Plenty to Fear, Including Fear Itself

by Dan July 28, 2011 9:16 am • Commentary

Ok, the title might have been a little alarmist, but let’s be honest our elected officials in Washington are cause for alarm.  

Yesterday was the sort of day where there weren’t many places to hide…..equities were down, Gold was down, the Euro down, Crude was down and my goodness even AAPL was down a whopping 2.7%!  Also, the sort of day that brings me back to Q3 2008 where investors are helping to write the story by pushing the markets lower and forcing politicians to act…..until yesterday the the markets had been very complacent leading up to this Aug 2nd debt ceiling deadline as the 10yr yield had been hovering just below 3%, while equity markets had actually rallied 3.5% in the last week on strong U.S. corporate earnings.  The rally in the Euro and Gold were kind of telling the story in the background, but as we get closer to our potential deal, currency traders sites will again be set on sovereign debt issues in Europe and likely cause a little flight to quality in the greenback (read my trade here).

In single stock land I am still fixated on a few names that have shown massive out-performance since mid-June; AAPL, AMZN, NFLX, WYNN, CMG, LULU and HANS.  This group has displayed a sort of flight to quality that makes me fairly nervous if there was a sustained “risk off” panic.   They are very crowded longs and these sorts of stocks can definitely overshoot on the downside if holders head for the door at the same time.  AAPL is defintley in a different camp than the others on the list due to many factors including, market cap, valuation, balance sheet and overall quality, but it will clearly not be immune if  investors need to raise cash, as they often go for the most liquid names first.  A lot of the stocks above, excluding NFLX were all down at least 2.5% yesterday, a bit more than the market which makes sense, but clearly doesn’t display relative strength, which could signal that investors are starting to part a  little with their cult favorites.

Yesterday the VIX had its biggest one day move in a month and will likely continue to move up right up until Friday’s close especially if there is no debt ceiling deal by then.  Today’s action will most definitely be a repeat of yesterday without any positive news or progress towards a deal and this will likely present some unique short-term trading  opportunities.  I am still of the belief that there will definitely be an 11th hour deal (even if just a stop-gap) which should cause a short squeeze, even if it a short lived one.

CC posted a note yesterday on the XIV which tracks the inverse performance of the short term VIX futures (read here) and this is something I am looking to buy as we head into Friday’s close.

I remain in the camp of caution and defense and that doesn’t mean panic and sell all stocks that you own, but use times like this to re-evaluate why you own things and re-establish some guidelines as it relates to stops.   Move your feet, as always, cut losses when you are uncomfortable with a position and don’t be afraid to take some profits every so often.   Markets could be in for a rocky ride over the next few weeks as negative earnings results out of XOM, PEP, CAT and UPS may trump some of the more positive, stock specific results from GOOG, AAPL and JPM from earlier in the cycle.