Blue Horseshoe Loves This Finance Blog

THE RIGHT CALL AT THE WRONG TIME A few weeks back, I predicted that we would see an increase in short term market volatility... http://tancockstradingblog.blogspot.com/2016/04/technical-indicators-point-to-more.html While that forecast did not exactly come to fruition at the time, the market action we've seen over the past couple of days is the manifestation of the technical pattern that lead to that call. Here's the chart of the SPY to illustrate the point: The red arrow signifies the chart pattern at the time of the previous call and the circle points to where we're at as of the close today (Friday, 4/29).  This is the infamous (to me anyways) fill gap pattern, where prices have a tendency to consolidate inside of the 20/50 day moving average range before finding direction and breaking out again. http://tancockstradingblog.blogspot.com/2015/09/the-fill-gap-pattern.html If the pattern holds true, we can expect to see the broad market consolidate inside of this range befor...

THE US DOLLAR'S TECHNICAL PATTERN IS FLASHING A BUY SIGNAL Back in February, I noted that the US Dollar was breaking down and discussed how a less strong domestic currency would affect the market... http://tancockstradingblog.blogspot.com/2016/02/the-death-of-dollar-rally-and-why-it.html Today, the greenback is flashing a buy signal all of a sudden as the technical pattern has shifted from a bearish trend pattern to a consolidation/fill gap pattern.  Here's the USD chart: The red circle shows the dollar's move today inside of the moving average variance gap... this typically suggests that a security will become range bound in between the two averages while they collapse on each other.  However, the fill gap pattern is the least reliable trading pattern of the four that I chart so it's not unheard of for a security to move in and out of these ranges without consolidating.  This actually happened with the dollar in March, shortly after it started its breakdown. But what ...

"They say it can't be done, but it don't always work..." -Yogi Berra In baseball, no major league player has hit .400 since Ted Williams hit .406 in 1941 for that team 250 miles northeast of New York.   The last time a player reached 4,000 career hits was in April of 1984 when Pete Rose did it while playing for Cincinnati.  Lastly, no player had collected a batting triple crown in 45 years until Miguel Cabrera did it in 2012 with Detroit.  These are all amazing feats of skill that are remembered because of their rare achievement over the course of an entire season or, in Rose's case, a career. The thing is, though, that players don't need to hit .400 or collect 4,000 hits to be considered great.  The greatest (legitimate) hitters of my lifetime hit .284 and .267 over their careers; of course Ken Griffey Jr. and Mike Schmidt also had career OPS's of .907 and .908 respectively. In the world of asset management, we tend to remember the great years that manage...

Today's move was an important one for more than the fact that it snapped a streak of low volatility trading days.  Technical patterns have now developed that would suggest that more volatility is likely in the coming days. Here's a look at the SPY chart: Important Points of Note: The S&P closed below its 20 day moving average for the first time since mid February The index is now inside of a very large moving average variance gap which has been shrinking for the past week now. This sets up a 'fill gap pattern' where the index is likely to trade inside of the range between the 20 and 50 day moving averages before breaking out again. For the time being, the market does not appear to be at immediate risk of a systemic correction like were seen in August and January.  However, it does look like it will be a while before the S&P approaches its recent highs. 

This is looking like a good time to try to capture upside in financials as the sector begins to show signs of life after a prolonged slump and implied volatility is cheap across the board. New Position -Bullish Goldman Sachs The chart: Exponential trend analysis projects a +2.97% price appreciation over the next 20 trading days with a projected volatility of 20.36%... the at-the-money call is pricing at 25.1% vol. Here's the stochastic price simulation: Finally, the trade. Short 100 shares at 158.72 Long 6 April 29th 157.5 calls at $5 Long 2 April 29th 160 calls at $3.70 Long 1 April 29th 162.5 call at $2.53 Break even price: $163.49 Convexity 14.83x at 16% price shock Expected Value: +$1,770 Max Risk: ($3,873) Here's the payoff chart:

THE KNOWN UNKNOWN Markets have become reacquainted with volatility over the last 7 months and with a host of omnipresent macroeconomic factors still unresolved, this seems like a good time to discuss tail risk. Throughout my career, I've found that a lot of institutional asset managers rely on Value-at-Risk (VaR) as a risk management tool.  Unfortunately, this practice is completely inadequate as VaR cannot protect against against outsized, downside losses - also known as tail risk -... probably because it was never intended to. VaR is merely an interval threshold measurement given an assumed degree of confidence.  So if we assume a 95% confidence interval for daily, monthly or annual returns, VaR will tell us the single point at which we would expect 5% of our returns to fall below.  Conversely, VaR represents the point where you expect returns to be greater than 95% of the time. VaR does not, however, give the user any information about the shape of a given return distr...

"Give me a lever long enough and I'll move the world." -Archimedes Options are a very popular tool for the purposes of hedging and speculating because of their exponential return profile... relatively small cash outlays have the potential of delivering very large profits. Above, we see a chart of the April 22nd ATM put option on the SPY (currently trading just above $203).  The contract is priced at $2.85 and in the case of an immediate move in the price of the ETF, the price of the option will follow the blue curve... exponentially higher in the case of lower SPY prices and lower at a decreasing velocity in the case of higher a higher SPY price.  At 4pm EST on April 22nd, the price of the contract will lie directly on the orange line as the time value associated with the contract will have completely decayed. The line and curve in the chart above represent the leverage benefits of options investing.  If, at expiration, the price of the SPY has fallen to $190, the value o...