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PPL spun off to a new Talen Energy. Shall I keep it or sell it?


PPL changesIf you own shares of PPL Corporation, you are most likely a new owner of a brand new company Talen Energy. I bought 66 shares of PPL a few years ago, I think it was in 2013, and since then my holdings grew up 12% plus I enjoyed a nice dividend at around 4% annually.

PPL has been increasing the dividend for 15 consecutive years. Its 3 year average dividend growth is at 2.1%. The last year dividend growth was at 9.85%, which is impressive. And PPL’s current yield of 4.70% is also attractive.

In the past, the dividend yield and growth fluctuated significantly. In 2013, the dividend growth was negative (-7.69%), in 2012 it was positive (5.93%), etc. I think in the near future, PPL will enjoy a positive dividend growth and it will be a great and shiny dividend growth company. Why?

I believe, it is because of a recent spin off.

You may be interested in:
Talen Energy Corp. established as PPL Corp. energy generation spinoff by Kurt Bresswein
Talen Energy
What Should PPL Corp. Shareholders Do With A 65% Stake In Talen Energy? by Chronic Bull at Seeking Alpha

In 2013 PPL announced it will spin off a portion of its business into a new company. And the new company is Talen Energy (TLN). So why PPL did it and why it seems that it will help PPL to have more consistent revenues and thus dividend growth?

PPL made money, originally, in two major segments – power (energy) generation (unregulated segment), and energy delivery (regulated segment). PPL owned several power plants (coal/gas/ oil fired plants as well as nuclear plants) around the country such as in Kentucky, Pennsylvania, Montana, as well as in the United Kingdom. In many of the States, and in the UK, it was also involved in energy (electricity, and in some locations natural gas) delivery to the end users.

And here was the problem. The unregulated segment of energy generation was very volatile and dependent on natural gas, oil, and coal prices. The volatility was responsible for unstable revenues and as I believe, dividend growth. The company was able to overcome bad years and keep the dividends growing, but the history of the dividend growth shows the picture of the struggle quite clearly.

PPL still increased the dividend, but due to a huge slump in 2014, the growth was very small. And thanks to low oil prices in 2014 – 2015, it will most likely be small in 2015 as well.

From this perspective it looks like the spin off was a good move. By doing so, PPL got rid of all its unstable energy generation segment and a new company, Talen Energy (TLN), is now completely involved in energy generation while PPL in energy delivery.
 

 

Every holder of a PPL stock received 0.125 shares of TLN. My 66 shares of PPL earned me 8 new shares of TLN at $16.3112 initial purchase cost (I actually didn’t pay for it, but this was the spin off initial price reported to my broker by the new company). At a current price of $19.30 a share I am immediately gaining 18.32% profit.

It is nice, but as a dividend investor, I look at it from the dividend perspective. And that perspective shows that Talen is not paying a dividend and most likely will not pay a dividend. From the CEO speech at the initial conference call it is clear that this will be a growth company focused on M&A (mergers and acquisitions) rather than on dividends.

And here comes my dilemma. Should I sell the new stock and invest all proceeds back to PPL or keep the stock and let it go?

Reason to sell

The reason to sell TLN is simple. No dividend, no holdings. Why holding a stock which may (and also may not) sometimes in the future make me money. The power generation sector is so volatile that it has big up swings as well as huge down periods, just look at oil price chart in the last 20 years and you will see what I am talking about. What if I need the cash and the stock will be down? A never ending problem with 4% withdrawal rule, right?

Reason to hold

The reason to sell TLN is more pragmatic, while the reason to keep it is more from the land of dreams. Once I read a story about an old woman who died a few years ago, but lived long enough to remember both world wars, but most importantly, she died very rich.

When she was born sometimes in 1902, her father bought her 1 share of AT&T company (at that time the company’s name was Bell Telephone Company). The old lady held the stock until her death, but over the years, she not only held the original stock, but many more shares of all the spun off companies (such as AT&T, Lucent Technologies, NCR, and others). She also ended up holding many shares of AT&T company (as the company split stocks several times over the years).

