the rise in PMs. Let's visit the charts and see what we can learn. First, let's look at GLD's daily chart:
I have circled the area from 2010 that I expected GLD to touch before it reversed. The circled area is on a Fibonacci retracement line (50% retracement, $113.62) from when gold was in the ~$400 area back in 2004/2005. The lowest GLD got to on Friday was just below $115 and it bounced hard from there. In the next chart of GLD, a weekly chart, you can see that it has formed a reversal candle (long thin tail), generally indicative of a trend reversal.
What does this mean for us? It means that come Monday, I will start nibbling on some more precious metals positions. We missed the absolute bottom, but we may catch a fair amount of the upside yet.
The gold miners are showing an even more convincing hammer candle pattern, generally a strong indication that a reversal of the trend has taken place, but the bounce came at a level that seems like it was a no-man's-land and could have gone either way. Let's look at the retracements first and then at the hammer candle.
In the daily GDX chart above, you can see that the bounce happened part of the way between it's all-time low and the 78.6% retracement (from all-time low to high). I couldn't find anything particularly technical about that area, but I guess that doesn't mean that there wasn't a signal and I simply missed it. In the weekly GDX chart below, look at that beautiful candle, which indicates that GDX will continue to rise on Monday.
What is tough to figure out is whether there will be a quick revisit of the $22.50 level before this turns around and explodes higher, or whether we simply rocket higher from here. The MACD is starting to cross-over again and likely means that any visit back down will be brief.
The silver miners are showing a similar reversal candle. Thankfully, we were positioned before the reversal to catch some of the upward movement in HL. Depending on Monday's price action in HL, I may add to our position to catch some more of the bounce taking place in the PM sector. I may also enter a small position in GDX, SLV or something else in PM space. The one thing giving me slight pause to go crazy-long this sector is the Selling on Strength (SoS) number in NEM, a large-cap gold miner. Take a look at the last line in the screen shot below:
NEM's number is not as large as AIG's, but anything over $100M catches my eye. [The top 3 SoS numbers are huge. There may be a short play on AIG here that I will look.]
MARKET. The question for me about the bounce that we have seen in the S&P is reflective of the analogy from 2011 that I have talked about a few times in prior posts. The chart below is a weekly chart of the SPY and is marked with two green arrows that are the subject of my quandary:
The past week's candle looks qualitatively different from the one in 2011 marked with an arrow, while the MACD and the 14-day RSI are behaving quite similarly to the way they did in 2011. This next week promises to be pivotal for informing us whether we are headed to new highs or whether a plunge is imminent. The daily chart, shown below, tells me that the 50-dma is action as a strong resistance to gains in the index, while the chart after that – the NYSI, NY summation index – is showing that a turn up is underway.
In the daily SPY chart above, the 50-dma stopped the advance of the SPY almost on the nose. If the market is to continue to new highs, we will need to see a gap step up above the 50-dma and a close above it as well. The NYSI chart, on the other hand, supports a continued move up in the SPY:
The daily chart of the NYSI has the 5-dma still below the 20-dma – no upward cross-over just yet – but the index line itself is starting to show an up tick, coincident with the market going from 1580 to ~1610 (black line in the above chart is the S&P 500). The 14-day RSI is also starting to turn up. Early next week should be very telling about which direction the market will take for the next few weeks and whether our analogy still holds.
SQNM. I am beginning to hate our position in SQNM, as it appears there is a big seller that comes in right above $4.30 to knock the stock down and a buyer in the low-$4 to push the stock up. An ideal, day-trader stock, but not a style of trading I like. I tried to protect my downside a little by selling the July calls, but the trade did not execute and Friday the stock was down hard enough to make the call sale not worth taking. I sense a lot of downward pressure on this stock – short interest is ~30% after all – and I am trying to decide whether it would be good to wait for a short squeeze or throw the towel in, despite all the fundamental analysis I've done. Needless to say, I will be watching this closely over the next few days to decide what to do.
That's it for me. I am going to try to stay cool for the next few days, as reports come in of triple digit temperatures through Tuesday. Have a great rest of your weekend!
June 27
Announcement: I will be updating the some things behind the blog this weekend. While I don't expect problems, please email me if you experience difficulty logging in Monday morning. My email is firstname.lastname@example.com.
Trade Alert Follow-up
It appears I was too greedy in wanting my price points met. DXCM never even took so much as a slight dip today and just stair-stepped higher all the way to the close and SQNM did nothing but dither. Needless to say, neither of my orders from today's Trade Alerts were executed.
It's the end of the month and the blog-o-sphere as been abuzz with quarter end fund rebalancing driving the market higher and beaten down things getting sold even harder. Here's what I see:
The daily chart of SPY shows that we have bounced nicely from the lows of this Monday. The 50-dma, which used to act as a springboard to launch stocks higher, can now potentially act as a resistance line to drive stocks back down. This view is counter to the 2011 analogy I have been talking about in recent posts, but it is a possibility that we should consider. How will we know which scenario is playing out? Simple. If the SPY closes past the 50-dma on the daily, then we know it is not going to act as resistance. I would be much more comfortable with the 2011 analogy if we close not only above the 50-dma, but also above $165 on the SPY or ~1655 on the S&P500. Let's see what tomorrow brings.
Precious Metals / Gold
If the theory that funds need to toss their losers before quarter close is true, then it makes sense that gold took another step down today. What was surprising, however, is that the miners did not follow suit. We may be starting to see the type of divergence that is telling us that gold is near it's bottom. This divergence bears watching.
HL took a nice step up today. Going to stay put and see how this sector plays out over the next couple of days.
Action plan for tomorrow: try to get into a couple of positions. Will try again on SQNM. Will find other equities to play, possibly look at DXCM again.
That's all for tonight. Have a great evening!
June 27 TRADE ALERT #2
About to enter the following put sell order:
Sell 10 NKTR Jul 20 2013 11.0 Put for $0.40. All-or-none, limit order.
June 27 TRADE ALERT
About to enter the following covered call sell order:
Sell 50 SQNM Jul 20 2013 4.5 Call for $0.14. All-or-none, limit order.
June 26
Precious Metals / Miners / HL
Well, it looks like I entered HL a bit too early. Bummer, but I am thankful the position size was quite small. A few weeks ago, over the space of a few posts, I guessed that gold (GLD) and the gold miners (GDX) would bottom out around $1250 and $26.30, respectively. I was wrong on both counts and how! The precious metals complex has fallen far farther than I thought reasonable, given the cost to mine gold. Should the trend continue, miners will shutter mines to contain costs and decrease supply, as, traditionally, that is the means by which to raise the price of anything (exactly the same thing that has happened to home prices due to a constrained supply). The question then is, how much further can gold fall?
One of the fundamental driver of gold prices is currency debasement and inflation. We have had the former steadily in the form of greater and greater amounts of printed money by the Fed, but inflation has remained fairly contained, as most of the liquidity generated by the Fed has gone into risk assets / equities and bonds (and some into food and oil). Let's look to the gold, gold miners, silver and silver miner charts to see how far down we have before we hit some technical resistance. Let's face it, the liquidation currently happening is partly forced through ETFs, as there are stories of physical shortages in a number of places.
The GLD chart above is a 10-year chart with daily prices and has two Fibonacci retracements on it: one from the lows in 2004/2005 to the highs of 2011; one from the lows in 2008 to the highs of 2011. While the 38.2% retracement level from 2004 seemed to have served as support three times recently, GLD is now well below that level of support. The next level of support for GLD is in the range of $111-113, corresponding to the 50% retrace from 2004 and the 61.8% retrace from 2008. Nothing is stopping gold from falling another $75-100 and we will likely see ~$1150 gold/oz in short order. In other words, the precious metals complex has not finished correcting; at least not gold.
The large-cap gold miners in the chart below look to have no support until their lifetime lows.
If gold has another $100 to fall, it will get to a price at which miners will need to start shutting down mines, which will reduce their production output and valuations. This means that miners can fall much more than the price of gold, simply because normal business operations will make miners bleed money when the price of gold gets low enough. Some smaller miners will likely go out of business altogether. GDX hitting $15-16/share is not so far fetched at all. In fact, if conditions get bad enough quickly, GDX could easily trade below $15.
You may be wondering why I don't take a short position if I believe there are such headwinds ahead for gold and gold miners. Primarily because once plunges get going, they are difficult to step into for the risk of hitting a bear market rally. The right time to go short is when it seems as there is no way things could fall apart and you have a fundamental reason to be short. With gold, everything (currency dilution, volatility, safe haven buying, etc.) except for the inflation number is saying go long, not short. It is precisely for that reason that the disintegration of gold and gold miners is puzzling, unless you argue market manipulation by the powers that be for the last 9 months. Another reason not to step in short is because there is much more money to be made waiting for things to reach extremely oversold levels and then to go long.
Let's see how silver is faring.
The above is a lifetime chart of SLV, the ETF for silver. From lows to highs, SLV has retraced nearly 75% of that move and is fairly close to its 78.6% retracement level. Looking back to 2009/2010, the area of $16-18 is quite busy – lots of wrestling for direction of silver. It is likely that SLV will whipsaw in this area for a while before it picks a direction. At least with SLV, I think we are close to coming to the end of its slide. What do the silver miners show? Do they look like they are slowing their collapse? Let's look at their chart below:
This chart shows the new lifetime lows the silver miner ETF, SIL, is hitting and the only technical indicators to provide any idea of whether we are done with the collapse is the Relative Strength Indexes (RSIs) and the MACD, all of which are in oversold territory. So, no real help there. The silver miner do mirror the price of silver, so if we take that as a cue as to what silver miners will do, then we may hit bottom with silver miners before gold and the gold miners do. Let's what clues the chart for HL may have for us:
Not terribly confidence building, as the next support line is not until it's lifetime lows down near $1, though there is a lot of back and forth in the $2.50-3 area. I will need to watch this closely and cut our losses quickly should it appear that HL is rapidly headed to $1.
Regarding trading anything in the precious metals sector, I am a big fan of waiting for things to bottom and then going long, but only on those issues that stand to give us a nice rate of return. It is possible that once this sector bottoms, it will simply remain in the doldrums for a long time. I will react to what the market presents, rather than feeling that I need to form an opinion, invest and hold on stubbornly. The latter characteristic is a sure-fire way to blow up your account.
The move in the S&P yesterday and today have me believing that we are forming our weekly candle that is the mirror of the 2011 analogy, shown in the chart below:
I have marked with different colored arrows where we are (dark blue) and where we are headed (light blue). If the analogy holds, we will make marginal new highs in the next six weeks. At that point, everyone is going to think that the bull market of the past four+ years is once again in tact and about to take off. We will likely then reverse and continue in our trading range until the big plunge, which I anticipate at the end of October or beginning November. If the market continues to hold around these levels, then the dark blue arrows in the above char will mark the lower bound of our trading range. I will likely enter a lottery put position once we make new highs and everyone is screaming about the S&P going to the moon [much like people are now calling for sub-$1000/oz gold]. If there is some consolidation over the next few days, I may enter a very small long call position on the SPY and hold it until the S&P hits or passes 1700. This will be a very small position because it is a high-risk play and we may lose all of the money we spend buying these calls. Must keep risk contained.
I really do not like how SQNM cannot seem to get past it's current price. We got a giant indecision candle today, which tells me that neither the bears nor the bulls are winning in this tug of war.
At some point soon the indecision will be resolved and my hope is that it is to the upside. All the fundamentals point in that direction, but the price action is terribly suspect. I may take a covered call trade this week to give us a little premium to soften a down move in the stock.
June 25
Some sort of a relief bounce was expected from the relentless selling over the last few days. What today may have done is set up the reversal candle that I am hoping to get by the close of this week – this would give us a lower bound on our range for the 2011 analogy discussed over the weekend. Enough technical and emotional damage has occurred to have me believe that we will not simply rocket higher from here. Then again, I have been known to be wrong before.
I did not like the price action on the stock. It couldn't hold on to its morning gains and basically just drifted lower all day. Luckily, this is a small position for us and I feel patient enough to ride this for a little while, even if there is a draw down. I suspect the precious metals sector will explode higher when the Fed announces that it will initiate some program which will essentially be nothing other than printing more money. I believe the chances of more QE-like programs happening increases every day that bonds suffer – prices drop and yields rise. The bond market may just be forcing the Fed's hand.
Nothing much to report on SQNM either. A consolidation day; let's hope it's not a consolidation before a plunge. No news that would make me believe that my fundamental analysis is egregiously wrong.
