Tag Archives: nyse

Hedging Interest Rate Risk with Eurodollar Futures

It is time to look at alternative ways to hedge against rising interest rates. Unfortunately, with the huge increase in volatility due to so many headline issues from Greece to trading halts on the NYSE, that it makes it tough to hold onto positions. Fortunately, the most liquid interest rate market is structured in such a way that hedging against inflation can be done with a reasonably fixed amount of risk.

Continue reading Hedging Interest Rate Risk with Eurodollar Futures

The Stock Market Bounce is for Real

We published a sell signal for the S&P 500 in our October 4th article, “Who is Pushing the Stock Market.” Several fundamental and technical reasons were laid out. The fact that the market topped out the very next day and sold off by 9% in the last month leads me to believe that this decline may have run its course. The easy money on the sell side has been made and perhaps, we should start looking at the buy side of the market.

Separating the, “what happened” from the “why did it happen” is always tough. Throwing political variables like the election and the Euro crisis into the mix along with individual accommodations for the fiscal cliff and estate planning leaves us with very real macro and micro implications currently in play. We’ll take a brief look at these and see why the odds may be stacking up in favor of the buy side of the market.

The markets clearly viewed the election results in a negative light by selling off 6.3% in eight trading sessions. I think the markets were fully prepared for an Obama victory prior to the debates however Romney’s debate performance was just enough to make it a bit of a race. Therefore, investors chose to hold on through the election just in case Mitt pulled it off. Had Mitt won, we wouldn’t have seen the selling pressure. Obama’s victory guarantees higher taxes going forward. Therefore, many people are rebalancing their portfolios to take advantage of the tax laws as they stand in 2012. That answers some of the, “why” for the decline.

Commercial traders greeted the sell off in the markets with open arms. Traders in the Nasdaq and Dow Jones were major buyers, doubling their net long position in the Nasdaq and increasing their position in the Dow Jones by more than 50%. The major surge in commercial buying has pushed momentum back in favor of the bulls. Furthermore, combining the recent sell off with commercial trader buying has provided us with a Commitment of Traders buy signal. This is the methodology I presented at the World Traders Expo in Chicago last month.

Further bullish indicators focus on the extremely bearish sentiment of the trading public. Without getting into too much detail, many of the indicators that measure investor sentiment are exceptionally bearish. These readings typically mean the opposite is about to happen because the investing public typically does the exact opposite of what they should do. This one of the primary reasons we follow the commercial traders, rather than the small speculators.

Technically speaking, there are two key points. First of all, the sell off pushed us to a new three month low. Secondly, the about face reversal the market pulled provided indication of a major rejection of that low. The rally on the 19th was so strong that 90% of roughly 2,800 stocks traded on the NYSE closed higher. That kind of rally provides a statistically valid bottoming signal. Merrill Lynch was the first to capitalize on the statistical relevance stating that since 2006 there have been 1,733 trading days and this type of day has been observed only 62 times. The relevant pattern is that we should pause for a couple of days before resuming our climb through the 10, 20, 30 and 65 day moving averages which come in at 1372, 1388, 1404 and 1417 respectively.

One last piece of evidence of the rejection of the new three-month low made on the 16th is that the market immediately opened .5% higher and continued to climb another 1.5% for the day. The strong rally off the multi month low has only occurred 9 times since the Daily Sentiment Report has been tracking this and their research shows 7 of the 9 led to multi week bull runs. The two that didn’t pan out were both in the months following the tragic events of September 11th.

The sell off that we anticipated came to fruition however, I believe it’s much harder to turn around and buy the market when the media is so full of naysayers. To them, I would concede that not coming to an agreement on the fiscal cliff would send the stock market much lower. However, I believe that they will reach some type of settlement. The market will gyrate according to the most recent piece of news but ultimately it will climb higher. Finally, we cannot let sentiment overrule quantitative analysis. To ignore the facts would be choosing to live in ignorance.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

What a Cycle Part 2


What a Cycle! – Part 2

The first part of this cycle generated large amount of feedback. Many customers were calling with the same questions. “How do I do it?” How do I use commodity futures hedge my portfolio if I think there is further downside?” I also received the opposite question, “I don’t think this will last forever. How do I take advantage of the move back up?”

