Overnight vs. Daytime Market Returns

Absolutely fascinating study of market returns for the active trader to consider:

Hat tip MarketSci Blog via Crossing Wall Street

Brandon R. Rowley
"Chance favors the prepared mind."

*DISCLOSURE: Nothing relevant.

Optimism Continues Around the World, CAT Guides Up

Asian markets and European markets generally traded higher overnight across the board. Positive results from a US bellweather, Caterpillar (CAT) are boosting futures this morning in New York. CAT reported EPS of $0.50 (ex a charge for the healthcare plan) versus expectations of $0.39. Revenues were lighter than expected but upside guidance impressed the Street with CAT forecasting FY10 EPS of $2.50-3.25 versus $2.69 consensus. It's a big week of fundamental concerns. Goldman CEO, Lloyd Blankfein, will spend his morning tomorrow testifying before the Senate Permanent Subcommittee on Investigations about GS's conduct during the subprime boom. I doubt he'll have too many friends on his side throughout the grilling. The FOMC releases its interest rate decision Wednesday, once again the focus is likely to fall on the language Bernanke and his cohorts adopt in the statement.

On a side note, really Joe Biden? Our highly successful prognosticating Vice President was quoted as saying: "Even some in the White House said 'Hey, don't get ahead of yourself.' Well I'm here to tell you some time in the next couple of months we're going to be creating between 250,000 jobs a month and 500,000 jobs a month." (CNBC) I refer you to my post in December entitled "Our Ugly Jobs Picture" where I highlighted our month-to-month employment situation. In the last 10 years, should you look at just the months of gains in jobs you come out with 178,900 job additions on average. These months of gains were at the height of the tech boom and throughout the leveraged real estate boom. I hope he is right but I do not see where these jobs will be created, especially in the next couple months.

I have a small position in GLD again after taking a break from it for a few months after it cracked in December. The world's favorite metal broke out of its consolidation pattern to the upside earlier this month and has since retested the top side of the channel. Friday's powerful move higher has confirmed my long bias and I will look to add shares of GLD through $114 for a swing back to highs and potentially higher.

I still have shares of Nike (NKE) long, looks great above $78.50. I have a small position in AEM, looking to add through $62. Picking up some shares of POT for a longer-term swing, more on that trade later this week and note earnings are on Thursday.


Disclosure: Long NKE, GLD, AEM.

The World of High Frequency Trading

Originally posted on the T3Live Blog

With all of the recent interest in high frequency trading, I put together the chart below explaining what we see as the six primary strategies of buy-side short-term algorithmic traders. This chart excludes the subset of algorithmic trading dedicated to the execution of buy-side funds with longer-term interests. These six strategies are what short-term traders contend with on a daily basis and understanding their methods is useful.

Nike (NKE) Ready to Breakout?

Is Nike (NKE) ready to breakout? After a strong earnings report on March 17th, shares of NKE have been in a high-level consolidation for a full three weeks. NKE is basing at all-time highs absorbing the profit-taking and holding a base level around $73. I have been tracking the stock for a couple weeks now and it seemed that the price action was noticeably different today. After hours Market Intellisearch reported that 629 puts traded today versus 4,497 calls. It looks like the options market is betting on higher prices. Is it just excitement from Tiger Woods and The Masters or are shares ready to breakout? Traders should put this stock on their radar tomorrow with the $75 level likely to trigger a breakout to new all-time highs.

Disclosure: Long NKE.

Recent Swing Trades Begin Working

Today was a nice day for my swing trading ideas. Only Nike (NKE) failed to offer a trade remaining within its high-level consolidation base throughout the day. Las Vegas Sands (LVS) jumped nearly 10% today rocketing back through the $22 level and closing up nicely for the day at $23.34. I think there's still a good deal of room for LVS to run. The $30 level doesn't seem unreasonable as LVS is a great leveraged play on the economic rebound theme going into first quarter earnings season. I am following advice out of High Charts Patterns: "The best trading advice we could ever give is to trade around the base. The base is everything." I'll stay long but continually buy on pullbacks and sell on rallies. Sometimes I do this well, other times I cause myself a bunch of headaches. Either way, I've gotta do something while I'm sitting here all day, right?

