Last week was one of the most brutal corrections I have seen in a particular index - the tech-heavy Nasdaq. For the week the Nasdaq plunged 6.5%. Many of the high fliers such as Apple, Google and Research in Motion made dramatic moves down. Cisco had an excellent quarter but comments by John Chambers about weakness selling into the financial sector caused Cisco's stock to also fall precipitously.
But consider this. Even after last weeks relentless move downward the Nasdaq is still up 15.63% for the year. That is an excellent annual return by any measure. Google plunged from an all time high of $741 to Friday's close of 664, a decline of $77 a share. But you know what? Google could fall another $50 and still be up $121 since the low during the August correction.
If you catch a Wall Street analyst in an unguarded moment, he will tell you that it is hard to imagine Google not going to $1,000 a share. The only thing that can stop Google reaching that lofty level is their own lack of execution - of which there is no evidence to date. Google continues to execute well and pursue growth ruthlessly.
Charts for Apple and Research in Motion made very similar moves. But tech continues to be a huge beneficiary of global growth and have no mortgages on their balance sheets. I certainly believe that investors overreacted to the comments on Cisco's conference call. The next major "tell" for the tech sector will be the quarterly earnings report for Hewlett Packard, scheduled for November 19th. Investors will be watching closely to see if the results indicate domestic weakness such as was experienced by Cisco.
I continue to be optimistic on tech going into year-end. It is unrealistic to expect that the tech sector would continue to race upward without profit taking and some retrenchment. Technical analysts are saying that the technology charts have "broken down" portending a bear market. I'm not a technician, and I'm not so sure that is true.
I believe that Apple will have positive "buzz" going into the holidays. Apple's new iPods, including the iPhone-based iPod touch, continues to extend Apple's reputation for innovative consumer products. The European launch of the iPhone appears to be going well. Just before last week's correction one firm raised its 12 month price target on Research in Motion to $180 (closed Friday at $113.22). Research in Motion continues to release strong products and expand international growth.
It is hard to predict what direction the stock market will head this coming week. This coming Friday is November options expiration. There is quite a bit of economic data being released and more yapping by the Federal Reserve Governors. Chairman Bernake testifies again before Congress. Options activity combined with everything else will almost certainly mean a high level of volatility, both up and down during the week. We may even see a "30 handle" on the VIX this week.
Disclosure: at the time of this posting the author was long GOOG, AAPL, RIMM and HPQ.
Sunday, November 11, 2007
Saturday, November 10, 2007
Giuliani Prostate Statistics - Follow-up Part II
After my "Follow-up Part I" post my liberal friend told me I clearly don't get the point of the Michael Dobbs article. My friend states:
"Take a look at what the survival rate means and how it is measured. It is not the inverse of mortality rate. The survival rate is not what is important. The mortality rate is what is important. The mortality rate is the rate at which people actually die from the disease. The survival rate, as Dobbs carefully points out, is a function of many things, in this case early screening. Since the mortality rates are the same, all early screening does is change the survival rate (as in his example early detection means that, regardless of treatment, you have a better chance of being alive 5 years from now simply because since the disease progresses slowly, not due to medical intervention). This is a function of the early detection. You may say that this is great and you'll take it. Fine, but understand that it DOES NOT affect your chance of dying from the disease - mortality rates are THE SAME. You will know sooner than someone in England that you have prostate cancer, but your chance of dying from it is the same."
I absolutely get the point about morality rates. But my reasoning is that there has to be more people dying of prostate cancer in England that never get diagnosed. You can’t have it both ways. You can’t say that the U.S. survival rates are artificially high due to better screening – and then say that the mortality rate in England is the same as the U.S. when the diagnosis rate, and therefore the mortality rate, clearly does not represent the actual occurrence and consequence of the disease.
How many people die in England because of prostate cancer that was just never diagnosed? Doesn’t it make sense that if there are fewer people diagnosed then the actual number of cases is higher, and the mortality rate is higher as well – and neither are in the numbers?
