IMF 2013 global economic growth forecasts

The International Monetary Fund (IMF) slightly lowered its forecast for global economic growth in 2013 to 3.5% (versus 3.6% forecast in October), and in 2014 to 4.1% (vs. 4.2% in October). The growth rate in 2012 stood at approximately 3.2%. In reference to the expected moderate growth in the next year, said the chief economist of the IMF: “It’s clear that financial markets are ahead of the real economy. The question is whether they are too much ahead or not… What we know is that it always takes some time for financial markets’ optimism to feed to the real economy and at this stage there are still obstacles to it.

The IMF economists estimate that the Eurozone's economy will contract in 2013 by 0.2%, compared to the previous forecast (October) of a 0.2% growth. The IMF warned that the Eurozone still poses a major risk to global economy. Nonetheless, they predict that the economic situation will improve and that in 2014 the Eurozone's economy will grow by 1%.

The IMF economists slightly cut their forecast for the U.S. economic growth in 2013 to 2% (vs. 2.1% forecast in October), but, at the same time also raised their economic growth forecast for 2014 to 3% (vs. 2.9% forecast in October). The fund said: “U.S. politicians have to insure that the country gets through the debates regarding raising the debt ceiling without severe fiscal restraints. Politicians must agree on a credible medium-term fiscal consolidation plan, focused on entitlement and tax reform.
The IMF did not change their estimates regarding the Chinese economy - a growth of 8.2% this year and 8.5% in 2014. The fund's chief economist said that "It’s not the rates that we saw before the crisis, but these rates are long gone”, but added that things are generally fine.

To summarize the global economic situation we note the phrase that the IMF managing director, Christine Lagarde, has coined: "We stopped the collapse, we should avoid the relapse, and it's not time to relax".

Positively, we should note that most of the economic data published this week in the U.S., Europe and China were encouraging. We mainly note the rise in the Purchasing Managers indices in January (PMI).

Regarding the European economy, we note the significant improvement recorded last week in most of the expectation surveys. However, expectation surveys continue to show the expectations for further contraction of the European economy in the coming months, even if at a relatively moderate pace (compared to the anticipated contraction in the fourth quarter).

Highlights regarding Global economy

The U.S. Congress voted last week in favor of a temporary increase of the U.S. "debt ceiling", which will allow the government to continue to operate until May 19th. However, the debate about the future fiscal adjustments that has raged between republicans and democrats may increase uncertainty in the financial markets in the coming months (towards the decision to raise the debt ceiling permanently). In addition, if U.S. politicians will do not reach an understanding regarding the automatic budget cuts (sequestration), then transverse cuts of $110 billion will take effect in early March.

More on the positive side, the ECB announced last Friday that the volume of loans repayments granted within the Long-term refinancing operations (LTRO) auctions was higher than expected, further evidence for the improvement in the liquidity of the financial system in Europe. European banks have decided to return to the ECB 137 billion euros, out of a total of 1.04 trillion euros that the ECB lent in two LTRO auctions, compared with estimates for a repayment of 84 billion euros.

Economic releases and events of the week

• Monday: U.S. durable goods new orders
• Tuesday: January U.S. conference board consumer confidence, expectations for a slight decrease
• Wednesday: U.S. GDP for Q4 Quarterly rate (expectations for +1.2% vs. 3.1% in Q3), U.S. Fed rate decision, U.S. Personal Income and Spending (both for December), Eurozone Economic Sentiment Indicator and Consumer Confidence Indicator (both for January)
• Thursday: December Germany retail sales for, expectations for an annual decrease of 1.3%
• Friday: Eurozone employment data (expectations for a slight increase in the unemployment rate), U.S. employment data (expectations for stability in the unemployment rate and an addition of 160 thousand jobs in January), Purchasing managers' indices (PMI) of the manufacturing sector in the U.S., China, and the Eurozone

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Precious Metals & Miners Making Waves and New Trends

The precious metals sector has been dormant since both gold and silver topped in 2011. But the long term bull market remains intact. As long as we do not have the price of gold close below the lower yellow box on the monthly chart then technical speaking precious metals should continue much higher.

Large consolidation periods (yellow boxes) provide investors with great insight for investments looking forward 6-18 months upon a breakout in either direction (up or down). The issue with investing during these times is the passage of time. One can hold a position for months and sometimes years having their investments fluctuate adding extra stress to their life when they really do not need to.