I have the same "base" strategy in WFMI as that traded through the 52-week highs of $37 and tacked on another 70 cents for a solid 2% gain on the day. I've booked a lot of the trade but I still see more upside possible to $40. Last but not least, TLT broke down hard today falling 1.5% as the 30-year took out support. I never got the chance to add to this position but it seems like it has a good deal of room to the downside over time.

Disclosure: Long WFMI, NKE, LVS. Short TLT.

Last Day of the Quarter, Bulls Still Driving

Last day of the month, last day of the quarter. What a month for shares of Apple, up 12.6% in March alone. Apple is now the third-largest company in America eclipsing Wal-Mart yesterday. The indexes are fairing well this year with the Dow up 4% YTD, S&P 4.75% and the Nasdaq 5.8%. Chinese rockstar Baidu (BIDU) is up an astounding 44.7% YTD.

The Federal Reserve ends its mortgage-backed securities purchases today. The Fed bought $1.25 trillion in junk from Fannie Mae and Freddie Mac helping to keep interest rates low. What does this spell for bonds? 30-year Treasury futures are bouncing this morning after a poor jobs report from ADP but we'll see if there's a substantial impact in the coming weeks. I don't see Armageddon but removing a major buyer from the bid probably allows rates to drift higher. I am still short a small position in TLT to feel out the market. Bonds have yet to breakdown to trigger a full size trade.

I'm still sitting in my longs of WFMI, LVS and NKE. Wish I would have sold some WFMI pre-market yesterday when it was printing $37 but oh well. I'll give a small position down to $35 just to give it time to play out. LVS is acting a bit weak but I'm giving it some extra room based on how it trades, seems to act weak and then rip out of nowhere. I'll probably give my initial position to $20. NKE is holding up, still drifting along in its flag. The out on NKE is around $72.50. All these positions are just initial feelers and are not of make-or-break sizes. I just want to be early and feel out the stocks and learn how they trade before committing real capital through breakout levels. To review the breakout levels: WFMI, $37.00; LVS, $22.50; NKE, $75.00.


Disclosure: Short TLT, Long WFMI, NKE, LVS.

30-Year Treasuries Consolidating at Support

Last week saw a strong sell-off in 30-year bonds. Lower demand at the Treasury auctions caused a relatively large spike in yields last Wednesday and further follow-through selling on Thursday. The selling brought bond futures into support at $114.24. Friday and today were lower volatility consolidation days at the low end of the range. This marks the 4th test of support and given the macroeconomic fundamentals, it seems likely that bonds could break down. I am short a small position in TLT but will consider adding upon a break of this support level.

Holiday Week Begins Higher, Opened Longs in LVS, WFMI & NKE

• The Dow closed the day 45 points higher, more or less where it opened for the day. Volume was light with Passover today and the holiday week with the markets closed on Good Friday. Citigroup (C) lost 3% after the Treasury announced it will begin selling its 7.7 billion share stake in the company throughout 2010 likely acting as a ceiling on the stock throughout the year.

• I picked up a couple longs today. After blowing a trade in LVS I re-entered today after the stock has consolidated for a few days and now offers another good risk-to-reward opportunity should it trade through $22.50. There is a lack of overhead resistance until the $30 area. I also bought WFMI through $36 and I will be looking for a breakout through $37. Shares look good on various timeframes and while the valuation may be high, the underlying fundamentals are very strong with solid growth rates fueling the momentum trade. I also picked up a small position in NKE and will look to be aggressive over $75 as shares have held the earnings gap and a move higher should kick up the momentum again.

• One of the smartest guys I know started up a blog today, Alata Zerka. He reposted a bunch of his older writings that are worth checking out. He has an excellent understanding of the macro economic picture with plenty of financial content intertwined. Definitely check it out!

• This week we'll be entering what has historically been the best month in the market averaging a 1.94% gain over the last 50 years. (Bespoke)

Great Swing Long Idea in NKE

MarketClub presented a great swing long idea in Nike (NKE) this week. The trade has yet to trigger but it is one I will take should $75 be taken out. All timeframes look great with stops to be placed at $73 if NKE trades higher this week.

Disclosure: No relevant position.

Short Treasuries Trade Developing

Lackluster demand for Treasuries this week has investors fleeing the bond markets sending yields to their highest levels in months. While the Federal Reserve has kept a lid on the short end of the curve, the long end is steepening. Bernanke may be forced to chase the long end up if demand for US government debt continues weakening. If GDP readings continue improving and the unemployment rate ticks down further, Bernanke may have a difficult time justifying the continued ultra-expansionary policy.

