Market Update

Oil is leveling off from its $135 a barrel highs. I expect it to range between $125-$135 for a while, which should easy the negative sentiments of the market. I still believe in what I posted on Tuesday, and I have been buying June options on the cheap.

Market Conditions Seem Bleak...

...with the rise of oil to almost $130 a barrel and core inflation rising.

However, I sincerely believe that there are two phenomenon occurring in the market:

(1) The market is trading in ranges. The expectations is for the market to go +/- 3%. Today' the Dow was down about 1.5%, so I expect at least another big down day, and the market will rebound. In general, investors have been flaky, alternating between lots of optimism and instant reaction to any kind of economic news

(2) Rising oil prices is one of those pieces of economic news that investors have been overreacting to. However, it appears that speculators are also happy to trade within ranges, with big oil price spikes resulting typically with big oil price drops. Additionally, I firmly believe rising oil prices should already be built into the market, and so in about a 6 months, this should all even out.

With those two in mind, I am planning to buy both DIA and QQQQ (Dow and Nasdaq ETFs) Call options tomorrow afternoon, when I believe both will be near their low points.

Long-term investors beware...

In a recent MarketWatch article, Chuck Jaffe who writes a column titled "Stupidest Investment of the Week" (link), talks about a specific Vanguard mutual fund that essentially invests all the other managed Vanguard mutual funds. Jaffe suggests, and I agree, that this type of diversification is over-diversification, or a type of risk aversion akin to keeping your money under 8 mattresses instead of one.

While most readers know I enjoy risk, my retirement funds are long-term focused. I've often debated the risks of holding one good stock (leading to high risk) or just holding something safe (Treasury bills). Classic finance would tell you that the ideal location is somewhere in between; a good mix of high risk and low risk investments.

Jaffe writes, "Studies have shown that holding more than four funds that cover the same ground results in a 'closet index fund,' where an investor pays the price for active management but winds up with the performance of an index fund."

People sometimes take mutual funds and diversification too far, believing that spreading their money around to various mutual funds meets the criteria of diversification. Instead, look at each mutual fund's holdings and find out if you are duplicating sectors. If you are, rather than holding two mutual funds and paying double the management fees, just put twice as much into one mutual fund and get out of the other.

Stock Market

Today's stable inflationary figures coupled with Congress' suspension on buying oil for the Strategic Oil Reserve caused a large bump in the stock market. During this time, I sold off half of my Dow call options, making about $300. Unfortunately, I'm still in the hole for other options that I have bought.

During the afternoon, the market began to dip, as finicky traders began to take advantage of the large uptick to make some quick profits. By day's end, the upward movement had been halved. Believing that this downward pressure was purely speculatively based, I bought in near the end of the day on both the Dow and Nasdaq ETFs, hoping for another quick pop tomorrow.

[Update] Attached is my current spreadsheet. For trades where I have yet to sell, I have added the current market value of the options in orange with an estimated trading cost. As you can tell, one trade in particular has had a huge negative effect on my overall profit:

Stock Market Updates

A recent reader asked for my an update to my investment experiment with credit card debt. Unfortunately, there isn't much to tell yet. Last Thursday and Friday, I bought in Dow Jones Industrial Average ETF Call Options, thinking the market was severely battered by what I believed to be high speculative oil prices.

This bet has been proving well for me today, with oil prices coming down. The DJIA has also been helped by positive expectations for tomorrow's earnings report from Wal-Mart.

Along with Wal-Mart's first quarter earnings report, retail sales figure will also be released. This is a key indicator of consumer spending patterns. The market expects a downward pressure, in line with general thoughts of recession. If this measure is neutral, or if better positive, the market will react very positively, perhaps seeing another flirtation with the mythical 13,000 mark.

Investment Progress and Outlook

Despite my own cautions yesterday, the Nasdaq continued to transpire against the Dow and S&P, which prompted me to make a quick profitable trade.

As expected however, the Dow and S&P showed that most investors were awaiting word from the Fed. If there is news that a Fed cuts are stopping, then the market will react quickly and optimistically. However, if the news is that the Fed does not see any end to cuts, then the market will drop quickly. More likely though, the Fed will have a 25 bps cut with not much mention of the continuation of cuts.