The first week after OpEx tends to be a little slow for me. The next OpEx is still a month away and I don't really want to take any directional bets with markets as volatile as they are. I am starting to dig up other interesting stories to invest into, but haven't done enough research to even mention possibilities here at this point.
Have a good evening and let's see what tomorrow brings!
June 24
Today we saw what appears to be the first day of the bull-bear wrestling match and it appears the bears won. If we continue to trade sideways for the week, which might be unlikely, then we may get the hammer candle I described in the weekend report to satisfy the analog from 2011. If we continue the plunge tomorrow, then we probably won't stop until everyone is running around saying 800 on the S&P is just around the corner.
On the daily chart for the SPY, we are starting to get into oversold territory on the 5-day RSI and MACD, which may spur a short relief rally tomorrow. We saw today a strong reversal intraday, but the bulls just could not hold on and were overwhelmed by selling pressure. In the longer term chart for SPY, shown below, we have a little ways to go until we hit either of the moving averages or any of the Fibonacci retracement lines.
Parallel to the decline in the market has been the rise in interest rates on longer-dated maturities, particularly the 10-year, off of which so many types of loans and bonds are based.
The above is a weekly chart of TNX (10-year treasury note) and you can see how explosively rates moved up last week and today. It doesn't seem as though there is a pause ahead, as TNX blew through its 200-dma with ease. I'm certain that the Fed will have to make a stand here sometime soon before rates get completely out of control or all rate-sensitive instruments – especially mortgages – will feel a ton of pain. By historical standards, however, we are nowhere near high interest rates; just check interest rates your money market or checking account…laughably low.
We are certainly in the process of popping the stock market bubble that the Fed has blown over the last four years. The only way this pop is averted is if the Fed doubles- or triples-down on QE. They don't seem to know to do anything else, so I suspect that that will happen when enough pain in the market has been felt; it may take an actual 20% plunge in the S&P. When that happens, it will seem as though the market will rocket higher again, but what may really happen is that hot money may seek a different, under-appreciated asset class. What is one of the most hated asset classes at the moment? That would be the precious metals and their miners.
Earlier today, when I thought the intraday reversal was real, I posted a Trade Alert to buy 1000 shares of HL @ $2.85 (initially this was $2.79, but then I chased it higher). You may have gotten a better entry than I did, as HL came back down to $2.82 from its highs, but it ended the day right where I bought it at $2.85. I fully realize that I may be catching a falling knife and that miners could go much lower, but it is a small position and if the price action is truly atrocious, we can jettison the position with little loss to the overall portfolio.
At least on the daily chart HL appears a bit oversold and there is a gap right around $3.10-3.15 that should get filled (see chart below).
The 5-day RSI is as negative as it has been in the last six months, as is the MACD histogram. We also have a hammer candle today, which should hold us here as the market figures out whether it will continue to plunge further or find its footing. One of my favorite indicators about what direction something is going to take is the Goldman Sachs call on anything. There are many times when I've seen Goldman make a call on something, only to see it go in exactly the opposite direction within a few days. Zero Hedge has long argued that Goldman's call are their mechanism of transferring client positions to their in-house prop desks; in other words, telling their clients to do something while they internally do the opposite. Today there was a Goldman report on how gold is going to $1050 in 2014.
Time will tell, of course, what happens to gold and the entire precious metals sector. It's not clear to me that the bloodbath is over, especially in GDX, which crossed below what I thought was it's bottom ($26.31) and has declined even more since. The next line of resistance seems to be the 2008 low at $15.48, with little in its way to that destination. Check out the chart below.
There is a very good chance that if gold miners continue to fall, silver miners will follow, which makes me a bit nervous about holding HL for the duration. I will have to watch this complex closely.
Despite the drubbing the market received today, SQNM (and our portfolio) did quite well. SQNM ended up ~4.6%. I'm quite comfortable with the fundamental analysis of this company that I posted in this weekend's report and I think we have about six months to hit a fantastic return on this position. What thrills me is that the Model Portfolio is <30% invested and still managing nice returns with plenty of dry powder to spare, should we see an opportunity with fantastic odds in our favor.
That's all for me this evening. Happy Monday!
PS: I apologize for forgetting to post the link in the email for the Trade Alert today. I hope that it did not affect you negatively.
June 24 TRADE ALERT
Buy 1000 shares of HL @ $2.85. Limit, all-or-none order. Currently trading at $2.89.
June 23 Weekend Report Part 2
Stock Positions
ARNA closed above $8 on Friday, which means that we pocket the premiums we received for selling the $7.50 puts and the $8 puts, as both sets of puts expired worthless. We will not own any shares of ARNA on Monday.
SQNM closed at $4.12, which means that we pocket the premium of puts sold at the $4 strike, but will be assigned the shares for which we sold puts at a strike of $4.50. The assignment forces us to buy SQNM at $4.50. On balance, the assignment is costing us $4.50/share – $0.44/share received on the put sale. Even though we are buying the shares at $4.50, the net cost to us is $4.06 ($4.50 – $0.44). In the Model Portfolio, I include the cost of commissions in the P&L calculation. On Monday morning, we will own 5000 shares of SQNM.
I will see what the price action is like Monday before making any trades with SQNM. Right now, the $4 strike covered call is selling at $0.31. I'd like to see SQNM pop in price before selling the covered calls or selling the stock outright. I think we will have an opportunity to get in again before earnings, which are not due until the Monday after July OpEx.
Model Portfolio
The Model Portfolio Excel file has been updated and is available on the link to the right. The expired options have a value of 0 and the P&L is adjusted accordingly, though the assigned shares of SQNM will bring that P&L down quickly if we sell it immediately on Monday (which we won't). Until we sell the SQNM shares, that P&L number is not truly accurate – something I thought I'd make everyone aware of, in the interest of full and accurate disclosure.
Until the analogy with 2011 is invalidated, I'm going to operate under the assumption that we still have ahead of us a high-volume hammer candle on the weekly chart. I've marked up a few things in the SPY chart below as guidance on what we may expect:
The thin blue circles mark the analogy that I'm working off of. We still have not seen a big, high-volume day that reversed some steep intraday losses. The thick blue line of the volume chart is what I'm expecting to get close to (if the analogy is to remain valid). On the MACD panel, the green circle is our past pattern and the purple circle highlights what appears to be the black line/red line crossover, mirroring the downturn in the market and signaling that the short-term signal is still trending down. Next week or so is when I expect to see a hammer candle, which would make me feel much better about the analogy and give me an idea of what the lower bound in the range for the next few months will be before the big plunge (which may not be much more than 350 points).
I'm going to stop here and tackle what next week brings with fresh eyes. Adieu!
June 23 Weekend Report Part 1
I am so used to writing a Report every day that when I don't publish anything for a couple of days, it feels as though it has been ages. This weekend's Report will be in two pieces. The first, this piece, is an update to the earnings model for SQNM. It turns out that Yahoo Finance had the wrong numbers for a couple of expense metrics. I dug though the 10K and 10Q filings, found the right numbers and they changed the model a bit. I will be submitting the following article to Seeking Alpha – they published the non-fixed version and I am trying to get them to publish the fix. Here we go:
Brief Background. Sequenom (SQNM) is a diagnostics company that has commercialized non-invasive diagnostics tests, branded as Heredi-T™ CF, MaterniT21™ PLUS, Heredi-T™, SensiGene® and RetnaGene™. It sells the hardware platform (MassARRAY) and consumables to run those tests, as well as performing those tests as a service in its own laboratories. Instrumentation and customer purchase consumables, together referred to as Products, and diagnostics services, referred to as Services, comprise SQNM's primary revenue streams. SQNM has established itself as the leader in the non-invasive pre-natal testing (NIPT) market, primarily through its detection of trisomy for chromosomes 21, 18 and 13. The company has not yet reached profitability, however.
Q1 2013 Performance Review. SQNM made some nice progress in Q1 2013:
(1) tests performed grew from 33,000 to 44,500 on a quarter-over-quarter (Q/Q) basis;
(2) payment collection for tests performed gained enough traction to yield an increase in the average revenue per test (ARPT) by 2.2% Q/Q;
(3) gross revenues increased by ~38%
(4) operating costs decreased by ~2%%.
Unfortunately, the Q1 earnings report also had items that were of slight concern:
(1) products revenue declined ~25%;
(2) cost of revenues increased ~15%.
The cost of revenues increase is understandable because of the rapid growth in test volume. The total cost increases were sufficient to drive the earnings-per-share (EPS) loss to -$0.26 on expectations of -$0.22. The stock did experience a ~15% pop after earnings, primarily as a result of the growth in tests accessed.
Estimating Q2 2013 Performance. To estimate revenue and earnings numbers for Q2 2013, growth and decline rates of the following factors need to be modeled:
(1) change in number of tests performed;
(2) change in ATP per test;
(3) decline in Products revenue;
(4) increase in cost of revenues;
(5) increase in operational expenses.
Number of Tests Performed. In my previous article, I made the assumption that test volume would grow 15% quarter-over-quarter (Q/Q). This was meant to be a conservative estimate to the actual 34.5% test growth experienced from Q4 2012 to Q1 2013. Given that SQNM is pushing hard to sign on with insurers, thereby expanding lives covered, a 25% test volume growth from Q1 2013 to Q2 2013 seems reasonably aggressive. In Q2 2013, a 25% increase in tests would result in 55,625 tests accessed.
Due to the trend towards next-generation sequencing for everything diagnostics related, I believe SQNM faces an uphill battle to sell its instrument and consumables to outside laboratories. Revenues from product sales came out to a ~25% decline in sales of products in Q1 2013. I believe this theme will continue throughout the year, even though management has offered explanations for the quarterly decline, and make the assumption in my earnings model that product sales will decline 10% Q/Q.
Pricing Power. As SQNM gains a stronger and greater position in the NIPT market – it is currently the leader – it will gain pricing power on its tests, but this will be short-lived as competition increases. The MaterniT21 test currently lists for $1500 and makes up ~75% of the tests that SQNM performs. The ARPT in Q1 2013 was $653, a number that reflects the payment collection ability for tests performed up to a year ago. During their earnings call, SQNM management mentioned that it is able to recognize revenue for ~30% of tests it performs in a given quarter and the remaining is recognized in subsequent quarters. Since it is focused on capturing market share as quickly as possible, SQNM is discounting its MaterniT21 test and given the mix of price points for its other tests, we will likely see ARPT grow incrementally rather than exponentially. After all, it makes sense to discount your best seller in exchange for gaining market share quickly.
There are competitors that pose risks and downward pressure to SQNM's pricing power. Some competitors have products on the market; some are in the process of ramping up a commercial launch, while others are future entrants in the NIPT market. Ariosa Diagnostics is a current competitor, while Natera is aggressively pushing its recent launch through acquiring distributors and NIPD Genetics will enter the market in the future. Through its acquisition of Verinata Health, Illumina (ILMN) could become another competitor down the road, probably as early as 2014. Because of the trade-offs between capturing market share and competition, I kept the Q/Q growth in ARPT at a reasonable 2.5%. ARPT grew at 2.3% from Q4 2012 to Q1 2013.
Expenses. Calculating earnings, or in this case losses, requires making some estimates on expenses. I assumed a 10% Q/Q growth rate for cost of revenues and a 1% decline for Q/Q operating costs. In Q1, the increase in cost of revenues was ~15% and a pleasantly surprising decrease of ~2% in operating costs from Q4 2012. While the costs for performing tests should continue to come down as scale and workflow efficiencies take hold, it seems that capturing an ever larger market share in an increasingly competitive market will continue to pressure expenses upward.
Earnings. We can estimate gross revenues by multiplying the Q2 estimated number of tests by the Q2 ATP estimate. From that we subtract all expenses, divide by the number of common shares and arrive at a loss of ($0.20) per share in Q2 2013. Extrapolating to Q3 2013, I get ($0.14). For Q4 2013: ($0.05). Thus, it seems that SQNM will not hit profitability until 2014. The caveat to these EPS estimates is continued use of cash-based accounting. SQNM has mentioned that it would switch to accrual sometime in 2014, in which case the revenue numbers would experience a nice bump and could lead SQNM to be profitable in the same quarter the switch is made. The table below summarizes the numbers.