The exchange-traded fund that corresponds with the Lehman Brothers 20+ Year U.S. Treasury Index (TLT) broke through long-time support today. Equity traders can short TLT as a proxy for the bond markets after today's drop below $88.80 signals a close below support.

Yet, caution is necessary considering the technical landscape on the 30-year Treasury bond futures. The futures paint a slightly different picture as the two days of selling have brought T-Bonds into long-time support at roughly $114.23. While the TLT may have broken through, I think it is more instructive to understand the underlying for technical interpretation. I am waiting for a close in the future below this level to be fully confident in the short Treasury trade.

If this trade materializes, the major support level in the TLT comes in at $82.50. The 3-year weekly chart below shows no significant support until this level. This likely takes weeks to play out but could offer a profitable opportunity.

Disclosure: Short TLT.

Gold Still Not Ready

The shiny yellow metal continues to base above previous all-time highs of 1,028. The consolidation looks healthy and controlled within the confines of a descending channel roughly $75 wide. I have long been interested in gold and have actively traded it with a long bias for months. Lately, trading has clearly not been as profitable as the sell-off in late December has led to months of back-and-forth action with no clear direction. My size has been light and I've dabbled here and there but no trend trade has materialized yet. I don't think there is much of a trade until gold clears $1,125 on the upside. At that point I will put on some longs and see if the long-term uptrend is taken up again.

The catalysts for gold to trade higher just haven't been sustained. Early last year gold offered the safety play while later fears of inflation cropped up everywhere. A weak dollar in later 2009 offered strong negative correlations for a while. But, the data have yet to support the high inflation thesis as the Fed is still battling deflationary pressures. Gold has effectively decoupled with the dollar and has been consolidating while the dollar has mounted a strong rally off lows. It is strong and looking good, just awaiting a catalyst.

Disclosure: No relevant positions.

LVS: An Epic Failure (...For Me)

Wow, sometimes your failures can be simply incredible. I was an absolute failure today in terms of executing a swing trade in Las Vegas Sands (LVS). Today's trade shows me precisely why return calculations based on "calls" are complete BS. One of the most difficult components of trading is the execution of your ideas. I could have told you LVS would be higher sooner or later and will probably trade up to $30 eventually. Yet, putting a solid trade on with good risk-to-reward can be damn hard!

I had some success to start this month buying breakouts in some tech names and financials that I outlined two weeks ago. Yet, even with my successes in those trades, I was unable to put on sizable positions because I was primarily buying breakout levels. On my better trades I had a small position in the base and then added on the breakout. For this LVS trade, my goal was to begin buying on the pullback and add into the upswing allowing me to size up comfortably with quality risk control.

I starting buying LVS last week around the $20 area on its first pull-in. I've been watching the stock for a while looking for a breakout through the $20 level. The stock has no technical resistance to the upside until around $30 on a weekly timeframe so the move could be highly profitable for swing traders. Last week Tuesday saw a strong move higher and a close above $20. So, I started buying Wednesday on the first pull-in expecting the $20 level to hold roughly. I expanded my stops a bit and gave my position to $19 for a stop (a 5% potential loss). Shares continued pulling in on Thursday and I averaged down in my position around $19.40. I held my position over the weekend and into today's gap down.

Today's gap down was discouraging but I still thought the stock had a good chance of quickly recovering and rallying positive. Knowing that whole numbers are foolish places to put stops, I smartly placed my mental stop at $18.90. Five minutes into the day the stock broke through $19.00 and dropped below $18.90 so I hit the bid getting my fill at $18.89 on my entire position. With my overnight losses and hitting out, I surpassed my maximum loss limit and my company's system locked me out of making any further trades for the day.

The above chart was what I was looking at when I hit the bid. Nearly the entirety of last week's Tuesday move had been retraced and I had to adhere to my pre-determined stop loss. The low of the day turned out to be $18.88. I literally hit the bid one penny from the low of the day as the stock was trading down over 3% on the day. Shares turned and never looked back. LVS rallied $2.50 (a 13% gain) from where I hit out. The stock ended the day 10% higher!