Once a breakout takes place a powerful rally or decline will start putting an investors’ money to work within days of committing to that particular investment compared to money invested waiting months for the breakout and new capital gains to occur.

Gold Price Chart - Monthly

Gold Price Chart - Daily

The chart of gold continues to form a large bull flag pattern with a potential 3 or 5 wave correction. If price reverses this week and breaks above the upper resistance trend line then it will be a 3 (ABC)  wave correction which is very bullish. But there is potential for a full 5 wave correction which is still bullish, but it just means we have another month or two before metals bottom.

Gold Miner Stocks – GDX ETF Chart – Daily

Gold miners do not have the sexiest looking chart. It was formed a strong looking bull flag but has continues to correct and is not nearing a key support level. This level could act as a triple bottom (bullish) or if price breaks below then it would be breaking then neckline of a massive head and shoulders pattern which points to 50% decline. I remain bullish with the longer term gold trend until proven wrong.

Silver Price Chart – Daily

Silver remains in a long term bull market much like the monthly chart of gold shown earlier in this report. Silver continues to work its way through a large bull flag pattern with a positive outlook at this time.

Silver Miner Stocks – SIL ETF – Daily Chart

Reviewing the precious metals sector it seems that silver miners have the sexiest looking chart. All price patterns are showing strength and are in proportion to one other. If this chart plays out to what technical analysis is pointing to then we could see the precious metals sector put in a bottom and rally within the next week or two. And if this is the case then silver miner stocks should provide the most opportunity going forward.

Precious Metals Trading Conclusion:

In short, what you need to focus on is the yellow consolidation box on the monthly gold chart. A breaking in either direction will trigger a massive move that should last 6-18 months. Until then long term investors can simply sit back and watch the sector while they put their money to work in other active sectors.

From a short term traders point of view, that f mine. I am looking for a signs of a bottom on the daily chart to get my money working earlier to play the bounce/rally that takes place and actively managing the position until a breakout occurs. The charts overall are not that clear as to when a breakout will take place. Metals could start to rally next week or in a few months and all we can do is wait for a reversal to the upside before we get active.

Knowing the big picture trends and patterns at play along with major support and resistance levels (breakout levels) is crucial for success and piece of mind.

Article contributed by Chris Vermeulen from www.TheGoldAndOilGuy.com


 

Wrangling of debt limit continues

Republicans and Democrats continue to wrangle regarding raising the long-term debt limit. President Barack Obama called the Republicans in congress to increase the country’s debt limit without preconditions, and emphasized that another conflict regarding fiscal issues, may lead to an extreme response of the financial markets. In addition to that, Obama said that the Republicans shouldn’t expect a "ransom" in the form of spending cuts for their agreement to raise the debt limit. The White House stated that it has no backup plan to pay the government's bills so the meaning of the congress not raising the debt limit is leading the nation into default.  During the weekend, Republicans announced that on Wednesday they would vote for a temporary increase of the debt limit, and emphasized that raising the long-term debt limit would be possible only if the government performs an equivalent amount of spending cuts.
Rating agency Fitch has mentioned this week the importance it attributes to the way they handle the crisis. More they mentioned is that it seems like Washington elites haven’t yet learned the lesson of the last fight over the debt limit in August 2011, when the Republicans and Democrats hesitancy eventually damaged the business confidence.
Most of the data published this week was quite encouraging. The recovery trend in the real estate market continues, jobless claims fell sharply, and private consumption increased at a sharper rate than expected in December. Nevertheless, we negatively note the rising pessimism reflected by the expectation surveys regarding the future of the American industry and the drop recorded in the Consumer Confidence Index.
Regarding U.S. monetary policy, Fed Chairman Ben Bernanke spoke at the University of Michigan and did not say that the Fed intends to terminate or slow down bond purchases. Bernanke emphasized that the double role given to the Fed (stabilizing inflationary pressures while supporting the labor market) justifies using aggressive monetary measures.

