Yesterday’s Action – Including thoughts on RIMM

by Dan June 17, 2011 8:09 am • Commentary

Yesterday had a little something for everyone, I laughed, I cried, well mostly cried……even-though we spent most of the day in the green the equity markets had a sort of heavy feel to them. Chart below shows the 1% sell off that came between 1;30 and bottomed around 3pm…..  The sell off was initially caused by Bloomberg quoting a “person” close to the Basel bank surcharge negotiations stating that they may arrive at 3.5% surcharge rather than the initially speculated 7%, but higher than the 2 – 2.5% that some were thinking late last week that caused a little rally in the bank stocks….obviously you can see that the SPX recovered to close up small on the day, but the intra-day action had a slightly panicky feel to it which suggests to me that we are close to a near term capitulation.

June 16th SPX Intra-Day Chart Provided by

The next chart is a 1 yr chart of the SPX showing how it stopped today right on the Index’s 200 day moving average at about 1257, less than 1% from the March panic lows….this is significant in my mind because there are a lot of stops at or around this level and most market participants are focused on it…..I suitable test of these levels followed with a snap-back would lead many to believe that the correction was over for the time being. I am not entirely in that camp as I feel that the issues in Europe are not contained to Greece and any push-out of a bailout resolution by broader Europe will lead to greater speculation about other troubled nations debt and will most definitely cause a summer of volatility in or around sovereign debt fears.


1 Yr SPX chart Provided by Bloomberg


Away from Europe our banks are in their own world of hurt largely to due with their exposure to European sovereign debt and to their own issues at home with lack of growth opportunities and fears of tighter regulation that will challenge prior profitability metrics.  The markets seem to be speaking that JPM, C and BAC have the most exposure as all three made new or matched lows to last week.  I am long July Put Spreads in JPM and I am staying with them until I see these names get puked, which I think will come sometime before July expiration leading up to or after JPM’s July 14 Q2 earnings release.

Tech continues to be a mixed bag as the SOX remains weak (chart below)  an broke through key support and its 200 day moving average.  This is interesting to note because many semi companies are considered early cycle recovery plays and the stocks excluding maybe INTC are telling you a slightly different story.   Also interesting to note is that some high-fliers like NFLX (down almost 5% at one point today) and PCLN (down almost 4% at one point today) took it on the chin with massive under-performance right out of the gate extending to the close…..Also AAPL breached the very important 320 support level and looked to be breaking down until the market’s late day heroics nearly wiped out all of its losses….

1 Yr SOX chart Provided By Bloomberg

One of the more instructive happenings in tech today was Pandora’s massive flop from its post IPO high of $24 to its almost 24% drop today, leaving it 17% below the offering price of $16.  LNKD was down 8.5% in sympathy closing below $70 for the first time since going public in May, but still well above its $45 IPO price……this thing will see lower lows………..

Clearly there is a lot of movement in the markets and this volatility tells me one of two things, that we are getting ready for a violent near term break lower, or we will continue to have short squeezes that are met with selling like we saw tues/wednesday…..either way market is likely to make a longer term bottom from lower levels, in my opinion.



RIMM was out after the close and, not unexpected, the guidance was just horrible.  I spent a lot of time thinking about how to approach this one and to be frank, after being right about the direction over the last 10 months, I wanted to make a contrarian bet that everything that I know about the company, and all my negative beliefs about their products and their positioning was at this point in time baked in to the stock at today’s close at ~$35.   Well I was right and wrong these guys are really screwed as I have been saying, but the guidance was not in the stock as the stock was down 15% in after hours trading to $30 and change…..I think I was clear on this one that it was speculative and I was willing to risk some of my winnings to make this bet on the long side for an oversold bounce, but I guess the news is just too bad at this point…..Just as I didn’t want to press the short at 37 or 35, I certainly don’t want to at 30.  So I am going to take my losses on the June calls and move on, likely not touch the name for a while……The only reason anyone would buy the stock here is because they think activists will come in and effect change or that the company will get bought……but as I have said often this management is arrogant and kind of stupid and the company is likely to go the way of NOK and MOT…..sorry about this one, I put my money where my mouth was and I was wrong, and that’s just part of trading.  But I will say that this was the right way to play this story with options and by defining your risk……..also please consider the different trade structures when I write up an idea….when I throw out the case for buying call spreads I also suggested that buying a June strangle looked reasonable giving the potential uncertainty and the stocks past propensity to move on earnings……this strategy will end up working very well.

What we’re trying to do here is express views with an eye towards risk management, but also using leverage correctly. If you were long 100 shares of RIMM going into yesterday’s earnings, you would be out 500 dollars this morning. If you bought 1 contract of a call spread you have risked 50 dollars and could have quadrupled your money had RIMM reversed its dive into the abyss. There will be trades like this where it just doesn’t work out. But you define your risk in this way to fight the next fight. It doesn’t take many wins on 4-1 or even 8-1 payouts to make up for the ones that don’t work out.