The diagnosis rate for the U.S. in the Commonwealth Fund report is 132 per 1,000. The mortality rate is 26 per 1,000. The diagnosis rate for England is 49 and the mortality rate is 28. Let’s assume that the U.S. represents the best data for the occurrence of prostate cancer due to superior screening. That means that the rate for prostate cancer in England is not 49 but actually 132 per 1,000.
That means the mortality rate is also higher than what is being reported. If it is never diagnosed, they can’t say you died of it. This is not "CSI: London". They're are not cutting open people that died, but don't have a stab wound, gunshot, etc. If prostate cancer was never diagnosed and the individual dies, it has to be classified as something else: "natural causes, perhaps"?
On a relative basis this means that the actual deaths in England are 75 per 1,000, but 47 of those deaths are not identified as resulting from prostate cancer.
If my friend in his defense of the New York Times and Washington Post op-ed pages can point out a flaw in this I'll pass it along in a subsequent post.
"Take a look at what the survival rate means and how it is measured. It is not the inverse of mortality rate. The survival rate is not what is important. The mortality rate is what is important. The mortality rate is the rate at which people actually die from the disease. The survival rate, as Dobbs carefully points out, is a function of many things, in this case early screening. Since the mortality rates are the same, all early screening does is change the survival rate (as in his example early detection means that, regardless of treatment, you have a better chance of being alive 5 years from now simply because since the disease progresses slowly, not due to medical intervention). This is a function of the early detection. You may say that this is great and you'll take it. Fine, but understand that it DOES NOT affect your chance of dying from the disease - mortality rates are THE SAME. You will know sooner than someone in England that you have prostate cancer, but your chance of dying from it is the same."
I absolutely get the point about morality rates. But my reasoning is that there has to be more people dying of prostate cancer in England that never get diagnosed. You can’t have it both ways. You can’t say that the U.S. survival rates are artificially high due to better screening – and then say that the mortality rate in England is the same as the U.S. when the diagnosis rate, and therefore the mortality rate, clearly does not represent the actual occurrence and consequence of the disease.
How many people die in England because of prostate cancer that was just never diagnosed? Doesn’t it make sense that if there are fewer people diagnosed then the actual number of cases is higher, and the mortality rate is higher as well – and neither are in the numbers?
The diagnosis rate for the U.S. in the Commonwealth Fund report is 132 per 1,000. The mortality rate is 26 per 1,000. The diagnosis rate for England is 49 and the mortality rate is 28. Let’s assume that the U.S. represents the best data for the occurrence of prostate cancer due to superior screening. That means that the rate for prostate cancer in England is not 49 but actually 132 per 1,000.
That means the mortality rate is also higher than what is being reported. If it is never diagnosed, they can’t say you died of it. This is not "CSI: London". They're are not cutting open people that died, but don't have a stab wound, gunshot, etc. If prostate cancer was never diagnosed and the individual dies, it has to be classified as something else: "natural causes, perhaps"?
On a relative basis this means that the actual deaths in England are 75 per 1,000, but 47 of those deaths are not identified as resulting from prostate cancer.
If my friend in his defense of the New York Times and Washington Post op-ed pages can point out a flaw in this I'll pass it along in a subsequent post.
Giuliani Prostate Survival Statistics - Follow-up Part I
A liberal friend of mine kindly suggested that I read "The Fact Checker" column by the Washington Post's Michael Dobbs regarding the Giuliani statistics debate. Mr. Dobbs trys to substantiate the previous columns by Mr. Krugman of the New York Times and Eugene Robinson of the Washington Post that claimed Giuliani was basically pulling statistics out of thin air to support his position.
http://blog.washingtonpost.com/fact-checker/2007/10/rudy_miscalculates_cancer_surv.html
I read the Michael Dobbs article, I read the Commonwealth Fund paper from 2000, including the data used to calculate the 44% survival rate, I read the press release by the Commonwealth Fund stating their believe that their data is being misinterpreted., and I read Mr. Grazer’s rebuttal to the NY Times and Washington post, et.al.
