The market managed a modest gain as the dollar dropped and gold went to a new high, yet again. Gold finished above $1190/ounce. We took things easy on Wednesday to get ready for Thanksgiving. Most sectors closed higher and VIX came down to test 20. It managed to bounce a bit and closed basically unchanged. Commodity sectors were strong Wednesday as gold and gold miners led the rally. Even energy stocks bounced as oil came back up a bit. Still, it seems like the financials remain the key that's holding the market from breaking higher.

Another thing to note is how strongly the agriculture stocks bounced Wednesday after a day's rest: MON +3.48%, POT +1.85%, MOS +3.48%, CF +2.67%, AGU +3.35%. It does seem that one way or the other, one company or maybe two, some merger/acquisition deals are going to happen in this sector. It is certainly fitting to talk about the agriculture stocks on Thanksgiving, as it is a holiday not only about family and giving thanks, but about celebration of harvest. We'll keep our watch on these potential M&A deals and hopefully capture a good harvest.

With the Baltic Dry Index (BDI) clearing a 52 week high finally, now at 4381, the situation for beaten down shipping stocks has not looked this promising for all of 2009. My personal index of shippers is now up over 15%, and there is little sign of it stopping. Indeed, approaching the end of year, there could be additional pressure on shippers to book December early.

The market was choppy Tuesday, with more shippers down than up. As usual in this case, it is logical that some of the leaders are being sold and the cash moved directly into the laggards. This either indicates maturation of the sector move, or the end of one wave of the move. During this time, if the 2nd tier survive their advance, the former leaders will take off again, if not, there will be a more general retreat across the board in shippers. If and when the next wave comes, if one over-commits to the 2nd tier, it usually is hard to take profits on the 2nd tier in time to get the money into the leaders again, so one has to think out their strategy ahead of time. In my case, I moved out of the leaders entirely, playing smaller names such as PRGN and FREE, but holding lots of cash and watching for bargains and risk-reduction in GNK, DSX, and EXM.

The market started out a bit weak, but, managed to came back up to close in the green. Coal stocks were strong today: MEE +5.68%, CNX +1.88%, BTU +2.37%, ACI +2.14%. I mentioned unusual options activities in MEE in last night's article. Today I bought some Jan 40 calls on MEE at $2.95 and took a quick +22% intraday profits, at $3.6, in the afternoon (click to enlarge the image):

We had a big day for shipping firms today in the stock market, with SEA (Claymore-Delta Global Shipping ETF) moving up over 3%, and some shipping companies posting gigantic advances: EGLE up 16%, OCNF up 15%, GNK up 15%. So what is the real reason for the sudden optimism in this beaten-down, depressed and desolate market sector?

Most traders will probably point to the Baltic Dry Index (.BDI), which has been up about 10 days in a row, as the cause. Now it is over 3700. The market considers 4000 to be a portent of the recovery of shipping rates, leading to bigger profits. The yearly high is only a bit more, near 4200. This means that rates for new contracts have almost doubled in the past couple of months. The BDI explains a lot, especially the rate at which speculator money flows into the dry bulk names, but it is as much a symptom here as the stock prices are.

We picked off a nice winner with PNC calls early this am, and look to do the same on some names early on Friday! Nice kaching here for a few hours time.

October 22, 2009
10:49 | Bagger Vance PNC ($51.12) Sold to Close PNCKJ Nov 50 calls, at $2.90 +61%
06:45 | Bagger Vance PNC ($49.60) Bought to Open PNCKJ Nov 50 calls, at $1.80

By Skymist

After a thrilling two-week rally in the stock market during early September, shippers began to fall. They had been enjoying a nice rally on the general premise of economic recovery, market stabilization, and rising materials prices. But suddenly on September 17th, the shipper sector broke, and leading names fell - plummeted, actually, at a much faster rate than the modest pullback in the general market would have implied.

The 3X funds from Direxion have grown to 22 in number. These 3X funds have been widely disparaged, because they have been used as longer-term holds by investors who did not realize that the funds are designed to depreciate (in proportion to the volatility of the price) a bit every night. The funds only have low depreciation when they do not change much in price. However, as a convenient hedge in a daytraded pairs play, they are perfect because they require relatively little capital to establish a position. This is how they were designed to be used. For instance, if during the morning opening, you think that Research in Motion (RIMM) will move up in price, you might buy some RIMM and some TYP, the Technology Bear, and hold both through the trading day. If technology shares sink, taking RIMM down with them, you would be hedged by owning TYP, which would rise. But if RIMM behaved as you suspected, and rose faster than technology in general, you could sell them both at the end of the day with a profit.

Because the funds reset and depreciate overnight, they are not a good choice for an overnight hold unless you feel that the potential for a large move, with the high leverage the 3x fund gives you, outweighs the cost. This can be partly offset by using short positions instead of long ones. For instance, in the previous example, instead of going long TYP the Technology Bear, you can go short TYH the Technology Bull. In doing so, the depreciation will tend to work to your advantage for the overnight position. Shortable shares for these funds are sometimes hard to find, or require a shorting fee from your broker. This tends to partly offset the potential gain of going short a bull and bear fund both and trying to design a pairs trade to profit from the depreciation. (a strategy which CAN pay off if you do your math - I may write an article on how to set this up later...)

