VIX Puts Active, Broke 50 Day Moving Average, Looks Double Toppy

Last week I was looking at the chart of the Volatility Index (VIX) and saw two things. It was flirting with the 50 day moving average and it looked double toppy.. So I decided to head over to Option Monster to see what was going on and checked out their Volatility Sonar report on 12/3 and 12/4. Surprisingly they saw thousands of May and April '09 $30 puts trading which is a bet on lower volatility in the future. Add on to that a futures curve trending lower and you have a bullish scenario for the market since VIX:S&P are inversely related.

Fast forward to Friday's close and the VIX actually broke below the 50 day moving average when the market rallied at the end of the day. Also the index futures are up big tonight. The Dow is +190 and the S&P +22 as of 1:32am est. If the break below the critical 50 day ma can be sustained it would bring a lower VIX and a nice profitable trade (less the premium paid). Awesome.

Watch the videos and also provided are VIX charts and a snapshot of the futures curve with data via the CBOE Futures Exchange as of Fridays close (12/5/08).

Long Term S&P Technicals Including Charts, Technical Analysis, CBS News

(updated the video sizes) 

I want to revisit the long term technicals of the S&P 500 which will feed into my next post about the VIX which will include videos, charts, futures curve and options activity. On 9/13/2008 I posted a long term chart of the S&P but I forgot to add a trend line from the '87 crash lows. The updated chart is provided below.

I was able to gather some historical charts from Yahoo Finance and Bigcharts.com. The S&P 500 just bounced off the 26 year trend line and what's interesting is the trend does not include the tech bubble lows of 2002. I'm not exactly sure why, maybe the recession wasn't fully realized because it was artificially propped up by monetary policy. Like what Peter Schiff's been saying on cnbc for years. But it's interesting that we're hitting the long term trend today. At the same time the S&P is also testing the tech bubble lows which could also act as support. So if, I said if, the S&P shows sustained strength above these levels it could technically prove a bottom. Again I wouldn't be surprised if we retested the Nov 21 lows of 741 in the near term so monitor the S&P for up moves on strong volume and higher lows. It's interesting that the market charged higher today on horrible news (videos). Hopefully the Obama administration can renew confidence in our economy and be a positive catalyst for the market.

Baltic Dry Index, Dryships (DRYS), Excel Maritime (EXM), Charts, News, Reports...

Check out the Baltic Dry Index which measures commodity shipping costs on various carriers. It tanked due to the lack of demand for commodities and the inability to get letters of credit due to bank counterparty risk. Plus the lack of demand and excess tonnage capacity drove prices lower.

I remember analyzing the Baltic Dry Index in 2005 when it took a hit and EXC (Excel Maritime) was around $11/share in the beginning of 2006. In 2005 there was a tightening bias¹, hurricanes, a steel price correction that slowed down the movement of iron ore and coking coal, China was in an inventory correction and vessel rates declined. But the global growth story for China and India was still in tact. Plus there was congestion at Chinese and Australian seaports at the end of '05 when China was loading up on iron ore (olympics). The positive fundamentals allowed the Baltic Dry Index and EXM to increase 8 fold within a year.

Now the fundamentals have clearly changed. Lower rates are squeezing cash flows and vessel values have fallen so dramatically that they could breach NAV ratios on credit lines secured by vessels. Hopefully tonnage capacity, commodity demand and vessel values bounce back sooner or later. A story below did say many vessels get scrapped during a recession creating "vessel supply destruction". There's even some chatter that some public shippers might go private. But some analysts think there is more pain ahead for the industry. Plus if one of the Big 3 went under it would put more strain on the global economy. It's interesting that a bunch of DRYS out of the money calls traded today on a 13% up day when the market was down 2-3%. I'm not making any recommendations but if I went long for a trade here I'd buy some puts for protection. Very risky!

I provided the charts of the Baltic Dry Index, EXM, DRYS and the Commodity Index/Australian Dollar which have both taken a hit (Australia is a big commodity exporter so importers need the AUD). Also I found a few research reports posted on Scribd.com about the Baltic Dry Index.


Baltic Dry Index (Source: findata.co.nz)



Excel Maritime (EXM)


DryShips (DRYS)


Commodity Index/Australian Dollar (Source: futuresource.com)


Recent News:Dry bulk rates to rise as China starts restocking of iron ore 12/5/08 (Steel Guru)

"It is reported that Dry bulk rates are likely to recover when China replenishes its dwindling iron ore inventory and demand for thermal coal starts to pick up."

Charting Mutual Fund Performance Vs. S&P 500 (4 year period)

What have mutual funds done for investors during the past 4 years? Not much. I found some well known value funds that significantly underperformed the S&P. I googled "mutual funds" and found this recent blog post: Eighth Annual Mutual Fund Turkey Awards by Maxfunds.com which gave me some interesting ideas.

Some of the value funds the blog mentioned were down 50%+ ytd. Hopefully they have a nice dividend to reinvest so people can average down for the next bull run. For the people that hoarded cash in late 2007; once the recession/credit crisis fades out (could take a while) these funds will be great buying opportunities for the long haul, but so will the SPY (S&P 500) exchange traded fund. By the way I'm not making any recommendations here.