# of Tests | 44500 | 55625 | 69531 | 86914 |
Revenue/Test | $653.55 | $669.89 | $686.64 | $703.80 |
Products (M) | $9,415.00 | $8,473.50 | $7,626.15 | $6,863.54 |
Total (M) | $38,498.00 | $45,736.09 | $55,368.85 | $68,033.87 |
Shares (M) | 115 | 116 | 117 | 118 |
Stock Price. Based on a 4X multiple of 2013's revenue and 118M common shares available at the end of Q4 2013, I get a stock price of $7.13. SQNM hasn't seen these levels in years, but strong revenue growth and containment of expenses should drive the stock price higher. The number of shares short has declined from 37.7M at the end of April to 34.33M at the end of May, equivalent to 30% of shares sold short. One solidly positive surprise could send these short sellers scrambling to cover and would deliver a sizable pop to SQNM's stock price.
Note on 8-K Filing. The most recent 8-K filing from Sequenom (SQNM) was interesting for its ratification of two equity issuance plans, the 2006 Equity Incentive Plan and the 1999 Employee Stock Purchase Plan. Under these plans, SQNM may issue 4M and 2.3M common shares for each plan respectively. Given the current outstanding share count of 115.2M shares, there are a couple of ways to interpret this ~5.5% share dilution that SQNM is planning through the incentive plans.
One effect of an increased share count will be to make the earnings-per-share (EPS) loss smaller than it would be without the added shares. As SQNM grows its way to profitability, it will take increasingly smaller EPS losses due to the compounding of revenue growth and share count increase. Unfortunately, once it hits profitability, the bigger share count will result in a smaller EPS profit. The reverse is true for profitable companies in decline. Share buy backs yield increases in EPS for profitable companies, but once those companies slide to a loss, there are fewer shares to divide the loss into and EPS becomes a big negative number quickly.
A second interpretation is that SQNM management wants to reward its directors and employees with low-priced shares now, implying that management believes the share price will be much higher than where it currently is. Timescales by management tend to be measured in quarters and years, implying a higher share price in late 2013 – early 2014. This timeframe parallels my stock price projection of $7.13 in the next nine months.
My bet is that management is so confident of its testing volume growth that any bottom line fiddling due to share dilution will be negligible. Assuming that this read of SQNM management's perspective is correct, I feel more confident in choosing the more aggressive growth estimates modeled above.
June 20 Part 2
The most recent 8-K filing from Sequenom (SQNM) was interesting for its ratification of two equity issuance plans, the 2006 Equity Incentive Plan and the 1999 Employee Stock Purchase Plan. Under these plans, SQNM may issue 4M and 2.3M common shares for each plan respectively. Given the current outstanding share count of 115.2M shares, there are a couple of ways to interpret this ~5.5% share dilution that SQNM is planning through the incentive plans.
One effect of an increased share count will be to make the earnings-per-share (EPS) loss smaller than it would be without the added shares. As SQNM grows its way to profitability, it will take increasingly smaller EPS losses due to the compounding of revenue growth and share count increase. Unfortunately, once it hits profitability, the bigger share count will result in a smaller EPS profit. The reverse is true for profitable companies in decline. Share buy backs yield increases in EPS for profitable companies, but once those companies slide to a loss, there are fewer shares to divide the loss into and EPS becomes a big negative number quickly.
A second interpretation is that SQNM management wants to reward its directors and employees with low-priced shares now, implying that management believes the share price will be much higher than where it currently is. Timescales by management tend to be measured in quarters and years, so I suspect that the projection is that share price will be much higher in late 2013 – early 2014.
My bet is that management is so confident of its testing volume growth that any bottom line fiddling due to share dilution will be negligible. Assuming that this read of SQNM management's perspective is correct, I feel more confident in choosing more aggressive growth estimates when modeling earnings for the remainder of the year.
Number of Tests. In my previous article, I made the assumption that test volume would grow 15% quarter-over-quarter (Q/Q). This was meant to be a conservative estimate to the actual 34.5% test growth experienced from Q4 2012 to Q1 2013. Given that SQNM is pushing hard to sign on with insurers, thereby expanding lives covered, a 25% test volume growth from Q1 2013 to Q2 2013 seems reasonably aggressive. In Q2 2013, a 25% increase in tests would result in 55,625 tests accessed.
A side-effect of growing its own testing facilities, SQNM faces an uphill battle to sell its instrument and consumables to outside laboratories. This cannibalization of revenues from product sales came out to a ~25% decline in sales of products in Q1 2013. I believe this theme will continue throughout the year and make the assumption in my earnings model that product sales will decline 20% Q/Q.
Pricing Power. As SQNM gains a stronger and greater position in the non-invasive pre-natal testing (NIPT) market – it is currently the leader – it will gain pricing power on its tests. The MaterinT21 test currently lists for $1500 and makes up ~75% of the tests that SQNM performs. Since the average test price (ATP) in Q1 2013 was $653, SQNM is not charging anywhere near $1500 for its MaterniT23 test currently. It makes sense to discount your best seller in exchange for gaining market share quickly. After all, there are competitors that are exerting pressure on pricing and more entrants are on their way leveraging next-generation sequencing, such as Natera now and possibly Illumina (ILMN) down the road. Because of the trade-offs between market capture and competition, I kept the Q/Q growth in ATP at a reasonable 2.5%. ATP grew at 2.3% from Q4 2012 to Q1 2013.
Expenses. Calculating earnings, or in this case losses, requires making some estimates on expenses. I assumed a 3% Q/Q growth rate for cost of revenues and for operating costs. In Q1, the increases in these numbers were 3.9% and 3.5%, respectively, from Q4 2012. I was hoping to see a cessation of growth in expenses last quarter, but was disappointed. While the costs for performing tests should continue to come down as scale and workflow efficiencies take hold, it seems that capturing an ever larger market share will continue to pressure expenses upward.
Earnings. We can estimate gross revenues by multiplying the Q2 estimated number of tests by the Q2 ATP estimate. From that we subtract all expenses, divide by the number of common shares and arrive at a loss of ($0.21) per share in Q2 2013. Extrapolating to Q3 2013, I get ($0.15). For Q4 2013: ($0.06). Thus, it seems that SQNM will not hit profitability until 2014. The caveat to these EPS estimates is continued use of cash-based accounting. SQNM has mentioned that it would switch to accrual sometime in 2014, in which case the revenue numbers would experience a nice bump and could lead SQNM to be profitable in the same quarter the switch is made.
Stock Price. My projections show that the stock could be at $6.88 by the end of 2013. SQNM hasn't seen these levels in years, but strong revenue growth and containment of expenses should drive the stock price higher. The number of shares short has declined from 37.7M at the end of April to 34.33M at the end of May, which is 30% of the shares floated. One solidly positive surprise could send these short sellers scrambling to cover, which would deliver a sizable pop to SQNM's stock price.
Due to our sold puts positions, we will likely own at least 5000 shares of SQNM on Monday. If SQNM trickles down and looks like it will close above $4 tomorrow, I may purchase an additional 5000 shares before the close. Please keep an eye out for a Trade Alert tomorrow (you should receive an email about it and I will tweet it out as well)!
I will submit the above analysis to Seeking Alpha tonight. I don't expect it to have any impact on the stock price and since we are already long, we don't need time to position ourselves before its release.
That's it for tonight. Have a nice evening!
June 20
Today's hard down move may have killed my analogy of how the market is going to trade in a range for the next five months. We may be on the start of an unwind that could take us down to the 50-day simple moving average on a weekly chart of the SPY, down near 1480. If we get a swing tomorrow, meaning a plunge that is reversed and where the close is well above the lows, then we may be at the March 2011 consolidation point marked in the chart below. That will mark the bottom of our trading range. The swing is essential to determine the low point in the range, though.
The thing that is showing a positive divergence to the negative chart, however, is the big Buying on Weakness (BoW) number in the SPY today (+$321M flowed in). A few days ago we had an equally large Selling on Strength (SoS) number in Intel (INTC) and a smaller one in QQQQ. It seems that someone was anticipating a big down move. It also seems that the big down move today won't turn into a waterfall decline, according to the BoW print today. The key thing is to keep calm and watch for a turn tomorrow. If we don't get one, there may be more downside pain ahead.
On a psychological level, what the market might be doing is reacting to the withdrawal of cheap money, but what it might really accomplish is to force Bernanke to double-down on QE. After all, one of the indicators of the health of the economy was the "wealth effect" generated by rising markets. If markets fall, how can money printing be turned off or tapered? The Fed does not know how to do anything other than to print money when there is a problem. If the Fed decided to raise rates anytime soon, it would slam the economy into a brick wall. As it is, the yields on long term paper are already beginning to spike – this will raise interest rates across the board, especially mortgage rates, which will put significant downward pressure on the housing market, a huge driver of the overall economy. The most likely scenario in September is no tapering of QE and possible increase in QE.
Gold / GDX / DUST
Since the rose has come off the market bloom, I expect that the next larger crank of the printing presses will have liquidity flowing into the most hated sectors, such as commodities. Earlier today I tweeted that I was not going to dip my toes into GDX as I had mentioned in last night's report. With good reason. GDX punched through the 50% Fib line ($26.31) much too easily. I anticipate gold making a move down to it's 50% Fib line (~$1250) handily because the CME just hiked margin rates on gold – in the past this has slowed the rise of gold and in the present the hike will add insult to injury and take gold down farther. No matter what gold does tomorrow or in the near-term, the short interest in it and the mining sector is too large to pass up as a contrarian play. But, I will need to choose our entry point very carefully.
One trade I have made a ton of money on in the past is to be short leveraged ETF, such as DUST, the 3X gold miners short ETF. When these things hit parabolic increases, those parabolas collapse with 100% certainty. In the next few days, DUST will likely hit its parabolic blow-off and be ripe for the picking for a huge decline. The leveraged ETFs also have going against them time erosion, where the expenses of keeping the leverage erode the price of the instrument itself over time. I will likely enter a put position on DUST as soon as I see a pause in the miner's (GDX's) decline.
Despite today's huge decline in the market, ARNA closed down just a little, right at $7.50. Tomorrow is options expiration (opex) and we will know at the close how many shares of ARNA we will own on Monday. I think ARNA will close between $7.50-8, resulting in our accounts having 1000 shares of ARNA bought at $8 minus the premium received from the put sale ($0.55). Let's see what happens with this tomorrow.
I have a big write-up on SQNM and will publish it in a separate post as Part 2 of today's Nightly Report. It will consist of a review of its earnings model I built and talk about their most recent 8-K filing.
Stay tuned for Nightly Report Part 2!
June 19
Before we get down to discussing our positions and the markets, I wanted to remind everyone that you should now be receiving email notifications of any new posts (including Trade Alerts) and that you can receive such notifications via Twitter as well @ProtectedReturn (notice no "s" after "Return"). The Twitter feed is private and only available to Protected Returns subscribers.
Thank goodness for FOMC day being over. It is days like today that I am reminded of how few fundamental factors the market is operating on and how nearly all of the risk in the market rests in policy risk. As expected, the gyrations in the markets today were rather nauseating. On volatile days like this, it helps to look at a longer-term picture:
If the analogy I charted from a few days ago still holds true and we are in a period similar to February – August 2011 in the above chart, then today's action has not violated that analogy and won't do so until it breaks below 1600 S&P level convincingly. I suspect we will be in this narrow 100-150 point range on the S&P for the next few months, while investors try to figure out what impact a September tapering of liquidity provided by the Fed will have on the markets. The forces at play are the push-pull of stronger economy+decrease in money printing vs. weaker economy+more or continued money printing. In a market that is addicted to cheap money from the Fed, I believe it is this back and forth between cheap money and stronger economy that will keep markets in a trading range, until it becomes apparent that there is nothing strong about the economy, that everything that seemed strong was due to excess amounts of cheap money. At that recognition point, the markets will take a tumble and the Fed will do what it does best: Print Money.
I will certainly try to play the dips, but it will take strength to buy the draw downs once the S&P hits certain levels and sell the rips once those get high enough. Everyone (mostly mainstream media) will be screaming that the market is about to fall to pieces when the declines seems as though they are picking up steam and everyone will be screaming about a new bull market and a strong, healthy economy when the rips get near new highs or actually make new highs. It takes a death-grip on your emotions to be a contrarian in the markets.
For now, I have been carefully choosing the stocks that we go long to avoid being whipsawed by the market and gain entry points that provide favorable odds of going in our way regardless of what the market does.
