Market Touch: 9/14/11

by Dan September 14, 2011 9:08 am • Commentary

Market Touch: 9/14/11:  

It is hard to argue with this week’s price action in the equity markets, especially ours…..overnight futures declines as a result of Europe weakness are being met with buying on this side of the pond and it feels like we are trying to put in a near-term bottom while holding the little uptrend channel I have been highlighting for the last week (chart below).  Unfortunately we are in a bit of holding pattern until we get a sense for the actions our FOMC is willing to take to help stimulate our own faltering economy when they meet next week for a 2 day meeting.  Most of what will ultimately be done will be leaked prior and at some point the markets could start discounting…..”operation twist” as some are suggesting might have already lost a good bit of its punch and Fed inaction in light of further weakening economic data, (like this morning’s abysmal Aug retail sales) could send the wrong message to the markets.

Europe obviously remains the focus and with the on again off again rumors that China will buy Italian sovereign debt or make strategic investments in Europe driving much of this week’s action. I can’t say with any conviction that I would be holding out for that.  China made many bad investments during the 2008/2009 financial crisis that were initially thought to be back stops from a capital and sentiment standpoint.  China is jawboning this speculation (read here) and not likely to stick their toe(s) in the water other than at fairly favorable terms.  SocGen was downgraded by Moody’s and BNP is scrambling to raise capital even though they say they are “well capitalized”, we all know how this goes… until they are not.

So what to do? I recognize that I am being a little stubborn here and trying to weather this little rally we are getting, pessimism is at an near term high and that could clearly cause a rip higher to the top end of the range in the SPX (about another 5%).  At that point I want to get very aggressive on the short side…..All of my short index bets are either spread or in flies and I like the risk reward in all of them…..and again I am defining my risks.  I did not add many longs at the low end of the range as I feel very confident that we will make a new low in the coming weeks and would rather buy stocks on a panic lower…..

 

Market Touch: 9/13/11:

Yesterday’s late day rally on the FT report that China would come to Italy’s rescue by buying their beleaguered bonds seems to be counter-punched by a WSJ story this morning that one of France’s largest Banks, BNP is having counterparty issues not too dissimilar to Lehman back in Aug/Sept 2008. The late day action just reinforces how nervous the market is…..Hedge funds have gotten turned around massively the past 6 weeks, and make no mistake about it, they have their fingers on the trigger….Negative Sentiment has hit a 1 yr record as of last week’s TrimTabs reading of about 42%. You know what I’m getting at here, when sentiment turns so dramatically in one direction the likelihood of the mob being correct is not great.

I remain bearish largely because I feel strongly that Europe’s debt issues have a very strong chance of turning into a full blown crisis and that the likelihood of our economy and markets being able to “de-couple” from their issues is slim to none. German chancellor Merkel’s comments alluding to Greek default, “there was currently no formal procedure in the eurozone for an orderly default of a member state”, are frankly hard to swallow as the truth……I find this rhetoric to be scary, if they aren’t prepared, they should be.

The chart below is the SPX ytd (down 7.58%) showing a very distinct trend channel since the Aug 9th low. The series of higher lows and higher highs is fairly telling and in some ways for nimble traders this could be a fairly useful pattern to trade. Off of the Aug low the index rallied about 11%, we have recently given back about half…..markets are obviously trading very technically. Yesterday’s intra-day low of 1135 seems like a big level near term to the downside and then obviously the Aug 9th closing low of 1121. I do believe we go back there and break 1100 on a full blown debt crisis, but the market is not immune to snap-back rallies that can be fairly painful if you are short.   So if you want to trade that channel put stops in below the low and try to play for a 3-5% bounce…..Not exactly what I am doing as I am playing for a near-term break below the trend line, but I am defining my risk with long premium even with the VIX at 39.

YTD SPX chart

 

 

The markets squeeze 2% on articles citing “anonymous sources,” when some real news comes out we are gonna have a very big move one way or the other….there is no shortage of catalysts coming over the next few weeks, so my advice is to reduce exposures and define risk where possible.

 

 

 

Market Touch: 9/12/11:

Deja vu all over again….the start of this week seems to be a redo of last Monday/Tuesday…..The DAX is making fresh 2 year lows, down almost 4%, hovering around the psychologically important 5000 level which served as important technical level during the financial crisis.

