On July expiry the Dow has been down 6 of the last 8 years, and off 4.6% alone in 2002. We will add to this that our bell curve count has approached 10 for two days, clear signs of a massively overbought market. So, the market will go up again, perhaps, for no good reason.
By noon the market had moved to our recalculated r1 and s1 three times. Classic flat lining. By 2.30 p.m. calls were profitable. Remember,we do not often trade at what we think are market tops, but some traders were risk oriented enough to buy in at 2.90 to 3.00 on the August 460 Call, and sell to 3.67 And by 3.30 the market had topped at 8747.
Fed minutes showed officials are preparing for an unusual recovery in which the economy improves, but unemployment worsens.
U.S. consumer prices jumped last month, led by energy and autos, thought compared annually they fell by the fastest rate since 1950.
In a euphoria driven market we continue to see the summation indexes operating off sell signals, slow stastics shows overbought, and chartists that believe in the head and shoulders pattern are watching now to see if a rally can be created, or if the pattern is being violated. This may lessen the downside, and we're revising our Dow projections.
Yet again, although profitable to the call another day this week, we remain both suspicious and surprised. We make massive moves down, up, and never really make headway. Stock traders are not making money "guessing" this, only option traders that are playing the overbought and oversold conditions.
For traders learning our moves with 3X bear and bull funds, that we'll be discussing more, a good comment from a subscriber:
"I've been reading about BGZ and double and triple leveraged ETF's...some of it is quite confusing BUT I did find this blog that spoke in "layman's terms" and I understand the severity of the risk...
Below is a quick excerpt that makes sense to me...
As posted on my blog July 11, 2009, after reading a lot of blog posts and comments, tweets on twitter, Facebook comments, and emails, I decided it was time to figure out if there was any real decay behind the leveraged ETFs, both long and short. I wanted to revisit this issue of the double and triple leveraged ETFs, and why investors should stay away from them, and to clear up some confusion. With the popularity of ETFs came these funds which use 200% and 300% leverage. Yes in any steady trend they can grow like weeds, but in a correction they will give back much of their gains. This is simple, and basic math.
First of all, these are extremely risky, and investors shouldn't hold on to any leveraged ETF(s) for the "long run", they are almost sure to lose money. These instruments are ideal for traders not investors!
Second of all, let's identify what a leveraged ETF does. A double leveraged ETF uses 200% (triple uses 300%) leverage to capture a specific basket, sector, or index move. Let's take the very popular SDS, which is a 2X inverse tracking the S&P 500; for every 1% move up in the S&P 500 index, SDS will move down by 2%, and for every 1% move down in the index, SDS will move up by 2%. Similarly is the SSO, which is the 2X tracking the S&P 500; for every 1% move up in the S&P 500 index, SSO will move up by 2%, and for every 1% move down in the index, SSO will move down by 2%.
If you're the person who says "It's a great way to hedge my portfolio, so what's the problem with them?", then clear all your other thoughts and read this post carefully - it may save you some money.
It's basic math that so many people overlook! Let's use the benchmark S&P 500 index for an example. Let's say we start off on the S&P 500 at 1000 and a double and triple leveraged ETF both at $100 per. If the benchmark index moves down 10% in 1 week to 900, and assuming both ETFs track perfectly it would put the double leveraged ETF at $80 per share, and the triple leveraged ETF at $70 per share.
Here is where some investors don't use those basic math skills they learned so many years ago, and assume that when the S&P gets back to 1000, the leveraged ETF will trade at the identical value as before, when the S&P was at 1000... THIS IS FALSE!
Basic math tells us this is impossible. In order for the benchmark to get back to 1000 it will need to go up by 11.11% which will correlate to a 22.22% and 33.33% move in the double and triple ETFs respectively.
As we can see, in order to get the double leveraged ETF back to 100 from 80, the benchmark will need to increase by 12.5% correlating to a 25% increase in the double ETF. The triple leveraged ETF will need an even greater move to get back to 100. In order for the triple ETF to get back to 100 from 70, the benchmark will need to increase by 14.283% correlating to a 42.85% increase in the triple ETF."
We have now had 5 profitable call trades in a row, and hold one of two hedge put positions.
And a note from subscriber JK:
> "Floyd,
> An interesting letter in the Australian Shooter Magazine this week, which quoted: "If you consider that there has been an average of 160,000 troops in the Iraq theater of operations during the past 22 months, and a total of 2112 deaths, that gives a firearm death rate of 60 per 100,000 soldiers."
>
> The firearm death rate in Washington , DC is 80.6 per 100,000 for the same period. That means you are about 25 per cent more likely to be shot and killed in the US capital, which has some of the strictest gun control laws in the US, than you are in Iraq.
>
> Conclusion: The US should pull out of Washington.
>
> Just a thought...
>
> Johnny
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