WARNING Danger Will Robbins Economics Ahead
Today we will talk about economic data points. Hello! Where did everybody go? Hanna, (Not you Dave. We know you have already stopped reading after the word Economic!) you might be the only one left reading, but we assure you it is worth it.
This week was our best week in trading since we bought our first ten shares of DIS in 1986 at a split adjusted price of $2.75 a share. Two weeks ago we were telling you this may be our first year of not making money in the market. (Remember fortuitous timing had us out of the market during a few key recessions.) Not only are we in the black, on a percentage stand point this may end up being our largest out performance over the market ever.
We keep this blog for many reasons, but mostly as journal of what we do and why. We know it is very painful to read the weekly economic data points every Sunday Night, but this week is undeniable evidence that if you are able and willing to spend about an hour a week getting to understand what economic reports are coming out and get a feel for the economic linkage and rational behind the number, you can with SOME accuracy (We would peg ours at about 60-65%), leverage and hedge your investments to your advantage.
Before we give you the grizzly details of the successful week, we have a confession to make. Thursday night we told you we received a portfolio alert from Schwab on our iPhone announcing our successful sale of our HUGE VXX call option position. I was wrong, as it was a notification that the order had expired for the day. We were taking back a bit on Friday when the market opened and the huge cash balance we were expecting did not materialize. It was then I realized it was an expiration notice not a confirmation. To my pleasurable surprise and with the expected help of one Mr. Bernanke our VXX option had now gone past the natural double range and provided a 101% return. (We got a double plus fees.) It was the first time we ever had to wait for Schwab to clear all 650 contracts representing 6,500 shares of VXX. By 7:10 the cash was in our account.
We also closed out another September call option on the VXX at 28% profit. We held that one for less than 48 hours. We made the right guess when we bought the September PUTs (a bearish call) against the SPY (an ETF representing the S&P 500) as we held it for 3 days and made a 32% profit. After that I was ready to call it a day and go melt on the golf course and watch Man Child. It was a long nervous 5 months gathering and holding on to the VXX options, but we had a nice payday.
Now they were not lucky guesses. As you know by the boring weekly, and some times daily, diatribes about the 20 or so economic data points we follow, we do keep track of these numbers and anticipate what they might be and how they might impact the market.
In the case of the VXX, which tracks the VIX, which is the CBOE's measurement of volatility in the market. Now think about that. You don't need to know if the DOW or the S&P 500 are going up or down, just if it's going to be volatile. The VIX is an index based upon the shift in the number of PUT and CALL positions on the market. Now yes there is a correlation between the direction of the market and whether people are buying or selling PUTs and CALLs. The changes in those directions cause the VIX index to be up or down. At the height of the debt crisis circa October 2008, the VIX was trading at 70ish. By May of 2009 it was back down to the 20s.
From our reading, it was becoming very clear that we NEEDED to address the debt issue this year and with the newly split congress it was going to be a struggle and probably and insurmountable task. We started collecting the VXX and sure enough the debt issue did not get solved to anyone's satisfaction. We had the added benefit of international sovereign debt issues, geopolitical unrest and sadly some natural disasters that all moved the VXX number from the 20s to the 40s. It could get higher, but it was time to take a profit.
If we had to give a cram course in economic data points. I would suggest one book for the book shelf. "The Trader's Guide to Key Economic Indicators" by Richard Yamarone is a clear and concise explanation of 14 groups of key indicators. His approach is NOT academic, it is utilitarian as each chapter has a section called "How To Use What You See". We have been using this book for more than two years and it is great at helping us connect the dots every week and every month. As you read the book and understanding their relationship you can SOMETIMES predict the moves Mr. Market will make over a day a month or a year. Keep in mind that Mr. Market is an irrational manic depressive (perhaps reflecting the psyche of the participants.)
Once you read the book you'll know where all the sources are for the data points. There is an easier way. At Barron's on line, they provide the week's key data points and the consensus numbers currently available. Yes that is from where we pull our consensus figures. This is the free part of Barron's so everyone should have access. Click here to see this weeks data points.
Let's take a look at this week. If there is a week? New York, including Wall Street might be pumping instead of pimping this week. The last time people left Manhattan in such large numbers was in 1965 with the Opening of the Musical "Kelly", a musical about a guy jumping off The Brooklyn Bridge and surviving. But assuming they survive and we have a market opening, there is a lot of international economic data to keep your eye on this week. (Eurozone employment figures, consumer prices in the Eurozone, Italy has a producer price index report, we also get a Eurozone GDP number which could rock our world-negatively, Japan has some household spending and retail numbers reporting, and China has a Manufacturing report.) All of this is the back round music to the data points being released this week. As we have found that back round music can easily drowned out the dialogue of our news.
Personal income and spending reports Monday and there are some fairly optimistic consensus figures. We don't see it. Now keep in mind that market does not react to the number, it reacts to the difference between the number and the consensus figure. Here is a quick example. Consumer spending is expected to recover from a minus .2% to a positive .5%. That is 7 basis points. If the number comes in at .3%, an improvement, the market will not like it because it was supposed to be at .5%. Got it? Our guess is .3% and an income number that remains flat at .1% a downer for the market. We also have pending home sales on Monday. Look for a disappointment, so that is two down figures. You could get up early and buy a PUT on the SPY if you think the S & P 500 will react negatively to the news.
Since we are running long here, we will see if you want to take a crack at the other 11 relevant economic data points the rest of the week. Go ahead and send me a note to see if you tell what the other 11 are and what the number might be in comparison to the consensus. We will go over more later in the week, but at face value we a re looking for another down week with a lot of sideways trading. Look for a Friday close of 11111, about 1.5% down. Trading will be scarce on Monday and Tuesday, if at all due to the Irene Factor.
Hope the rest of your weekend is great.
Salve Lucrum
