What a Wonderful World!

Stock Market and Weather

“You must out of your mind!” --- A friend told me after he read my article “Look the market...” and saw what I said about the weather of New York City and the stock market.

“While, to me, the first is for fun; the second is that it is not groundless. There are reasons for it.” I said.

“You don’t want people think you are crazy, and you don’t want to destroy your reputation neither, right?”

“Yah, but my purpose is to attract people’s attention, and lead them to a new angle to view or think.”

“How can it be? How will you show the correlation between the two things that are completely irrelevant?”

“By regular statistics mean, you can not calculate or summarize a correlation between that two. But it does not mean they are irrelevant. Many factors impact on the stock market. Many factors are against each other and balance on each other. The strength of each factor is different in different period. Each factor has its own impact and power. I don’t think we can discover all factors by statistics, even a quarter of them.”

“I could agree with you, but it does not mean weather is a factor of stock market, or there will be a correlation. By the way, no superstitious, please!”

“It is not. We all know that the people would feel happier in sunny day, and get depressed when rainy. The stock market is run by the traders, analysts etc. They are human. Their feelings, mood would be impacted by the weather and expressed into the market…”

“It sounds reasonable, a little bit. How can you prove it?”

“Through statistics, I can’t. And I don’t even think to do so. There won’t be any result, I guess.”

“Then it is not a science though!”

“I don’t care what we call it. I just believe that the weather does impact the stock market indirectly. Sometimes it is strong, sometimes it is weak. Because of many other factors, people would not realize that it is even existed. Once in a blue moon, when all other factors are balanced, its impact might appear. I just think this week seems a good candidate to show such thing.”

“It still sounds very very crazy to me! You know what? Let’s just watch it next week.”

“I completely understand your feeling. I am not sure what will happen neither! Based on my analysis, the possibility is high…regardless the result, we shall learn something which is our true purpose.”

*****

Now, it is the time to review the correlation between the weather and stock market for this week.

The first picture is Dow’s five days chart; the second one is the five day weather record for New York City.

Unfortunately I cannot provide a very detailed weather record. If we compare each day’s record with its Dow’s trace, from Monday to Thursday, you would see a correlation. I think the correlation is not visible on Friday. It is OK that we cannot expect it can stand too long.

Wednesday is a perfect example for the correlation between weather and stock market!

Please let me describe the weather in more details for Wednesday:
In the early morning, there was a partly sunny momentarily; then it turned to cloudy. The sky then got darker and darker. Once a while, the outside was like in early evening. Then a light snow began, then a very heavy snow. Later on, the snow changed to a light rain. At about noon time, the rain was stopped. Then it was cloudy and sometimes we can see the sun. The afternoon was cloudy and mixed with partly sunny.

When I showed the chart to my colleague, He was so surprised by the matching of the two. They just matched so perfectly!

*****

The above picture shows the following fields:
1. Column B --- Dow’s Closing number of each day
2. Column C --- The High Temperature of each day
3. Column D --- The closing number of Dow divided by the High temperature
4. Column E --- The nearest whole number of Column D
5. Column F --- The component or factor of Column E

Please look the Column F! What are they?

“39, 43, 47, 41, 37” or “37, 39, 41, 43, 47” --- They are the sequence of undividable numbers!

If we assume there is a “discipline”: the market should move sequentially. We would be able predict something. In our case, when you see the first 3 numbers on Wednesday, you can simply assume the market will try to fill out the empty spot, which is 41. --- If you do so, your guess would be right; On Thursday, you can make another guess: it will be either 37 or 53. The 53 is seems less reasonable yet, so you better choose 37. --- If you do so, you would be right again!

I just show you that if I have weather broadcast, hopeful it is correct, and then I can guess the market, isn’t it?

Why there is a '5'? --- Another interesting question.

Let me tell you: In traditional Chinese wisdom, number 5 can represents “Spring”!

…

Many times, I have been so amazed by the harmonious beauty of our mother nature!

Before its Earnings announcement --- SNDK

SNDK (SanDisk Corp.)

SNDK engages in the design, development, and market of flash storage card products used in various consumer electronics worldwide.

