Friday’s Action-Disparity on Austerity and the “Big Man”

by Dan June 20, 2011 8:23 am • Commentary

The market is obviously having a hard time holding on to any gains that come on the openings. This comes at a time where headlines out of Europe about their in/ability to deliver on a promised aid package to avoid Greece’s default leads our markets to widening volatility bands of the SPX (currently the S&P futures are down .6% in sympathy with Europe’s major indices down over 1% across the board on further disagreement on Greek bailout).

The VIX had its first weekly close above 20 since March and the orderly state that governed the rally off the March lows and the relatively orderly sell-off from the May 2nd highs may be at a bit of an inflection point as we start to focus on some issues specific to our own economy and markets: U.S. corporate earnings.

[caption id="attachment_2765" align="aligncenter" width="300" caption="1 Yr VIX chart Provided by "][/caption]


Readers of the is space know that while the VIX is useful to the financial media to sound smart and try to scare the lay people by dressing it up as the “fear gauge”, unless you are a volatility trader it doesn’t really mean that much other to tell you that there is demand for puts and this usually comes at time when people are looking for protection once a market shock is already upon them………..and then the question you will here frequently by those sufficiently scared by the fear gauge; “is it too late to buy puts?” My simple answer is usually to use the VIX as a sentiment indicator…..I generally don’t want to do anything the herd is doing in the market. When I look at the VIX at 20 and the market is only down 7% from the multi-year highs, if I wanted to make an outright bearish bet that the market could go into a serious correction than maybe puts would be very cheap at this point, if I were right on direction, timing and speed….But If you wanted to buy puts to protect a long holding it may be cheaper to explore stock replacement strategies, selling your long stock and maybe buying a call or a call spread as puts likely to be more expensive on a relative basis.


FRIDAY’S ACTION: another day another failed rally….the market trades horribly and just can’t hold any gains…when you look at a 6 day SPX chart you see that most of the closes except Tuesday, were near 1270. This could have happened for a whole host of reasons on options expiration week, maybe there was a ton of open interest at the 1270 strike, but mote likely than not the market is trying to find a near-term bottom and is doing a little back end filling…..I think this sort of action right above support is going to lead us to nastier things to come as the underlying strength of any rally is weak at best…..a little bad news, not the sort of European kind, but the kind that comes from our own shores could send us back towards 1200 in a quick……The one thing that would change my mind would be to see a 2 day rally on volume with some conviction.


6 Day SPX chart Provided by Bloomberg LP

As for the underlying sectors in Friday’s trading we saw a little bit more of the same……Tech continues to be a mixed bag and it seems like there are new problems that pop up daily….GOOG which has become an also ran in a lot of different ways is starting to see its stock show a status once only held by tech bell-weather’s like MSFT, CSCO and HPQ…..GOOG is currently down 18% ytd and 25% from it’s 52 week high in Jan…..people aren’t paying much attention to the once famous innovator because, well I guess they just aren’t innovating any more and just like many before it, smaller more nimble guys like Facebook and Groupon are stealing a lot of attention….I guess GOOG investors are raising cash so they can buy the next net IPO…..good luck with that.  I mention this because GOOG has clearly added to the Nasdaq’s under-performance and on a day like Friday when the markets were desperately trying to rally……GOOG’s worst sell off in 2 months doesn’t help the cause……

The SOX has fully broken down and has usually been the leader in the tech sector’s weakness.  All eyes will be on INTC as we head into the end of the quarter…..unlike TXN, INTC used to give mid-quarter updates and narrow 0r re-set the range of the previous guidance for the current quarter but at some point a couple years ago they decided that less is more for them and did away with the practice……on numerous occasions since, the company has pre-announced and the stock and the sector is acting like they have something to say……any disappointment in the current qtr would be a disaster in my opinion as the company guided up in April and saw the stock soar 20% in the 2 weeks following the announcement to make new 52 week highs.  The stock is now back to the level at which it gapped to after earnings and could either be a great spot to get back in or add too, or it is going back towards the 52 week lows of ~18 on a miss and a guide lower…..chart below is also interesting because with the stock at ~21, it is equidistant between the 52 week low of ~18 and the 52 week high of ~24…..Aug Strangles could be in order…..

[caption id="attachment_2768" align="aligncenter" width="300" caption="1 Yr INTC chart Provided by Bloomberg LP"][/caption]


As for AAPL stock had a tough couple weeks since its WWDC with the stock down almost 8% since the iCloud announcement……I had suggested a bunch of different trades in June to play for this potential weakness and almost all worked out….with the stock sitting at 320 and below it’s 200 day moving average I think there is more room to the downside, not because anything is wrong, but as I have said in the past it is just a really crowded long and as markets get weaker, investors will look to whereever they can to raise cash, so why not a stock that you have enjoyed fabulous gains over the last 2 years…..As I have said, I want to be more constructive on the stock and will do so when we get back towards the $280-300 range……early Fall should see a handful of catalysts worth getting in front of including….back to school and potential iPod, iMac and iPhone refreshes…..

[caption id="attachment_2769" align="aligncenter" width="300" caption="1 Yr AAPL chart Provided by Bloomberg LP"][/caption]


OUTSIDE OF TECH the banks held Friday’s gains all day which can be explained as nothing other than constructive….this sector has become important for the market to make a rally, they need to bottom at some point and start building a base.  GS seems like the obvious candidate to play for a bounce as there was stock specific news that sent it lower starting back in April well before the market topped…..the stock has been quietly basing in the mid 130s and any whiff of some form of settlement of outstanding issues with Feds, coupled with what I would guess to be great relative business performance in the quarter, could cause shorts to cover, sending the stock back to 150, the level where it broke down from in May.

[caption id="attachment_2770" align="aligncenter" width="300" caption="1 yr GS chart provided by Bloomberg lp"][/caption]


Energy Names continue to be hurt by Crude oil’s 20% sell-off since the high made in early May, and in a lot of ways could just now start to see an acceleration to play a little catch up to the commodity… some point weak crude has to start helping our economy and stock market or it will be proven to be a proxy for weakening global demand.

[caption id="attachment_2771" align="aligncenter" width="300" caption="1 Yr crude oil chart provided by Bloomberg LP"][/caption]

Retail stocks held in Friday with some better than expected retail sales and consumer confidence data late last week, but this is backward looking and housing and jobs remain the key….

As always, move your feet in this trading environment, don’t sell into rallys too early and don’t be afraid to take some profits on the short side when things get oversold……as you can tell, some of the names I highlighted this morning I am considering for trades, AAPL, GS, GOOG, INTC, oil names……so in our little contract with each-other (see about this site/about us) let’s both start to do a little work if you agree with some of my initial observations on the names….my trade ideas will follow…..but again this site is not the sort of thing that we want people just doing the suggested trades on blind faith we get plenty of things wrong, but really want to get the readers on board and learning along the way.

Also this one goes out to the “Big Man”, Clarence Clemons from the E Street Band……I grew up in the late 70s and early 80s listening to 2 albums that strongly influenced my musical interests; Born to Run and Born In The USA…..Clarence’s booming Sax solos in “Jungleland” and “Born to Run” will be in my head for ever!  The Big Man will be missed.