And of course, she was receiving and reinvesting fat and growing dividends from many of those companies she held.

Grace GronerI do not remember details and all names of those companies, or how much she ended up having in her portfolio. I couldn’t find her story on the Internet anymore. But there was a similar story about another woman named Grace Groner who purchased 3 stocks of Abbott Laboratories in 1935. In 2010, at the time of her death, all her holdings grew into $7 million dollars thru dividend reinvestment, stock splits, and spin offs.

A great example of compounding. Yes, she was compounding for 75 years, and even though it looks like she never used the money, it clearly shows that over time and with the right dividend growth stock your investment can grow substantially.

Both women kept all the spun off stocks and let them grow over the years. That’s was impresses me and makes me think to keep TLN. Although TLN can be a volatile company due to the nature of its business, it may grow, split, and spin more, and more, over time.

Getting the shares didn’t cost me a penny. I didn’t have to sell PPL or any other stock to buy TLN. I didn’t have to add more cash to my account to buy TLN. It was given to me. I still hold 66 shares of PPL, enjoy nice dividend and the price of the stock is still 12% up amid a small turbulence after the spinoff and current tornado in the stock market.

You may be interested in:
The Problem With Grace Groner (And Stories Like Her’s) by Nelson Smith at Financial Uproar

I can easily pretend that I haven’t received any new stock. But there is still that little doubt back in my head that now I have additional $154 which I can add to my savings and later (once I save more money using my commission free ETF strategy) buy a dividend growth stock. It could either be PPL or COP.

Keeping the stock is very appealing to me, but the pragmatic voice is strong too.

This is why I am asking you, my readers, what would you do in this situation? Hold TLN or sell it?

Let me know, what you think!

Image credit: WNEP
 
 






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Posted by Martin June 01, 2015
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Path to nowhere continues. Where is SPX going tomorrow?


Monday was again as expected. I expected it to go higher at first to overcome Friday’s selling but then drift lower. At first the manufacturing data which came out better than expected but along with not so good economic data (mainly consumer spending) put the market on an upward trend. The market seems to love not too good data and not too bad data as they prevent FED from being aggressive raising the interest rates.

You may be interested in:
AbbVie: The Future’s So Hazy I Can’t Wear Shades By Ben Levisohn with Barron’s
The Oil Glut is Not Real By Leonard Brecken with Oil Price
Are Stock Bears Being Too Pessimistic? by Chris Ciovacco
Outlook for June 2015 by Roadmap2Retire

The market looked good until about one hour before the end of the session when bears once again took over and send the market down. I expected the gains very small and thanks to last 30 minute selling it happened. We bounced off of 2100 support but failed to break the resistance at 2120.

I am afraid this weakness would continue as I see my indicators pointing down.
 

 

I believe tomorrow the weakness will continue and for that I expect the market to go DOWN to test 2100 level again.
 






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Posted by Martin May 31, 2015
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Tech stocks are going to break out this week, will $SPX follow?


Tech stocks are about to break out in a big way, according to one top technician.

“The Nasdaq Composite has outperformed the broader market this year, outpacing the S&P 500 [Index],” technical analyst Rich Ross said on CNBC’s “Trading Nation.” The Nasdaq Composite has rallied more than 7 percent year-to-date, while the S&P 500 is up just under 3 percent in the same period.

Against that backdrop, “I have high hopes for the Nasdaq as we head into next week,” the Evercore ISI analyst said.

Continue reading >>

My expectation for $SPX move tomorrow is UP although there is a great weakness in the market so the gain may be very small.






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May 2015 trading, investing and dividends results


Another choppy, crazy month in the stock market is over. It was a month about which people have a saying: “Sell in May and Go Away.” If you have done that, you would lose money. I watch other investors and traders at StockTwits to see what they have to say about the market. I found a chart, see below, from a trader about “selling May” trading.
 

Sell in May
 

If you followed the May seasonality and sold all last three May months, and stayed in cash until September, you would lose money by being left out. I find this quite interesting.

So what about you? Did you sell your stocks in fear of a sell off?