Economic data from Europe and China

Europe: Eurozone economic data point to the contraction of the European GDP in the fourth quarter. A third consecutive monthly decline was recorded in the volume of industrial production in the Eurozone, the German economy contracted by 0.5% in the fourth quarter, and the volume of bad debts in Spain keeps breaking the record. Positively, we’ll note the increase in the Eurozone's exports in November (+0.8%). The relatively sharp appreciation of the Euro could harm the recovery of the European exports, as marked by the Eurogroup chairman, Jean-Claude Juncker, that the Euro currency is dangerously high. On the other hand, one of the ECB members said he believes the current level of the Euro is not expected to threaten the European economy.
China: the batch of data published over that past week indicates an increase in the rate of growth of the Chinese economy. GDP in the fourth quarter rose by 7.9% year over year, compared to expectations for +7.8%, and a growth of +7.4% in the third quarter. The recovery in the growth rate in the fourth quarter was driven by a jump in infrastructure spending by the government, which began to grow in mid-2012, when concerns regarding the depth of the economic slowdown started to grow. Exports stabilized towards the end of the year, and china's large trade surpluses contributed to the positive momentum.
Additional data released on Friday pointed to an increase of 20.6% in the investment in fixed assets in 2012, compared with an increase of 20.7% (annual rate) on the first 11 months of the year. The industrial production rose by 10.3% in December and retail sales rose by 15.2% in December, vs. 14.9% in November.

Economic releases and events of the week

Monday: Eurozone finance ministers Meet in Brussels.
Tuesday: EU-27 Finance ministers meet in Brussels, ZEW Germany Assessment of Current Situation for January, U.S. Existing Homes Sales December (both expected to slightly increase). Draghi speaks at in Frankfurt.
Wednesday: IMF to release world economic outlook update, Eurozone Consumer Confidence Indicator for January, expected to increase slightly.
Thursday: Preliminary manufacturing PMI for January in China, Eurozone PMI (expected to increase from 46.1 to 46.6), Eurozone Preliminary services PMI for January (expected to increase from 47.8 to 48.0).
Friday: Germany – IFO Business Climate for December, which examines the economic assessments of the business sector; current expectations are for a slight rise in business confidence.

Content provided by:  AnyOption

How to Trade Options Around Company Earnings

The hallmark of a professional option trader is the ability to use a wide variety of trade structures in order to exploit opportunities to profit from specific situations the market presents. One of the opportunities routinely presented multiple times yearly is the impending release of earnings.

Underlying the logic of earnings trades is the stereotypic pattern of increasing implied volatility of options as earnings approach. This pattern is so reliably present that experienced options traders can recognize the approximate date of an impending earnings release by simply perusing the implied volatility of the various series of upcoming options.

As a real time example of this phenomenon, consider the current option chain of AAPL which will report earnings after the market closes on Wednesday, January 23. (Click on each image to enlarge)

As can clearly be seen, the front weekly options, the first series in time following the impending earnings release, has dramatically elevated implied volatility as compared to the series expiring later.

It is because the release of earnings routinely causes reversion of the elevated implied volatility toward its historic mean value that a number of high probability trades can often be constructed surrounding earnings.

I thought it would be instructive to review a recent earnings trade I made in order to see how this consistently observed collapse of implied volatility works in practical terms.

EBAY was scheduled to report earnings after the market closed on Wednesday, January 16. As the price chart below reflects, EBAY had recently rallied and was trading in the price range circled in red.

At the time of the upcoming earnings release, there were only a few days of life left in the
January options which would expire the following Friday afternoon. The then current implied volatility situation can be seen in the option chain displayed below.

Note the elevated implied volatility in the January options as compared to the February options. The value is around twice that of the February options and clearly demonstrates this routinely observed spike as we also have seen above in the case of AAPL options.

My operating assumption was that EBAY would trade down slightly following earnings. This was wrong. As we will see however, proper trade construction resulted in a nicely profitable trade despite incorrect price prediction.

After considering a number of potential trades, I decided to use a short strangle in an attempt to capture the collapse of implied volatility. As a brief review, remember that a short strangle is a two legged position and consists of both a short out-of-the-money call and short out-of-the-money put.

Because my price hypothesis was that EBAY would sell off a bit, I weighted the strangle to the downside slightly by selling different quantities of puts and calls. The P&L graph of the position I took late Wednesday afternoon is displayed below.

The earnings were a bit better than anticipated and resulted in a modest price increase. I was able to exit the position shortly following the market open on Thursday morning for a profit of 6.45% based on the margin encumbrance required to maintain the position under Regulation T rules.

The results of this trade illustrate two critically important points for the new options trader to
understand clearly. First, my price assumption was wrong but the trade was still profitable. For those used to trading stock this may be almost an unbelievable result since in the world of stock trading there is no margin of error for an incorrect price assumption.

