MorningWord: 9/29/11

by Dan September 29, 2011 9:01 am • Commentary

MorningWord: 9/29/11: S&P futures are trading near the highs of the overnight session on better than expected GDP and lower than expected Jobless Claims coupled with a mildly positive German Parliament vote in favor of the Euro Rescue fund.  The futures are essentially getting back what they gave up in the last hour of the day yesterday.  Volume could be light today as many market participants are celebrating the Jewish holiday, which makes volatility all the more likely.  

Again I am watching the banks and the European close to help dictate my course of action for the day.  I am definitely looking to re-short the market from an intra-day perspective and may not wait long…. many of you ask what I am trading on weeks like this when I am not initiating new options positions and the truth is I do my very best not to over trade index etfs, but I am drawn to trade/fade gap openings and closes…..So for instance, this morning we are opening up 1.5% near a resistance level from yesterday, I will look to short some SPY‘s and use a mental stop of where I would cover them on the upside if I am wrong and where I would start to take profits on the downside if I am right on direction…..Now the reason I don’t speak about this style of trading much on the site is that it really isn’t that appropriate for most investors unless you are staring at every tick of the s&p and monitoring dozens of inputs that help affect your decision making…..I have been doing this for 14 years, so it isn’t exactly new to me, but experience and pattern recognition are fairly important in this process……

SO my playbook will be too try to fade the first push higher and if we can’t hold the opening gains I predict some pain today and a possible assault on the Aug9th lows in the coming days……


MorningWord: 9/28/11:  Yesterday’s rally of 2.8% in the SPX was fairly impressive until about 2:30pm when they turned on a dime and spent the next hour and a half giving back two thirds of the day’s gains into the close….Even with the SPX closing up 1% on the day, marking the third consecutive up day, the action was anything but encouraging.

Intra-day SPX chart from Bloomberg


The Intra-day high was almost 1196, just a shade away from an important psychological level of 1200, and a place in which I was looking to get short with the intention of getting more aggressive if we popped through that level.

This morning’s price action could be very instructive of the balance of the week which will likely see light volume as we head into the Jewish Holiday starting this evening at sundown.

A few names stuck out to me yesterday as the market appeared headed to breaking out through the 1200 level. A few big names that helped get us there weren’t participating, AAPL, AMZN and CMG.  All three massively out performing the markets, but just couldn’t get going……watching some leadership not participate and then having the banks give up most of the gains late was all I needed to see that the rally was getting long in the tooth….If the banks can’t hold and other high-fliers start to lose altitude then it will be all clear to press shorts back to 1121.  I am keeping on the long positions I added in the last few days as most of the names like HPQ, RIMM, FSLR and S are so beaten up. My shorts should outperform them in a down market…..

For today, I am going to keep a balanced book, but look to lean short on a rally back to 1180 in the SPX.  With the potential for light volume in the coming days and the potentials for headlines out of Europe we could see some swift trading, so be disciplined and use stops for intra-day trading.


MorningWord: 9/27/11: Up was the preffered direction overnight…..To say equity markets the world over are raging is an understatement…..The DAX is up 4% as I write at 8am capping a 3 day rally off of the matched lows last week, now equalling almost 11%.  Hong Kong was up 4% and Japan up almost 3%.  Gold, Crude, Euro and even the yield on the 10yr are all up.  The one thing that will most certainly be down is the VIX.  The VIX has remained elevated for some time and the fact that it barely budged on Friday and yesterday’s bounce told me that many traders remain skeptical of what seemed as of midday yesterday a fairly mild bounce.  The VIX  has remained above 30 for over 6 weeks which it hasn’t done since the end of the financial crisis in 2009.  The VIX could be very instructive over the coming weeks as a “tell” for sentiment of big money.  If our markets can get some legs (our futures up ~1.6%) and try to test 1200, and close above, then we may see confirmation that the little trend channel we have been in since the Aug 9th low was in fact the near-term low.

4 month SPX chart from Bloomberg


If you believe in this pattern then we have at least another 3-5% to go before we get to an overbought level…..I will look to lay out shorts again at 1200 and look to get very aggressive at 1228….1250 is a huge support/resistance level going back years and I am hard pressed to see us go through that in a meaningful way this year.

The news in the last couple days has gotten mildly more positive with our Senate reaching a deal to avoid a government shutdown and rumors of a levered SPV in Europe to assist in the bailout helped sentiment in our markets.