If you are diligently investing, like I do in my ROTH IRA account, you should be doing well. However, trading may be a totally different story.

May 2015 trading results

For me, May 2015 was somewhat successful. It was, once again, extremely hard to trade this market, compared to last year. The stock market created a new all-time high this month, but failed to hold and follow through. My trading business experienced large swings from great up-moments to scary down-moments. As you can see in my Weekly monitor, my Net-Liq lost 10% last month.


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No matter how inconvenient it is, as a trader I must find a consent in those swings. I must find a way to deal with those swings and be able to ignore them. Lately, I found a few novice traders and investors being deadly scared seeing their Net-Liq swinging from one edge to another. They weren’t able to stomach that their account was down 20% one week and up 20% the other. This market is extremely hard to trade and being driven by fear can force you making trades which you wouldn’t normally do.

You may be interested in:
Options Expiration – May 2015 by Alex with My Trader’s Journal
Selling Puts to Buy Dividends by Dennis with Dennismccain Investing
Discover Financial Services (DFS) – Sold Jun 5, 2015 weekly Covered Call by Stocks and Options

As long as you stay the course (follow your trading plan), defend your trades, and try hard not to take a loss, or take a small loss only, the Net-Liq swings would be unimportant (all that depends on your trading plan and the way you protect your trades). As far as my trading, in May 2015, I was able to close trades making money and losing none. Of course, it may all change next month, but I hope not. In this light, my 10% down swing in net-liq doesn’t bother me. It is just a temporary drawdown. If my trades I have open, expire worthless this week, this same Net-liq will be back up where it was last month.

And that is the nature of trading. If you cannot handle it, do not trade or learn it first. I found an interesting post by Joshua Belanger, an option trader, where he listed at least four reasons why he is not posting his trading results. These up and down swings was one of them.

He says:

However, it was common to see traders up big…down big…or even scratch on the day. Not to mention the swings, from positive to negative…or negative to positive…the roller coaster ride that is called trading.

This can be discouraging to many. I feel it inconvenient, mainly when I have to post my down days (or weeks, or months). Yes, posting my trading results makes me feel guilty about my trading and about the results. It forces me to get better. But such forcing may be contra productive. It may force you into trading although you should stay out of the market.

But why do I post my trades? Well, I want to show to everybody interested in trading options that it is possible to make it (because 97% of traders lose money). But also, I want to show you that such trading can be also bumpy and not an easy quick rich scheme. I hope that my blog can do this job and it can be a helpful source to any trader or investor.

Below, you can see my May 2015 trading results. I post only closed trades here. You can follow all my open trades at My Trades & Income page.

$4.95 Stock Trades at OptionsHouse.com

 

May 2015 options trading result: $106.52 (0.91%)
2015 portfolio value: $10,977.82
2015 overall trading account result: -6.23%

 

May 2015 dividend investing results

My dividend growth investing strategy worked very well this month. My ROTH IRA was actually the only one account up in this crazy market. That may lead you to a question, why am I trading options and not just stick to dividend investing. Well, trading provides me with excitement I like, and also I hope that I will be able to build another good source of additional income which can be used to invest into dividend stocks. If you look at my dividend income below, you can see an interesting comparison:

My approx. $18,000 dividend account brings approx. $100 ($93.69 to be exact) monthly dividends.

However, my approx. $12,000 options trading account brings approx. $100 monthly premiums.

As you can see, my smaller account generates the same income as my larger account. It is nice, but there is a catch. It can be riskier and definitely it is not a passive income. You need to do some work than just buy a stock.

But there is a way to make options trading work without exessive risk and losses: stay small and do not overtrade. A golden rule, which I myself break time to time. Sometimes, I am driven by the market into breaking this rule (which is also wrong), sometimes, I break it because I am greedy, have enough available cash and want more trades (also wrong).

But back to my dividend investing. I used my accumulation strategy I wrote about in my last post. I bought a few more shares of my commission free RWX saving vehicle and accumulated approx. $980 savings. That means, that the next month after I receive June dividends, I should have my $1,000 saved (my minimum amount to buy a dividend paying stock to minimize negative impact of commissions).

