Riding The Tax Credit Roller Coaster…

Pending home sales surprised to the upside for a second straight month in March. Follow through for April existing home sales (up 6.8% in Mar) should be expected. Pending sales (contract signings) lead existing sales (closings) by a month or two.

The homebuyers’ tax credit has generated big swings in pending sales: +40% from Jan 2009 to Oct 2009; -20% from Oct 2009 to Jan 2010 (after original expiration); +14% from Jan 2010 to Mar 2010 (ahead of current expiration).

Apr 30 Deadline

Buyers need a contract in place by Apr 30 to qualify for the tax credit. Further upside for pending sales is likely next month.

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So, much of the information on this site may appear to most people as gobbledygook if they aren’t traders.  Since non-traders are our main readership, we thought it would be helpful to occasionally explain what the heck we are talkin’ about.  Uh, ya think?  LOL!  So, anyway, here is the low-down on selling short and buying long.  It’s pretty simple, actually.

Y’all already know what ‘buying long’ is.  It’s the regular old way to make a profit.  Buy low, sell high.  You buy something at as low a price as you can, and then you sell it for more.  It’s called “marking up”.  Retailers do it all the time.  You hopefully do it when you buy and sell a house.  Pretty simple.

Selling short is just as simple, but since most of us don’t sell short on a regular basis, it’s more unfamiliar to us.  Say your next door neighbor has been working long, tough hours.  She really needs a new car, but she doesn’t have the time or energy to shop for one herself.  She tells you what she wants…a 2008 Toyota Prius.  She wants to pay no more than $16,500 for the car.  You say, sure, neighbor.  You can buy that car from me for $16,500!  Then you find the exact one she wants that someone, terrified of the Prius recalls, is willing to sell for $13,500.  You buy that car for $13,500 and sell it to your neighbor for $16,500 and you made the difference for your time.  So, you sold a car that you didn’t own, then bought it for a lower price and profited by the difference.

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To understand PMI (Purchasing Managers Index) in this context, you need to understand that the Institute of Supply Management (ISM) Manufacturing Index measures the activity level of purchasing managers in the manufacturing sector by surveying more than 300 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories. A reading above 50 indicates expansion. Traders watch these surveys closely because purchasing managers, by virtue of their jobs, have early access to data about their company’s performance, which can be a leading indicator of overall economic performance.  More specifically, PMI is a rating from 400 purchasing managers who are asked to rate the level of business conditions including employment, production, new orders, prices, supplier deliveries, and inventories.

Dawn-Renée's ISM Manufacturing PMI Trade; 05-03-10

There is a whole slew of related information that comes out with the ISM Manufacturing PMI.  When the PMI came out today, it was slightly lower than expected, which caused an initial drop in the market.  I did not get in right away because volume was low.  Then the volume spiked and things started moving.  At the point volume started increasing, we were close to one of Market Mover Trading’s proprietary Prediction Points.  So I decided to buy long at 1190.25, knowing that we were likely to see a correction.  The market continued to go down.  However, the rest of the ISM Manufacturing data had come out and it was all positive, more orders, higher prices and lower inventories was GOOD news!  I

Jody's ISM Manufacturing PMI Trade 05-03-10

knew the market should start to go back up as traders digested the rest of the ISM news.  We were coming up on the next Prediction Point, so I decided to put another buy long order in at 1189.50, in case it got that low.  It did, and then started going back up.  I put my sell order for both contracts at another Prediction Point, 1191.50, but I got nervous and decided to pull down the sell orders to 1191.25.  A bird in the hand…told you I was conservative! Anyway, I still made 2.5 points total on my money (1 contract @ $500), which is a 25% return or $125.  Took me all of 10 minutes to setup and 7 minutes in the trade; and 7 minutes is a long trade for MMT!

To the above right, you can see Jody’s trade.  He waited for the initial movement downward to stall out, then he bought three contracts long at a Prediction Point (1089.50).  Then, his profit target, which was set at 1.5 points above his buy point,  sold him out automatically at 1091 for 1.50 points, or a 15% return on his investment – $225!  Jody said if he would have been thinking about it, he would have pulled his profit target up to the next highest prediction point at 1191.50.  But profit is profit!  What a great trading day!