I did also make one speculative move. I continue to hold my financial ETF, and I bought 5 Dow Jones Industrial average ETF contracts, in the hopes of positive news from the Fed.

The following is a new tracking sheet for my investments, which will better show my trades. I have also included other brokerage fees and added the prospect of taxes.

Outlook for the Week

After a rough learning curve from late November to January of this year, I have gained some market experience, and have learned that patience is a virtue, especially when acquiring stocks and options.

This week, I am holding off on any major transactions until after Wednesday, when the Fed announces their future policies on rate cuts. Also on Wednesday are large economic indicators, primarily inflation and employment figures.

Barring any unexpected news, I expect Tuesday to be quiet, as the risk is just too high on Wednesday for speculators to take any significant positions.

Items to watch out for this week? USO (United States Oil Fund) and GDX (Gold Index).

Investment Update

I've had some very hectic couple of work days recently, and it's been difficult to spend time on this blog. As promised, I will begin accounting for my investments.

My current investment strategy is split between $2,000 in an interest-bearing checking account and $6,500 in investments.

Those investments will be primarily in ETF index options. My investment goal is a modest 6% a month, which is ample to pay back the initial loan fee of $255, and make some money on the free loan during the next 6 months without much time commitment from me.

Here is my current tracking sheet:

I am keeping track of each of my investments, and as you may be able to decipher, I have already made one profitable trade worth $190, or about 3% return.

I am halfway there to my monthly goal already, and I have yet to begin the first full month of investing.

Market Sentiments

The market continues to feel edgy, erring on the side of optimism. With an expected rate cut coming, but with future rate cuts in doubt, the market is wearing its heart on its sleeve, ready to ride the waves of any surprise earnings releases.

Now that I've been burned a few times by this volatility, I am going to sit back and watch the markets closely today. While I now have the money to implement my trading strategies, I will still err on the side of caution.

Borrowed Cheaply - Day 1

Today marks the official beginning of my borrowed funds. I chose to borrow $8,500 @ 0% APR until November 1, 2008. However, there is an associated 3% balance fee, removing immediately $255.

As soon as the money clears the bank, I will move it into my trading portfolios. I will then track the outcomes of those portfolios and monthly remove money in order to pay the minimum monthly balance on the loan.

I will keep readers informed and up to date about my progress.

Initially, I am thinking of buying 10 Nasdaq Index (QQQQ) July Options @ 48 and increasing my investment in E-Trade (ETFC), if it falls below $4/share again.

Borrowing cheaply to fund investments - Pt. 4

So just as I was about to embark on my plans, another balance transfer arrived, charging 0% until November 2008, and allowing for $11K. I think I will take these checks with me to work tomorrow, and use them for my trading accounts.

Many are wandering what I am going to invest in, here we go:

QQQQ Call Options for July, XLF Call Options for July, and NCC Put Options for May.

I will report back here once I have started making these transactions and start tracking the results of these transactions.

Socially Responsible Investing

Socially responsible investing is all the rage these days, with investors boycotting companies that exploit rainforests, emit high amounts of pollution, or have insensitive HR practices. While normally these types of "irresponsible" corporate behavior are items I don't consider, a recent proxy for my mutual fund got me thinking.

It read:

"Shareholder proposal for ... [list of fund names] ... concerning Board oversight procedures to screen out investments in companies that substantially contribute to genocide."

Well that got my attention.

While I'm okay with minor corporate indiscretions, I was definitely curious as to how contributing to genocide could possible add value to a company. So as with any question I don't know the answer to, I did a Google search.

I found this page: "Investors Against Genocide". In the FAQ, they answer:

"Although federal law prevents most US companies from operating in Sudan, American financial institutions, in particular mutual fund companies, are major investors in the Chinese, Indian, and Malaysian oil companies involved in Sudan which are helping to fund this genocide."

Essentially, the Sudanese government is taking the oil revenues generated and plowing it into its war effort, which explicitly supports the genocide they are committing.

Certainly I had no idea that such investments in genocide were occurring. The above website is worth checking out for any socially conscious investor.

I definitely am voting for this shareholder proposal, and standing up against genocide.

The week, moving, and reader questions

This has been a hectic week. In my trading, I caught a great dagger in USU last week and made about $1000 from the trade. I thankfully dumped it about 3 hours before it started crashing two days ago.

