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Friday, July 29, 2005

Market Anomalies

RoboTrader writes about well known (plus some not so well known) market anomalies:
"The Efficient Market Hypothesis on Trial: A Survey", by Philip S. Russel and Violet M. Torbey, contains references to interesting research and commentary on:

The January Effect. "...higher mean returns in January as compared to other a tax-loss selling explanation of the effect."

Other Seasonal Effects, e.g., holiday and turn of the month effects. "US stock returns are significantly higher at the turn of the month, defined as the last and first three trading days of the month...returns are, on average, higher the day before a holiday
Read further:
RoboTrader: Market Anomalies

Update: Live Action: Yahoo (YHOO) puts

I sold my Yahoo (YHOO) Aug $35 puts with $1.80. Total profit +38.46% in 2 days with YHOO options. I believe that YHOO trades down next days, but I didn't want to stay over the weekend with the options (due to the time decay).

See also:
Live Action: Yahoo (YHOO) puts

Stocks to Watch: ITWO

ITWO trading at $21.10 (+62%) in pre-market. ITWO beated earnings expectations.

See also:
Today's Earnings: JILL, BOBJ, LEXR, ITWO

Thursday, July 28, 2005

Today's Earnings: JILL, BOBJ, LEXR, ITWO

Some movers on earnings reports in after hours trading.

The J. Jill Group Inc (JILL)
Reports EPS of $0.19 vs consensus of $0.00; revenues $117.4 mln vs $115.9 mln consensus
Trading at $15.50 (+9.54%)

Business Objects SA (BOBJ)
Reports EPS of $0.32 vs consensus of $0.27; revenues $262.4 mln vs $254.5 mln consensus
Trading at $31.50 (+9.00%)

Lexar Media Inc (LEXR)
Reports EPS of -$0.06 (including one-time items) vs consensus of -$0.15; revenues $189.3 mln vs $200 mln consensus.
Trading at $5.02 (-6.52%)

Reports EPS of $1.66 vs -$0.23 consensus; revenues $98.5 mln vs $75.65 mln consensus
Trading at $14.85 (+14.23%)

Trade Center Inc. Interview: Dean Hoffman

There is an interview between Scott Hicks of Trade Center Inc. and Dean Hoffman on Michael Covel's web site. Quite interesting.

Trade Center Inc. Interview
July 26, 2005
Scott Hicks. What is your entry method to the market?
Dean Hoffman. My primary entry is based on some form of trend recognition. It is not merely a function if price but rather a combination of algorithms and filters. I also use money management overlays for position sizing considerations, as it's a critical component.

Q. How important are the entry and exit points for you?
A. Entry's and exits are much more important than they used to be.

Q. You are a systematic trader, what do you tell clients who believe in using fundamentals in trading?
A. Good luck, I've never seen it work over the long run. The problem is that the leverage in futures is so large that even if your long-term fundamental opinion is correct you can still lose all your money 100 times before the market goes the anticipated direction.

Q. As a trend-follower, I can assume that you don't shoot for 100% winners. What are your goals in terms of successful winning trades?
A. I'm happy with 40% winners. Percentage of winning trades has very little to do with success. Some of the worst systems I know of have a very high percentage of winners. Focusing on percentage of winning trades is fools gold.

Q. Is there such as thing as an optimum time frame to hold a position?
A. I've found it very difficult to build good winning systems with time frames much under a few weeks.
Read further:
Michael Covel: Trade Center Inc. Interview

Update: Live Action: BUD calls

I was forced to close my BUD options position. I had a limit order at $0.40 and it was executed just some time ago (I was away from my computer at this very moment) as BUD made a nice intra-day rally from $44.50 to $45. I bought the calls with $0.35 and had a really small amount, so it didn't make me rich to profit +14.28% (but still only $0.05 for a contract) ;)

See also:
Live Action: BUD calls

Trading during Earnings Season

There is a post in Earnings Trader blog that writes a little about trading in earnings season. He focuses on straddles, this is what I also do occasionally. Straddles are definitely not free launch in Wall Street, but if you are good enough in picking the right stocks, then it can be profitable (like any other strategy or trading system).
There are many traders who often use option straddles to play earnings. Basically, with straddles you dont care which way the stock moves. All you care is that it MOVES. A long straddle is long 1 call and long 1 put at the same strike price and expiration and on the same stock. Such a position makes money if the stock price moves up or down well past the strike price. The beauty of this approach is that risks are limited, and there's a potential unlimited (hmmmm) profit potential.

As they say, every system, every model, every style, generates losers eventually. But in trading, if we can win two out of three times, and exercise sound money management principles, we can generate profits.

Here are a couple of links that describe in brief how straddles work.

Event-Driven Trading

Straddles and Strangles
Read further:
earnings trader: Earnings report for July 29

Hedge fund cash flow still strong

I found the following Financial Times article via Hedge Fund Street blog:

Hedge fund cash flow still strong
Financial Times
By Tony Tassell

Published: July 27 2005 17:42
Hedge funds continued to see inflows of new money in the second quarter, defying concerns that lacklustre investment returns from the asset class might trigger a rush of redemptions.