The CAC (the main French Index) is hardest hit this morning in Europe for a change as rumors of an impending downgrade from Moody’s of the largest French Banks due to their exposure to a potential default by Greece,  SocGen and BNP are down about 10% locally.  Additionally there was an accident at a nuclear reactor that has reportedly left one person dead, which is obviously not helping things….

Here in the U.S. (as of 8:30) our futures are down about 2% in sympathy with Europe and Asia (Japan was down more than 4% while Hong Kong down almost 2.5%). The Euro is virtually unchanged vs the US dollar, Gold is down a tad, crude down 1.5% and the yield on 10 yr treasuries still below 2% .

Citi cut earnings on all their banking brethren this morning which, while not a surprise, will not help sentiment in the sector on a day where European banks are getting destroyed.

Excerpt from Bloomberg:

Morgan Stanley (MS) may post profit of 25 cents a share, lower than a previous estimate of 36 cents, while Goldman Sachs Group Inc. (GS)is forecast to report earnings of 10 cents a share, down from $2.70, analysts including Keith Horowitz wrote in a report dated Sept. 11. JPMorgan Chase & Co. (JPM), the most profitable U.S. bank, may report $1.17 a share, down from $1.26, they said.

The playbook for today reads like most with down openings for me……Take some profits on the opening on a portion of shorts, leave on most convicted positions (BANKS) and look to fade the first rally.  One thing we don’t want to do is have a repeat of last Tuesday’s action where we gapped lower with Europe and then spent the rest of the day rallying into the close…..The markets are obviously very oversold at this point as we approach the early august closing low of 1121 and any efforts by centrals banks to take coordinated actions like we saw in 2008/09 could definitely cause a nasty short squeeze.  This is one of the main reasons why I take profits on a portion of positions on most openings like today….and in a nasty market like we are in now your shorts should get smaller as we go, any investor/trader who tells you that they routinely catch the bottom is just a liar.  But if you don’t have max short exposure at the bottom you will fair much better and be a bit nimbler.

 

 

Market Touch: 9/9/11:

Phew. Now that the President’s speech is over the market can get back to catching up to the ever weakening economy……As far as I can tell from what I read and hear this morning the President did and said what he had to and in most ways put his best foot forward.  The Republican response wasn’t as negative as some has felt it could be, but in the end the proof will be in the pudding……getting a bi-partisan agreement in place this year, prior to the big 2012 election cycle will be difficult.  The usual back and forth over this proposal will not be a positive for our equity markets.  Nothing the President said last night changes my mind as to the direction of our markets as we head into year end and the longer we muddle below 1200 in the SPX the path of least resistance will be lower.  Once fund managers and bankers come to the realization that there is no point in marking up the markets into year end because they won’t get paid, could be the final nail in the coffin.

The Dow Jones Industrial Avg is down less than 3% on the year vs the DAX which is down 22%…SOMETHING HAS TO GIVE HERE……I have to assume (and I will get this data) that at least half of the revenues of the 30 Dow components come from Europe and abroad….there is a  massive disconnect here between our equity performance and theirs.

As for today with the market basically unchanged at 9am, I think you take a defensive posture as we head towards the market’s next catalyst, the 2 day Sept 20th FOMC meeting.  Bernanke, in his speech yesterday, gave no indication of potential action at the highly anticipated meeting and basically gave the same message as he did in Jackson Hole.   While expectations were not high in front of the President’s speech, the markets clearly wanted more.  Some QE is coming and will likely be a more nimble plan than 2010’s, but my strong feeling is that the equity markets are not likely to buy it this year.

Today I will be getting more aggressive with my short thesis…..and will be back to present some ideas.  Europe and Financials are still the focus of the weakness, but broader industrials could be where you get the most bang for your buck.

 

 

Market Touch: 9/8/11:

Yesterday’s opening gap followed by a close on the dead highs was nothing short of impressive.  On a technical basis, the SPX is in a constructive uptrend as noted the last couple days in this space (read here).  All eyes today will be in on Obama’s speech tonight, which was already VERY important before the SPX’s 5% rally off of Tuesday’s lows.  The further we run into it I feel the farther we will fall after.

Yesterday’s Beige Book report gave the markets a little confidence that things aren’t as bad as the markets our interpreting them and Chicago Fed Chief Evans  said the Fed should consider adding “very significant amounts of policy accommodation”.  Citigroup is holding it’s annual Tech conf this week and there have been plenty of cross currents…..I assume that those who don’t have a cautious stance now, will when they report Q3 in mid to late Oct and Q4 guidance will be wide enough to drive a truck through.