While I was very excited about this, I also had other things on my mind. Primarily, I have been looking for a new job since I believed I had no real future career at my current position. I resigned this week, and I will write more about this subject over the weekend.

To reader questions who are curious about how I learned to trade and want to learn to trade, I will try to run a series next week.

For now, I need food and drinks or else I will go crazy.

Learning to Trade... the hard way

So the last week of ups and downs have taught me two lessons I really should have known:

1. Use bracket orders to set sell points, both at profit-taking and loss-prevention points.
   
   
2. Gold used to be a hedge against the stock market. Now, it mirrors the stock market.

(1) I realized because the market has been making huge swings, and obviously, trading at work prevents me from watching the market constantly. I ended up missing great selling points and then getting really screwed on the way down, as everyone jumped on the profit-taking wagon.

I now have a pricing rule for my options (using + to indicate profit percent and - to indicate loss percent):

25 cents or less: +40,-25
26-50 cents: +25, -20
51 cents to 150 cents: +15, -10
151 cents or more: +10, -5

If you consider options in general, you will see these price points make sense, as early on, the out of the money options tend to swing a lot and have lower prices. Closer to the money options are also more expensive, but this also prevents huge swings.

(2) I did manage to sell my gold options for a 5% profit, but for a good 3 days, they were down 20%. Why did this happen? I thought perhaps when the market was down, people would rush to a safe commodity, gold. Instead, as a co-worker explained to me, gold has been mirroring the market in recent years because the same money being put into the market is also put into gold. So when investor confidence is low, and the market is tanking, that same money is not being reinvested into gold. Instead, its probably being pulled out of the market altogether.

Thoughts from the Casino Floor

Today I was at Foxwoods casino, in Connecticut, playing blackjack and poker. For anyone familiar with the finance world, this is the draw at any casino. For anyone who even has the tiniest gambling itch, these two games are the most popular and fun to play.

There, sitting at blackjack, we joked about the MIT blackjack team, and consulted one person's "MIT Blackjack Rules" index card. After a few consultations, where the rule resulted was for the house and against the player, the dealer spoke up that the rules were meaningless, and that the thing going against the MIT Team was "a string of bad luck". He further stated that this was a clear indication why statistics is always beaten by the real world, and so you should never even play.

I thought about this statement, and matched it against what a lot of what finance does, using statistics to predict the payout across a large population. Investment-wise, this is especially relevant to the analysis and "picking" of stocks. So much of what happens is based on statistical probabilities that play out across many trials, they hold, but in few isolated instances could go totally against you.

It is this willingness to accept risk that really define the successful financial professionals from the mediocre, and the good investor from the bad. It is not to say that you should accept any risk, but rather you will consider reasonable risks as that is the only way to get good returns. To this end, a good investor must also understand that they will lose sometimes, but overall, they should be ahead.

Keep in mind the advice of the blackjack dealer. If you can't deal with the random "strings of bad luck", don't play. But, remember that statistics does work, but only if you do the same thing across a large number of trials, not just in isolated instances.

Investment Scams

Last night, I was channel surfing and stopped on an interesting infomercial. They were offering an "unique", "simple and easy", and "guaranteed" investment system. Well, when it comes to new investment "systems" I would definitely like one that is "simple and easy" as well as "guaranteed".

The infomercial advertised for a trading seminar that was taught by someone who had been "trading for 25 years". There was no mention of his track record, work history, or even any degrees or certifications he had. The biggest selling point? "It's easy, guaranteed and look at all these people who have made money!!"

These shows always annoy me because they spread the notion that somehow, there is a some secret formula or rain dance that you need to follow, and investment riches comes to you like water.

This simply isn't true. People on Wall Street would not be paid between $100K-$20 Million because they know some secret rain dance. When it comes to it, investment is hard work, and not everyone is cut out to analyze stock or be an i-banker.

Think of it another way. The stock market is a zero-sum game. At most, you can make all the money that is currently invested in the stock market, nothing more. So in order for you to win, someone has to lose. Well, if there was such an easy system out there, who is doing the losing?

In general, the losers tend to always be amateur investors or people following a "plan" or "secret" formula. Be wary of these systems, and consider that financial advisers do actually provide a valuable service.