ARNA ended the day +$0.10 at $7.61. We own two long positions on this stock, both by way of selling puts: 10 puts sold at $7.50 strike for $0.18 and 10 puts sold at $8 strike for $0.55. The $7.50 puts are trading at $0.09/0.12 bid/ask, giving us a small gain. The $8 puts are trading at $0.43/0.44 bid/ask, also giving us a small gain. If ARNA stays between $7.50-8, we will own 1000 shares at options expiration. If it goes below $7.50, we will own 2000 shares; if it trades above $8 at options expiration (June 22nd), then we will 0 shares of ARNA but will have pocketed the premiums from selling the puts.
For now, I will simply watch how ARNA trades tomorrow. I have no need to close either position on ARNA at the moment. Let's see what tomorrow brings.
We are long SQNM via another pair of put sales: 50 puts sold at $4 strike for $0.22 and 50 puts sold at $4.50 strike for $0.44. The $4 strike puts are almost worthless, giving us a near 100% gain; the $4.50 strike puts are trading at $0.28/0.33 bid/ask, giving us a small gain. If SQNM goes below $4 by the end of Friday, we will own 10000 shares of SQNM. If it stays between $4-4.50, we will own 5000 shares and if it goes above $4.50 by options expiration at the end of this week, we will own 0 shares of SQNM but will have collected all of the premiums from the put sales.
I have done a bit of fundamental analysis on SQNM and am quite comfortable holding 10000 shares of it, if it comes to that. In prior posts, I put up my earnings model and the analyst reports from several banks. Here are those reports again, for your perusal:
GDX is getting close to the 50% Fib level of $26.31, illustrated in the chart posted yesterday. I may take a small nibble at this tomorrow, should it hit or briefly dip below that level. You should receive a Trade Alert email about it as soon as I post the trade I will be entering.
That's it for tonight. The next couple of days promise to be exciting!
June 18
Hello! This site has undergone a bit of a redesign and I will be adding some color to it, as it is just a little to plain for my taste. But it's functional and that will do for the moment. I have started a Twitter handle (@ProtectedReturn) through which I will announce new posts, especially Trade Alerts. The feed is Private and only subscribers will be allowed to follow it.
I have also set up a new post notifications wizard, which should send an email to every subscriber when a new post goes up. Please let me know if you do not receive such emails, as I just implemented that functionality and there may be a couple of bugs to work out.
Both of today's Trade Alerts were executed. I have been watching ARNA for over a year now and while the fundamentals of the business still need to be borne out – subscription growth and insurance coverage – the technical side seemed to be broadcasting oversold conditions. Thus, we are now long ARNA through 20 puts sold:
10 puts sold for $0.18 at a strike of $7.50 expiring this Saturday.
10 puts sold for $0.55 at a strike of $8.00 also expiring in four days.
I realize that tomorrow is going to be one hellishly volatile day with the FOMC statement coming out. It may not have been the best move to be long anything before such an event, where everyone is expecting some insight into when and by how much money printing will be scaled back, but the ARNA chart presented a great set-up. Let's review that through the charts below:
The above chart is a daily ARNA chart for the past six months. Since March, ARNA has touched the ~$7.35 level three times (including today) and bounced rather strongly from it. We will know quickly if the same pattern will play out, with the added complication of FOMC day. The 5-day RSI is as oversold as it has ever been in the last six months. The short term chart tells me that ARNA is due for a little relief bounce. The longer term chart is shown next:
All the way back to July 2012, after its breakout from its Phase III clinical trial success, the $7 mark has held strongly as a bounce point for the stock. The longer therm chart tells me that we might suffer a draw down to ~ $7, but that we shouldn't linger there long and that a healthy bounce from that level is expected. Something that gives both of the above charts some validity is the following chart showing Fib lines:
The above chart shows Fib retracements from the lows of 2011 to the highs of 2012. The 50% retracement comes in at $7.36. It is my belief that the $7-7.35 is a strong bounce zone for ARNA. Tomorrow is an unreasonably monumental day for the markets, so it is unclear what monkey business will go on that could take stocks on a wild roller coaster ride, but we have our lines in the sand and can remain dispassionate when deciding what to do with these positions tomorrow. It might be worthwhile to stay away from looking at the markets at all tomorrow and come back to them on Thursday, after all the hoopla is done and things have settled down. Please know that I will watch these positions for unusual activity and will post Trade Alerts if needed. You should receive email notifications of them or through Twitter, if you follow me there.
Gold and gold miners has been beaten to pulp over the last nine months and this has become one of the most unloved sectors in the market. Being a bit of a contrarian, I did a post a little bit ago that showed where I thought the bottom on GDX was. The chart below is an update of that earlier chart and shows that the 50% Fib retracement line is at $26.31. If we return to that level, I may take a small position.
It will be difficult to hold a position in GDX, as the precious metals sector is quite volatile and because I think gold has lower to go, but at the same time, I believe the miners have fallen much more than gold and may not have a great amount of downside left. I will watch how GDX fares over the next day or two. Keep your eyes peeled for a Trade Alert.
Not a ton to report here that I haven't said over the last few days. Thing to remember is to keep emotions in check as market plays in the range I highlighted yesterday and in this past weekend's Report. The dollar seems to be forming a base. The FOMC announcement will certainly have an effect on the dollar and trigger all kinds of derivative and correlative market moves. Put on your seat belts and hold on tight.
That's it for me tonight. Till tomorrow!
June 18 TRADE ALERT #2
About to put in the following order:
Sell 10 ARNA Jun 22 2013 8.0 Put @ $0.55. All-or-none, limit order.
Same reason as prior post, just getting more exposure. We are only 30% committed in our portfolio after all and 70% in cash. This will be a bounce trade, so I will keep this on a short leash.
June 18 TRADE ALERT
June 17
A lot of what I wanted to say for what I think the markets will do over the next 5 to 6 months is in yesterday's Weekend Report. Today, I'd like to discuss what my plan will be in trading the SPY during the consolidation period. The chart below shows my guess at the consolidation range:
Once the S&P hits the 1705-1715 range and everyone is screaming for how it is going to 2000, I will enter longer-dated put positions and when the S&P gets down to 1575-1600 and everyone is screaming that a plunge is right around the corner, I will enter longer-date call positions. We need to leave enough time for the positions to work out and we will be managing them actively, i.e. selling them when we think a turn in either direction is near.
Not much new to report on SQNM. I am happy that it sold off just a bit today and am hoping for a little bit more of a sell-off tomorrow. Again, I think this stock will not go below $4 before Friday and I am looking to invest another slug of my portfolio in this if/once it gets down to about $4.10, as the downside to an entry at $4.10 seems to be around $3.95, while the upside is around $6 over the next six months. In my estimation, the earnings power of SQNM is being under-appreciated by Wall St.
This stock had an enormous Selling on Strength (Sos) number today of ~ -380M in both total money flows and block trade categories. Such numbers portend a decline in stock price, though the timing is a question. Earnings don't come out until July 17th, so it's a little surprising to see such a big SoS on no discernible big news. The chart seems to suggest that INTC is a bit stretched to the upside and today it had an indecision candle (open and close numbers were close, but the intraday high to low was big).
I will keep an eye on this stock and see if an interesting short entry presents itself.
Nothing new to add to my thoughts on BBRY that I didn't already present yesterday.
On June 8th, I presented a chart that showed how severely the dollar had been crushed since the end of May. Below is an updated chart and while I am not ready to jump into gold, as I believe lower prices – not higher – are ahead in the next few weeks to months, I do want to keep an eye on the movements that are occurring.
On June 13th, I made a guess as to where I think gold was going to get down to before it would experience a significant and sustained bounce that isn't crushed by the powers that be. I still think we will get there, but that does not mean that I will stop watching it until we get there. Markets are fickle and change on a dime. If they do for gold, I want to catch that turn.
That's it for tonight. This Friday promises to be an interesting day, given our long positions in SQNM and opex. Until tomorrow, I bid you good night.
June 16 Weekend Report
First: Happy Father's Day!
As I have mentioned a few times before, the nature of the market seems to have changed from bouncing off of the 50-dma on the daily chart to whip-sawing back and forth with no sustained breakout from the bounce. I have illustrated this in the chart below and discuss its implications following the chart.
As you can see, over the past six months, the bounces off of the 50-dma were strong, accompanied by decent volume poles and continued higher. Only once, before the third bounce was there a near-test of the 50-dma that launched higher, was reversed and then rocket-launched from that (third) 50-dma touch. Compare that to the 50-dma touch in June, which launched higher initially, was entirely reversed, launched higher again and turned back around. A distinctly different character to the market compared to the previous 50-dma touch launches. Also notice that the initial June 50-dma touch occurred in a volume hole; another distinct difference from previous touch occurrences.
Let me add some further color to these bounces: bounce 1 lasted 8.5 weeks (end of December 2012 to ~ end of February 2013); bounce 2 lasted 9 weeks (end of February to 3rd week of April); bounce 3 lasted 6.5 weeks (3rd week of April to early June); bounce 4 lasted 1 week ( June 5th to ~ June 12th). If the market behavior remained consistent to previous bounces, we should have had at least a 6 week rally in the S&P. What does this mean? The next chart will illustrate the market that awaits us, I believe.
The above is a weekly chart of SPY, marked up with time periods for 50-dma breakout to test. Over the last three years, the middle two periods were ones that tested the 50-dma (either after breaking above or touching it) within 5.5 to 6 months, from touch to touch. When the 50-dma was not tested in a 5.5 to 6 month period, which happened towards the last quarter of 2010 to beginning of 2011, the market entered a 5.5 month consolidation period before plunging to test the the 200-dma (left blue circle in above chart). We have experienced a similar 5.5-6 month uptrend since middle November 2012 with no 50-dma touch and it is my hypothesis that we have entered a 5.5-6 month consolidation period that started at the middle of May and will thus end around the end of October to middle November. How is that for parallels and analogs? :-D
Let's take this a step further. The highs of the consolidation period in 2011 actually occurred past the highs set at the start of the consolidation period, by about 30 points. What does this mean? This means that we could break through 1700 on the S&P and still be consolidating before the big plunge down to ~1240 in the latter half of October. The runaway move in the S&P is done. Welcome to trend-less whipsaw hell. A trader's paradise, for which I have a game plan for you, my dear subscribers.
I love how SQNM is performing for us. By the end of this week, we will know if we will own 0, 5000 or 10000 shares. I am highly doubtful that SQNM will close below $4 on this coming Friday and I will use decent draw downs to purchase 5000 shares outright. If my call on the market overall is correct (above section), then we should be entering a period where one or a few up days are followed by a few down days. I believe SQNM has completed any gap-fill it was going to do (from after the earnings announcement in early May, see chart below) and if it gets into the $3.95-4.10 range, I will be buying more.
Even though we don't own BBRY anymore – I am still beating myself up about not following the chart and closing out the position early entirely because I was frustrated (emotional) that it wasn't moving up fast enough – there is still a possibility to play this stock if I can stay unemotional and disciplined and trade the chart (below).
It is abundantly clear that BBRY has broken above the purple line and an semi-close retest of it or the blue line is a good entry point to get long. Earnings come out before market opens on June 28th, so this stock should experience some volatility that we might be able to leverage using options expiring this week. I will see how BBRY does in the morning and possibly take an entry on some options for the week. Please keep an eye out for a Trade Alert.
Sorry to be delivering this Weekend Report at 2am on the 17th, but yesterday was my birthday and I was out playing all day. Have a Happy Monday!
June 13
Published tonight's report here. I am working on an intermediate cycles report on the S&P and it's taking a bit of annotating to get it together.
For now, we are out of our BBRY position (too early, given where it ended the day) and we are well positive on our SQNM positions.
Sit tight; I'm doing lots behind the scenes. For now, good night!
June 13 TRADE ALERT
UPDATE: Leave it to me to close this position at the most inopportune time. Sell triggered this morning @ $13.95 and the stock continued to ramp to $14.33. Oh well, at least we made some money.
Just entered the following order:
Sell 500 shares of BBRY @ $13.65. Limit, all-or-none order.
June 12
This is one roller coaster of a market. It is more reminiscent of a topping process and selling the rips higher than a continuation of the bull run we have had for the past few years. Time will tell, of course, but I certainly do not want to be long anything when the market hits the skids and takes everything down with it. In fact, the big money is really made waiting for the plunge to end and going long at or near the bottom and then simply riding the luxury of time to turn positions profitable. Way more money is made that way than shorting stocks and the markets. Shorting takes a serious effort, as you have to micro-manage your positions almost daily with adjusting stops. Nonetheless, there is a way to short the market, if it cracks past the first volume hole (see yesterday's chart) and I will see if such a position is going to give us better odds of making money than simply waiting out the plunge.
