By Chris Ebert

The stock market is hot. There’s no denying it. Yet, it just doesn’t feel the same as it did a few months ago, or for most of the past several years for that matter. It’s like there is something missing.

SNP Temperature 11-11-14Perhaps there truly is something missing – something big. It’s almost impossible to know for certain. It is possible to speculate as to the exact nature of what it is that is currently missing (big hands, little hands, hedge funds, HFTs, corporate fundamentals, QE, etc.) but the truth may never be known. The effects, on the other hand, are known.

Additionally, given the current effect on the stock market, it is possible to make some assumptions about the near-future for stock prices based on what has happened in the past. It doesn’t matter so much what exactly it is that is having the observed effect, if the end result is generally the same.

The end result of the current set of conditions in the options market has been for a Bear market in stocks to ensue within several weeks. In the past 12 years or more for which options data was obtained, the current condition of the stock market has always been followed by a major sell-off – a major decline in stock prices, not just a simple Bull-market correction – within as little as 4 to as many as 16 weeks.

When broad index ($SPY) at-the-money Covered Calls become unprofitable at expiration, as they did back on October 10, 2014, a full-blown Bear market has typically begun no more than a few months later. Viewed in this light, Covered Call losses mark the start of every Bear market. That means the current market is a Bear market, in spite of the fact that the S&P 500 is at all-time highs.

A Bear market does not mean that stock prices are headed straight down. In fact, it is not unusual for stock prices to hit all-time highs when a fresh new Bear market is underway. What it does imply is that something is missing – something big – and that whatever-it-is that is missing tends to have the eventual effect of driving stock prices far, far lower than those prices have been at any time in recent months, sometimes years.

Stocks and Options at a Glance 11-15-14

* All profits are calculated at expiration, as a percentage of the underlying SPY share price. SPY is an Exchange Traded Fund (ETF), the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) that closely tracks the performance of the S&P 500 stock index. All options are at-the-money (ATM) when-opened 4 months (112 days) to expiration.
EXAMPLE: If Long Call premium paid is $2 when SPY is trading at $200, the loss is 1% if the option expires worthless.

You are here – Bear Market Stage 6 – the “Phew!” stage.

On the chart above there are 3 categories of option trades: A, B and C. For this past week, ending November 15, 2014, this is how the trades (more…)

By Poly

This is an excerpt from this week’s premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. Now offering monthly & quarterly subscriptions with 30 day refund. Promo code ZEN saves 10%.

I’m going to spend little time on the equity markets this week, covering just the fundamentals of where the Cycle’s stand. I’m convinced now that the equity markets are peaking, into their final bull market speculative run that will soon end badly for these markets. But soon is a relative term, considering that this bull market is fast approaching its 6th anniversary.

A flat and tight week for the equity markets, I suspect because the S&P is already well into the Half Cycle Low that it’s keep a lid on the recent move. So I’m going to consider this sideways move as consolidation at that HCL juncture, where normally we would be seeing a decent drop into that Low. To me, this only highlights the speculative (runaway) move the markets currently find themselves in. The fact that after a 220 point record setting run that we’re not seeing even a token decline is indicative of where we stand in the bull market Cycle.

11-15 Equities Daily

Of course we would be crazy to bet against this move because it’s just far too strong. It’s a bull market in its most dangerous point of the Cycle, which is why of late it has shown a complete disregard for any conventional analytical study. In theory, we could see this market spike yet another 150 points before the holidays are through, and honestly it would still fit the profile of a speculative blow-off top.

But at the same time, I’m bothered by so many underperforming indices (divergence). Its never different this time and at some point very soon the market will turn and drop like a stone. The recent Investor Cycle failure that went on to make new all-time highs is yet another symptom of that disregard for any study, but it also confirms that this market is running wild on “animal spirits”. I eagerly await the outcome of this move. (more…)

By Chris Ebert

inputIt can be fascinating, yet horribly frustrating, to realize that stock prices are not a mathematical function. If stock prices behaved as a mathematical function, there would be only one outcome for a given set of conditions. For example, if a stock price fell to the 200-day simple moving average, and always moved higher immediately afterward; the bounce higher would be a function of the simple moving average.

Output is, in reality  not a function of input for stock prices. Stock prices are always stochastic no matter how deterministic their appearance.

While it is true that there are times that stock prices tend to behave as a function of certain technical indicators, there are also times when those technical indicators fail miserably. No technical indicator works 100% of the time. If it did, there would be no need for human involvement in the stock market; computers could handle every trade with 100% efficiency.

In fact, it is quite possible that 100% efficiency would eventually lead to one huge stalemate, in which no computer could gain an edge over another, and all trading would cease as if in the middle of an un-winnable chess game. Thus, the fact that trading has not yet reached such a stalemate justifies the conclusion that the stock market is not yet 100% efficient. As such, human interaction still plays a role, and it will continue to play a role as long as prices remain stochastic and not deterministic.

The emotional aspect of human interaction is important; greed and fear still have a measurable and noticeable effect on stock prices. After all, the effect of human emotions is why indicators such as the S&P 500 Volatility Index (the VIX) are ubiquitous these days. The effect of emotion, as big as it is, is sometimes overshadowed by the effect of price manipulation.

Manipulating stock prices isn’t necessarily an evil act. It’s human nature. Who among us would not manipulate the price of a stock if we had such power? To believe that stock-price manipulation is not ongoing, moreover that it is not rampant, is naïve. To believe that others would not manipulate stock prices for their own benefit, when we would do it ourselves given the opportunity, is hypocritical.

How then, does one detect the effect of manipulation? In some ways, detecting manipulation can be achieved in much the same manner as one detects the effect of emotion – through a study of traditional technical indicators. However, when one gets down the rabbit hole far enough, it becomes evident that traditional indicators themselves could be targets of manipulation.

It is not out of the realm of possibility that an everyday occurrence, for example, a bounce higher off the 200-day simple moving average, or a sell-off from the RSI 70 level,  could each be a scripted event. While the event may be scripted – intentionally caused by those who would benefit from it – some of the effects of that event are not so easily written into the script.

Changes in option premiums occur as a result of such events. Those option premiums are not so easily scripted or manipulated as the changes in stock prices. Options traders, by nature, assume that stock prices are stochastic; and by assuming they are stochastic, generally make accommodations for everything except for intentional, outright, off-cue price manipulation.   Thus, it is entirely possible that options, viewed in strict and disciplined manner, have the ability to indicate periods of time in which stock prices have gone off the expected script – when stock prices are being manipulated excessively.

The following analysis is presented here weekly, and may prove effective in identifying stock-price manipulation.

Click on chart to enlarge

Click on chart to enlarge

* All profits are calculated at expiration, as a percentage of the underlying SPY share price. SPY is an Exchange Traded Fund (ETF), the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) that closely tracks the performance of the S&P 500 stock index. All options are at-the-money (ATM) when-opened 4 months (112 days) to expiration.
EXAMPLE: If Long Call premium paid is $2 when SPY is trading at $200, the loss is 1% if the option expires worthless.

You are here – Bear Market Stage 6 – the “Phew!” stage.

On the chart above there are 3 categories of option trades: A, B and C. For this past week, ending November 8, 2014, this is how the trades performed on (more…)

By Jeff Pierce

My trading bias is obviously bearish, I’m not going to try to hide it. Over the last 6 months this Index has shown considerable signs of negative divergence as the Nasdaq posts higher highs but the High Low index continues to weaken.

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