All I can do is laugh. What a freakin' joke. All I can say is this trade was an epic failure. For the trade to work, the short-term selling pressure needed to be relieved. The break through $19 set off a flurry of stops and overhead selling pressure was taken out. I panicked right along with the pikers and lost my position and my ability to trade for the rest of the day. Frustrating indeed but I live to fight another day. So often stocks need some type of capitulation to reverse trends. Technical patterns need to break in order to work. It's amazing how often the majority needs to be wrong in order for the trade to work in the opposite direction. Oh well, what can ya do? I just needed to share my war story today because it was laughable, just laughable.

Reliving the Stock Rotation in this Upswing

I had not been trading with much success for 2010 until the end of February. I was not losing money but I would just manage to give back anything I made. Shorts just never traded lower within my timeframe or risk tolerance and longs were choppy and difficult. Such is the life of an active trader in rangebound action. Yet, Apple's breakout at the end of February signaled a distinct change. I want to relive the action to get it in the record books and to talk about some of my success and why it worked. I hope to learn from this time so that next time around, I have more confidence, take larger size and hold for larger moves.

Apple (AAPL)
Apple started the move higher by breaking back over the psychological $200 level on February 25th. Interestingly, this was dependent on a news catalyst that was false. Rumors circulated the desks that Apple was going to split its stock 4-for-1 and shares jumped $2. These rumors were disproved but the interest was generated. CNBC jumped on board and investors began debating what Steve Jobs can do with the $40 billion in cash on AAPL's balance sheet. Jobs stated that a dividend or share buyback was not in the cards, that he was looking to do some aggressive acquisitions. Shares rallied another $2 into the close that day. I traded this stock long intraday but didn't hold anything not entirely trusting the move. Yet, Apple proved that it still leads this market and has been the best long of the high beta names (ignoring BIDU which is in its own world).

Amazon (AMZN)
Next came Amazon. I had been short a feeler position for most of February believing AMZN was forming a classic bear flag pattern and eyeing a move into its earnings gap on the downside. Yet, every move lower was met with buying and shares simply would not drop. The breakout through $200 in AAPL changed my mind in AMZN and I flipped, covering my position and putting on a feeler long. This proved to be a wise decision as March started with a bang and I was able to add to AMZN through the technical breakout level at $120. I believed AMZN would go to $130 but took profits around $125 and sold the last of the position at $127.

Goldman Sachs (GS)
Goldman Sachs was the next to wake up as financials joined the rally. I completely missed the first day for GS. I argued with colleagues that I did not believe it would go referencing upside tails over the weeks before that signaled weakness to me. Boy, was I wrong! GS exploded through the $160 technical level and closed the day up over 5 points on March 4th. The price action told me I was clearly wrong. I traded GS the next day taking a couple points out of it before selling everything before the close. Not having good prices made it very difficult for me to hold this position for a swing trade. Now the stock trades at $175 making me a piker for selling $168.

Research in Motion (RIMM)
The next stock on every trader's radar was RIMM. I had a long feeler position in RIMM for a couple weeks before it broke out and I began wondering whether this was the only stock that was not going to participate. This past Monday, March 8th was RIMM's turn to shine. A morning upgrade from BMO Capital provided just enough fuel for shares to power through the technical resistance level at $72. I comfortably added to my position and sold into the move. I sold the last of it today at $75.50.

Canadian Solar (CSIQ)
The last of my plays to join the party happened yesterday when the solar names popped. I scanned through the sector and found CSIQ to have the best looking chart. It looked to me that a move through $22 had room to rally up to $24. I took a position through $22 and sold most at the close around $23.30 and the last of it today.

The point of this exercise is not to talk about any great trading on my part. I made plenty of mistakes most notably not taking enough size initially, doubting particular plays and taking profits too soon. And I only say this because I did have conviction for an upside move in the market so I would have expected more out of myself. But, I wanted to show how the rotation worked, and worked very well. Simply having names on your watchlist that were forming nice bases allowed you to spot the movers each day. Every stock acted as it should have and followed through on the subsequent days.