Its earning announcement date is 4/20. Most likely it will release a good number. At least the good speculation will drive its price up. It is a good choice for short term and option player. Its closing price of today is $63.32.

My suggestion: Buy (6.5)
Instruction:
1. Buy gradually in a small amount. You could buy more if there is a price adjustment.
2. To protect yourself, reduce your position and cash some of your gain before the announcement.

Option Trading Basics --- Buy and Sell Option

Buy and Sell Option

To do option trading, you need a special permission from your broker. You have to fill out option trading application forms, and ask your broker to enable the option trading in your existing account or set a special option trading account. Once your account is set up, you can start your trade.

The option trading procedure is like regular stock trading.

A typical buying procedure is as the following:
1. Set the option symbol
Any option has its own symbol just as a stock has. You need find an option that you want to buy, and have the symbol ready. Almost all trading programs provide some functions to make it very easy.

2. Select “Buy/Sell” type
There are four types for “Buy/Sell”: Buy to Open; Buy to Close; Sell to Open; Sell to Close.
At this movement, we only discuss the basic ones. Please select “Buy to Open”.

3. Choose order type
There are two order types usually: Market order or Limit order.
You can select either one. If you choose limit order, you have to input your limit price.

4. Enter the number of contract
Please keep in mind that one contract represents 100 shares of underlying stock.

5. Set the duration or your order
There are two selections at least: Today or Good till Cancelled.

6. Submit order
All programs will show a confirmation page after you submit order. You need make sure to click the “confirm” button (may appear differently in different program)

To sell your option, you need following the same steps. The difference is at step 2 and step 3 as the following:

2. Select “Buy/Sell” type
To sell, you need to select “Sell to Close”.

3. Choose order type
There maybe four order types: Market order, Limit order, Stop order, and Stop limit order.

I will talk about the two stop orders later. For now, you can just pick either Market or Limit order.

The price of an option is always the “whole numbers” such as the multiple of $0.05, $0.10 or even bigger. It depends on the price of its correspondent stock. When you input your limit price, you have to put your price in “whole number” also. For example, you can set your prices as $0.35, or $0.40; but should never set it as $0.37.

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Trading option is almost the same as trading stock. Once you bought an option, you can sell it at any time. You don’t need, and better not, to wait for the expiration date to sell or execute your option.

Let’s talk the same example in my article “Call Option”:

If you bought a call option at strike price $25 and expiration date July, 2006. This option’s price is $1.00 when the stock price at $20.00.

When the price of the stock changed, your option’s value would change accordingly.

If the stock price changed to $21.00, then the option price might increased to $1.20; if the stock price decreased to $19.00, then the option price might down to $0.85.

You don’t need to wait to neither July nor the price reached $25.00. You can cash out your investment anytime you want. You need watch the market carefully and make your own judgment about the trend of that stock, and make the best decision at where and when to sell your option.

But remember, you need sell your option before the expiration date. The option does not like stock, you cannot hold it forever. If it expired, it is worthless.

While Gold Reached New High, Yet the Gold Company --- ABX

ABX (Barrick Gold Corp.)

Barrick Gold Corporation, in Canada, operates as a gold mining company with operating and development properties in the United States, Canada, Australia, Peru, Chile, Argentina, and Tanzania. It has 89.1 million ounces of total proven and probable gold and mineral reserves.

It is a good candidate for short and mid term investors.

My suggestion: Buy (7)

Option Trading Basics --- Call Option

Call Option

“An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.”

“It may help you to remember that a call option gives you the right to "call in" (buy) an asset. You profit on a call when the underlying asset increases in price.”
--- www.investopedia.com


The above definition for “Call Option”, or “Call”, probably is too abstract. Please let me give you an example to help you to understand this concept.

Let’s focus on stock only. Suppose there is a stock ABC. Its price is $20 as of today. If you, the “investor”, believe that the price of ABC will go up to $25 within 3 month, you could then buy a contract, the “agreement”, from a seller (“writer”, we would rather not discuss it now). You could choose your contact’s price, the “specified price” or strike price, at $25; and select the expiration date, the “specific time period”, to July, 2006.

Any option consists two parts: strike price and expiration date. The expiration date is represented as month and year. The exactly expiration date is usually the third Friday of that month.