The global hedge fund industry saw net inflows of $10.9bn in the second quarter, lifting total assets under management to a record $1,025bn, according to data from Hedge Fund Research.
Read further:
Financial Times: Hedge fund cash flow still strong

Wednesday, July 27, 2005

Live Action: BUD calls

I just bought some BUD Aug $45 calls with $0.35. Playing on the bounce, BUD support at $44.62. Currently BUD shares have dipped slightly through the support, but I still believe, it closes above it today.

Too bad I sold my puts so early, they are trading at $0.90 at the moment (+64%).

See also:
Update: Live Action: BUD puts

Update: Live Action: BUD puts

I covered the BUD options position at $0.60. Total profit +9.09%. I missed the best place to sell ($0.75).

See also:
Live Action: BUD puts

Live Action: BUD puts

I just bought some BUD Aug $45 puts with $0.55. BUD missed the earnings and lowered guidance.

Live Action: Yahoo (YHOO) puts

I just bought a few Yahoo (YHOO) Aug $35 puts with $1.30 on technical reasons (see below). Implied volatility is also low at the moment (around 23%), so it minimizes the risk. I have a possibility to get profit if YHOO shares fall and/or implied volatility rises.

I'll probably stop out if the shares rise above $34.55.

Choosing the best option

Peter Stolcers writes in Options Trader Magazine how to choose the best options for swing trading instead of buying stocks directly. In my opinion, his story is a little too simplified and doesn't reflect the full reality (especially when he speaks about point-for-point moves). It's still worth reading to get some idea of options trading.

Choosing the best option
Options Trader
By Peter Stolcers
July 2005
In today’s market, an overnight stock position can cause insomnia and devastating losses. Swing traders who typically hold positions for two or three days should consider buying options to potentially limit their risk. Finding the “right” option to trade plays a large role in the success of this approach. Options may or may not be a suitable trading strategy for you.

If the options have more than a week until expiration and are trading within 50 cents of their intrinsic value, they present an opportunity because they are a low-cost, limited-risk approach that controls the shares of the underlying stock without being
exposed to time premium decay. If the options have more time premium than 50 cents, you may need to go one strike further in-the-money.

This is a surrogate stock position with less risk since you can only lose what you paid for the option if you buy one option contract for every 100 shares of stock you intend to purchase. This is an important point. Many traders will increase their leverage by trading more options. Why? Because they can. More is better, right? Wrong!

To find options that are trading close to parity, we need to focus on the front month because those options don’t carry as much time value.

Front-month options that are only one or two strikes in-the-money generally have good volume. This normally narrows the bid-ask spread and may make it easier to get in and out of the trade.
Read further:
Options Trader Magazine (free subscription required)

Tuesday, July 26, 2005

Merrill Lynch: Hedge funds buy dollars, sell euro; long Nasdaq 100

A Merrill Lynch research about hedge funds action lately (via Roberto's NasdaqTrader).

Hedge funds buy more dollars, sell euro -Merrill
Mon Jul 25, 2005 10:52 AM ET
LONDON, July 25 (Reuters) - Hedge funds bought more dollars, added to their short euro positions and went long of U.S. technology sector benchmark Nasdaq 100 in the week to July 19, research by Merrill Lynch showed.

Hedge funds covered record net short positions on the Nasdaq 100 and took on a net long position. "The long position is not near an extreme level, leaving room to add to the positions," Merrill said.
Read further:
Reuters: Hedge funds buy more dollars, sell euro -Merrill

Monday, July 25, 2005

Today's Earnings: CNET

Today's earnings:
American Power Conversion Corp. (APCC), EPS estimate $0.20;
CNET Networks, Inc (CNET), EPS estimate $0.03;
Netflix (NFLX), EPS estimate $0.01;
Nissan Motor Co. Ltd. (NSANY);
Volvo AB (VOLVY), EPS estimate $1.24;
Zerox Corporation (XRX), EPS estimate $0.23.

SmartMoney bets on CNET ahead of earnings (via The Internet Stock blog). Some of the key points according to SmartMoney:
  • Acquisition target
  • Strong growth
  • Strong growth in Internet advertising
  • Stock price momentum
  • Strong growth in retail electronics spending
  • New products
  • International improvement

Talking Emerging Markets With Mark Madden

Talking Emerging Markets With Mark Madden
By Gregg Greenberg
7/22/2005 7:26 AM EDT

OK. How much longer can this bull market run?

Emerging markets began outperforming most developed markets in 2001. Nevertheless, 2001 and 2002 were dramatic down years in the global equity markets, so the emerging markets were also down modestly in those years. Even so, the outperformance relative to the developed markets began in 2001 and has continued since then. We expect overall outperformance to continue for several more years.

Which developing markets show the greatest promise?

In our view, some of the more attractive markets are Brazil, Turkey and India.

What are your prospects on the dollar?

I believe the direction of the dollar from here will depend on the U.S. consumer. If consumption continues to be strong, then I would expect the dollar to remain stable at these levels; however, if the consumer slows down and the economy hits a rough patch as a result of it, I would expect the Fed to back off on rate hikes and perhaps even reduce rates again while simultaneously allowing the dollar to weaken further.

Read further: Talking Emerging Markets With Mark Madden