You may be interested in:
Weekly Roundup – May 31, 2015 by Passive Income Pursuit
Stock Analysis: Lowe’s Companies by DivGro
June Stock Considerations by DivHut
$3,010,671 My Net Worth Update May 25, 2015 by Asset Grinder
My Stock Watch List For June 2015 by Jason with Dividend Mantra
Dividend Income for May 2015 by No More Waffles

 

What dividend stock would you buy if you were me?

I published a small poll wondering which stocks you would buy with that saved $1,000. As of now, readers voted for Chevron (CVX), but the poll is still open and I am interested in knowing your pick.

If you have a minute, please, go and vote which stock you would buy.

 

May 2015 dividend stock buys: none
May 2015 dividend stock sells: none

 

 

May 2015 dividend income: $94.31
2015 portfolio value: $18,561.26
2015 overall dividend account result: +6.37%

 

ROTH Dividend Income
My ROTH IRA dividend income breakdown per month and per company.
 

All accounts

Besides trading and dividend accounts I also have 401k account, emergency savings account, etc., which I do not report in detail. You can review those accounts in my “all Accounts Value table at the bottom of My Trades & Income page.

From that table you can see that all my accounts are up 8.99% for the year. Considering how bad the market was this month I think, this is not a bad result.

What do you think?

How about your investing or trading result?
 

What is my market expectation for June 2015?

Trading this market is difficult. Calling where it will end or go is even worse. However, although many people think it is impossible to predict the market, I believe, it is possible. Of course, I do not mean calling the exact number where the market ends. I mean where the market may go. We can look in the history. The past trading may give us some clue. It is not 100% guarantee.

Today’s market is fear driven. Many investors believe, that FED would raise interest rates which would be bad to stocks. But, as Jim Cramer said, would you raise the rates in a faltering economy?
 
 

Nevertheless, investors are fixed to FED too much and stopped thinking rationally. We have to deal with it.

You may be interested in:
Stock Market Top-Callers Are Missing One Key Ingredient by Chris Ciovacco
Greece, facing euro zone exit fears, designs new two-euro coin by Karolina Tagaris with Reuters
More Weight Added To Equity Bear Case by Dana Lyons
Here’s why traders on New York Stock Exchange floor aren’t convinced the bull market is over by Akin Oyedele with Business Insider
Rate Hikes and Market Returns by Chad Gassaway

I mentioned above that following seasonality in May 2015 could lead to bad results, if you sold in May and ran away. But not all seasonal patterns may be bad to follow. Recently, I found a website by Dimitri Speck who worked hard to create charts about seasonal cycles. He combined all data of several indexes into one chart per index to create a pattern of cycles. An interesting seasonal pattern or cycle was a pre-election year for DOW index, for example.

We are in a pre-election year and May worked very close to what this cycle shows. Will June work the same way?

Pre-election year

If the market continues to show the same pattern, we may see June end higher. I cannot say how high it would go, it may be only a little growth, but it may be higher.

For the next week, we have a Greece deal or no deal event in front of us which may move this market higher or down. Another event would be Friday’s employment report which also is a market mover, so expect bumpy trading next week.

I hope you had a great month in this crazy market. I hope your investments or trades performed the way you wanted. And if not, do not worry. This craziness will end one day and the stocks will perform once again. If we see a correction, many wait for it so desperately, it will be great for dividend investors as well as for traders. And if the market continues higher out of this 7-month of going nowhere it will also be good for you. So don’t let anyone out there derail you and keep holding tight to your investing or trading plan.

And if you have a minute, share with us your investing or trading story!

Happy trading and investing!

 






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Nothing exciting before GDP data adjustment.


The market did exactly what I expected. It went down and later recovered the selling. But the recovery wasn’t strong enough to push the market higher, so it ended down.

Tomorrow we will see GDP revised. This may be a market mover. Will it be taken positively or negatively by the investors? Normally, I would say the market would go higher tomorrow, but if the freaks at Wall Street get spooked and irrational again, the market would go down.

Let’s see tomorrow though. For now, I would call the market to go UP.
 