Each contract represents 100 shares of stock. The real price of an option contract is the quote price * 100. In our example, suppose the quote of the call is $1, when you buy the contract, your total investment would be 1*100 = $100.

If you want to buy the stock for 100 shares, your investment would be 20*100 = $2000. Using the same money, you could buy 20 contracts that represent 2000 shares.

A call is the right to buy stocks at the agreed upon price during a certain time period. If the price is lower than the strike price, then no one would execution this contact. The contract could be expired.

Let’s say, when July came, the price of ABC is still $20. No one would execute this contact and buy the stock at $25. If someone really wants it, he/she can buy it at the market price $20. The $25 contact is worthless. You would loose your investment at $1*100 = $100, which is 100%.

If the price of ABC jumped to $30 in July, you can execute the contact and buy the stock at $25, and sell it at market price of $30. Your contract would worth ($30-$25)*100 = $500. It means you earned $400 or have 400% profit.

In our example, you can see that if price of ABC before the expiration date of July is below $25, then the contact is worthless; if the price is above $26, then we can make money; if the price is between $25 and $26, we would loss portion of our investment.

To buy a call option, your lost is limited which is your option cost; and your gain potential is unlimited.

In real situation, an investor would not wait till the expiration date to execute the contract. He/she would sell the contract earlier.

When you try to buy an option contract, it is called “Buy to Open”; when you sell your option, it is called “Sell to Close”.

To trade option, you need have your option trading enabled or have a separate option account. In either case, you need to fill out special forms. On the forms, you need show you have enough experience on stock trading. An option trading experience is a big plus for your account approval.

Good luck!

Weekly Review (3/27/06 – 3/31/06)

Look the market...

In the article “A Warning Message”, I predicted a market down in this week and said “The most possible time is from Tuesday afternoon to Wednesday.” Now, let’s check out this week’s result:

We can see that both Dow and NASDAQ were down at Tuesday afternoon. From the peak to the bottom, Dow was down about 125 and NASDAQ was down about 25. Both downs were over 1%. Despite the down was smaller than I thought (NASDAQ decrease >50), it can still be considered at a medium to large scale.

For the whole week, the Dow was down for 170 and the NASDAQ was up for 25. The two indexes have started out of synch since Wednesday. The strength of tech stock, or the NASDAQ, came too early. It acutely will bring the uncertainty to the market for next week.

From Dow, we can see that the market is nearly ready for the next charge; from NASDAQ, because the down pressure is not completely release yet, the shaky situation will dominate its up track for next week.

While I finished my study, I found an interesting point and want to share with you: If you want to know the market of next week, please referral to the whether of New York City.

Let’s check it out whether it is correct and have fun!

***

This week, I suggested my readers to reduce your position and have enough cash. Because the Dow is down, now it is the time to get back. For the next week, our strategy is to accumulate stocks whenever the price is lower.

Because my suggesting list is getting longer and longer, I will not discuss them one by one going forward. To keep my article short, I would rather not to mention the ones that do have much change.

1. CSCO
“Reduce your holding when it above $22.00.” --- If you read my last weeks review, and checked Cisco’s five day chart, you would know what exactly what I mean.

The price of CSCO reached $22.00 just momentarily during this week!

I expect it will performance better starting from Thursday.

2. GOOG
Google was the star of this week. On Monday, it did not reach $372, but on Tuesday and Wednesday, it broke its two very important resistant lines: $375 and $390. Finally it did not cross $400 which is the most important psychological line.

The Google is too wild and too difficult to predict now. We need to wait and watch. The $400 line is so critical that if it was crossed, the stock will have a short rally; if it could not, the stock will shift between $400 and $350 for a while.

3. ANX
It tried another time for $5 and was almost there. If you have not had it, you should buy some.

4. SUNW
Just as I wished, the Sun is rising!


5. LVLT
If you follow my instruction in my article “Insider News”, you may have a 10% margin in your pocket, haven’t you?

***

Some readers are very interested the option trading, and want to know more about it. Going forward, I am going to periodically introduce some basic knowledge and terminology from my own understanding.

You are welcomed to write comments or email your question to me.

Wish you be successful on your investment!