The Tycoon Report

The Key to Daytrading Futures

Monday, April 6, 2009 | Barbara Cohen

First, I want to thank all of you for warmly welcoming me to The Tycoon Report.  I was amazed by your comments.   

Over the next few weeks, I will attempt to answer your questions in the first part of my articles. 

Since my article appears on Monday, towards the end of each one, I will discuss the current week's economic report(s), in the section: News Analysis.  If you are not interested in learning about Futures trading, click down to the News Analysis section and read that.

The Key to Daytrading Futures

The key to daytrading is volatility.  The dictionary defines volatility as "the pace at which the price of a security moves higher and lower".  What does volatility mean to a Daytrader? 

Daytraders are interested in one thing: consistent stock swings from high to low and low to high.  You can't make money when price remains flat.  A stock or futures contract that consistently gives high/low -- low/high price swings is volatile. 

In order to have volatility, chances are you'll see heavy trade volumes.  Daytraders expect to see higher and lower price swings when the stock/future trades more, and less when the stock/future trades less.  You can find heavily traded stocks on the NYSE, the Nasdaq, and high volume contracts on the CME (Chicago Mercantile Exchange).

Let's compare a heavily traded Nasdaq stock with a heavily traded Futures contract and see which one provides better daytrading opportunities.  For comparison purposes, we'll use Microsoft and the S&P 500 E-Mini Futures Contract for volatility and risk/reward ratio. 

Why choose Microsoft to compare with the S&P 500 E-Mini?  Microsoft trades upwards of 75 million shares daily and is a key component of the S&P 500 Index.

The S&P 500 Index, which is the basis for the S&P 500 E-mini Futures Contract, is composed of the top 500 large cap stocks actively traded in the US.  It is a value weighted index, meaning that the index's price is influenced by each of its 500 components in proportion to their market value.  Weighting is calculated by multiplying each component's outstanding shares by its price.  For example, Microsoft represents nearly 2% of the S&P 500 Index.  Therefore, a small move in Microsoft's price can dramatically affect the price change of the S&P 500 Index.


The first chart is Microsoft, March 30, 2009 (a 1-minute chart).  Take a look at the big movement that occurred from 11:16 to 11:34.  If you were lucky enough to find the very bottom and exit at the very top, you would have made 15 cents over a period of 12 minutes.  The stock is trading around $17.00.  You can't trade just 1 share, but need to trade in lots of 100.  So let's say you had 100 shares.  That would have been an investment of just over $1700.  You would have made $15 on the trade, minus the $8 for commission, so a net of $7.  That is a return of .004 on your investment.


Now take a look at the S&P 500 E-Mini for the exact same 12 minutes.  Again, if you were lucky enough the find the very bottom and exit near the top, the move would have been from 782.25 to 786.50, a move of 4 and a quarter points.  Each point is worth $50.  On average, a contract is $500 (on margin).  For the same $1700 we used to trade 100 shares of Microsoft, we could trade 3 S&P E-mini Contracts.  The E-mini moved 4 points, at $50/point, or $200 for each contract.  Since we traded 3 contracts, during that 12 minutes, we made $600.  Our commission was only $13, so the net was $587 on a $1500 investment, or nearly 38% return on investment.

This is not to say that every trade will net you 4 points.  But even if you had made just 2 ticks, one half of one point (there are 4 ticks in a point), that would still have earned you $61.00 after commission, on a $1500 investment, or a 4% return. 

Here's another difference ... you can trade with just 1 contract, an investment as low as $400-$500 (on margin).  A 2 tick trade with 1 contract earns $20, or a 4% return after commission.  Not fabulous money, but the investment was only $500.

What is surprising is that Microsoft's average daily volume is 75 million shares.  Clearly somebody is daytrading Microsoft.  But why, when you can get much greater volatility and better risk/reward ratio with the S&P 500 E-mini Futures Contract?

By the way ... for those of you who daytrade, you'll need to do some research regarding the datafeed that your desktop trading application works with.  There are two very different approaches. 

One, and unfortunately the kind found on most common trading platforms, summarizes the data at the datafeed provider's server, and then transmits the summarized data across the internet to your desktop application.  Those providers don't have great bandwidth and this is their way of reducing overhead.  But if the provider transmits summarized data to your desktop application, and then your desktop application re-summarizes the data with technical indicators (such as moving averages or MACD), your chart is actually displaying a summary of the summary ... producing unreliable analytics.