Here is a summary of what I found:
http://blog.washingtonpost.com/fact-checker/2007/10/rudy_miscalculates_cancer_surv.html
I read the Michael Dobbs article, I read the Commonwealth Fund paper from 2000, including the data used to calculate the 44% survival rate, I read the press release by the Commonwealth Fund stating their believe that their data is being misinterpreted., and I read Mr. Grazer’s rebuttal to the NY Times and Washington post, et.al.
Here is a summary of what I found:
- Rudy Giuliani made a statement in a speech that his survival from prostate cancer would have been 44% in England.
- The Commonwealth Fund paper shows that for every 49 people diagnosed with prostate cancer 28 die from it. That is a survival rate of 44%. The Commonwealth Fund paper’s data for this is from the Organization for Economic Cooperation and Development. This data is from the time relevant to Rudy Giuliani’s personal battle with the disease.
- Michael Dobbs states that the survival rate for prostate cancer is 98% and 74% for the U.S. and England respectively. But he also says that the mortality rates per 1,000 is roughly the same. Does that make sense?
- The International Agency for Research on Cancer number for 5 year prostate survival rate for England is 44%. This is from a study published in 2003 based on patients diagnosed from 1985 to 1989.
- Michael Dobbs cites (finally) data from the National Cancer Institute for the U.S. and the U.K.’s Office National of Statistics of a survival rate of 98% and 74% for the U.S. and the England respectively. These are apparently more recent numbers that some of the other citations.
- The American Cancer Society has released data from the 1990s suggesting five-year survival rates of 95% for the U.S. and 60% for Britain.
- Lancet Oncology, drawing on data from the Eurocare database for this decade, published five-year survival stats this August showing survival rates of 99% for the U.S. and 71% for the U.K. (without England because of incomplete data).
Here are my conclusions based on my analysis:
- It is not fair to accuse Giuliani of making statements that are not true; is it fair to call his a liar (I think that’s what 4 Pinocchio’s means). There is simply too much data from the period when Rudy had cancer that substantially validates his statement.
- No matter which methodology is used, and you would expect different study methodologies to have somewhat different results, it is undeniable that there is a much higher survival rate in the U.S. that in England for surviving prostate cancer. Nobody is traveling to England for its superior cancer diagnosis and treatment.
- Single payer, government health care relies on rationing and queuing for cost control . The OECD paper from 2000 showed that the wait time for the U.S. for non-emergency surgery was 0.9 months compared to 2.2 months for England.
- In single payer, government health care there is a shortage of oncologists, PET scanners are rare, innovative cancer drugs are not covered. For a slow growing cancer such as prostate this is not as serious a problem. For fast developing cancers such as melanoma this is a death sentence.
- The higher level of survival rates in the U.S. by study are: National Cancer Institute and U.K.’s Office of National Statistics (32%) American Cancer Society (58%) Lancet Oncology (39%), International Agency for Research on Cancer (86%), OECD (86%). So you can quibble with the statistics but the U.S. is head and shoulders above the U.K. by any methodology. I think I’ll just stay here thank you very much.
- It is interesting that the number for survival is England that is by far the highest comes from the U.K’s official government agency, who clearly has a vested interest in making the number as favorable as possible. I still find it implausible that the survival rate in England could shoot up that much in just a few years.
- It appears that Krugman, Robinson, Dobbs, et.al., are falling back on Ken’s standard liberal responses #1 and #3*: when presented with facts that do not support their liberal agenda (government single payer health care is the only solution) just ignore those facts and repeat your position as if they had not heard them, and, when in doubt, launch an Ad Hominem attack.
- The lower level screening as a way of invalidating the statistics for England are a red herring (or a McGuffin if you are a student of film). The health care system is what it is. Saying that the prostate statistics in England aren’t valid due to a lack of screening is like saying the U.S. high infant mortality rate is not valid because we don’t do enough prenatal care.