Markets topped in the middle of January as the start of earnings season made investors jittery about holding positions. This lead to a 9% pull-in which was a tough grind for most active traders. Many, including myself, believed that the inevitable correction had begun. We were wrong. Earnings reports came in far ahead of expectations and stocks just wouldn't go down. I began to doubt the correction theme in the back of my mind even while trusting my original judgments. Then, AAPL rallied. I knew then that I was wrong. I am frustrated that I did not swing AAPL long on the 25th. I think I would have if it hadn't been a false news catalyst that jump-started the move. The fact that the news was untrue and shares had already rallied made me far too cautious.

Having feeler positions in AMZN and RIMM was the best thing I could have done. I watched them both for nearly a month waiting for a trade to setup. In AMZN, the inability for my short feeler to work convinced me the long would work and in RIMM I just thought it was only a matter of time before $72 would be overtaken. I doubted GS because the chart seemed so bearish. Funny thing is, the more bearish the chart, the better the rallies in many stocks. MA and GOOG had fantastic moves after false breakdowns precisely because shorts were baited in and provided the initial squeeze to rip shares higher. I did not play either of these stocks though I wish I would have.

My final trade this week was long CSIQ as the final phases of a rally eventually pull up even the worst of stocks. CSIQ is not necessarily one of those names but the solar sector had not participated. Finally, over the last couple days the solar names were dragged up by the bottom-fishing crowd.

I don't know what will happen next week but I was able to put myself back on track over the last two weeks. The strong upswing after the correction was a very profitable couple weeks for many active traders. The difficult part is recognizing it ahead of time, positioning yourself well and then actually letting the move play out. Looking back, we can see that we should have trusted the leader of the market. Even if you had missed AAPL, there were plenty more stocks to play. Creating a watchlist on pull-ins of stocks that refuse to continue downward will put you in the right place if and when markets turn around. Watching those stocks closely will allow you to time the technical entry correctly and trade with the momentum.

HFT Forcing Traders to Become More Sophisticated

In recent years, high frequency trading (HFT) has become a buzzword even in the mainstream media. HFT has been attributed as a contributing cause of many events, including the velocity of the 2008 crash and the duration of the 2009 rally. Active traders perhaps did not see the effects of HFT on their trading results in 2008 because volumes were highly elevated as panic set in. However, 2009 was a year of struggle for many in the active trading industry. I believe a significant catalyst behind this struggle has been the increased presence of HFT.

While high frequency trading is highly profitable for the companies developing the algorithms, few understand how they work in any detail. HFT shops are filled with mathematical and computer science Ph.D's writing sophisticated algorithms that no one outside the industry can comprehend. A report out of TABB Group in July 2009, a financial markets research and strategic advisory firm focused on capital markets, claimed that while HFT firms represent only 2% of the 20,000 trading firms in the US, these firms account for 73% of all US equity trading volume. HFT firms are a force to be reckoned with and a reality in today’s markets.

What is high frequency trading?
High frequency trading, also known as algorithmic or black-box trading, is the use of computer programs for the execution of trading strategies. The program is written such that all decisions for time of entry, price and quantity are pre-defined and executed without human intervention. Algorithmic trading has long been used by buy-side institutional investors to execute large orders effectively by minimizing the price impact of the order. Rebate algos have also been around for a while seeking to provide liquidity and capture the rebates paid by ECNs. Active traders see these algos constantly creating the bid and offer in high volume large cap stocks. More recently though, there has been a large explosion in predatory algorithm development. Predatory algos attempt to detect larger players in the market and front run those orders.

While HFT has increased liquidity and tightened spreads in large cap names, small cap companies have actually seen spreads increase according to NYSE Arca data. Investment Technology Group’s trading costs for small-cap stocks were 40% higher in Q2 2009 than Q1 2008, reflecting the inability to get trades processed and rising commission costs. Joseph Saluzzi of Themis Trading, a lone voice in bringing HFT to light, has argued that this is because of predatory algos.

With HFTs as dominant players in the market, active traders need to learn as much as they can about them. First, high frequency trading strategies are highly dependent on ultra-low latency. Many shops have their servers co-located on the exchanges to provide the fastest possible execution. Second, the coding is under constant evolution because of exceptionally high competition among participants and the micro precision of strategies that means they may only be effective for days at a time.

