Friday’s Action

by Dan June 12, 2011 9:55 pm • Commentary

Friday’s action was more of the same that we have seen….the SPX didn’t see an uptick ’til about 2pm when CNBC ran a story that the capital standards that are being proposed by international regulators could be more lenient than the originally suggested 3%+ surcharge. …..this sent the stocks soaring in a straight line, up 2-3%, from multi-month lows…..color on this rumor was few and far between, but the stocks will likely remain volatile until this surcharge issue is ironed out by regulators at some point in late June or July.  Bank stocks hold the key to a snap back in the market and what would possibly be a sustained rally back towards the highs made last month.  The stocks, despite historically low valuations and horrific investor sentiment, face the the perfect storm of increased regulatory scrutiny and lack of revenue opportunities resulting from decreased trading volumes, lackluster loan demand and continued charge-offs of mortgage assets.

The market tried to rally in sympathy with the banks only to fail very late in the day, closing near the session lows, despite banks holding most of their gains….this was a small but important victory for the sector as they have been the leadership on the downside….Barron’s ran a positive story on the banks stocks, see earlier post…..what I think is interesting here is that the sentiment has been horrible towards this sector and last weekend the financial press couldn’t be more negative, but after one up day that bucked the overall market trend we see the value guys peeking their heads out…..also of note is that the 3 large bullish risk reversals that traded in the market last week in BAC, JPM and WFC were likely stock replacement strategies as 2 of them were accompanied by large blocks of stock.  In this scenario the investor said uncle on his/her long positions and replaced them with options structures that widened the bands in which he/she would be exposed on the downside on expiration….so the net of it is, less bullish than originally thought.

Aside from the Banks, Tech and Energy were particularly weak with crude closing below 100 and the OIH down 2.7%, almost double the % loss of the S&P.  Some industrial weakness stuck out to me as CAT, BA, GM and F were all done at-least 2% with some hard-line retailers like LOW and HD both down 2.25% plus.   AAPL continues to captivate me, because I, like most, am waiting to see if it will eventually stop its orderly sell-off and finally puke.  It got close late in the day Friday as selling accelerated into the close and nearly touched its 200 day moving average at about 324.  320 continues to be a big support/resistance level dating back to last October and this will be a big test…..I promise I intend to get bullish on the name after a bit of a shakeout, I want to see a little panic and then somewhere between 280 and 300 I will happily get long for the move into iPhone5 or 4S or whatever that should come in the fall.

In sum there were very few places to hide other than a handful of banks and I wouldn’t exactly call them defensive…..I also want to make a point about “defensive” names, you will hear this a lot on CNBC when guys talk their books in corrections, they will tell you to buy consumer staples and telecoms…..I say you don’t have to buy anything if you think the market is going lower… about raising cash….what we are trying to do here is illustrate how to be nimble at perceived inflection points in the market……I don’t have any interest in watching you churn your account, I am not a broker dealer and I am certainly not trying to be your broker….But what I am trying to do is get you out of the habit of listening to people in the financial press who have every incentive in the world to convince the people out there that everything is “ok” and that corrections are “great buying opportunities”.  While I would be a fool to say that all corrections are NOT buying opportunities, I would say ones that are at the start of a corrective phase are certainly not.  I think there is enough anecdotal evidence to tell us that we could be in for a rocky summer and that this may be the exact time to maintain a cautious stance….now I know I have been saying this for months but I want to maintain caution, I want to look for trade-able rallies and we probably have one coming very soon.  Take some profits in names that are getting oversold and start to nibble from the long side at stocks that you think are getting overdone on the downside.  Be careful here selling puts to get long because if we do have a scary capitulation bottom I would rather sell them in the throes of the sell-off than prior to it.