One of the most important factors in economics is the balance between supply and demand. Too little supply and too much demand leads the price of goods higher. Too little demand and too much supply means a drop in prices. It is through the imbalance of the first description that observers witness the forming and then eventually, the gradual deflation or outright bursting of bubbles. This phenomenon has been played out countless times and one need only look to recent examples in the real estate market or the gold market to see what happens when demand dries up. The stock market is the quintessential example of supply and demand, and what is developing currently is very unnerving.
Volume is the key to demand. The number of shares bought and sold on a given day indicates the interest of investors in a company's stock and in the market overall. Consider that from January 2008 to the September 15, 2008 collapse of Lehman Brothers, the Dow Jones Industrials reported an average daily volume in the in the neighborhood of 300,000,000 shares. The market breadth was evenly spread and the market was breaking new highs. Today the market continues to break new highs but from January 2, 2013 to November 13, 2013 the average volume for the year is roughly 85,000,000 or nearly a 72% decline.
A little buying pressure can move a stock dramatically upwards. If the volume is light but weighted in one direction it can send a stock irrationally higher or lower. There are few things to consider when looking at the current market. First, we must assume that the majority of individual investors who were devastated in the crash of 2008 have yet to recoup their losses and return to the market. Secondly, only a few high priced stocks are moving higher. Stocks that trade over $100.00 per share (or over $1000.00 on the S&P) are purchased by forces greater than most individuals. This leaves mutual funds, institutional investors and hedge funds in charge of the markets and their selections consist of what is moving; and what is moving is what they are buying. Today, on a day where the Dow closed up 70 points and hit another new high; 14 of the companies listed closed up with less than a .50¢ gain, 6 closed above .50¢ but less than $1.00, 6 closed negatively, and only 4 closed above $1.00. All on light trading volume.
The last thing to look at is margin. The current market has the highest margin debit balance in its history. When markets crash, margin calls are the reason. Investors who are over leveraged on margin must either bring in funds or sell stock (sometimes two to three times the amount they have borrowed) when the margin call comes. This is one of the reasons many individual investors have not been able to participate in the market after 2008.
It is hard to say if a market bubble is now forming or about to burst, but there are enough warning signs pointing to dangerous conditions on Wall Street.
Chapter 1 of my book The Book on Put Option Writing is available to read FOR FREE. Click here.
Wednesday, November 13, 2013
Sunday, November 10, 2013
MARKETS AND MADNESS AND GREED (OH, MY)
Jesse Livermore, once said that the book that influenced him the most was "Extraordinary Popular Delusions and The Madness of Crowds" by Charles MacKay. It might appear odd at first glance, that one of the greatest stock traders in history chose a book about mass psychological hysteria instead of some arcane academic study of economics, but in actuality, this is the perfect book to cite. What Livermore is saying, in no uncertain terms, is that the stock market runs simply on speculation and greed. For every fundamental or technical analyst that picks his or her stocks carefully, there are tens of thousands that are trying to catch the next big winner. People will buy a Certificate of Deposit at their local bank and wait six months to get a fraction of a percent at today's rates; If they purchase a stock however, they will want a double within the hour.
Any market that exists solely on ill conceived logic is destined to be volatile, and a volatile environment is nothing more than backroom card game with a fancy address. There is no difference between Tulipomania in the 1600's and The Internet Bubble of the 1990's. As raw speculators enter the markets, bubbles form in those markets and when they bust, so too does the bankroll that created them. Current volume on the Dow Jones Industrial Average compared to pre-2008 volume is all the proof one needs to conclude that a vast majority of investors are gone and despite the easy flow of money, very few people have as much of it as they did five or six years ago. Any insane and unjustified run where buying enters a maniacal phase is sure to ultimately lead to a destruction of wealth. As Euripides might have said; "Whom the markets would destroy, they first make mad."
Is there another bubble forming? That will be the subject of the next blog entry.
Click the title to read Chapter I of "The Book on Put Option Writing" for free.
Any market that exists solely on ill conceived logic is destined to be volatile, and a volatile environment is nothing more than backroom card game with a fancy address. There is no difference between Tulipomania in the 1600's and The Internet Bubble of the 1990's. As raw speculators enter the markets, bubbles form in those markets and when they bust, so too does the bankroll that created them. Current volume on the Dow Jones Industrial Average compared to pre-2008 volume is all the proof one needs to conclude that a vast majority of investors are gone and despite the easy flow of money, very few people have as much of it as they did five or six years ago. Any insane and unjustified run where buying enters a maniacal phase is sure to ultimately lead to a destruction of wealth. As Euripides might have said; "Whom the markets would destroy, they first make mad."
Is there another bubble forming? That will be the subject of the next blog entry.
Click the title to read Chapter I of "The Book on Put Option Writing" for free.
Sunday, November 3, 2013
THE BOOK ON PUT OPTION WRITING (and a freebie).
"The Book on Put Option Writing" is available in paperback and as an e-book. But even better, the first chapter can be downloaded for free by clicking here.
"The Book on Put Option Writing" focuses on a single option strategy that generates an immediate cash credit to the trader's account upon execution or can be used to create a "paid limit order". The strategy can be utilized in a bullish, neutral, or even slightly bearish market.
Many option books being sold are simply long technical descriptions of puts, calls, and the strategies that employ them. They tend to be nothing more than dry text books which most new investors either loose interest in by the first chapter or become completely lost by the second.
"The Book on Put Option Writing" was written with the novice investor in mind. Chapters are written in clear and easy to understand language. Many have quizzes at the end for the reader to measure his or her comprehension of the material and there are real world examples that are dissected to show the logic and strategies behind them. Experienced traders will also find this book helpful; finding new insights to old practices.
While other books try to explain the technical aspects of every single type of option trade, "The Book on Put Option Writing" only deals with selling puts. What might only be limited to a few paragraphs or pages in other books, is expanded and transformed into 80 pages in this book.
"The Book on Put Option Writing." It's concise, It's thorough, and it's worth a look. Click here to read the first chapter for free.
"The Book on Put Option Writing" focuses on a single option strategy that generates an immediate cash credit to the trader's account upon execution or can be used to create a "paid limit order". The strategy can be utilized in a bullish, neutral, or even slightly bearish market.
Many option books being sold are simply long technical descriptions of puts, calls, and the strategies that employ them. They tend to be nothing more than dry text books which most new investors either loose interest in by the first chapter or become completely lost by the second.
"The Book on Put Option Writing" was written with the novice investor in mind. Chapters are written in clear and easy to understand language. Many have quizzes at the end for the reader to measure his or her comprehension of the material and there are real world examples that are dissected to show the logic and strategies behind them. Experienced traders will also find this book helpful; finding new insights to old practices.
While other books try to explain the technical aspects of every single type of option trade, "The Book on Put Option Writing" only deals with selling puts. What might only be limited to a few paragraphs or pages in other books, is expanded and transformed into 80 pages in this book.
"The Book on Put Option Writing." It's concise, It's thorough, and it's worth a look. Click here to read the first chapter for free.
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