So if everyone looking at the glass as half full for the moment than I think it makes sense to let it run a bit even if you are a bit skeptical.  As readers of the site know I covered a lot of my short positions on Thursdays close and on Friday started to add some long positions in some beaten up unfavored names that were severely oversold.  These positions were not exactly to take advantage on any impending bounce, but I was looking more towards what identified as potential catalysts over the coming months…..If you want to get the most bang for your buck go for the names/sectors that have been working….I say this from a trading perspective and I wouldn’t get married to any longs as I think there is still a good chance that we have one more test of the 1121 level.


MorningWord: 9/26/11: Our futures had a wild night, up 1% out of the gate, then down 1% now up 1%…..European markets are raging, up 2-3% across the board as their is greater confidence that European nations, coupled with the IMF are getting their act together on Greek bailout and the hope of raising greater than expected bailout fund.  Well if this is the only reason why we are up then I say fade ’em on the opening……Gold continues its wild ride after last week’s disaster, the metal is down 1.5% this morning, but recovered from being down 6% earlier.

I guess for our markets it comes down to the banks stabilizing…..if they can do that and start to base with an upward bias then it could signal the all-clear…..Late last week I got slightly less bearish as it appeared we could not make a new closing low…..I still think there is a distinct possibility that we do this soon, but as we headed into Thursday’s close I wanted to cover a lot of my shorts as I thought we were getting too oversold….Make no mistake about it, Europe is the gift that will keep on giving for the bears and the likelihood of a unilateral solution that is a long term fix is not great….If you remember back to 2008/09 our markets went much lower after the announcement of TARP and this could happen in Europe too……we will likely see a short covering rally following any final announcement but could be a great one to fade.  I am still fearful of the sort of short term rally that could exist if there is some massive coordinated central bank activity coupled with a sizable Euro-zone Tarp…..

For today I am going to take a shot at shorting the open but with a tight stop above the overnight high of about 1151…..I will look to aggressively re-short around 1200 if this rally has some legs….Again I have mentioned the trend channel that our markets have been in, I want to get more aggressive at the top end of the range, and as I didn’t do on Thursday, I want to be careful pressing shorts at the low end.

As always, check back on the site for the trades.



MorningWord: 9/23/11:  Waking up this morning we see a continuation of yesterday’s very poor action….Europe is down across the board, the DAX is close to the intra-day low it made on Sept 12, which is also a 2 year low and huge support…..the index is now down almost 34% from the April highs and 27% on the year…..

Risk assets are being sold across the board, Gold down another 2.5%, Crude down 2.5% and of course, the yield on the 10 year treasury down to about 1.7%.  Our Futures are obviously down a little, but off of the lows of the overnight session.

Bank stocks continue to be the problem as the stocks are being sold with impunity, at this point it is feeling more like guilt by association than anything specific to their businesses.  It is widely known that earnings are being depressed by flattening of the yield curve, lower trading levels and m&a and suppressed proprietary trading due to regulation…..but on a near term basis they could be extremely oversold….I wouldn’t be pressing shorts in this space at the moment, we may see one more flush but then we could see an explosive rally….MS is down 20% in 5 trading days…getting a bit overdone……You will want to see a capitulation before you step in, so wait for that….MS at 11, C at 20, GS at 80, BAC below 5 and JPM 25ish…..but again no reason to be a hero so consider using short dated call spreads to define your risk if this appeals to you.

Tech continues to show relative strength which was helped by strong earnings and guidance out of ORCL, ADBE and RHT this week in the face of a handful of negative pre-announcements in the semi space…TQNT, CAVM and XLNX….INTC showing great relative strength though as investors are flocking to the company’s 4% dividend yeild.

FDX‘s 8% decline yesterday on guide lower for the balance of the year was a bit uprising when you consider the stock  was already trading at 2 year lows…..the volume was enormous and you are seeing wholesale selling of names where the news is less than stellar….this action is starting to resemble panicky behavior, but we still haven’t had a day where we have seen wide spread panic across the board, it is more stock by stock….other than banks of course……FDX was punished by comments that shipments from Asia are slowing and this is important……Market Pundits want to talk about how cheap the S&P is to bond yields and that this is not 2008/09 for the US and thus stocks are historically very cheap…..the only problem with the comparison to 2009 is that we don’t have emerging market demand to bail us out, and we don’t at the moment of a trillion dollar worth of stimulus designed to just inflate assets… we could be stuck with a very stagnate economy, teetering on recession for some time…..this will not make for a great equity investing environment.