So, what is the active trader to do?
Clearly, any strategies that have an edge based on speed are out the window with the increase in high frequency trading. While the active trader used to front run the order of the institutional desk that was inefficient in execution, now even the small trader’s order is front run by the computer algorithm. Every human trader is now the inefficiency with their slower execution. Entering and exiting stocks will also be tougher. Any active trader is quite used to seeing his order front run immediately as he shows his bid or offer making it more difficult for him to get a fill. There is a high likelihood that active traders must become used to paying an added toll to HFTs for entering and exiting their positions.

The trading business is forever changing, that we know for sure. Level II strategies based on speed of execution are certainly on the decline. Active human traders must therefore become more sophisticated. First, minimize the impact of HFT by trading “in-play” stocks that have large volume from “real” players. Second, avoid non-volatile stocks trading below average volumes. Third, greater anticipation based on sound technical analysis is also needed. Most of us will need to fight hard for better prices and avoid the temptation to buy highs or short lows as algos are programmed to manipulate prices around these areas. Fourth, many of us will need to cut down our size and look for larger moves in stocks. Scalping very small moves is not nearly as profitable when a predatory algo scalps 3 cents from you on your buy and another 3 cents on your sell, just as a hypothetical. Also, levels in stocks are not as clear-cut because algos are programmed to push stocks through the level to shake out weak holders. But, if you can begin trading for dollar moves on less size, you’re less likely to notice the 6 cents you paid as a toll and you’ll be able to give the stock a little extra room around levels.

In order to successfully navigate through the choppiness that HFT has brought into equity markets, traders must spend an increasing amount of their after-hours time researching and learning levels. Spend more time analyzing charts on multiple time-frames. For traders who focus on very small timeframes, now might be the time to take a step back, decrease size, and look for setups and levels on higher timeframes. The higher the timeframe, the more powerful the setup and level and the harder it is for an algo to overtly cloud the area. Additionally, familiarity as to how particular stocks trade around levels helps provide the confidence necessary to follow-through on your ideas. Traders need to develop a universe of familiarity—a core group of “in-play” stocks and sectors—to follow each and every day. The more often you we trade a particular vehicle, the more familiar we become with how algos work in that particular stock.

These are not fail-safe rules but HFT is a reality and it is here to stay. Active traders must adjust and come to find a new edge beyond speed of execution. Where there’s movement, there’s opportunity and the survivors in our business will become more sophisticated in order to continue trading profitably.

Market Feeling Heavy

The S&P 500 has traded in a rising channel for about 6 months being bought on the low end and sold on the high end. Channels are some of my favorite technical patterns because they're very basic and give traders an idea of how to approach trading from a general strategic perspective. My view is that markets and stocks are either trending or consolidating. In up-trending markets, look to a buyer on pullbacks and in down-trending markets, look to sell rallies. The market has been trending higher for months but the picture may have changed in the short-term.

Last week's aggressive sell-off brought the market to the low end of the range and we are hovering. While there's been lots of reasons to rally, the market just isn't rallying. Apple's blow out earnings left the Street unimpressed and the iPad was met with lukewarm reviews, yet only relative to previous product releases. Bernanke's re-confirmation was sold yesterday afternoon. Basically, I'm just not seeing the market rally like I would expect. It seems that we have fallen to the low end of the range and we are not bouncing, at all.

A break through yesterday's lows at about 1,080 in the S&P will forecast a move to the 1,000 level given the technical rules of ascending channels. As Laz always says, a rising channel while increasing in price has bearish implications upon a break to the downside. The measured move will be the width of the channel to the downside and finally provide us with the 10-15% pull-in many have been awaiting.

Dollar Target Reached, Gold Finds Support

The dollar's strong bounce from the December '09 lows is almost complete according to the basic technical pattern. The dollar traded within the confines of a descending channel for months leading me to consider the possibility of a bullish upside break in my December Outlook. I again highlighted that the bounce was almost complete in mid-December. And, now it has reached my initial projection of $79. Breaks of descending channels project upside moves equivalent to the width of the channel.

I did not play the bounce in the dollar but watched it for caution on my gold longs. I took profits nicely on the way up in gold and I have been waiting for the prime time to add back in for a larger move. I am looking at today's action for a possible double bottom at the $105 level in GLD.

Financials Heading Into Support

The financial sector has been without trend for a full 6 months, consolidating in a sideways base. Last week saw the single largest volume day within this base as major banking stocks were hit after President Obama proposed some of his ideas for financial reform legislation. With the 200-day moving average rounding up and coming nearer to the current share price, enough time may have passed for stocks to resume their uptrend.