Well, I tried to get rid of this thing, but was too greedy. I will put the following order in tonight to try to get rid of this position again:
Sell 500 shares of BBRY @ $13.65. Limit, all-or-none order.
I will also do a separate Trade Alert post of this placed order.
Nice rise during regular trading, but I see this stock down 5% in after hours. Let's see what tomorrow brings. I still feel quite comfortable with our positions.
That's all I have for tonight. See you in the morning!
June 12 TRADE ALERT
We are still 6.5 hours from market open, but I have entered the following sell order:
Sell 500 shares of BBRY @ $13.86. All-or-none, limit order.
June 11
Today is the first time in a little while that we did not get a Buying on Weakness number in the SPY. The last couple of times the S&P was strongly in the red, a BoW number appeared. Not today. A trend change. Right now, the futures are up. I supposed a little bounce out of the oversold conditions is not unexpected, but I believe we have entered a period where the rips higher are sold, setting up for a fall in the near future. The reason for a decent corrections could be many, including the bond market, the FX markets, or an non-market event. No idea, but when the rips higher get sold and the dips lower are not bought strongly, it's an indication of folks becoming nervous and using every opportunity to exit positions. We will be doing the same with respect to BBRY (more below).
It looks as though the bounce off the 50-dma was pretty shallow and turned over rather quickly. We will need to wait and see if we get another bounce off of the 50-dma, but it is certainly unusual for the S&P to be testing that moving average so soon after having just tagged it.
If it does break through the 50-dma, we will rapidly see a 1550 print on the S&P. The MACD is still pointed down, with now cross-over to the upside yet and the 14-day RSI is pointing down as well. We'll have to wait a few days to see if the 50-dma is tested and holds or if it will give and the market will enter into a more serious correction mode. It is likely that the FOMC meeting will cause a break in either direction, as it has done so many times in the past.
It is disappointing that BBRY has not broken to the upside with any decent conviction. With the decline today, it is back in the short-term down-trend pattern. I am not a fan of how this is behaving and tried to exit the position today, but without success. After this Nightly Report, I will post a Trade Alert: I will enter a limit order higher than the closing price and hope that a morning market bounce takes me out of the position. My sell price will be $13.86.
Noting new to report on our SQNM positions. If this does continue a bit lower, say towards $3.80, I may double down on it and buy 10000 shares. For now, there's nothing to do but to watch it.
Trade Alert post to follow momentarily. Happy Trading!
June 11 TRADE ALERT
Seconds ago put in the following sell order for BBRY:
Sell 500 shares of BBRY @ $13.89. All-or-none, limit order.
June 10
This is going to be a very brief Nightly Report. It is late and the market hardly did anything today.
SQNM has bounced nicely over the last few trading sessions. A little less than two weeks until opex and we are doing quite well on our positions.
BBRY just can't seem to hold itself above $14. I am getting worried enough that I may try to sell on a spike up tomorrow, if one does occur. Keep your eyes open for a Trade Alert.
That's it for tonight. I will keep watching the market closely to ascertain any trend changes. For now, nothing stands out in the near-term.
Good night and Happy Trading!
June 8 Weekend Report
The chart for the markets looks interesting in light of the prognostication I made a few days ago about how there was real potential for the 50-dma to act as a springboard for the next jump higher in the S&P.
As you can see above, the S&P stuck a pin through the 50-dma just like it did back on April 18th and bounced higher from there. If this 50-dma trampoline effect holds as it has over the last six months, we could see new highs in the S&P in the next month. What is equally interesting is what the FX markets are doing. Let's look at the moves in the dollar just over the last few days.
First the dollar chart. Look at the action over the last two trading weeks and the enormous candles over the last three trading days. Those are enormous moves. Currencies are entirely manipulated by central banks (through rates and purchases), which makes this an interesting illustration of how badly Ben Bernanke wants to stop the dollar from appreciate and lengths he will go to do so – no end to money printing.
Several months ago, Japan's Abe announced an unprecedented money printing operation and look at what that has done to the Yen over the last few months. It is clear that governments are engaged in a global currency war, where the person printing the fastest devalues their own currency the fastest. Since all the major global currencies are valued against each other (fiat currencies – not tethered to a commodity), one currency declining in value necessarily means another rises in value. Hence, a currency war, where the government that devalues their currency the most gains the most by way of cheaper exports.
Devaluing your currency, in turn, promotes inflation, which if not controlled, can spiral quickly into hyperinflation, wrecking the entire country. The game being played to fight deflation at all costs risks creating inflationary bubbles. Just look at what the money printing has done to inflate the stock market over the last four years in the US.
A disaster in this global monetary expansion experiment is inevitable. It's just a matter of time. We simply need to be adept at adapting quickly as events unfold and protect our assets as best as possible. In the near-term, it means we need to ride the trend of an inflating market, but we will switch gears pretty quickly into the inflation protection assets once the market starts to unravel. The latter is an eventuality, not hypothetical.
That 6% ramp on Friday in SQNM was refreshing. I was anticipating it continuing to trickle down to about $3.60, but when the market went screaming higher and SQNM followed, that was quite surprising. Looking at the longer-term weekly chart, I notice now that I really should not have been surprised. SQNM has not closed below the 50-dma on a weekly basis since the last earnings report.
If SQNM could make it past that giant volume bar that ends ~$4.40, then there's a good chance it will run up to the 200-dma. We have about 2 weeks until opex and I expect no significant, stock-moving news before then.
On the daily chart, I see SQNM needs to make it past $4.20 and will then have an incrementally easier time rising, as the volume bars get smaller and smaller from there on out.
I debated myself most of Friday again about whether to sell the BBRY position or not. In the Model Portfolio, which will be updated after June opex, BBRY is a small position on a percentage basis. When BBRY hit $14 and briefly went past it, I though for sure the short-term trend had been broken, while the longer wedge pattern was going to push the stock into the $15s. As a reminder, the chart below shows the trendlines.
On Friday, BBRY clearly broke through the short-term downtrend line (purple), but that it failed to close above it did not make me happy. Perhaps it is too much to expect BBRY to break through that purple line on the first try; that was one of the reasons I decided to hold the position through the weekend. I would like to give it just a bit longer to work out and I may sell the weekly covered calls early next week to collect some premium in case the stock decides to reverse course.
Have a great weekend! See you guys on Monday.
June 6
That was one hell of a reversal in the last half hour of trading. Unbelievable rip higher, but nothing should surprise us in this bot-driven market. Couple that with major gyrations in the FX markets and you have a mutli-trillion yo-yo called the markets. Simply crazy and all the more reason to keep you cool.
We got to our 50-dma and stuck our foot into the first volume pole and bounced back up from there. At least today, the chart proved useful and reasonably accurate. The brief break beneath the 50-dma is reminiscent of what happened ~ April 18th. The market rallied 120 points after it punched a pin hole into the 50-dma. Will history repeat itself? I certainly don't know for sure, but the odds right now favor the longs, though I wouldn't be exuberant until the S&P gets above 1645. Until then, the newly acquired downtrend channel is in tact.
Unlike yesterday, when we saw a Buying on Weakness (BoW) number in SPY, today we have a Selling on Strength (SoS) number, though not as big as yesterday's number. Though not predictive by themselves, these numbers give an indication of what bigger traders are doing. For example, yesterday's BoW was a big number in total money flow, but was minuscule for block trades – indicating that big, institutional trades were not buying the dip. Today's SoS is of decent size in both total money flow and block trades. Again, it looks like the big guys are using the rips up to unload some of their positions. This makes me skittish and has me watching markets more closely than I should need to.
Not surprisingly, SQNM pushed down with the market. Perhaps what is happening now is the real gap-fill move from the earnings gap up. All we can do at the moment is sit tight and let this play out for the next couple of weeks. If SQNM should get down to ~$3.50, I will double-down. Doubling down will make this a high-risk trade/position, but I am willing to hold through earnings in July. My modeling tells me that they will actually blow the test volume numbers out of the water. I think this weekend I may revisit the model and develop conservative, average and aggressive scenarios for SQNM.
Today again, I was tempted to jump out of this position because it just seem to pick up gains convincingly. But because it held up in a declining market, I thought I would give it one more day. I am hoping that's not going to turn out to be one day too many. Let's see what the chart is telling us.
While BBRY has bounced off of the rising bottom blue line, making higher lows in the process, it has not yet broken through the short-term declining trend shown by the purple line. In order to convince me that it will reach the top blue line, BBRY will need to break through the purple line. I will be watching the price action closely tomorrow and early next week. If it looks like the purple line will present too strong a hurdle to overcome, I will seriously consider selling this position. As always, keep an eye out for an intra-day Trade Alert.
That's it for me today. Have a nice evening!
June 5
It looks like we might have to suffer a brief draw down on SQNM, depending on how the market fares. Sit tight; we have the fundamental analysis to give us some comfort. No need to panic just yet.
I went back and forth all day today trying to decide whether to sell this position or not. In the end, my reasoning for holding on to it was simply that in the face of such a steep market sell off, BBRY not only held its ground, but actually rose. Perhaps this means that when the market picks up again at my first line in the sand (~1603 S&P), this will rise some more. More on my market take below. For now, I'm not going to panic out of this position just yet. But please do stay close for a Trade Alert tomorrow, just in case.
We were pretty close to our first line in the sand today. We definitely fell into and through the volume hole I pointed out in yesterday's report. If we do not bounce convincingly tomorrow, then we are definitely headed to the S&P 1550 area next week. The flavor of the market has changed notably. I think we are now entering a period where the rips upward will be sold or used as opportunities to unload positions. This implies that there is a significant correction just around the corner. Nothing I am going to react to right now, but will watch the tap closely and play the hand dealt.
Tomorrow, I am expecting the market to bounce. Of note was the Buying on Weakness number the SPY posted today. The bulls will not throw in the towel to the bears without a fight.
Stay tuned for more tomorrow. Good night!
June 4
I am now in possession of 500 shares of BBRY bought at $13.50. I am nervous holding it and will jettison the position quickly if I think the market is looks like it will turn hard and BBRY doesn't bounce off of its trendline with an conviction. I had hoped to hold this for a week at least, but its price action will have to set the plan, especially if it does not bounce convincingly. Here's the chart as a reminder of where the top of the wedge is:
BBRY is already below the lower wedge line. If it does not get decisively above that tomorrow, I will likely sell the position a little above break even.
Not much to report here. Our positions are fine. The stock basically has a 10 cent range and barely moves regardless of what the market is up to. Perfect.
The whipsaws that are occurring on a daily basis in the indexes is more reminiscent of a top formation rather than an imminent, small correction. Time will tell of course, but we can look to the charts to see how far of a fall we can expect if there is a draw down ahead.
The daily SPY chart shows the moving average hovering just above 160 (~1600 in the S&P), while the first big volume pole is just above 155 (~1550). In the near-term then, those are my two markers. If there is no bounce off of the 50-dma, I expect the market to continue down to 1550 before another bounce opportunity presents itself.
That's all I have for tonight. Keep your eyes peeled for a trade alert regarding BBRY. Happy Trading!
June 4 TRADE ALERT
Buy 500 shares of BBRY @ $13.50. Limit order, all-or-none.
June 3
The trade from today's Trade Alert did not trigger. I beat myself up a bit over this today, as I got greedy and wanted this absolutely at my price, even though it had already met the support-line bounce illustrated on yesterday's chart. Arrrgh. I will try again tomorrow and may get an equally opportune entry, given tonight's dump in the S&P futures.
The whip-saw over the last two days in the final 30 minutes of trading has my head spinning. Please recognize that it is all noise. The upward trend is still in tact and until this thing really breaks down, no one should be selling this market short, except for a lottery play.
Let's see the roller coaster the rest of the week shapes up to be. Our SQNM positions are still fine and holding above $4.0. Not much to do there but to sit back and watch.
Sorry to make this short, but there just isn't a ton to report on. Sometime this week, I will do a report on some visual correlations between the dollar, S&P and gold. Regarding gold, I am still kicking myself hard about not having executed the put on DUST. Oh well, water under the bridge. There will be more opportunities, a saving grace of the market.
Stay sharp!