ECB and the Bank of England left rates unchanged this morning, but most will be listening to see if Trichet will move to a more easing bias from the prior tightening bias.  All of this as Our fed prepares for their Sept 20 meeting where we will get a sense for how dire our central bankers feel our economic predicament is…..

Today will be an important test for the strength of the rally……if we give back 1 or 2% in front of the speech it will tell me that we were in an oversold condition for the last 2 days where sentiment got very bad……if we continue to climb the wall of worry, which our markets most often do until it is too late than again subscribe to the “farther we run the farther we fall”  theory, either way I think we are screwed, if not this week then next…..I don’t see how equity fund managers will take QE3 and run with it the way they did QE2 last year given the scope of the debt crisis in Europe and more importantly the obvious failure of QE2 last year and its inability to help the housing market and stimulate jobs growth….

So for today, I remain cautious, I still have my weekly SPY put spread on and my Sept SDS call spread…those are serving as good hedges against some longs, AAPL, CSCO, ETFC, S and some bank call spreads that performed well yesterday.

Our banks continue to be a problem and I still fear they will make lower lows before they stabilize, I want to use some strength to put them back out, I still have on some of my JPM Sept 34/30 put spreads and think vertical spreads look attractive.

As for tonight’s speech my only question is, where the hell have you guys been? Seriously, now we are going to turn to job creation?  And you have to blame both sides for this, we are a day late and a dollar short and even with some grand plans I fear it is too late to avoid higher unemployment and the dreaded double dip…..The Republicans, truth be told, are walking a tightrope, they can’t get behind too much stimulus that will make the economy come out of its funk next summer or lights out for them in the election (USA, USA!)  So we are all stuck in the middle. If the debt ceiling debate made you ill wait until u get a load of things to come!  The markets will not take this rhetoric fight kindly.

 

Market Touch: 9/7/11:

Yesterday’s rally off of the opening lows was quite impressive to say the least…..in the face of a 2 day, almost 6.5% sell 0ff in the DAX, the SPX did the unthinkable and closed down a little less than 1/2 % .  As I write this morning at 7:30am the S&P futures are up nearly 1.3%, while the DAX is up almost 3%.

European equity market strength this morning is largely the result of 2 factors, first Germany had a very strong reading for Industrial Production in July and  a German High Court ruling that the country’s contribution to the already agreed upon Greek rescue package is constitutional.  Many now think with this out of the way, that the beleaugured German Chancellor will have an easier time expanding the European Financial Stability Facility that was put in place early in the summer to combat the sovereign debt contagion in early summer….this will be voted on Sept 29th.  I think the Euro is telling you the story here, and its inability to rally on this news after its recent downdraft could signal more problems to come, especially in the face of the Swiss Central Bank’s action yesterday to intervene and pressure their currency vs the Euro……

As for the equity markets today, I guess Europe got a little oversold and the powers that be on this side of the pond decided that Friday’s almost 3.5% sell off following the Jobs data, and the yesterday’s damage on the open sufficiently reflected our problems over here…..I don’t buy it and I believe we will soon break yesterday’s lows and close below the Aug 9th closing low of 1121.  Earnings warnings and estimate cuts are likely to be prevalent as we limp into the end of Q3.  I guess the market could run a little bit into Obama’s speech tomo night, but I will treat this rally and my longs just like I have been treating my shorts on days like yesterday: I take profits and re-adjust…..for instance mid last week as the market rally off the Jackson Hole Speech lows started to get long in the tooth I started buying SDS, the SPY double short inverse etf….this served me very well on Friday and Tuesday and yesterday morning I sold the common for a nice gain and swapped into a short dated, low premium SPY put fly to maintain some broad short exposure, but defining my risk.  Additionally on Friday, I suggested a shorted dated low premium short in INTC that I also took some profits in on yesterday’s open…..you gotta move your feet in this market and take what it is giving you.  I did this on the long side too off of that very short term bottom after Bernanke’s speech, I bought common and then took profits after a couple days and swapped into call spreads…again defining my risk. So there is a little theme here…..the volatility is likely to stay for the time being and if you can be nimble and not be too stubborn there will be daily opportunities to take advantage of the volatility in a defined way, even with the VIX in the 30s.