Dow theory implies that when the country recovers from a recession, one of the first signs will be that the volume of materials shipped will increase. This led to the creation of the Dow Jones Transportation average, because investors wanted to track the prices of industrial stocks against the average of the stocks of companies transporting materials for them.

There may be new CFTC rules in the works. These rules would limit how much of a stock could be owned, if that stock was directly based on an energy commodity.

Tuesday morning both TGT and HD gave buyers some incentives to come back into the market. Both companies reported better-than-expect earnings. TGT shares jumped +7.55% while HD added +3.14%. The market was strong right from the open and finished near the day's high. Financials were strong after upgrades on GS and AXP. GS rose +2.05% and AXP gained +4.28%. Commodity sectors also bounced and helped to push the market higher.

The Dow finished up +82.6 points; SPX added +9.94 points; Nasdaq gained +25.08 points:

The bounce was broadly based. Most sectors closed higher. USO (oil) was up +3.77%. Commodity sectors all participated: XME (metals and mining) +2.25%, GDX (gold miners) +1.53%, OIH (oil services) +1.87%, XLE (energy) +1%. XLF (financials) added +2.05% while HGX (housing) gained +1.96%. FXI (Chinese ADRs) advanced +2.29%.

After yesterday's strong showing, the market pushed higher today. In my article last night, I said,

"I think we'll need to see the commodity sectors push higher in order for the broader market to break above the recent resistance levels."

When a company without a dividend declares one, the stock is supposed to be worth more. Especially a shipper. For a shipper with a suspended dividend, restarting its dividend again is almost the Holy Grail of good shipper earnings reports. But not if you are Paragon (PRGN), apparently.

The market took another break today, as the financials pulled back. Goldman Sachs (GS) was very weak, dropping another $3.29 and going below $160 intraday. Just two days ago, GS traded above $170. Nevertheless, beaten-down insurers continued to rebound' AIG (AIG) added another +5.75%. Freddie Mac (FRE) jumped +128%. Fannie Mae (FNM) gained +51.5%. Commodity sectors were mostly on the weak side.

This morning, Pimco Corporate Income Fund (PCLN) reported great earnings and good guidance going forward. Its stock hopped +14.41%, up almost $19, closing just above $150, at $150.24.

Last weekend, in my Market Forecast, I said,

For the new week, I think there is still a lot of sidelined money looking to come in the market. There is a possibility that we see a quick pullback, just to make some room for the technicals. The dollar took a big drop on Friday, which sparked the buying in commodity sectors again. This could be an important factor for the new week. Financials stayed strong last week. If they break out, we should see SPX charge above 1000!

On Thursday, one of our readers asked my opinion on holding DRYS options through their earnings announcement, and I had to give my frank opinion -- that it was simply too dangerous given the current market sentiment.

I think the trader was disappointed to hear that and had been hoping for a bigger win after the announcement, considering that much of the market seemed to expect good numbers from DryShips. But sector conditions seem to require caution still.

Thursday's market started out strong and finished stronger. In the morning, both home sales and unemployment numbers were seen as favorable to the economy. Stocks charged higher and higher. Commodity related sectors came back up. GS led the financials higher, adding $5, or +3.11%.

We locked in profits Thursday on the way up. ISRG was a huge winner (+300% to +400%). I will write about the ISRG trade separately this weekend.

Euroseas is a Greek-owned shipping company which operates a 16-ship diversified fleet of container, dry cargo, and dry bulk cargo carriers. The company is small and opaque enough to fly under the radar of the market to a great extent. The company's former 32 cent dividend has been pared to 10 cents, giving a respectable 8% yield at today's prices. It is relatively low on long term debt, compared to most other shipping companies, which gives it a lower risk profile.

Quoting Zacks in late Sep 08:

By Skymist

Omega Navigation (ONAV) is a small cap Greek owned shipping company which transports crude oil and refined crude oil products. It used to be priced in the mid 20's per share, but today it is a mere $3.61. Did its ships sink? Captured by pirates? No, but the story is still interesting.

I was in shock at the turnaround. My shipping index was up 4.4% on Wednesday alone. EXM was up over 20%! GNK, TBSI, EGLE were all up big. So what is going on?

My first thought - ok, so the S&P head and shoulders formation is complete, a sharp down move took place to a known support level, so the market is bouncing up, especially because of the start of earnings season. Everyone is ready to speculate, and they will put their money into the most downtrodden shippers. Does it fit? Not at all. The market has not moved enough to trigger this amount of breadth in the shippers. The distribution of the SMA20 position in the winners is not lower (more oversold) than the losers. In fact, the non-winners tend to be those which are carrying more debt per equity. That means that buyers are being selective. So it isn't just a bounce, there is value buying going on here.

Stocks hopped out of the gate this morning, cheering better-than-expected report on durable goods. But, just before the Fed announced its decision on rates, the market became unstable. The Fed kept rates unchanged, between 0 and 0.25, and said that inflation is contained. As usual, the market was very volatile immediately after the Fed's statements were released. In the end, most sectors were able to retain some gains.

Chinese internet stocks were very strong today. SNDA led the charge, jumping almost +12%! SOHU followed with a +3.89% win. BIDU gained the most "points", up $10.51. NTES hopped +7.79%. SINA was up +3.13%.