The other type of datafeed, found less frequently, sends every trade without summarizing the information on the provider's server first.  Now your desktop application summarizes the information once, providing far more accurate technical indicators.


News Analysis

While the key to daytrading is finding stocks/futures with consistent low-high / high-low swings, the key to daytrading news releases is entirely different ... it is reactionary. 

The instant the news is released, investors trade the released number.  If the number is positive, the Market soars.  If the number is negative, it plummets.  It may take up to 5 or even 10 minutes after the release for the Market to actually set a trend, once the report's details are digested.

Large cap stocks on the NYSE/Nasdaq come with analyst opinions (upgrades / downgrades).  The stock's performance is forecast based upon fundamental analytics (EPS, management, sector, etc.).  Analysts also forecast the news; the forecast is actually a consensus of analyst opinions. 

Ostensibly, the forecast comes from a thorough examination of the current economic conditions.  But here's the insider reality that we certainly saw under the Bush administration and we are still seeing with Obama:  So many of the forecasts are outlandish.

When a forecast is significantly different than the previous month's actual number, know that the administration is doing this to help the Market go up.  For example, let's say last month's number was minus .2%.  This month's forecast is minus .5%.  Minus .2 to minus .5 is a big, improbable move.  The report is released and the number is minus .3%.  See, it's "better" than forecast.  The number is positive and the Market goes up.  But what is the reality?  Minus .3% is an awful number.  No one trades the truth, they just trade the number.  So watch for the spread between last month's actual number and this month's forecast.  If it seems outlandish, chances are, go long.

Outlandish is exactly what we saw on Friday.  At 8:30am EST, the unemployment news was released.  On hearing that 663,000 jobs were lost in March, the S&P 500 Index rocketed up, passing 844.  Get this ... it was because 663,000 was less than expected.  That made it a "GOOD" report.

Never mind that 5.1 million jobs have been lost during this recession.  Never mind that Friday's report puts unemployment at a 26-year high, ticking up to 8.5%.  In fact, go look at the headlines on the financial news websites and all they talk about is the DOW closing above 8,000, with little mention of unemployment. 

What is worse is that the Market went up by jerry-rigging the data.  It was so important to close above 8,000, that the unemployment news was made "palatable."  Only 663,000 jobs were lost, let's have another up day.  What no one read in very fine print ... January's unemployment report was revised from minus 655,000 to minus 741,000.  That's a 13% margin of error.  Most reports have a margin of error of 2-3%, not 13%.  So can you imagine what the real unemployment number was (to be revised over the coming month) and what that would have done to the Market? 

Analyst consensus had forecast the number to be 659k to 660k.  Yet when the data was released, suddenly the forecast number was said to have been 689,000, showing that 663,000 was less than expected.  Not only was the 663,000 number jerry-rigged,  the forecast number was changed AFTER the release so they could show that  unemployment was better than expected and improving. 

Tell that to the 663,000 who lost their jobs.

I like what the economists at RDQ Economics had to say ..."There is nothing in this report that points to economic recovery." 

Economic data has not improved, and in many ways, is worsening.  Last week we saw the Case Shiller Home Price Index tick lower than last month, Construction Spending tanked, Chicago PMI was basically non-existent, and ISM Services was in the doghouse.  And remember Auto Sales?...uh, there weren't any.  So why did the Market go up last week, the 4th week in a row?  Simply put ... someone wanted it to, that's all ... and let's leave it at that.

So what will happen this week (a shortened trading week for Good Friday)? 

This week we'll see trade balance, import/export prices, wholesale inventories and consumer credit.  On Thursday morning between 7:30am and 8:30am EST, the retail chains will report same-store sales for March.  Now we'll be able to see if the consumer has participated in the last 4 week's run up. 

On Tuesday, after the Market closes, earnings season begins with Alcoa reporting.  When stocks report earnings, the reaction is just like news releases.  If a larger S&P 500 stock reports well, the S&P 500 E-mini Futures Contract soars, and vice versa.  Alcoa is always the first S&P 500 stock to report and kicks off earnings season. 

After market reporting occurs either from 4:00  to 4:14 EST or 4:30 to 4:35.  From 4:15 to 4:30, the Futures Market is closed.  The CME Futures trading day is 4:30 in the afternoon to 4:15 the next day.  The Market is closed for database maintenance for 15 minutes.  Rarely does a major stock earnings announcement come when the Futures Market is closed.  Alcoa generally reports between 4:00 and 4:10.  So be there ready to trade.  Alcoa is on the rebound and investors have been buying.  While  it may not report well, it may report "better than expected" and drive the S&P 500 E-mini Futures Contract up.