So I guess the gist of it here is while I am obviously bearish on a macro level, I am very cognizant of the fact that there will be short term, trade-able snap back rallies…Yesterday (below) I said the following, and this pertains to both the long and short side of the markets:

As for this morning, I think you have to be careful just walking in and shorting the open, the healthiest thing to do would be to access the damage on the open and then wait for a rally, more often than not there will be one short covering rally on a day like today, if in fact we were to close on the lows…..You don’t want be the guy that sells the low on a day where we get some sort of surprise fed or European central bank action……shorts will cover all day.

As I came in short, I have my list ready of things that I want to buy if it gets overdone and shorts that I want to continue to lean on and sell on rallies.  You do not want to be too early in either task, but inevitably you will, so you have to have conviction on the individual stories and have a market call about the near term direction and the intermediate term.  Near term I am obviously bearish, but intermediate I am resigned to the fact that we will get very fierce snap back rallies like the one we had after Bernanke’s Jackson Hole speech.  Those are very trade-able and if you can be nimble and define your risk they can make your year.

Well the game plan is the same today from the long side……let this thing run a little and if you agree with me try to short at certain technical levels with clear stops in mind……The SPY and SDS shorts that I had on recently let me hold onto some longs that I have suggested on the site in the last couple weeks; AAPL, S, ETFC, CSCO, MS, BAC and GS (banks went from common stock to call spreads early last week).  I am going to continue to look for opportunities in single names on both sides of the market while also continuing to either hedge longs for fear of new lows or make outright bearish bets that we see 1100 in the very near future.

 

 

Market Touch: 9/6/11:

Been a bit of a busy night for our S&P futures down 2.5% out of the gate, then down only 1% after Europe opened up and now back down 2.5%.  It is unavoidable, without any coordinated intervention, we are going down, we will make a new closing low this week and we could finally see a little panic.  Tape bombs will be continually lobbed out of Europe and most of which we won’t at first understand…..Obama has his Jobs speech Thursday night which will most certainly be a disappointment, and I would be surprised if the Fed’s indecision on methods of stimulus changed publicly before then, especially now that they have extended their Sept 20 FOMC meeting to 2 days.

As I write at 9am, the DAX is now down 1.5% on the day, and 3% from the high made shortly after the open, this horrible action to say the least and the index is now down almost 11% month to date…..Something has to give there, and likely to see some central bank action there prior to here.  I worry that they will be half measures like restricting short sells…..I would view that as very negative and would look to short any rally based on that sort of restriction.

G0ld is off 1.5% from all time highs after the announcement that the Swiss Central bank will impose a ceiling for the franc vs the euro.  With the Euro as weak as it has been in the last few days, Gold moving around in dramatic fashion and the DAX moving around at what feels like 3-5% increments, things feel like they are about to get much worse before they get better…..

Back over here, bank stocks are obviously the focus and most are quickly approaching the lows they made 2 weeks ag0…how they react at those lows will be very telling….I also want to keep an eye on stocks that are thought to be defensive, pharma names and high dividend payers, telco and utilities etc….if these names start to give up with some of the more speculative names;; Chinese internet, our our new issue internet and then some high valuation consumer names like CMG, WYNN, HANS PCLN and LULU then watch out below…..

As for this morning, I think you have to be careful just walking in and shorting the open, the healthiest thing to do would be to access the damage on the open and then wait for a rally, more often than not there will be one short covering rally on a day like today, if in fact we were to close on the lows…..You don’t want be the guy that sells the low on a day where we get some sort of surprise fed or European central bank action……shorts will cover all day.

As I came in short, I have my list ready of things that I want to buy if it gets overdone and shorts that I want to continue to lean on and sell on rallies.  You do not want to be too early in either task, but inevitably you will, so you have to have conviction on the individual stories and have a market call about the near term direction and the intermediate term.  Near term I am obviously bearish, but intermediate I am resigned to the fact that we will get very fierce snap back rallies like the one we had after Bernanke’s Jackson Hole speech.  Those are very trade-able and if you can be nimble and define your risk they can make your year…..Oh and you have to be more right than wrong!

We will continue to see cross-currents, UTX this morning reiterated their 2011 revenue and earnings guidance, but the stock is still down 3%…..if markets stop caring about news like that either tells me what we already know that correlation is at record highs and/or it just doesn’t believe corporate managements, which would be far worse.

So today’s game plan is trim some shorts if we get really messy on the downside and look to put things back out on a rally.  Don’t be stubborn with longs that have reached stops, always make a sale at pre-determined levels, even if just a portion of the position, live to fight another day.  This will only help you wade back in the water when the time is right.