June 3 TRADE ALERT
Put the following order in 8 seconds ago:
Buy 500 shares of BBRY @ $13.46. Limit, all-or-none order.
Reason for doing so was covered in last night's Weekend Report.
(Finally fixed the clock on my posts…it is correct now.)
June 2 Weekend Report
Current Positions
Instead of starting with the usual market overview, I thought I would summarize quickly the positions I am in. At the moment, there are only two and they are both in SQNM:
SQNM Jun 22 2013 4 Put – 50 sold puts
SQNM Jun 22 2013 4.5 Put – 50 sold puts
At options expiration(opex) on June 22nd, if SQNM is trading below $4, we will own 10000 shares of SQNM, 5000 of which we will have bought at $4 each and 5000 at $4.50 each. If SQNM trades between $4-4.50 at June opex, then I will only own 5000 shares of SQNM, purchased at $4.50, while pocketing the premium on the $4 puts expired worthless. If SQNM trades above $4.50 at opex this month, then I will on 0 shares of SQNM, but will have pocketed the premium on both put lot sales. This is where we currently stand, with ~$45k of our capital spoken for (in case we have to buy the 10000 shares of SQNM at $4 and $4.50).
The sudden drop across all major indexes on Friday in the last 15 minutes of trading was a quite a shocker, not that our position in SQNM was affected by the plunge. What I was curious about was to figure out how much downside was possible given a few technical indicators. Let's have a look at the chart and observe what it might be telling us.
The STO and RSI appear to have rolled over and are approaching zones that are indicative of bottoming. The MACD looks like it has just begun to roll over and may indicate a bit more downside before a positive cross-over occurs (black line crossing up above red line). The 50-dma appears to have provided solid support and if the current correction does stretch, I would expect that the S&P would find support right at 1600. There it is – perhaps another 30 S&P points to the downside is possible in the short-term. I see volume support starting at 1600 and intensifying down to 1550. My most educated guess is that there are one or two more downside days left before this bounces.
I have been keeping tabs on BBRY as it has been trickling down. A couple of weeks ago (don't remember the exact post), I posted the BBRY chart as a trade that I was going to wait for to come to me. I think it is there or almost there.
BBRY has been trading in a narrowing wedge pattern, providing markers for support (lower thick blue line) and resistance (upper thick blue line). I will take a position in this for a bounce trade in the morning, provide is does not severely break down and out of the wedge. Watch for a Trade Alert post on this in the morning.
That's it for tonight. See you bright and early on Monday!
May 31 TRADE ALERT
Seconds ago, I put the following trade in:
Sell 50 SQNM Jun 22 2013 4.5 Put @ $0.44.
It triggered almost immediately, which means that better prices are to be had. I wouldn't muck around with a penny here or a penny there, however. I wanted to be positioned before their Jefferies conference on Monday in New York, in case they release some good news.
May 30
I posted a technical analysis on GDX earlier today on http://protectedreturns.blogspot.com/2013/05/gdx-bottom-is-in.html and on Slope of Hope. It is that analysis that prompted me to put an order in for the call options. Unfortunately, neither of the placed orders from earlier today triggered. I will try again tomorrow.
For SQNM, it has shown great resilience in a volatile market. I think we can get that up to full position. I will try again on this tomorrow morning as well.
Not a whole lot new to say here other than everything is tied to the USD/JPY pair. There's so much monkey business in the forex markets, that hardly any analysis barely matters. I will take a long view at things this weekend and see what trends might make themselves apparent. At the moment, it is still hazardous to short this market. The real money will be made going long once the market does correct, but it is very very difficult to pick a top and hold through the topping, whip-saw process.
Overnight, the markets appear to be trickling higher. A narrow range day tomorrow would not surprise in the least. It is time for the Hamptons for the Street boys after all.
It looks like gold is still crawling higher in the overnight markets. Up $4 right now. I believe this is the one sector that has been beaten down so hard that money is actually flowing into it right now in volume. After all, what will money flow into in size at the moment? Chasing a near relatively parabolic S&P or flowing into a hated/beaten down sector?
Hindsight is murder and I am still suffering from failing to enter the DUST short and selling HL too soon. Ugh. That one is going to take a weekend to purge out of my head.
That's the short of it for tonight. Much more this weekend. Happy Trading!
May 30 TRADE ALERT
Going to enter the following orders immediately:
Buy 2 GDX Jan 17 2015 30.0 Call @ $5.50. Limit, all-or-none order.
Sell 50 SQNM Jun 22 2013 4.5 Put @ $0.53. Limit, all-or-none order.
May 29
As promised, a late Nightly Report. This is going to brief as well. I am seriously upset at how badly I botched the DUST trade. First, I didn't enter it yesterday. Second, I saw it starting to downtrend and thought it would reverse and did not enter the trade in the morning. I am not going to chase the trade, as that is a recipe for disaster, but I am kicking myself pretty hard right now.
To boot: HL rocketed today! Oh well. Hindsight is 20/20.
Tomorrow is a new day and I will take a fresh look at everything and decide what positions would be reasonable to enter.
I'm exhausted and have beaten myself up nicely today. Good night! Happy Trading!
May 29 NOTE
It looks like DUST got away from us today. I'm not convinced that gold is about to rally, so we will wait to see if we can get a better put entry on DUST.
Everything else looks like it is rolling over. We are still three weeks from June opex, which means there is no rush to jump on positions right this second.
Let's be patient and see how this week plays out.
May 28
I apologize for putting out another late Nightly Report. This week is going to be a difficult one and the reports are likely to be late tomorrow and Thursday as well. Luckily, we are already positioned (sold SQNM puts) and aren't missing on much for the other things I'm tracking for good entry points.
I spent a good part of today reading through the analysts' reports for SQNM shared here with you yesterday. Briefly, they are all pretty much the same, slightly different assumptions and different numbers, but none go deeper than "here's my guess for test number and revenue growth." I have to say that I am not impressed. It didn't seem to me that they had materially more information than was available in the public domain. All mentioned the great growth in test volume, the good news about the Blue Cross Blue Shield agreement and the risks due to competition and patent litigation. All of this is easily obtainable through press releases in the public domain and from the earnings conference call. I would argue that my earnings model is no worse than anyone else's, as it is about the same amount of guess-work as all the professional analysts appear to base their numbers on. I am not impressed by the Wall Street analysts for SQNM. Furthermore, I am quite comfortable by how we are positioned.
These screamed up today. Shorting this market is hazardous to your health and portfolio. We still have a negative trend on the summation index (defined here and here), but the negative trends are not nearly as strongly correlated with market direction as the positive cross-over with the 5- and 20-dma's is. This may indicate be an indication of a pause before another push higher (as seen today) or it could be the sign for a correction ahead.
There was a decent sized Selling on Strength number for SPY today – an indication that the rips higher are used to divest from positions.
DXCM +2.5% today. Will continue to watch this for better entry point.
BBRY -0.85% today. It has not yet reached our trend line for a bounce play. Will update chart tomorrow or Thursday.
DUST +1.7%. Headed in the right direction for taking a short position very soon. Though right this minute, it looks like gold is moving up, which will cause DUST to move down, if gold remains positive through to tomorrow's opening. I may put a limit order in fairly early in the morning and see if it gets hit.
That's all I have for this evening. Happy Trading!
May 26 Weekend Report
You will have to forgive me for getting to this report so deep into the Memorial Day weekend. I hope that the report will make up for the tardiness.
It has been around a week since we sold the puts on SQNM and so far the stock has held steady. My latest SeekingAlpha article on SQNM led one of the commenters to contact me personally and offer to send me all the SQNM analyst reports that he had. He had them from five banks and they are attached below:
There you have it. Five of the 9 analysts that follow SQNM and their reports. Over the next couple of days, I will peruse the reports and do a cross-comparison of all of them and my model. Perhaps that will provide some insight about SQNM that I have not discovered on my own.
Something that makes me quite happy is that ZeroHedge published an article arguing the out-performance of the most shorted stocks due to short squeezes over the last year. The out-performance has been something like 8% compared to the S&P 500 over the last year. It seems there is little reason to thing that this won't continue. It turns out that SQNM is the 13th most shorted company under $1B by hedge funds. As they say in the article, let the short squeeze begin!
After giving the reports a close read, I will decided whether we should double-down on SQNM in some way. So far, I am quite comfortable with our position, but if there is a big rally around the corner, I want to gain from it.
A HIGH RISK position that I have been contemplating taking over the last couple of weeks has been to put a near-the-money put on DUST. DUST is the 3X gold bear ETF and while it has been screaming higher as gold has gotten pounded lower, the parabolic rise of DUST will collapse as all parabolas do. I am thinking about buying a single put option with a strike in December, to give the DUST parabola enough time to collapse. I have been tracking gold and silver for a while now, including their miners – and we have already made some nice swing trades in this space – and I suspect that gold and silver will necessarily turn some time in the next year. The key is to pick a point at which probabilities favor our positioning.
A second reason, beside parabola collapse, that I like the HIGH RISK put position in DUST is that it is a 3X levered ETF, which has slippage due to its daily re-balancing. For example, if gold is $100, goes up 10% one day and down 10% the next day, the price of gold over those three points is $100 @ day 0, $110 @ day 1 and $99 @ day 2. The price of DUST over the same three points – supposing DUST starts at $100 also – is $100 @ day 0, $130 @ day 1 [DUST will move 3-fold as much as gold - a 3X EFT], $91 @ day 2. As you can see, the daily re-balancing of levered ETF makes them prone to lose value over time. They are usually instruments used in day trades or when there is an overwhelmingly trending market. At all other times, holding them for longer time periods is a losing proposition. I believe a lot of people are holding DUST thinking that gold will continue in the direction that it has been in the past 9 months, but what is as likely is that gold just grinds slowly lower or higher. It's the slow grind that will work to our advantage in our put position, as grinding will cause the most slippage in DUST. There will certainly be a Trade Alert if/when I decide to enter a put order for DUST.
A friend alerted me to this company really starting to gain traction for its products and hitting an upswing in the diabetes market. This will likely be the next company that I will model and we may enter a position in it even before I release the earnings model. These are exciting times; stay tuned!
That's all I have for this evening. Happy Trading!
May 23
Despite the ferocious plunge in Japan, the US markets held up rather well. The Summation Index continue to roll over, as did the associated MACD and RSI in the chart below. This does not mean that an immediate plunge is coming, but it does mean that the buy-the-dips, rip your face off rallies are coming to an end, at least in the short term (famous last words, right?).
You can also see that a negative cross-over with its 10-dma has occurred. I will begin to think about nibbling on short positions now and pull the trigger on a rip up, if it occurs. One caveat to not the SI chart is that the market doesn't necessarily plunge the second the SI turns negative. In fact, from mid-Mach through most of April the SI was negative, but all the S&P did in that same time frame was consolidate mostly within a 40-point range. Let's not jump the gun here and slam the gas pedal on the short side. I will be patient and choose my entries with care.
As mentioned in the NOTE post today, we are now out of this position entirely. Now that it has closed, I have entered it into the Model Portfolio and updated the performance %age.
This staged a nice rebound today. I am wondering if that was the extent of the gap-fill move we are going to see. I am a patient man and would like to see if the market is going to take everything down before entering the 2nd half of the SQNM position. Let's see what the volume chart is telling us:
On the daily chart, the 10-dma is still acting as a line of resistance. A good sign is that SQNM didn't stay in that volume hole below $4.05 for very long. It had every opportunity to push lower. Unfortunately, the area between $4.05-4.65 is a battle zone, as represented by the number of volume poles. Unless a nice short-squeeze happens or next quarter's earnings are blow-away great, SQNM is going to have a tough time steadily traversing that area. On the weekly chart, the story is quite interesting:
Here, both the 10- and 50-dmas are acting as support and the price is riding the giant volume pole. This is a swing trader's paradise. The RSIs in both time-frames are off their lows. If SQNM can push past $4.40, then that volume pole will act like support bar. Until then, this is whipsaw city, with riders jumping on and off that pole, until a convincing move in either direction happens.
Not much else new to report. The BBRY trade has not come to us; GILD is showing weakness and there are a few others I'm tracking closely that I may build an earnings model for.
Happy Trading!
May 23 NOTE
The order placed last night to sell HL @ $3.44 was executed this morning. As of right now, I own 0 shares of HL. I will update the Model Portfolio to reflect this trade later today. I am not certain whether we exited HL too soon – given silver's strength today – but the precious metals are so volatile right now that I'd rather step aside, figure out if a new trend has formed and step back in at that point.
