Watch XBD’s Implied Volatility

With the DJIA up almost 100 points right out of the gate, I was curious to see GS and BSC quickly fade from green to red – and that weakness reflected in the XBD (Broker/Dealer Index.)

Of course, you probably don’t have to hedge the entire market too catastrophe-proof your portfolio these days. You can probably accomplish the same task by erecting a safety net under just one or two sectors, such as the home builders or financial institutions. So I looked at my favorite bellwether, Goldman Sachs, to see how their implied volatility has fared in the past month or so. While it makes for an interesting visual, I have not included the Goldman chart because the company has a history of slipping punches. A better chart is the XBD, whose components include 12 companies in the broker-dealer space.

The iVolatility chart below shows implied and historical volatility for the XBD going back three months. Prior to July, the XBD IV spent 95% of the past year in a narrow 20-25 range. After topping 50 in mid-August, the XBD IV looked to be headed back down to 30 or so, until the recent spike left it over 40 yesterday.

While it is important to watch the price level of this index to see how it holds up at support levels such as 215 and 208, I also recommend keeping a weather eye on the XBD’s implied volatility to see what the trend and absolute levels of IV tell us about the thinking of options players. It is quite likely that the tip of the next iceberg may be found floating in the IV chart before it shows up on a price chart.

CNBC Million Dollar Portfolio Challenge: #1280

You would think that a nice 2.2% gain (thank you GSIC) in addition to maxing out on the $3000 ‘bonus bucks’ trivia winnings would have served me well on a day in which the markets were essentially flat. That was not the case yesterday, as the AMZN bus rolled past me – just like the BIDU bus has done today – and I ended up dropping 20 places to #1280. One of these days, I need to catch a ride on that bus…

Thanks to these gains, my portfolio was up to $1.73 million coming in to the trading day, still good enough to keep me in the top 0.1% of the 1,382,297 contestants. It looks like I could be moving up a little today, perhaps even in to the top 1000, as I have all my chips on NetLogic Microsystems (NETL), whose positive earnings report has the stock up 7% at the moment, down from a 14% advance earlier this morning.

On the horn front, if old mono recordings of Dennis Brain are not your thing, try the more modern recordings of Barry Tuckwell. As luck would have it, he is responsible for what may be the second best recording of the Mozart Horn Concertos, but one that benefits from 1990 recording technology. In addition to the Mozart works, there are many other excellent Tuckwell recordings to choose from, including The Art of Barry Tuckwell, which is pictured at the right.

CNBC Million Dollar Portfolio Challenge: Top 0.1%

OK, so I didn’t buy Amazon (AMZN) before their earnings report and missed an opportunity to log an ‘easy’ 27% gain yesterday. I still made up some ground, however, with a more than respectable 2.9% gain in VECO.

My portfolio is now up to $1.69 million, but with tenth place in the CNBC Million Dollar Portfolio Challenge at $2.93 million, the task ahead continues to be a formidable one. On the plus side, at #1260 out of 1,324,502 contestants, I can at least claim to have made it into the top 0.1%.

As this contest has progressed I have discovered the need for an earnings spike potential algorithm and have spent some time testing and refining such a beast. Yesterday, before the close, it kicked out three companies with a high potential to spike after they reported earnings after hours. The good news is that the algorithm (which I will be glad to talk about after this contest is over) produced three highly volatile plays for today: SWKS (up 21% a little after noon EDT); HLIT (down 15%); and ARBA (down 9%.) Of the three, I looked hardest at SWKS and ended up passing on this one, as well as the other two. The potential for volatility was certainly there, but I was concerned that it was more likely toe be in the wrong direction. Instead, I went with a slightly less volatile play that has been showing a lot more momentum in the run up to earnings: GSI Commerce (GSIC), whose retail e-commerce solutions helped deliver a quarter that was good enough to overcome two analyst downgrades that knocked the stock down early this morning. After opening down 5.3% this morning, the stock has rallied to where it is currently trading up 4% on the day.

And now for the horn tooting portion of this post. For those who are late to the CNBC party, in the past when I have tooted my own horn here I have used the opportunity to highlight one of my favorite horn players. First up were two jazz trumpeters: Clifford Brown; and Lee Morgan. Today I want to turn my attention to classical music and Dennis Brain, who may be the greatest classically trained horn player of the modern era. If you are not sure whether you are a fan of classical music, you owe it to yourself find a way to introduce your ears to Brain’s 1953 rendition of the Mozart horn concertos. If this turns out to be a transformational experience in your life, don’t say I didn’t warn you.