As for today, the question is what happens when we break 1100?  At some point in the next day or so we will likely have a nasty intra-day reversal that you will not want to be short for….this is why right before the close yesterday I covered half of my short trading positions.  I did this because I want to give myself some room to lay shorts back out on any meaningful rally…..I want to be nimble hear and look to play for a trading bounce.. I will likely focus on buying names like AAPL on a dip to $370 (a girl can hope can’t she?), maybe BAC at 5, MS at 11, GS at 80, ORCL at 26, INTC at 20, CSCO at 14, MSFT at 24, AMZN at 190, NFLX at 100, ERTS at 18, T at 25. S at 2.90.  SO you get the gist, I want to buy quality names (for the most part) at massive support levels on big volume from a very oversold condition…..Biggest advice I can give right here is don’t press shorts before we get a bounce……if we crash and you have been reducing risk from the long side for some time, and have made money on trading shorts then it is not the end of the world, purpose of my strategy is not to hit home runs but to consistently spray the field with singles and doubles and hope to rope a triple every so often.




MorningWord: 9/22/11: So let’s recap the last 24 hour’s events, Moody’s downgrades BAC and WFC, FOMC states policy that was already in the market and specifically responsible for last week’s 5% rally, weak initial read on China PMI sends Hang Seng down 5% (lowest level since July 2009), Eurozone Manufacturing PMI also came in lighter than expected helping to send the CAC and the DAX down 5 and 4.5% respectively…..Oh and we haven’t even mentioned the Greek situation yet…..

The Fed’s statement that they see “significant downside risks to the economic outlook, including strains in global financial markets” kind of says it all, and if the markets are a discounting mechanism than the banks stocks both here and in Europe have been telling us what the fed just aptly said in their statement.

As I write at 8am, 10 year is up, gold down, crude getting destroyed, copper getting killed, USD raging, Europe down across the board at least 4% and our futures down about 2% after yesterday’s 2-3% shellacking.  Normally I would suggest taking profits on a portion of shorts on an opening like this, but I am not sure we are gonna get a rally to re-short today…..Not to sound overly dramatic but I think there is a good chance that when we take out the Aug9th low of 1121 we could flush straight through to 1050 in the SPX, the consolidation level prior to last falls historic QE2 rally.

As I have said in this space on many occasions of late, we are going to make a new closing low and at this point it is obviously going to happen sooner than later.  The real question is whether we crash or continue to have orderly sell offs like we saw in August that led to a short term bottom that was followed by a bear market rally that took us back to previous support…..I am no conspiracy theorist (well, maybe just an amateur one) but I have long thought that the longer this downward cycle goes into the calendar year the less incentives portfolio managers at mutual funds and hedge funds have to try to mark the year end close….Once the realization sets in that there is no payday for pm’s and bankers, well, they might as well save their bullets for next year.  Hedge funds have gotten turned around pretty decently in last few months and my sense is that they are not short now… some point in this cycle, as a result of Aug and Sept, hedge fund returns we will see a good many liquidations in the coming weeks as we head into the end of Q3…..hedge fund redemption selling could be just the fuel to turn this thing into a bonfire….and the only natural buyers are the mutual funds who were buying stocks with impunity back in July following what was thought to be the resolution to the Greek Debt Crisis in late June (what a joke).  They were buying at 1350, so they will of course be buying again at 1050…good luck with that……why anyone pays the fees for mutual fund’s active management amazes me…..just buy the SPY for most of your long equity exposure (that is a whole other conversation.).

So today, if we get a rally that does not correspond with any real news, it is to be sold until we meaningfully break 1100…..banks will likely get very sloppy and not until I see GS spread 7 points wide, BAC below 6, maybe even near 5, JPM at 25 will I want to step in and take a shot on the long side…..Tech stocks like AAPL and AMZN will try to hold and likely have a rally at some point, but they will not be immune…..

Remember the lessons of 2008….you don’t have to pick the bottoms, but you can consider dollar cost averaging, and don’t get fooled by guys like Warren Buffett who buy big stakes in beleaguered companies like BAC, remember he gets a to cut a fat coupon on that…..Move your feet and don’t be stubborn, I am not expecting a V reversal from the lows, I think there is a good chance that our indices play catch up to Europe and it is either going to happen very quickly in the form of a mini-crash or we will do it kind of orderly like August.