I have a long bias and believe anything below $14 will be a good buy in the long-term. I think significant earnings upsides for 2010 are still there for financials and especially the major firms and valuations are still attractive for the best of breed firms. Most major banks have repaid their TARP loans and continue to benefit from the steepest yield curve in decades. I see that yield curve only becoming steeper in the near term even if the Fed begins to tighten on the short end.

My only caution comes from the technical picture in the likes of JP Morgan and Goldman Sachs who saw drastic selling the last few days. These stocks may take a few weeks to recover from such a painful sell-off. So, I'm just dipping a toe, not doing a cannonball in yet.

Understanding High Frequency Trading

Hat tip Themis Trading

Manjo Narang, CEO of Tradeworx, talks about his company’s high-speed trading technology and what such systems mean in today’s stock market.

Trading Shares in Milliseconds

Earnings Expectations Are High

The following are the earnings expectations for major companies over the next two weeks. The Whisper Numbers are determined by analysts while the Surprise Expectation is a gauge of the website's user base.

Company	Symbol	Release Time	Consensus Estimate	Whisper Number	Surprise Expectation
Alcoa Inc.	AA	Mon ATC	0.05	0.15	82%
Intel	INTC	Thurs ATC	0.35	0.46	80%
JP Morgan Chase & Co.	JPM	Fri BTO	0.61	0.75	63%
Citigroup Inc.	C	Tues BTO	-0.28	N/A	85%
Bank of America Corp.	BAC	Wed BTO	-0.42	-0.35	72%
Wells Fargo	WFC	Wed BTO	0.07	N/A	100%
Goldman Sachs	GS	Thurs BTO	5.35	5.25	74%
Morgan Stanley	MS	Thurs BTO	0.51	0.35	0%
Google Inc.	GOOG	Thurs ATC	5.67	N/A	89%
General Electric Company	GE	Fri BTO	0.25	0.27	82%

Source: Earnings Whispers

Clearly, expectations are pretty high going into this earnings season. The website's users expect upside surprises in every major stock reporting in the next two weeks except Morgan Stanley.

With the large run in stocks over the last few months, overcoming the needed earnings hurdles to justify the moves is becoming tougher and tougher. This quarter's earnings reports will have the peak of the expansionary monetary and fiscal policy initiatives baked into the numbers. As the government starts thinking about reigning in its spending and taking back some of the provided liquidity in 2010, this quarter will likely be the one to compare against for the strength of the economy. We will look to these numbers when we study whether companies are going to be able to stand on their own later in the year with less government support.

Trading for Gap Fill a Legitimate Strategy?

Hat tip Trade Flight Plan via Slope of Hope

2009 ES Gap Fill Summary

Many traders regard the gap fill on the E-mini S&P 500 futures contract (designated on many trading platforms by ticker symbol root ES) as one of the highest probability trades each trading day.

Well, let’s see if the statistics held true in 2009. The gap fill is defined by price action that touches or breaks through the closing price of the previous trading day.

Since many traders regard the 4:00PM Eastern Time close as the gap to be filled, we’ll use the 4:00PM closing time for our analysis. Many trading platforms show the ES closing prices based on the 4:15PM session close, so custom tweaks are required to show the previous trading day’s 4:00PM closing price.

In this analysis, we track the number of trading days the ES filled its gap, or at least touched the 4:00 closing price from the previous trading day. We also observe the hourly time slot the ES first fills its gap on gap fill days.

You can see that based on Trade Flight Plan's study, trading for a gap fill is a legitimate strategy with a success rate of 66.5%. Friday's session filled the gap in 2009 far more often than Monday's, an interesting dynamic. The lower likelihood of a gap fill on Monday is probably a result of the more valid adjustment of prices from untraded weekend events.

Over at T3Live.com we often look for opening gap fills within the first hour. We preach that if the gap is left unfilled after the first hour, typically the market will trend in the direction of the gap. This continuation strategy is the most effective when trading larger gaps (roughly greater than 1%). Based on the chart, out of the 66.5% of the days that the gap is filled, 2/3 of the time it happens in the first hour of trading. This shows the effectiveness of the T3Live strategy throughout 2009. I will continue using this strategy throughout 2010.