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Posted by Martin May 28, 2015
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If you sell a put against dividend stock, do you pay a dividend?


Recently, I got this question from a subscriber of mine.

“Do you have to pay a dividend if you sell a put option against the dividend paying stock?”

It is a good question and short answer to that is no, you do not pay the dividend.

You are obliged to pay the dividend (its substitution) only if you sell the stock itself short. A put option is a completely different instrument, which although corresponding to the underlying symbol doesn’t carry any rights or obligations of a stock. Thus only a stock will give you the right to receive the dividend if the company decided to pay one.

With options you only have the right or obligation to either sell or buy the underlying stock at expiration and at a given price.

And of course, it is the same with call option. When you buy a call option, you will not receive the dividend either.

Happy trading and if you have a question, don’t hesitate to ask!






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Posted by Martin May 27, 2015
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FED Conundrum


Sometimes I like to be wrong in my market move expectations. Like today. I expected the market to move lower yet it moved up. It recovered almost all losses from yesterday.

I have a few long positions so it obvious that I wanted to be wrong in my expectations.

It looks like, we have experienced yet another spooky day yesterday. FED mentions a possible hike rate and investors panic. What is funny on that interest rate hike frenzy is that it didn’t happen yet, no one knows whether it happens at all and yet Wall Street is rushing to the exit. Yellen and her cohorts are just speaking about the possibility of the rate hike and it is not clear whether she will really do it at all.

Spook em
Courtesy: Stefan Cheplick’s Tumblr

So why are Wall Street freaks trembling whenever you just whisper “interest rate” words?

Those freaks out there are scared of money being more expensive would make it harder to borrow for the companies and thus slow down company’s growth.

“Higher interest rates has investors nervous about higher borrowing costs, which are negative for company profits and ultimately stocks. There’s also concern about market liquidity – how easily investors will be able to meet client redemptions if they come suddenly.” John Stoltzfus, Oppenheimer chief investment strategist

If you look at the base of the fear, considering that it really had something to do with the selloff, you must agree that Wall Street is really crazy.

What challenges are in front of FED?

Economic growth

As of now, the US economic growth is sluggish and actually slowing down. The GDP fell in three consecutive quarters and there is no sign of improving. We have seen bad reports across almost all companies out there. The only thing which makes them look good is buybacks. Consumers who were expected to spend their windfall from cheap oil did the right opposite and used the money to either pay off their debt or saved them.

The work force participation is smaller every month, jobs are mostly temporary, part time jobs. Salaries are stagnant and actually lower (inflation adjusted) than they were in 2008.

With the sluggish economic growth would raising the rates help the economy? Yellen is trying to convince us that the slowdown is seasonal and that it was caused by bad weather, too good weather, or who knows what else.

Raising the rates would slow the growth or even kill it whatsoever as the Wall Street freaks are correctly worried about. If they know it, Yellen does know it too. Would she be that stupid and raise the rates to kill the dying patient?

Enormous debt

People seem not to be talking about this item or dismiss it as irrelevant. I cannot help myself but I still am thinking about interest rates from the ordinary Joe perspective. Who typically benefit from low interest rates? Debtors or savers? Just go to the bank and open a savings account. What interest rate would you get? A miniscule 0.80% if you are lucky. Maybe 0.90%. Would you be saving happily in such environment?

And now, go and borrow that money. Unless you go to a credit card predator you may get the rate somewhere at around 15%. I was even able to obtain a personal loan at 7%. Most rates are fixed and consumer debt is expensive, but the government is mostly borrowing for what the rates are through bonds. Now, bonds are bearing some 3% or 2.5% interest. If FED raises the rates, bonds will become cheaper and their rates will go up.

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Of course, this will not impact existing bonds, but the new ones. And how is the US government managing the debt (forget now for a moment that they manage it so badly that even a total idiot wouldn’t dare doing it the same way)? They refinance the debt. As the old bond coupons are to be paid, the US government uses taxes and new debt to pay the old bonds. So they issue new bonds. That’s a luxury Greece no longer possesses. And if we act irresponsibly, we will follow the suit. Can you imagine FED raising rates to 2% by the end of 2016? Bond rates would simply go higher too and bear 5% in lieu of 3%. With $17 trillion dollars debt the US government would have to refinance at some point (they will never refinance the entire debt at once but in small increments, mostly adding new debt) at a lot higher rates and that would be very costly.