The second point is closely linked to the first. The second assumption in this trade was that
implied volatility would decrease substantially. This did in fact happen, the implied volatility of the 55 strike calls decreased from the 69.9% shown above to a post earnings release of 23%.

It was this volatility collapse in both the puts and calls that resulted in the profitability of the trade. Had I used my same price assumptions and constructed the trade using stock, the trade would have been a loser. We invite you to try our service to see how proper trade construction and position sizing can result in a high probability of success.

Article contributed by JW Jones of Options Trading Symbols

For more Option Trading Tips, visit Swing Trading Options

Weekly Metals, Oil, Dollar and Index Price Analysis

The US stock market was closed today for Martin Luther King, Jr. Day, and the inauguration. There does not seem to be much price action to take place on the Canadian or futures market today.

Pre-Market Analysis Points:

• Dollar index is giving mixed signals this week. Short term chart looks bullish for another couple of days but overall it is trading within a large bear flag and near resistance.
• Crude oil is trading lower by -0.50% but remains in a strong uptrend and bull flag. $97-$98 looks like the next upward thrust target.
  
• Natural gas is trading higher 0.87% touching our upside target of $3.60 this morning. It could keep climbing to $3.70 which is the next target but it looks as though its ready for a pause.
• Gold and Silver are trading flat. Last week they held up at resistance but have yet to breakout. They could do it this week but until we the trend shifts with volume to support the move and miners to also show strength I will remain on the sideline.
• Bonds are trading flat and giving off mixed signals much. The 60 minute chart is bullish with a bull flag, while the daily chart is bearish.
• SP500 index remains in a bull market grinding its way higher each week without a decent pausepullback to get long. Technically we could see a 3-4% pullback any day and the market would remain in an uptrend.

Contributed by Chris Vermeulen of ETF Trading Gold Newsletter

EU improvement is not reflected in markets yet

The improvement in Europe's financial markets has not yet been reflected in the real economy. Economic data regarding the Eurozone continues pointing to the recession prevailing in the continent, and expectation surveys indicate the further contraction expected. However, the deterioration recorded in these surveys has recently stopped, along with the sharp decline in the probability for the Eurozone's dissolution. The essentials of the data published were the following:

• The Eurozone unemployment rate continues to soar to new heights and rose in December to a rate of 11.8%.
• A sharp decline in German exports and imports in November (-3.7% and -3.4% respectively).
• A second consecutive monthly increase in the Eurozone's Economic Sentiment index. We'll note that the low level still indicates the expectation for further deterioration of the European economy.

Despite the recession, the debt yield of peripheral countries continued to fall sharply. The ten-year bonds yields in Spain and Italy fell by about 17 basis points and 13 basis points respectively. The ten-year bond yield in Spain fell this week to below the 5% threshold for the first time since March 2012. Among the reasons which supported further yield declines we note the Japanese finance minister's message that Japan will start buying European bonds (which will be issued by the ESM, European Stability Mechanism) and other Euro denominated sovereign debt, as part of the new government's strategy to weaken the Japanese yen while supporting the European economy.

Last Thursday, during the press conference following the rate decision, chairman of the ECB, Mario Draghi, said that the decision to leave the interest rate unchanged was received unanimous, as opposed to the differences that arose among the members of the committee in the previous interest rate decision, that the debt crisis continues to subside, and that the deterioration reflected in the leading indicators has stopped. Draghi noted that the positive developments in the financial markets are not yet reflected in the real economy, and that the growth forecast's risk is that it still tends to the downside. We note that towards the weekend the Euro strengthened (against the dollar) in light of the decline in the probability for an interest rate cut in the Eurozone in the coming months.

Improvement in the U.S. and China

Economic data from last week regarding the U.S. economy reveals a relatively sharp rise in the U.S. trade deficit in November, a fact that will detract from the U.S. GDP in the fourth quarter. There was a sharp decline in  exports in October, that increased in November by 1.0%, to a level indicating an annual increase of 3.3% (vs. an annual pace of +1.2% in October). Imports rose sharply in November by 3.8%, and increased annually by 2.5% (vs. an annual pace of -0.7% in October).