That's it for now. Have a good day!
May 22
The markets were fickle today. Hanging on every word from the Bearded One, reacting to his sighs and moans. As I had mentioned yesterday, the whipsaws were going to be roller coaster-esque and we were not disappointed. Looking at the Summation Index today, it appears we have the start of a trend change, one that isn't all screaming bullish at all and actually might be signaling choppy seas ahead – possibly even a pause or topping scenario in the relentless run up.
I suspect it will be hard for bulls to make money in the near-term. Time will tell, however. For now, this has me nervous enough to want to jettison our HL position, which we took on just yesterday. More on that next.
I tried to exit this position today, but was more stubborn than I should have been. My sell order at $3.49 was not executed. If you managed to duck out of this position today around $3.45, then you did well. Congratulations. Here's the game plan for me on HL. I have put the following order in and if it executes in the morning, then I will consider this trade satisfactory. Here's the order in place right now:
Sell 5000 shares of HL @ $3.44. All-or-none, limit order.
I am counting on the morning ramp we have had for the last few days to take this position out. I put the sell order at $3.44 because given the market action today, it is likely that HL will not go back to today's high tomorrow – those highs today got sold pretty hard. Even just peeking its head above $3.45 (@ $3.46) brought sellers out. Not willing to sit on HL when we have a little profit we can take off the table.
Looks like the gap-fillers were able to take SQNM down pretty hard today. We know our spot to buy back in and, in the meanwhile, we will need to be patient and see what SQNM does until June opex. No need to panic. The move was not entirely unexpected and if it happens swiftly, we may get an equally robust bounce out of it as well.
I published the revised SQNM model today on SeekingAlpha. The last time I published the earnings model, SQNM was taken down pretty hard – it went from $4.10 to just below $3.50. But that previous model also showed that earnings would be coming in well below consensus. This time around, earnings are projected to be just $0.01 shy. I will be watching the action on SQNM with interest. Perhaps my article will precipitate the gap-fill? That would be attributing a lot of weight to my analysis and I am doubtful that the article could have that much affect. Nonetheless, I will be ready to deploy some of the model portfolio to accumulate the second half of my SQNM position.
That's all I have for today. I will do a quick NOTE post tomorrow if/when the HL sell order triggers. Happy Trading!
May 22 TRADE ALERT
I missed all the action this morning on HL and a couple of chances to exit the position for a quick profit. Nonetheless, I placed the following trade on just now:
Sell 5000 HL shares @ $3.49. Limit, all-or-none order.
If it triggers, it triggers. I think the Bearded One is talking, so the market should bean especially nauseating roller coaster.
Stay grounded. Happy Trading!
May 21
Nothing new to say here that I didn't already say yesterday. The Summation Indexes are still in an uptrend. No big downdraft visible in the next few days. It is a sad shame that we have to watch markets so closely, but when they are being fed by the Fed, markets can turn on a dime and leave everyone scratching their heads.
The order to purchase 5000 shares of HL filled at $3.29. Given my perspective on silver - it still appears vulnerable and today's retracement of yesterday's pop might be more than a retracement – HL could develop weakness should silver fall hard over the next week. Hence, I will be keeping a close eye on this one for an exit. Looking at its chart in yesterday's Nightly Report, HL looks to be approaching short-term overbought levels. I may jettison this position if it gets to within a few cents of $3.50. I am still a bit miffed that I didn't nail the exact retrace to the 10-dma at $3.24, which was HL's low for the day. It appears that I am not perfect.
This trade from today's Trade Alert triggered as well. I am now sitting on 50 June puts sold for $0.22 at the $4 strike. The SQNM position is a half-position play because there is a chance that it will get taken down to fill its earnings gap, discussed a few times over the recent past, which could result in SQNM going back down to $3.75 and possibly as low as $3.50. If it does, I want to deploy the remaining half-position at that time.
I also updated the earnings model. I felt that I was underestimating the growth rate in tests performed and decided to up that rate to 15% Q/Q from the 10% Q/Q at which it was. This pushed EPS up by a penny and moved the end of the year target to $6.24/share. I will move this number down if the Q2 2013 earnings report does not support it. As it is, a $0.23/share loss for Q2 2013 is already a penny below consensus. Then again, my prediction of Q1 EPS of -$0.26 was 4 cents below consensus. The ramp up in test numbers from last quarter to this quarter appears to be gaining traction, as that has been the trend over the past 5 quarters.
BBRY Watch
In the May 16th report, I discussed a potential trade set-up for BBRY. This has not yet come to us yet, but I still watch it.
GILD Watch
I have been watching GILD for a little while and first mentioned it here. While I have not done a deep dive into the company to determine what drug approvals have warranted such an explosive rally over the last 1.5 years – it is up almost 2.5-fold – the chart looks severely stretched. I will be watching this for signs of a reversal.
That is all I have for this evening. Keep an eye out for a Trade Alert on HL. Happy Trading!
May 21 TRADE ALERT
I put in the following two orders just now:
Sell 50 SQNM puts @ $4 strike for $0.22. Limit order.
Buy 5000 shares of HL @ $3.29. Limit order. [Unfortunately, I missed buying these at my mark from last night - $3.24.]
May 20
That the S&P actually took a breather, albeit only a few points' worth, seems astounding. This might be the start of a new trend, or it may simply be a pause to calm things down before another push higher. Who knows for certain? What we can do is look at a chart and see that there's no clear indication that the market is ready to plunge just yet. Topping processes are wrought with whip-saws. The government is dead set against breaking the illusion of wealth for the few. In fact, the NYSE Summation Index show no negative divergence, nor a negative cross-over. Let me illustrate with the following figures:
Although the lines are a little difficult to differentiate, the daily NYSI (black/dark red) is shown with its 5-day (dark blue) and 20-day (bright red) moving averages, behind which is the S&P 500. You can see that the moving averages had positive cross overs ~April 23rd (5-day) and just before May (20-day). Both of these are still in an uptrend and there hasn't been a negative cross-over, where the NYSI moves below a moving average. It appears as though it is getting there for the 5-day average. On a longer timescale, a similar picture emerges:
Here, the NYSI is shown as a candlestick. Once again, the positive cross-overs of the moving averages occur in April, with the 5-day preceding the 20-day. The interesting thing on this chart is if the MACD plays out like it did January-April 2011, where after almost flat-lining, the market had a decent correction.
All this to say that it does not appear that the market is about to start a corrective move tomorrow. Famous last words, right?
Precious Metals
The entire PM complex staged a huge rebound, after being hammered in the morning. I think this is a real move and that it will go on for at least a week, after it takes a quick, shallow breather tomorrow. I tried to enter a position in HL at the close by selling the puts at the $3.50 strike for $0.28. This order did NOT get filled. It does seem that we will get another chance tomorrow, however – it is down $0.03 (~0.9%) in after hours.
I have traded HL for a couple of years. It is a small-cap silver miner, which recently engaged in the acquisition of a couple of mines. The above chart shows HL price plotted as a candlestick, SLV price as a black line and a couple of moving averages. What HL has going for it is that it pushed above its $3-3.25 volume bar, it popped above its 10-dma and has can conceivably touch its 50-dma at $3.60. What it has going against it is that its 5-day RSI is pretty close to overbought territory. Hence, I will wait for the brief breather that seems inevitable tomorrow (then again, SLV did surprise today) and enter a long position if this gets close to its 10-dma, near $3.24. This entire sector has been hated for so long, perhaps it will actually experience a sustained rally.
I discussed my SQNM analysis with a friend yesterday. He is a longer-term investor, at least 6 months, and he presented some good points about why he things SQNM is undervalued. As it is, I had contemplated selling some puts today, but the action in this stock was so muted that I felt I could wait at least a day or two to see whether it would move in any direction. There is certainly a lack of news forthcoming for this equity, so big directional moves are not expected. If my analysis is close or even somewhat conservative, SQNM has the potential to be near $6 by the end of the year. Anyway, here's what my friend had to say:
There you have it. All sorts of reasonable reasons for why SQNM is mis-priced and has the potential to turn on a dime. In my model, I have this being a laggard for another quarter and I suspect after next quarter's earnings is when this thing will turn. This means that I want to position myself now, suffer through a draw-down, if any and keep close watch on the earnings releases.
Stay tuned for a Trade Alert tomorrow – both HL and SQNM. Happy Trading!
May 20 Trade Alert
Huge reversal going on all across the precious metals sector. Silver turned around from the morning lows and has pretty much screamed higher since. If you were short, I hope you covered. Gold and all sorts of miners are experiencing a big bounce. Maybe the severely oversold conditions will finally be reversed after months and months of declines and an over-stretch to the negative side. It looks like the bears couldn't take silver down through the volume hole and push it to the next pole. Might be a good sign for precious metals longs.
I have just now put in the following order:
Sell 100 HL Puts @ $3.50 strike for $0.28. Limit order.
If it triggers, great. Will let you know in tonight's report if the order was executed (7 minutes left to do so).
Happy Trading!
May 19 Weekend Report – Part II
These weekend reports are running late. In Part I of this weekend's report, I updated the SQNM earnings model and predicted that EPS consensus is still higher than what my model suggests it will be. Time will tell who is correct.
I have updated the model portfolio with our May OpEx trades closed and noted. Since inception, my model portfolio (and I take these trades in my own portfolio) is now up 7.68%. That's almost 8% in 4 months. Annualized that comes out to being close to 30%! Not too shabby, given how few trades we have made to hit that percentage. Ok, enough self-adulation.
Monday approaches fast and here's my plan for SQNM. I think there may be more short-term pain ahead, especially on the technical side, where I'd like to see a gap-fill from Q1 earnings announcement to happen. I suspect such a gap-fill could easily get us down to $3.70 and possibly as far as $3.50, though the latter seems less probably now than at the previous earnings prediction back on April 12th. With a possible draw-down in mind, I will watch action on the stock closely next week and possibly enter into a long position via a put sale. Again, I'd like to see how far down SQNM will be taken over the next few days. We should also remember that SQNM has a ~30% short interest. Such a large number of short shares could add some nice tinder once this stock decides to stair-step higher.
In Part I of this weekend's report, I failed to mention that SQNM has ~$150M in cash and it burns somewhere between $25-30M each quarter. This means that SQNM has enough cash to last minimally 5 quarters, possibly 6. Not a big cushion and I predict SQNM will either do an equity raise or sell off its instrumentation business. Unless they manage to collect enough on tests done and turn cash-flow positive in Q4 – a possibility if they change to accrual-based accounting – they will need more cash to keep operations going through next year. I think there is a good chance that they turn cash-flow positive in Q4 2013 or Q1 2014. We will have more insight into this when next quarters earnings come out.
It appears that silver got taken down in the overnight session. It went under $21. SLV will open gap-down tomorrow and if it does not recover by the end of the day, then this thing is headed down to $17.50 in the not-too-distant future. For those of you who took the short SLV play I threw out (I did not and said that I would not), congratulations. It looks like your position will be profitable first thing Monday morning.
That's all I have for tonight. Stay tuned for Trade Alerts. Happy Trading!
May 19 Weekend Report – Part I
SQNM Earnings Model Update & Projections
Finally, after a number of hours of digging through SQNM's earnings release and reading through the earnings call and the EDGAR filing, I have updated the Excel file containing the earnings model. Here is the file. You will want to have this open as your read through the remainder of the article.
Q1 2013 Review
First, let's review Q1 actual vs. the modeling predictions. The table below shows the estimation, what the actual number was in Q1 and the difference. The gist of it is that I was spot-on for the earnings-per-share (EPS) number – I had underestimated the total revenue and the total expenses by approximately the same about (roughly ~$5M), offsetting in the final EPS estimation. Not bad (if I say so myself) for a hobby analyst with no formal finance education!
Predicted | Actual | Difference | |
# of Tests | 33990 | 44500 | 10510 |
Revenue/Test | $652.18 | $653.55 | $1.37 |
SCMM Revenue | $22,167.66 | $29,083.00 | $6,915.34 |
Products Revenue | $11,340.00 | $9,415.00 | ($1,925.00) |
Total Revenue | $33,507.66 | $38,498.00 | $4,990.34 |
Total Expenses | $63,200.00 | $68,612.00 | $5,412.00 |
There are a number of assumptions in the model that were off, some more than others, and they will need to be changed to improve the accuracy of predicting the numbers for Q2 2013.