*Ken's standard liberal responses when presented facts that do not support their position:
- Simply repeat the liberal position as if they had not heard the contradicting facts.
- Present an emotional argument that does not respond to the contradicting facts or logic.
- Launch an Ad Hominem attack.
Wednesday, November 7, 2007
This Wednesday vs. 100 Years From Now
Some of my more alarmist friends have called into question me citing of Professor Gray as a critic of the current global warming mania. Professor Gray, considered the best in his profession, has been criticized because his predictions for hurricane season have been less than accurate in 2006 and 2007. No, we can’t accurately predict the severity of hurricane season a few months in the future. Meteorologists can not accurately tell me if it is going to rain in Atlanta this Wednesday. But apparently scientists know exactly what the temperature is going to be 100 years from now.
I am by nature skeptical. I challenge and investigate.
My beliefs on global warming are pretty close to the scientific consensus, to the extent there is a consensus. But the scientific consensus isn’t that the oceans are going to rise 7 meters by 2050, per Al Gore.
Just because someone develops a computer model that uses a constant rate of growth of CO2 that is more than double what scientists agree on, and it gets widely publicized by the doom obsessed media, does not make it the scientific consensus. In fact, much of the reported gloom and doom about global warming is the result of computer models that use values that can’t be defended. These computer models are unable to correctly model the movement of water vapor and other weather systems. They are just not sophisticated enough. They don’t back tested validly.
Right now there is no scientific consensus on the impact of global warming on Greenland’s glaciers. Patrick Michaels examines two papers published in the same scientific journal. Using the same satellite data one determined that the glaciers were melting while there other determined they were not. The former used a computer modeling approach while the latter supplemented their data gathering with empirical measurements. Who is right?
People that would question the wisdom of the Kyoto accord, which would plunge the developed world into recession and deny developing countries industry and electricity, while not achieving a change that can be measured, are labeled “Holocaust deniers” by the religious faithful.
The scientific consensus is only the “truth” until someone comes along and proves it wrong. If scientists just voted and were always right there would have been no need for Watson & Crick, Hubble, Einstein, Currie, Pasteur, Volta, Newton, Galileo, Copernicus, or Archimedes.
It seems that the degree of scientific consensus on the extent, cause, and future of global warming is being exaggerated.
I am by nature skeptical. I challenge and investigate.
My beliefs on global warming are pretty close to the scientific consensus, to the extent there is a consensus. But the scientific consensus isn’t that the oceans are going to rise 7 meters by 2050, per Al Gore.
Just because someone develops a computer model that uses a constant rate of growth of CO2 that is more than double what scientists agree on, and it gets widely publicized by the doom obsessed media, does not make it the scientific consensus. In fact, much of the reported gloom and doom about global warming is the result of computer models that use values that can’t be defended. These computer models are unable to correctly model the movement of water vapor and other weather systems. They are just not sophisticated enough. They don’t back tested validly.
Right now there is no scientific consensus on the impact of global warming on Greenland’s glaciers. Patrick Michaels examines two papers published in the same scientific journal. Using the same satellite data one determined that the glaciers were melting while there other determined they were not. The former used a computer modeling approach while the latter supplemented their data gathering with empirical measurements. Who is right?
People that would question the wisdom of the Kyoto accord, which would plunge the developed world into recession and deny developing countries industry and electricity, while not achieving a change that can be measured, are labeled “Holocaust deniers” by the religious faithful.
The scientific consensus is only the “truth” until someone comes along and proves it wrong. If scientists just voted and were always right there would have been no need for Watson & Crick, Hubble, Einstein, Currie, Pasteur, Volta, Newton, Galileo, Copernicus, or Archimedes.
It seems that the degree of scientific consensus on the extent, cause, and future of global warming is being exaggerated.
William Jefferson to the Rescue - Demands No "Swift-Boating" of Hillary
The Clinton camp is in overdrive trying to combat Hillary's poor debate performance the other night. Bill Clinton came to Hillary's defense today. He warned that people better not "Swift-Boat" Hillary. He also lamented that the 2000 campaign unfairly focused on petty issues like Al Gore's penchant for exaggeration.