Would Yellen sink the US government into deeper debt hole? I think she won’t dare doing it.

End of recovery, political failure

There will be many people telling me that I do not understand the modern economy and that is true. I don’t. I look at the economy from a simple perspective – accounts payable and receivable. Anything beyond this is just a hocus-pocus juggling.

If we pretend to believe that we have a recovery, raising rates now would end this recovery for sure. Mostly for reasons above – more expensive money would encourage savers rather than spenders. And the US economy is based on consumer spending not saving. If consumers start spending, the inflation starts rising. And it is not happening now and it will not happen after raising the rates for sure.

I think, Yellen sees it although she will not admit it.

You may be interested in:
A Breakout To Nowhere
Price is What Your Pay Value is What You Get
My Stock Watch List For June 2015
Five Financing Options For Your Retirement
Portfolio construction is an underrated skill
To Win You Have to be Willing to Lose

Another issue is political and I believe that is one of her most important items to watch carefully. She will not dare to create collapsing market as it would look bad for the current (and any of the future) government. For six years we have been listening about great recovery from politicians and now boom. A crash. It will happen one day, but now I believe it is not politically sustainable as well as Yellen doesn’t want the market collapse (and take the economy with it) under her watch.

So, she is releasing test balloons into the economic air to see how investors, market, and or economy would react to interest rates hike. She can clearly see, that it will be nasty. Will she dare doing it and raising rates?

We will see. She may do it. I hope, I will be ready by then and not in the long positions as it seems the market will see a storm.

Are low rates good for us?

Now they are not. But I am still convinced that it wouldn’t be good for economy to raise them. Yellen can do it and risk economic turmoil and Wall Street storm. Maybe she will survive it politically, but she will do the right thing and let the economy heal itself. But she is a leftist and that doesn’t go to her agenda.

The best reason why low rates are bad were expressed by Bill Gates in the video below:
 

 

Market expectation for May 28th

The market recovered almost all losses from yesterday. Yet we are not out of the forest and we may see more selling to come tomorrow. However, today’s trading “saved the trend” and I do not expect down trend continuation. However, tomorrow we may see some selling pressure in the morning to compensate today’s bullish pressure, but at the end we will most likely end up higher. I expect the market to go UP
 
 






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Posted by Martin May 26, 2015
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$SPX market expectation for Wednesday, May 27th


(05/26/2015 HS) – Market took a hit today. Quite large one, compared to the non-moves we have seen in previous days. The S&P 500 lost 1% today. It could have been more, but at the last hour the market rallied and erased some losses. Should we be worried?

Hard to answer that question. The market lost on renewed fear of FED rising interest rates. It all has been here already. We have all seen this. This is nothing new and yet investors are freaking about it.

Does the economy justify interest hike? I do not think so. But I am not an economist and I can’t say. I just use common sense to make this judgement. But common sense is no longer used and desired in today’s Wall Street game or the economic books cooking.

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We are seeing FED applying all sorts of monetary hocus-pocus, kicking the can down the street and yet we see us floating. They do things even a financially irresponsible person wouldn’t dare doing and it flies by. Well, maybe we will see consequences later on.

Is the selling, we experienced, good for the market? Will it continue? No one knows. What troubles me with this market though is the pattern I am seeing. When the market goes higher, it is usually on a low volume, but when it sells off, the volume spikes up. This is troublesome.

Analysts are expecting this market going higher. But who are they? These are people from Goldman Sachs or Merrill Lynch, for example. Is their prediction meant to be good for all or are they just pumping this market up so they can get out?

Today’s selling provided a lot of technical damage. Many of my indicators I watch turned down. But nothing is lost yet. We still may see a bounce and recovery. We may see a bouncy market.