First, let’s deal with some basic mathematical issues and market barometers. The Dow peaked at 14,198 on October 11th. Currently, we are around 10,600. This is a decline of almost 3,600 points or, 25%. Now, if we were to bottom here, and I’m not saying we will, the 25% decline lost in the blue chips will need a rally of 34% to reach the same highs.

Here is a table for the other indices:

Market High Current % Decline % Rally to Reach Highs

S&P 500 1576 1140 25 38

Russell 2k 857 658 23 30

Nasdaq 100 2239 1137 49 97

NYSE Comp 10301 7319 29 41

The Point here is to illustrate that an account that is off 25% is going to need far more than a 25% rally to get back to even. Now, the month of September was particularly brutal. The S&P lost more than 13%. I went back to 1970 and I could only find nine other occurrences when the S&P lost more than 9% in one month. Unfortunately, the months following the decline don’t show a clear pattern. However, a couple of general assumptions can be made. First, the worst of the decline is usually over. The market is steady to higher in eight out of nine observations. Also, the market can rally substantially from oversold levels as we saw in 1998 and 2002.


close price

close + 1

% decline

two months later c + 3
































































Now, for the practical concerns of implementing an equity portfolio enhancing futures strategy we can begin with some practical portfolio composition issues. Let’s assume that one has a $100,000 portfolio and at this point is allocated to 50% stocks, 30% bonds and 20% cash. Using the S&P as a broad market proxy, the equity portion has lost 25% of its value and now has a current market value of $37,500. Sobering, isn’t it? As we discussed earlier, the S&P will have to rally 38% for the equity portion of this portfolio just get back to where it was one year ago. Does anyone want to add in the attrition of a 5% inflation rate?

Here are the tools we have to work with.

Market Contract Size Margin

S&P500 $285,000 $22,500

Mini S&P $57,000 $4,500

Russell 2K $329,000 $26,250

Mini Russ $65,800 $5,250

Dow $106,000 $7,005

Mini Dow $53,000 $3,503

Also, we have an entirely different commodity futures product called Single Stock Futures. These have been around for a couple of years and have built up pretty good volume. There are a few important things to know. First of all, SHORT TRADES are allowed. Secondly, they are 100 share contracts at 10% margin. In other words, Microsoft trading at $26 dollars a share in single stock futures would be worth the trade price multiplied times 100 shares or, $2,600. The margin, at ten percent of contract value, is only $260.

Therefore, these products can be used by smaller accounts or, to protect individual market sectors and individual issues. For example, there is a single stock banking industry contract, as well as several others. The Narrow Based Indexes can be traded just like the futures indexes because they are cash settled, which eliminates any delivery issues.

Here are the single stock futures with the highest open interest as of 9/30.

Verizon Kraft Chevron Corp. Bristol-Myers Squibb Wyeth

Juniper Networks Inc. Exelon Corp. Boeing Co. Marsh & McLennan Co.

I think this provides a good detail of the products that are available and the actual dollars involved in trading. The last step is making the transition from cautiously reading and internalizing the information to actually putting this information to use in your own accounts. I understand that no one wants to accept the current values of their portfolios. Believe me, I get it. However, for those who did nothing on the way down, hoping that it would, or will, turnaround, I strongly suggest putting these products to work in your own accounts. I will be happy to discuss an appropriate combination that makes sense for your portfolio and your objectives.

Crude Fundamentals Remain Negative

The underpinnings of the Crude Oil market do not justify the current market prices.

1) Crude made new all time highs Friday….on declining open interest, which peaked last July.2) Distant delivery for Crude isn’t charging the storage and insurance premiums it should in a healthy bull market.3) Using NYSE prices, oil stocks are pricing it at $75 per barrel. 4) According to Business Week, the major players have done little to increase capital spending….even at these prices.