For 35 years John Kerry has recounted his stories of service in Vietnam. As one of the leaders of Vietnam Veterans Against the War (VVAW) Kerry testified to Congress about the daily horrible atrocities being committed by U.S. troop in Vietnam. Kerry leaned on fellow VVAW leader Al Hubbard, of Winter Soldier fame, for some of his testimony.
It later turned out the most of the individuals that came forward to tell their stories for the Winter Soldier project of their experiences as soldiers in Vietnam witnessing these atrocities were later discredited . Either they never had served in the military, or had not served in Vietnam, or were never in combat. It was all made up. Al Hubbard, one of the leaders along with Kerry of the VVAW claimed to be an Air Force captain wounded piloting a transport over Da Nang in 1966. Hubbard was actually a staff sergeant who was never assigned to Vietnam.
Back to Clinton invoking the "Swift Boating" of John Kerry. Kerry has always claimed to be a Purple Heart deserving hero who spent Christmas night in Cambodia on a mission under heavy fire by the Viet Kong and the Khmer Rouge. 280 veterans that served side by side Kerry called him a liar.
All Kerry had to do to prove them wrong was to sign Form 180, a simple 2 page form, releasing his military records. Several years ago Kerry went on Meet the Press and swore he would sign the form to put and end to this. We are still waiting. Even the Admiral that was in command of the Swift Boat Unit signed an affidavit stating that Kerry was 50 miles from the Cambodian border (on the Vietnam side) on Christmas eve and was not in combat.
The soldiers that served with him say one of his Purple Hearts was not for a combat injury but was self-inflicted by Kerry’s mishandling of a weapon – which means he shouldn't have received that Purple Heart - which was the basis for being able to end his Vietnam tour 8 months early (he only served for 4 months and 12 days - 1 month of which was training).
One quick amusing anecdote about Al Gore. Mr. Gore liked to go on about his combat experience in Vietnam. He’d tell stories about taking his turn on the perimeter – shooting first and asking questions later. It turns out that Gore’s only weapon was a typewriter, he was never “on the perimeter”, he never fired a shot in anger. He had a personal bodyguard assigned to him. He was only in Vietnam for 3 months.
I certainly hope that if someone has "Swift-Boat" type information about Hillary it will come out. Anyway, Hillary continues to have a commanding lead in for the Democratic nomination. If you are the one in front you have to be prepared to take some shots.
For 35 years John Kerry has recounted his stories of service in Vietnam. As one of the leaders of Vietnam Veterans Against the War (VVAW) Kerry testified to Congress about the daily horrible atrocities being committed by U.S. troop in Vietnam. Kerry leaned on fellow VVAW leader Al Hubbard, of Winter Soldier fame, for some of his testimony.
It later turned out the most of the individuals that came forward to tell their stories for the Winter Soldier project of their experiences as soldiers in Vietnam witnessing these atrocities were later discredited . Either they never had served in the military, or had not served in Vietnam, or were never in combat. It was all made up. Al Hubbard, one of the leaders along with Kerry of the VVAW claimed to be an Air Force captain wounded piloting a transport over Da Nang in 1966. Hubbard was actually a staff sergeant who was never assigned to Vietnam.
Back to Clinton invoking the "Swift Boating" of John Kerry. Kerry has always claimed to be a Purple Heart deserving hero who spent Christmas night in Cambodia on a mission under heavy fire by the Viet Kong and the Khmer Rouge. 280 veterans that served side by side Kerry called him a liar.
All Kerry had to do to prove them wrong was to sign Form 180, a simple 2 page form, releasing his military records. Several years ago Kerry went on Meet the Press and swore he would sign the form to put and end to this. We are still waiting. Even the Admiral that was in command of the Swift Boat Unit signed an affidavit stating that Kerry was 50 miles from the Cambodian border (on the Vietnam side) on Christmas eve and was not in combat.