The market is quite oversold now (note, I am looking at a short period of time now at a daily frame) and we may see a bounce. It may not be a big one, however. The good thing was that bulls stepped in at the end of the trading session and pushed the market higher. They may have some more power left and recover this market.

Unfortunately, I do not think this will happen tomorrow. We may see some buying in the morning, but the rest of the day will belong to bears and I expect this market to go DOWN.
 
 






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Posted by Martin May 25, 2015
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$SPX market expectation for Tuesday, May 26th


(05/25/2015 HS) – On Friday, last week, I expected the market to move higher. I expected FED to be taken positively by investors as they would see that FED will most likely postpone interest rates hike due to slowing economy. I didn’t have time to watch or read what actually Yellen said, but overall results would be that FED is ready to raise the rates, probably in September, this year. I think such step would be bad for the US economy and slow it even further, but I am not here to judge or predict that. It’s just my guts.

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However, the market acted mixed on the news. The investors took it positively at first and the market went up, but it didn’t have enough strength to sustain the move and by the end of the trading session, it fell down.

Such weakness can be detrimental for the recent break out and stop it where it began. Although I do not like it myself, I think this weakness will continue and investors will continue freaking out and selling equities. For tomorrow, I expect the market to go DOWN.
 






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Posted by Guest May 20, 2015
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OPEC Struggling To Keep Up The Pace In Oil Price War


OilPriceSome market watchers, such as Cornerstone Analytics (CA), have consistently stated that the underestimation of demand, coupled with over-estimation of supply, will mask the growing call on OPEC oil in the second half of this year. CA recently noted that global demand outstripped supply by some 4 million barrels in April . This comes in addition to the mounting evidence that the oil market, via rig count declines, slowing production growth, higher demand and huge API crude inventory declines, is starting to readjust.

Be that as it may, Goldman Sachs (GS) seems to believe oil must fall to $45 by October (like it previously thought $30 oil was a certainty) to clear the market and rebalance, despite signs that a readjustment is already underway. When was the last time fundaments got ignored and prices went in opposite direction? As an aside, take a look at the S&P 500 vs. GDP growth, as one makes new highs while the other falls from 3.0 percent growth to under 1 percent so far this year!

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In other words, asset prices continue to be set by central bankers, and not free markets, so the GS call does make sense if you believe fundamentals don’t matter at all. Still, they should be discussed either way. Rather than being based on the fundamentals, GS, like others, have consistently been off the mark when it comes to oil prices, but refuse to acknowledge it (the agenda at GS has been exposed via Zerohedge). Multiple calls just this week for $45, on top of other economic research, clearly reveal this.

I will be first to admit that I thought oil prices short term would peak in $60s and $70s, but I never thought they would retest the lows. Why should they, if all the trends point to markets slowly rebalancing? In fact, there is growing evidence that not only are we slowly rebalancing but the world may actually be running short of oil. According to Reuters, Saudi Arabia has turned down requests from China for more oil, as they are using it for their own domestic refining needs. It goes on to quote: “[a]nother source with a Chinese refinery that takes Saudi oil said Saudi heavy crude was ‘a bit tight’ in May and June.” China was forced to turn to Russia, Oman, and other non-OPEC nations for their needed supply. Why would Saudi Arabia refuse to supply China unless oil was, in fact, tight?

This provides the strongest indication yet that the world is not facing a 2 million barrel-per-day surplus in supply, as many allege, and instead the call on OPEC crude is most likely growing. The latest EIA weekly inventory data showing a drawdown of 2.7 million barrels reaffirms that the US is no longer oversupplied either.

Finally, just to reinforce the point, oil companies indicated during some of their first quarter 2015 earnings calls that rigs could begin to be added back into operation when prices reach somewhere in the neighborhood of $70 per barrel. Quite frankly, producers shoot themselves in the foot by providing a set price, which, I believe, affects how oil is traded. GS and everyone else are using that guidance on trading oil. But to be clear, we know for sure rigs won’t be added at $50, never mind $45. Once you factor in the natural depletion of existing wells, production will have to eventually go down – another reason why the GS call will be wrong.

By Leonard Brecken of Oilprice.com






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