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There were several trades today, including Chicage PMI and GDP, but we are going to focus on the last trade of the morning.  So, UMich CC is the only news item we don’t get instantly on our server.  It’s normally delayed about 15 seconds, but we can still get in and make money.

Dawn-Renée's UMich Consumer Confidence Trade 4-30-10

Consumer Confidence was down; under expectations.  So, since the market was reacting negatively to this news, using Market Mover Trading strategies, I sold one contract short at 1202.5.  At first, it looked like a good move, but then the market started moving up (bad for my trade).  We were smack dab between two of Market Mover Trading’s proprietary Prediction Points.  The rest of the UMich CC numbers had come out (in addition to the main number, there are numbers for Current Conditions, Expectations Index and 6 month Outlook) over the previous few minutes, and all the numbers were lower than expected.  So I drug my profit target down (remember, this is a sell short, so moving my profit target down means I was trying to *increase* my profit!) to the next lowest prediction point, as I felt the market should turn around and the positive movement was not reaching or breaking through the next highest Prediction Point.  One minute of patience paid off, as the market moved down to the lower prediction point and filled my profit target and I made 1.5 points, or 15%/$75.  At that point, I had to pack up and leave to make a meeting and MMT class, or I might have pulled my profit target down again, as the market was plummeting.  The ride down in response to UMich CC ended up being 6 points, or 60%.  On one contract, that would have translated to $300.  But as long as I am on the upside, I am a happy camper!  The higher profits will come with experience; the point of MMT for me is to trade without emotion or greed.  Remember, until a few months ago, ALL of this stuff was Greek to me, and via Market Mover Trading’s fabulous educational tools, I have easily learned these tools and strategies.

Jody's UMich Consumer Confidence Trade 4-30-10

So, here’s Jody’s UMich Consumer Confidence Trade.  He went short with 3 contracts at 1202.50.  Then, on the same upward (bad for a short trade) movement that I decided to hold fast on, he panicked a bit and flattened (bought all three contracts) out for a profit of .25 points, or $37.50.  This is okay, as it’s a learning experience.  That’s why it’s a good idea to simulate trading for at least 100 or so trades before you trade live.

It gives you confidence, as you know what you trade well and what you need to work on.  Journaling is a MUST!  In this case, Jody had successfully traded the Chicago PMI earlier in the morning and had a profit of $275 for the day!

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Nonfarm payrolls for the month of March came in lower than anticipated, rising 162k following an upwardly revised 14k decline in February. January nonfarm payrolls also saw an upward revision, and now reflects a 14k increase after coming in at a 26k decline initially. Despite the headline improvement in March, the US unemployment rate remained a 9.7% for a third consecutive month.

March nonfarm payrolls were boosted by improvements in both goods-producing and service providing sectors. Goods-producing employment came in positive for since March 2007, rising 41k over the month while construction employment also managed to edge in positive territory with a 15k increase over the month. Manufacturing employment came in higher for a third straight month, rising 17k following a 6k rise prior.

Service sector employment managed its highest total in more than a year, gaining 121k in March following a 33k increase the prior month. Retail sector employment rose 15k in March following an 8k rise in February. Employment in transportation and warehousing came in at an 8k increase for the month following a 9k decline prior.

Employment in information services was down 12k in March following a 7k decrease the previous month. Employment in financial activities was down 21k in March following a 15k decline in February. Professional and business services employment was up 11k over the month following a 40k increase prior. Employment in education and health services was up 45k over the month, while leisure and hospitality employment rose 22k.

Government employment gained 39k over the month with Federal government employment up 48k thanks entirely to hiring for the 2010 Census. Average hourly earnings for private workers dropped 0.1% to $18.90 in March, reflecting the first monthly decline since April 2003.