So I screened for large reputable value funds with more than $3 billion under management and charted them against the S&P 500 since 12/3/2004 (4 year spread). I think it's fair because it gives a 3:1 bull/bear time period. It turns out many of the funds underperformed the S&P by 15%+. I should note that the Dodge Cox and Third Avenue fund did significantly outperform the S&P during 2005 and 2006. Below I provided the mutual fund, symbol and chart vs. S&P. Also check out this article: What went wrong with value funds (Money Magazine).

Legg Mason Value Trust: LMVTX
Dodge Cox Stock Fund: DODGX
Third Avenue Value Fund: TAVFX
Vanguard Windsor: VWNDX
Fidelity Equity-Income: FEQIX


S&P vs. Value Funds Over 4 Years (Source: Bigcharts.com)

Click to enlarge

Ben Bernanke Speaks Financial Zen at Austin Chamber of Commerce. Policy/Economic Outlook (Video Link/Script)

Bernanke Says Fed May Buy Treasuries to Aid Economy

Bloomberg Video Link (45 minutes)


Chairman Ben S. Bernanke
At the Greater Austin Chamber of Commerce
Austin, Texas December 1, 2008
Federal Reserve Policies in the Financial Crisis

http://www.federalreserve.gov/newsevents/speech/bernanke20081201a.htm

"Economic Outlook

Despite the efforts of the Federal Reserve and other policymakers, the U.S. economy remains under considerable stress. Economic activity was weakening even before the intensification of the financial crisis this fall. The sharp falloff in consumer spending during the summer was particularly striking. According to the latest estimates, real gross domestic product (GDP) declined at an annual rate of 0.5 percent in the third quarter, with personal consumption falling at an annual rate of 3.7 percent.

However, economic activity appears to have downshifted further in the wake of the deterioration in financial conditions in September. Employment losses, which had been averaging about 100,000 per month for much of the year, accelerated to more than 250,000 per month, on average, in September and October, and the unemployment rate jumped to 6.5 percent in October. Moreover, recent increases in the number of new claims for unemployment insurance suggest that labor market conditions worsened further in November. Housing markets remain weak, with low demand and the increased number of distressed properties on the market contributing to further declines in house prices and ongoing reductions in new construction. In reaction to worse economic prospects and tightening credit conditions, households have continued to retrench, putting consumer spending on a pace to post another sharp decline in the fourth quarter. In particular, sales of light motor vehicles fell to an annual rate of 10-1/2 million units in October, the lowest level since 1983, and November sales reports are downbeat.

Business activity also slowed in recent months. Excluding the effects of the hurricanes and the Boeing strike on production, manufacturing output fell 2 percent over the months of September and October, orders and shipments of nondefense capital goods fell markedly in October, and most survey measures of business conditions are at or close to record lows.

Amid the bad news, there have been some positives. The pronounced declines in the prices for crude oil and other commodities have helped to reverse what had been a significant drag on household purchasing power through much of the year. And there have been a few tentative signs of stabilization in financial markets. For instance, short-term funding costs for banks and commercial paper issuers have come down recently, and issuance of investment-grade bonds by nonfinancial corporations appears to have held up well. Banks have recently issued bonds backed by the FDIC guarantee. That said, investor concerns about credit quality have increased further, and risk aversion remains intense. As a result, in almost all credit markets, spreads remain wider, maturities shorter, and availability more constrained than was the case before the intensification of the crisis this fall.

The likely duration of the financial turmoil is difficult to judge, and thus the uncertainty surrounding the economic outlook is unusually large. But even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time. In particular, household spending likely will continue to be depressed by the declines to date in household wealth, cumulating job losses, weak consumer confidence, and a lack of credit availability.

The global economy has also slowed. Many industrial countries were affected by the financial crisis from the beginning, but the latest economic data point to a more noticeable weakening of conditions. And emerging market economies, which were little affected at first, are slowing now as well. One implication of these developments is that exports are not likely to be as great a source of strength for U.S. economic activity in coming quarters as they had been earlier this year.

At the same time, the increase in economic slack and the declines in commodity prices and import prices have alleviated upward pressures on consumer prices. Moreover, inflation expectations appear to have eased slightly. These developments should bring inflation down to levels consistent with price stability.

Although the near-term outlook for the economy is weak, a number of factors are likely over time to promote the return of solid gains in economic activity and employment in the context of low and stable inflation. Among those factors are the stimulus provided by monetary policy and possible fiscal actions, the eventual stabilization in housing markets as the correction runs its course, and the underlying strengths and recuperative powers of our economy. The time needed for economic recovery, however, will depend greatly on the pace at which financial and credit markets return to more-normal functioning.

The Outlook for Policy

Include Tesla Motors In Auto Loan Package!!! (Tesla Roadster Video)

I saw a video on Tech Ticker today talking about Tesla Motors who builds an electric car for 109k. There was a NYT article saying they shouldn't get low interest funding of $400 million included in the auto funding package. What the ffff, why not? If the taxpayer is going to keep the Big 3 from going out of business why not provide funding to a company with a cooler product that could lower prices in the future? I wanted to post about this because I saw an interesting interview with the founder Elon Musk at the most recent Web 2.0 conference which is embedded at the bottom.