Assumptions: Past, Present and Future
# of Tests. Assumed: 3% Q/Q growth in tests accessed. Actual: 34.5% more tests accessed. The reason this didn't throw my model of significantly (which it should have) is because payment was received for only ~35% of the tests accessed. The revenue recognition is on a cash basis, which means that even though the test was accessed/performed in Q1, Sequenom was not paid for it and, thus, did not include it in the revenue number. On the earnings call, management mentioned that it would change the way it recognized revenue to when Sequenom performs the test (accrual basis accounting), but that is not slated to happen until Q4 2013. Forward assumption: 10% Q/Q growth in number of tests accessed. Even though Q1 2013 posted much higher Q/Q increase, I want to play it conservatively and choose a less aggressive growth number in case Q1 was an anomaly.
Products Revenue. Assumed: 10% Q/Q revenue decrease. Actual: 24.6% decline in revenue. I underestimated the decline in revenue for this segment by nearly $2M. It appears that cannibalization by SCMM is proceeding more rapidly than I had anticipated. Forward assumption: 20% Q/Q decrease in Products revenue. This is an aggressive decrease assumption. My desire is to model a conservative scenario for Sequenom's performance, a scenario below which the company should not perform if its business is headed in the correct direction.
Expenses. Assumed: flat Q/Q. Actual: 3.9% increase in cost of revenues and 3.5% increase in total operational expenses. While the increase in expenses was relatively small compared to previous quarters, it was still more than I had estimated. Forward assumption: 2% Q/Q increase in cost of revenues and 2% Q/Q increase in total operational expenses. Because Sequenom is growing its top-line at a frenetic pace, that growth will come with a slight and continued increase in operational expenses.
Revenue/Test. Assumed: 2% Q/Q growth in average sales price (ASP) per test. Actual: 2.2% Q/Q growth. The assumption was quite close to reality. As mentioned above, the ASP includes cash received for tests performed in the quarter and cash received for tests performed in prior quarters. We don't have a more granular break-down, but as the year progresses, the company should see an increase in ASP, as that would parallel the increase in tests accessed since launching SCMM. Forward assumption: 2.5% Q/Q growth in ASP.
Other Adjustments. By by calculation, stock-based and other expenses shaved $0.03 off of the EPS. In Q1, the outstanding share count increased by 250k. While these additional factors have an obvious and significant impact on the bottom line, they are notoriously hard for me to predict. Going forward, I included them in my model at a flat $1.5M per quarter in stock-based and other expenses and increased outstanding share count by 100k each quarter.
Q2 2013 Predictions
The application of the forward assumptions to the Q1 2013 numbers leads the model to yield an EPS estimate of -$0.24 for Q2 2013. This number is $0.02 below the consensus of nine analysts currently following Sequenom.
May 17 Note
Good morning everyone. Today is options expiration day and SQNM is holding above $4, barely. I will not be covering the calls, but will let the stock get called away, if it stays above $4.
I am not as adept at shorting as I am at going long, but if you are so inclined, SLV looks like it has slipped of its volume pole and slid right into a volume hole.
What would give me pause is that it is well into oversold territory on the 5-day RSI and also on the 14-day RSI. There is little to stop this from getting down to $17.50-19.80. Buying puts may be worthwhile, especially if you leave enough time for them to work. Again, I will not be taking this trade and, as a result, I will not track it in the Model Portfolio. Just wanted to present it as an opportunity. If you choose to take this trade, please be careful in selecting the puts' strike price and date.
May 16
Tonight's report will be on the shorter side. The market feels crazy lofty right now and if we look at our volume-by-price profile, you'll see how it is just floating in territory it has never been before. So when this thing hits a bump in the road, how far will it fall before the first bounce? I don't have a crystal ball, but the following chart may provide some guidance.
You can see that the S&P 500 ETF (SPY) has been rising on declining volume, is stretched the farthest it has ever been from both the 50-dma and the 200-dma and has entered what feels like a parabolic move that inevitably is accompanied by a collapse of the parabola. The volume poles suggest that there is no real support in the draw-down scenario until about 1420 (~$142 SPY), with the strongest support coming in around $125 (or 1250 on the S&P). Thus, when the correction comes, we will see the S&P bust through the 50-dma and at least touch the 200-dma, which happens to be right around the biggest volume pole support at 1250.
SQNM took a stumble today, down ~3.5%. We are still holding above $4 and I will be watching this closely tomorrow to see if it stays above $4, or gets driven down to being its gap-fill process from earnings. We discussed this in yesterday's nightly report. For now, stay tight and see what this does tomorrow. There is a chance, if the opportunity presents itself in a well supported way, that I may close the calls and sell the covered calls for June options expiration. Watch out for a Trade Alert post tomorrow, if this course of action becomes a possibility and I decide to take it.
The early morning dip in SLV was bought quickly and silver ended up closing in the green, but still in a volume hole (see chart from yesterday's nightly report), which leads me to believe that we will see further weakness in SLV. This ETF has weekly options that we may be able to play. This sector is volatile and subject to overnight take-downs, so I feel skittish playing anything in the precious metals for any longer than a few days.
As a follow-up to the set-up that BBRY stock may be heading towards, today was some nice progress in that direction. We haven't touched the blue support line yet, but are headed in that direction. I have reproduced the chart below for your reference.
Lastly, I will be going through SQNM's earnings and their investor presentations with a fine-tooth comb this weekend. I will update the earnings model and the projections for the next few quarters and we will then be able to decide whether we want to enter positions on it again, if our shares should get called tomorrow.
Apologies for the belated Nightly Report tonight. See you in the morning. Happy Trading!
May 16 Note
This is a quick note to let everyone know that we won't be taking a trade today. Options expiration monkey business going on and would rather not step in front of a moving train.
If anything changes between now and close, I will put up another post.
Happy Trading!
May 15th
I'm going to leave off the general market commentary today, as it is getting to be redundant – new highs, new highs, new highs despite all sorts of crumbling internals and a global currency war. If you haven't read the book Currency Wars, I highly recommend it. You'll see parallels that have and are occurring with respect to China, Japan, Russia, the Middle East etc.
I published a trade idea on Slope of Hope today on selling SQNM June puts at the $4 strike. I will not be taking that trade here (in our Model Portfolio) as we already have 40% of our portfolio, 10000 shares, allocated to SQNM. But I think it's a nice play, though there are significant technical hurdles for the stock in the short term. Perhaps it would be worthwhile to take a position after options expiration, or next Monday, but there is enough time to see how SQNM trends the last half of May.
This weekend, I will publish an update of my SQNM fundamental model, using the earnings numbers released last week. I will use the analysis to figure out the next move to make on SQNM. You will see it here first, have the opportunity to get positioned before it is released to a wider audience.
Once I put up the updated Model Portfolio on Monday, it will be obvious how much of a life-saver it has been to be in SLV for no more than a day or three. This thing is seriously volatile and has been trending down for months. The precious metals and the miners should have been and continue to be a haven for bears. Let's hope they have been riding the fluffy teddy down the precious metals slide.
I was thinking this week that we might be able to take a take a quick swing going long at SLV, but this has officially slipped past one of its smaller volume poles holding it just above $22 (see chart below). It now has no real volume support until it gets down into the range of $17.50-19. In other words, the technical odds favor at least a 10% decline ahead for SLV.
I may present this bear thesis on SLV l sometime next week on Slope of Hope, but you will have ample time to get positioned before it gets released to the wider public. It's tough to buy puts to play this short, as those have a premium placed on them, more so than selling calls. The problem with selling naked calls is that it leaves you open to unlimited risk and options are expensive to trade. The best way to play SLV short is to short it outright (also unlimited risk), but limit the size of the position and monitor it closely so you can jump out if it moves aggressively against you, or put a stop on it at the most recent little bounce high around $23.50. Please stay tuned for an intra-day trade alert if I choose to enter a short on SLV.
I realize that everyone thinks that Blackberry is dead, but I respectfully disagree. This is a company that is cash-flow positive, has a big cash war chest, is on a war path of phone releases and is entirely unloved by the larger public. Their new phones are actually of great quality (according to reviews on the blogosphere, especially by Karl Denninger on market-ticker.org). Looking at the chart below, BBRY has good volume support from the $13.20-16.40 range, which is where it has been trading for most of 2013, after recovering from its panic sell-off.
The most recent trend on this suggests that it should bounce once it hits $13.50 or so. The volume poles suggest decent support down to $13.20, after which a volume hole opens up and there is no support again until $12.40. The way this has traded this year, the draw downs have been steep, but very quickly reversed. I will watch this for a suitable entry point. As always, stay tuned for a n intra-day trade alert.
That's all I have for this evening. Keep an eye out for an intra-day post. Happy Trading!
May 15
This is an intra-day update. Aren't you glad we jettisoned SLV on the 13th? It is down ~5% today and it looks like there is more downside to come. I will do a volume analysis on this in tonight's Nightly Report.
Our SQNM play is performing swimmingly. Just two more days after today and we'll have banked a pretty penny. I will update the Model Portfolio on the 20th and if things stay as they are, we'll be up over 8% since February. For now, all we should do is watch and wait.
Happy Trading!
May 14
Another day, another high. It has become a tired song – markets being lifted bereft of any fundamental reasons. The economy is not growing to record GDP levels, but lots of money is being printed and that money needs to find a place to call home. At the moment, this inflation is showing up in stocks - indiscriminately. How long until this bubble pops? No idea, but at this point, the greater risk is being long than being in cash.
So far so good. I still own 10000 shares of SQNM and have sold the covered calls at a $4 strike. These calls expire on Friday and if SQNM can manage to stay above that level – it's at $4.24 right now – then our stock will get called away and we will have banked some coin.
New Ideas
There are a number of biotech/pharma stocks that look dazzlingly overvalued. The momentum chases have their pedal to the metal, but this baby will spat this year. I took a look at GILD. This thing is in skyscraper heights above its 200-dma. The whole biotech sector, especially the large cap names represented by the ETF IBB looks like it has hit a parabolic stride. Every parabola implodes. Not sure when, but it always does. Perhaps this week or early next week, I may start nibbling on some lottery short positions that would pay off handsomely in a parabola collapse scenario. Stay tuned and keep your refresh button trigger finger sharp.
That's all I have for tonight. See you in the morning. Happy Trading!
May 13
Quick Update
Even though SLV closed in-the-money on last Friday's options expiration, the puts were not exercised by the party that was holding them and I was not assigned the 1000 shares of SLV. If you were assigned them, I would recommend putting a sell order in at last Friday's closing price – $22.98.
Close this position out.
SQNM Covered Call
We are in-the-money on the SQNM covered call and if SQNM holds above $4 at close this Friday, the stock will be called away and we will be able to pocket the call premium, while reducing our risk exposure. If the calls are exercised, I will have a 100% cash position. Next Monday, I will post an update of the Model Portfolio.
May 12 Weekend Report
Our SQNM position is tied to covered calls that expire close of trading on May 17th. Last Thursday, the company released earnings that came in below consensus on earnings per share, but were above consensus on revenue. On Friday, the stock rose over 10% and closed just above $4/share, which is our calls' strike price. If the stock retraces 50% of its bounce, in other words, if it goes back down to ~$3.75, I may close the calls and wait for a retest of the bounce high to sell the stock. Please stay tuned for a trade alert on this.
Sometime this week, I will be updating the SQNM earnings model and posting an update for the remainder of the year.
The limit order I set to close the SLV put options on Friday did not execute and as of Monday morning I will be owning 1000 shares of SLV. The precious metals are a volatile group and have been trading down pretty strongly over the last 8 months. Checking the real-time action on silver, it is clear that SLV will open down. I will need to put some plans into action to not get caught in a draw-down. From Friday's options prices, it looks like the covered calls for May 17th are going for $0.40/0.42 bid/ask. I will likely be selling these calls Monday, especially if SLV manages to trade right at or above $23. Once again, keep an eye out for a trade alert.
Coming Up
Beside the update of the SQNM model, I am going to try to work-up an analysis of Newmont Mining (NEM). This is a gold mining company and has gotten hammered with gold's plunge. Does the decline present a good entry point for a long position? That is the question I would like to answer.
Since this this OpEx week, I will be scouring stocks to find gems we can trade for the week. A few symbols are on my radar and I will be acting on them Monday.
That's all I have for the weekend report. Again, lots of posts coming for trades and fundamental analysis. Happy Trading!