Keith Lobodzinski

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Asian Equities were lower overnight w/ the NIKKEI closing down 7.20 as losses in Healthcare, Industrials, Basic Materials and the Oil and Gas Sector were nearly offset by gains in Consumer Goods and Services and in the Utilities and Financial Sector. Chinese Stocks fell more sharply with the Hang Seng off 135pts with some major stocks missing earnings estimates…raising the specter of a poor earnings season overall. Perhaps too, the emerging notion the U.S. will brand China a Currency Manipulator in it’s semi-annual International Economic and Currency Report due on 15 April.

European Equities are just in positive territory at this writing after German Employment fell 31k against expectations for a slight gain. Following on yesterday’s Irish bank implosion is poor news on the Irish Employment front with the Unemployment rate jumping to 13.4%. Irish PPI rose 1% month on month but tanked 2.6% year on year. In other troubled countries news, Greek Retail Sales were reported up 8.1% year on year vs a prior 2.7% gain. French PPI rose just .1% month on month, raising the specter of deflationary pressures.

U.S. Equity Index futures are very slightly in the red at this writing w/ Dow Futures off 9pts and the S&P off just 1.25.

The Dollar is putting in a mixed performance with losses against the EUR still contained in y/day’s ranges. A bit of short covering on the dollar seems the likely cause rather than any sentiment change. CABLE however is over y/day’s highs w/ a big leg up as yield chasers jump into GBP/JPY. JPY is in fact weakening against the EUR, AUD and USD into this morning’s U.S. Open.

U.S. Treasury Futures up slightly at the long end of the curve w/ the 30yr up 6 ticks and the 10yr up just a couple of ticks at 116-00 basis the June contract. The 2 and 5yr are flat at this writing. The 30yr yield is down very slightly at 4.737%, the 10yr is at 3.853% and the 2/10 is at 2.798 w/ as the recent downward slope levels off. Today’s Treasury schedule is limited to a Cash Management Bill, the size of which is yet to be determined.

Commodities prices are higher into the NY Open with Crude up over $83 per barrel ahead of today’s DOE inventories report. API reported a smaller than expected build last night. Gold is up nearly $6 at $1111 and change on dollar weakness.

Today’s data includes MBA Mortgage Applications which were up 1.3%. Of particular interest will be today’s ADP Employment data at 8:15am EST with expectations for a gain fully built into equities prices. ADP is expected to gain 40k jobs. Chicago PMI is at 9:45am and February Factory Orders are at 10am. Also at 10am, NAPM Milwaukee.

Today’s speakers include the Fed’s Lockhart and Duke at 12:30pm EST.

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The S&P futures are tacking onto yesterday’s encouraging performance despite sluggish econ data from the EU and UK.  The S&P futures are also ignoring strength in the Dollar and appear to be on a trajectory of their own these days.  Meanwhile, the futures are creating further separation from their highly psychological 1100 level.  Confidence is gaining in America’s economic recovery, particularly in comparison to the EU and UK.  However, uncertainties are still hanging around the globe, particularly in Europe.  On a positive note, the RBA decided to raise rates again today, a show of confidence in the global economic recovery.  On the other hand, China’s banks made a large cut in lending during the month of February, and it remains to be seen whether tightening in China will dampen recoveries around the globe.  Market volatility could pick up tomorrow with the U.S. releasing its Services PMI and ADP Non-Farm Employment Change data.  Investors are already trying to soften the blow from a potential letdown in employment data because of adverse winter weather conditions.  However, tomorrow’s data points could have considerable influence nonetheless.  The UK will also release its Services PMI data along with an HPI figure, preceded by Australian GDP during the Asia trading session.  Hence, there will be more than enough data to move markets tomorrow, not to mention ECB and BoE policy meetings on Thursday.  That being said, market activity could increase as the week progresses.  Meanwhile, the S&P futures have taken down some key barriers, although they still face our 3rd tier downtrend line.  Our 3rd tier downtrend line nearly runs through 2010 highs, meaning a more significant breakout could be on the horizon should fundamental and psychological developments create favorable environment for U.S. equities.

Thanks to Fast Brokers News.  Tomorrow should be a fun trading day!

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