The soldiers that served with him say one of his Purple Hearts was not for a combat injury but was self-inflicted by Kerry’s mishandling of a weapon – which means he shouldn't have received that Purple Heart - which was the basis for being able to end his Vietnam tour 8 months early (he only served for 4 months and 12 days - 1 month of which was training).
One quick amusing anecdote about Al Gore. Mr. Gore liked to go on about his combat experience in Vietnam. He’d tell stories about taking his turn on the perimeter – shooting first and asking questions later. It turns out that Gore’s only weapon was a typewriter, he was never “on the perimeter”, he never fired a shot in anger. He had a personal bodyguard assigned to him. He was only in Vietnam for 3 months.
I certainly hope that if someone has "Swift-Boat" type information about Hillary it will come out. Anyway, Hillary continues to have a commanding lead in for the Democratic nomination. If you are the one in front you have to be prepared to take some shots.
A Volatile Market Continues
Yesterday the stock market ended up a substantial amount. Today the DOW, Nasdaq and S&P 500 closed down 2.64% 2.70% 2.94% respectively. Ouch. The market technicals look terrible and it would not surprise me if the next 300 to 500 points on the DOW are to the downside.
Professional traders are "trading the volatility". One way to do this is to set up an options straddle using one of the major stock indices. To do this you by a put option and a call option with the same strike price (called an option's "straddle") - let's say $50 strike on the S&P 500 "spider" (SPY). You are betting on a strong move one way or the other. You can close one position for a profit as the market moves one way and then close the other position for profit when the market moves strongly the other way - making money on the volatility of the market instead of betting on it going up or down.
Another way to play a highly volatile market like we are in is to buy weakness and sell strength as the market gyrates around.
Regardless we are in for at least a few more weeks of big swings within a wide trading band. I believe the market will be down tomorrow due to disappointment with earnings by Cisco and AIG. Frankly, Cisco's earnings were excellent, but they did not raise guidance. Cisco continues to be a major beneficiary of the global boom and the continued investment in broadband infrastructure. But while this period of skittishness in the market continues good news will be sold and bad news will be sold huge.
The economic data today was actually very good. But unraveling the credit mess continues to overshadow everything.
High growth big tech continues to hold up better than anything else. The Nasdaq has been up big this year to date but that is a bit deceptive. Something like half of the gain in the Nasdaq is from the big tech growth names such as Research in Motion, Apple, Google, and yes, even Microsoft.
High growth big tech receives a very large percentage of its revenue from international operations (benefiting from the global growth story), is very profitable, have excellent balance sheets, and have zero exposure to mortgage backed securities. No party'n like its 1999.
Energy names except for the integrated energy companies (i.e., Exxon, Chevron), are also doing well as oil grinds inexorably higher to $100 a barrel. There is a growing optimism that refining margins will improve significantly as gas prices rise to be more in line with the rise in oil. I recently added to my refiner positions. Solar power companies have exploded higher as well.
Anything financial, home builder or mortgage related continues to be toxic waste. New York Attorney General Cuomo just went after Washington Mutual for allegedly fraudulent activities in the mortgage market - which is not going to make all of this go away any faster.
The investment banks write down billions daily. The only holdout is Goldman Sachs which seems to feel compelled to issue almost daily denials it will have to write down its portfolio as rumors by the shorts continues to swirl around the Street.
Good luck.
Disclosure: at the time of this posting the author was long RIMM, AAPL, GOOG, MSFT, VLO, TSO and CY.
Professional traders are "trading the volatility". One way to do this is to set up an options straddle using one of the major stock indices. To do this you by a put option and a call option with the same strike price (called an option's "straddle") - let's say $50 strike on the S&P 500 "spider" (SPY). You are betting on a strong move one way or the other. You can close one position for a profit as the market moves one way and then close the other position for profit when the market moves strongly the other way - making money on the volatility of the market instead of betting on it going up or down.
Another way to play a highly volatile market like we are in is to buy weakness and sell strength as the market gyrates around.