This week I leave you with one last thought ... 

Bear market rallies typically last about 30 days.  If this truly is a bear market rally, it would peter out around the end of April.  So let's all wait until then to call the Market's run up a Bull Market.  In the interim ... trade long. 

Buy and sell quickly, and take your profit.  For now, do not buy and hold.






Barbara Cohen
Contributing Editor
The Tycoon Report


Economic Calendar for the Week of April 06 - April 10

Thursday, April 9

08:30 - Initial Claims

Release Details

    * Importance (A-F): This release merits a C .
    * Source: The Employment and Training Administration of the Department of Labor.
    * Release Time: 8:30 ET each Thursday (data for week ended prior Saturday).
    * Raw Data Available At: http://www.dol.gov/opa/media/press/eta/main.htm.

Initial jobless claims measure the number of filings for state jobless benefits. This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signalling slowing (accelerating) job growth. On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend. It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.

There are two other statistics in this report -- the number of people receiving state benefits and the insured unemployment rate; neither is watched closely by the market. Some analysts track the number of people receiving state benefits from month to month as a guide for job growth, though this series has a poor track record in predicting the monthly employment report. The insured unemployment rate changes little on a weekly basis and is never a factor for the market.

Highlights

    * New claims for unemployment for the week ended March 28 rose to 669,000 from 657,000 the prior week.
    * The level was above the expected 650,000 level but didn't greatly dent the optimistic tone in the stock market as it is not (in these times) a huge variant from expectations or trend.

Key Factors

    * The level of claims is, of course, extremely high and an indication that the labor markets remain very weak.
    * However, the stable trend in initial claims suggests things aren't getting markedly worse than before.

Big Picture

    * New claims for unemployment are at recessionary levels, as the financial crisis on Wall Street spilled over to Main Street in noticeable fashion with the seizing up of the credit markets in late summer/early fall 2008.


08:30 - International Trade

Release Details

    * Importance (A-F): This release merits a C .
    * Source: The Census Bureau and the Bureau of Economic Analysis of the Department of Commerce.
    * Release Time: 8:30 ET around the 20th of the month (data for two months prior).
    * Raw Data Available At: http://www.census.gov/foreign-trade/www/press.html.

The trade report is most widely watched for trends in the overall trade balance. But trends in both exports and imports of goods and services bear watching as well. The export data in particular are important to watch for indications that a strengthening competitive position at home and/or strengthening economies overseas are boosting U.S. growth. Imports provide an indication of domestic demand, but given the severe lag of this report relative to other consumption indicators, it is not particularly valuable for this purpose.

The volatility in the monthly trade balance can play an important role in GDP forecasts. Net exports are a relatively volatile component of GDP, and the trade report provides the only early clues to the net export performance each quarter.

Highlights

    * The seemingly good news with the January Trade Balance report is that the deficit narrowed to $36.0 bln from $39.9 bln in December.  The improvement was led by an $11.5 bln drop in imports that was partially offset by a $7.6 bln drop in exports.
    * The real trade deficit (price adjusted) widened to $44.0 bln in January from $42.9 bln in December.
    * Non-petroleum exports dropped to $69.4 bln from $76.2 bln and are down 25% from last July.  Non-petroleum imports dipped to $102.2 bln from $107.7 bln and are down 18% since last July.

Key Factors

    * What the narrowing trade deficit really reveals is that we are experiencing an overall contraction in global trade.
    * The real trade deficit is what counts for GDP forecasts.  We don't expect economists will make any meaningful changes based on this initial number for the quarter, but it leaves Q1 GDP forecasts on track for some further downward revisions if the trend persists in February.

Big Picture

    * The trade data get far less attention than they deserve.  Exports are now about three times as large as residential construction in the GDP data.  Through August 2008, the trade data were a major contributor to GDP growth.  Exports added about 1.0% per quarter to real GDP growth in 2008, and falling imports added another 0.6% (as total consumer spending was more US oriented). The September data suggested an inflection point may have been reached when the real September trade deficit increased by about $3 billion.  The trade data will probably be a near zero contributor to GDP in 2009.  This would eliminate one of the largest positives to US growth the past couple of years.  This will be due in part to weaker demand overseas, and in part to the rebound in the dollar.