In China: the CPI (Consumer Price Index) rose by 2.5% in the past year, compared to an annual pace of 2.0% in November and slightly above expectations. On the other hand, the PPI (Producer Price Index) fell by 1.9% in the past year. In the Bottom line, it seems that inflation in China is stable and relatively low.
In addition, we note positively that the higher than expected increase in the Chinese exports and imports gave financial markets hope that the trend of moderation in the rate of Chinese economy's growth has stalled, and that in the near future the growth rate will reaccelerate. Chinese exports rose over the past year by 14.1%, compared to annual increase of 2.9% in November, and Chinese imports rose by 6.0% compared with annual stability recorded in November.

Economic releases and events of the week

Monday: Eurozone Industrial Production, expectations for slight increase 
Tuesday: N.Y Empire State Manufacturing Survey, U.S. Retail Sales
Wednesday: U.S. Industrial Production (expectations for slight increase), U.S. Federal Reserve Releases Beige Book 
Thursday: Philadelphia Fed Business Outlook Survey (expectations for a slight increase to a level of 5.6), U.S. Housing Starts, U.S. Building Permits for December 
Friday: Collection of important data regarding the Chinese economy, University of Michigan Survey of Consumer Confidence Sentiment for December

Taking Advantage of Recent Lows in the Volatility Index

To review quickly, the implied volatility of an options series is reflective of the aggregate market opinion of the future volatility of a given underlying asset. In terms of the Volatility Index, the price is the current market opinion of the future volatility in the S&P 500 Index over the next 12 months.

As are all attempts to predict the future, this value does not always reflect accurately the actual volatility as it plays out prospectively, but at a practical level it is the best we can do. As sage philosophers have long noted, “the future isn’t what it used to be.”

The importance for traders is the well established and generally known inverse correlation between prices for the given underlying and the measure of implied volatility, in this case our VIX value. What is typically less known is the fact that levels of implied volatility correlate even more closely to the velocity of the price move of the underlying asset in question. 

Because rapid price moves occur far more frequently to the downside, it follows that the general correlation between price and implied volatility is inverse. A fundamental characteristic that
underscores the logic of this trade is the strong tendency of the VIX to revert to its recent mean. While this is not a certainty, it is unquestionably a high probability outcome.

For professional traders, much of the focus of hedging activity has recently moved to establishing protective positions in this index rather than such older techniques as buying out-of-the-money protective index puts. However there are some well recognized pitfalls in this approach that lay in wait for the retail trader not aware of some of the nuances inherent to this approach.

One of the major risks in trading this product derives from the fact that the options are based on the value of VIX futures. Because there is no mandatory mathematical linking of the value of these futures in the several available expiration months as is routinely present in the options series with which most traders are familiar, a huge and not generally recognized risk exists. 

The founders of one of the major retail options brokers have repeatedly cautioned that the single major cause of irreparable account ‘blow ups” they witnessed were the result of time spreads, aka calendar spreads, in this VIX product.  This is the result of the ability of the various expiration months to move without mutual correlation in response to significant market events.

The result of this observation is the practical consideration that time spreads in the VIX must never be traded. No calendar spreads must ever be considered when trading the VIX. Failure to follow this admonition will subject your account to risk far beyond what you consider to be remotely possible. Simply put, “Don't do it.”

So what trades in the VIX carry reasonable and definable risk? A wide variety of trades including those with both defined and undefined risk is feasible. Such trades include verticals, butterflies, condors, and simple long and short options.

Long time readers know that I strongly prefer to structure positions to include at least a component of positive theta within my trades. Positive theta simply means that the spread has a component that will benefit from the passage of time. Let us consider a modified butterfly position; this position is commonly termed a broken wing butterfly.

First, let us review the current chart pattern of the VIX:

As can clearly be seen in the chart above, the VIX is at multi-month lows, and perusal of even longer term charts confirm this value is at multi-year lows. Given this situation, the probability of a move upwards toward its recent mean is overwhelmingly high.

In order to give sufficient duration to our trade, I would like to look at a butterfly structure
approximately 3 months into the future in order to allow for mean reversion of the VIX.

The P&L chart for our broken wing April put butterfly is displayed below:

As can be clearly seen, the trade structure has no upper bound of profitability and the risk to the lower side is the total amount paid to establish the butterfly. As such, this is a defined risk trade that will profit from a reversion of the VIX to its mean.

We welcome you to try our service to see more high probability trades that capitalize on current market conditions. Over the past two years, the service's performance track record has steadily beaten the S&P 500 Index while taking significantly less risk.



Article contributed by JW Jones from Option Trading Signals