Regardless we are in for at least a few more weeks of big swings within a wide trading band. I believe the market will be down tomorrow due to disappointment with earnings by Cisco and AIG. Frankly, Cisco's earnings were excellent, but they did not raise guidance. Cisco continues to be a major beneficiary of the global boom and the continued investment in broadband infrastructure. But while this period of skittishness in the market continues good news will be sold and bad news will be sold huge.
The economic data today was actually very good. But unraveling the credit mess continues to overshadow everything.
High growth big tech continues to hold up better than anything else. The Nasdaq has been up big this year to date but that is a bit deceptive. Something like half of the gain in the Nasdaq is from the big tech growth names such as Research in Motion, Apple, Google, and yes, even Microsoft.
High growth big tech receives a very large percentage of its revenue from international operations (benefiting from the global growth story), is very profitable, have excellent balance sheets, and have zero exposure to mortgage backed securities. No party'n like its 1999.
Energy names except for the integrated energy companies (i.e., Exxon, Chevron), are also doing well as oil grinds inexorably higher to $100 a barrel. There is a growing optimism that refining margins will improve significantly as gas prices rise to be more in line with the rise in oil. I recently added to my refiner positions. Solar power companies have exploded higher as well.
Anything financial, home builder or mortgage related continues to be toxic waste. New York Attorney General Cuomo just went after Washington Mutual for allegedly fraudulent activities in the mortgage market - which is not going to make all of this go away any faster.
The investment banks write down billions daily. The only holdout is Goldman Sachs which seems to feel compelled to issue almost daily denials it will have to write down its portfolio as rumors by the shorts continues to swirl around the Street.
Good luck.
Disclosure: at the time of this posting the author was long RIMM, AAPL, GOOG, MSFT, VLO, TSO and CY.
Profit & Risk Management through Option Stock-Replacement
Stocks that get pushed up rapidly, in part based on momentum traders, can make you a lot of money but are also very risky. When a momentum stock comes down it comes down hard and usually does not recover to its previous level.
Momentum stocks are usually high growth stocks. But the additional push by the momentum traders means that they really are not trading on a pure valuation basis. Baidu, the Chinese search and advertising company (competes with Google), is a good example of this type of stock.
One way to play momentum stocks is through a strategy of "stock replacement and roll-up". Instead of buying the stock you buy in the money call options, perhaps a couple of months out. This part is called "stock replacement" as you are using in the money calls as a substitute for the actual stock. The intent is to use the options as a derivative proxy for the stock. The intent is not to ever exercise the options.
As the stock continues to go up and hit new price milestones, the calls are rolled up. This means that you sell the calls you own for a profit and then purchase new options at a higher strike price. The most money you can loose is the cost of the options, which is a small percentage compared to the price of the common stock. Assuming the stock goes up and you are able to roll up the calls several times, at that point you are "playing with the house's money" and can never lose your original investment. You can take advantage of the rapid rise of a high flier while limiting your downside.
Disclosure: at the time of this posting the author was long BIDU and GOOG.
Momentum stocks are usually high growth stocks. But the additional push by the momentum traders means that they really are not trading on a pure valuation basis. Baidu, the Chinese search and advertising company (competes with Google), is a good example of this type of stock.
One way to play momentum stocks is through a strategy of "stock replacement and roll-up". Instead of buying the stock you buy in the money call options, perhaps a couple of months out. This part is called "stock replacement" as you are using in the money calls as a substitute for the actual stock. The intent is to use the options as a derivative proxy for the stock. The intent is not to ever exercise the options.
As the stock continues to go up and hit new price milestones, the calls are rolled up. This means that you sell the calls you own for a profit and then purchase new options at a higher strike price. The most money you can loose is the cost of the options, which is a small percentage compared to the price of the common stock. Assuming the stock goes up and you are able to roll up the calls several times, at that point you are "playing with the house's money" and can never lose your original investment. You can take advantage of the rapid rise of a high flier while limiting your downside.
Disclosure: at the time of this posting the author was long BIDU and GOOG.
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