I don’t believe that stocks trade at discounts, I believe they are where they are for good reasons….so don’t listen to all these jokers on TV who are just talking their books trying to tell you otherwise…..You can be in cash, especially in times like these where volatility rules the day…..for traders it is a different story, get in there and be disciplined, use stops and don’t be stubborn…..THE REAL QUESTION IS IF WE GET SOME FORM OF COORDINATED CENTRAL BANK CREATIVITY….IF THAT HAPPENS ALL SHORT BETS ARE OFF….THESE GUYS HAVE GOTTEN PRETTY GOOD AT FIGURING OUT HOW TO SQUEEZE THE SHORTS AND I SUSPECT THEY WILL TRY TO DO IT AGAIN SOON. So my point here is when we break and things get really oversold don’t get greedy.

As for my trading, I have been riding my JPM Oct Put Spread, DIA Oct Put Fly, XLF Oct Put Fly INTC Oct Put Spread and as always long out of the money SDS calls…..I will look to add back to my AAPL Oct Call Spread that I reduced yesterday as I think iPhone 5 launch should prove to be a meaningful catalyst, but AAPL could easily go back to 380 in the short term…..




MorningWord: 9/21/11:  Lots of cross-currents exist in the markets these days and price action does not always tell the fundamental story.  We know that the markets are a discounting mechanism for future events, but as many traders or investors have become painfully aware over the last 12 years, which has seen about 2.5 boom and bust cycles in that period, DURATION of the discounting is really the key….Markets climb walls of worry and overshoot on the upside, just as they get overly pessimistic and extremely oversold on the downside.  So the pressing questions now are; where are we in this cycle?  Is the almost 10% rally of the Aug 9th low a bear market rally, or was the pessimism following the debt ceiling debate, the S&P downgrade, weak GDP and the European debt crisis a capitulation in early August?  Is the low in????  Unfortunately I don’t have those answers and I can tell you that more times than not I have been particularly bearish on the markets for most of the downdrafts that we have seen over the period mentioned above, usually early and often a little too late……..

Back to cross-currents, banks have no edge with the yield curve where it is and their stocks are under siege near multi year lows due to fears to the European debt crisis spreading and they continue to cut costs and thus jobs….. tech companies like CSCO & ORCL are hoarding cash, waiting to acquire rivals and then cut non-core businesses and thus cut jobs…..All of this when the un-employment rate sits above 9% and Washington is desperately trying to figure out how to stimulate job growth….If QE2 taught us anything it was that it didn’t create  a situation where employers were incentivized to hire and it certainly didn’t help the housing market as 30 yr mortgage rates are near record lows around 4% and the housing market doesn’t budge……Forget about cross-currents, this feels like a minnow trying to swim upstream against a raging river.

This morning as I write,  Greek austerity remains the key to the next tranche of bailout cash to avoid default, just as unions are preparing strikes.  All eyes are on the FOMC’s statement today and I would expect we won’t see a lot of activity before the 2;15pm policy announcement…..

ORCL reported their fiscal Q1 last night that was basically in-line with expectations and offered guidance that was in-line with expectations….the stock is up 4.5% this morning trading slightly above the levels seen at the highs yesterday….if the stock can’t hold the early gains tech could be in for a rocky ride….the company on their call eluded more to company specific strength than broad enterprise strength…..

So today, watch ORCL and ADBE to tell you where tech is going and the banks price action in front of the FOMC meeting will also be telling…..The DAX down 1% on the day, only the second down day in a 7, will also be telling to see how European investors feel about risk heading into the FED’s highly anticipated statement.

So where are we? I suspect we make lower lows this year unless we see some signs of life in the jobs and housing markets, and at this point all signs point to continued stagnation.


MorningWord: 9/20/11:   Our futures and European markets have rallied off the lows this morning following S&P’s downgrade of Italy, with the DAX now up 2% and the S&P futures now up 60 bps….Gold has bounced a bit from yesterdays almost 3 week closing low as has the Euro vs the Dollar.

It’s interesting to note that for the last 3 weeks on the first trading day of the week, our markets have gapped at least 2% lower in sympathy with weakness in Europe only to spend most of the afternoon rallying and following through the next day which seems to be holding true today at least on the opening…..this is fairly constructive price action, and definitely shows healthy relative strength.  The chart of the SPX shows a little wedge or triangle that clearly shows that this thing is going one way or another, and soon.

YTD SPX chart from Bloomberg


1200 in the SPX remains the do or die level in my opinion, as this support resistance level has been the starting and stopping point for some healthy moves dating back to 2007.  Chart below shows the breakdown level exactly 3 years ago following Lehman and the subsequent 44% drop in the following 7 months, only to rally almost 80% off of those lows over the next year and practically stop on a dime at 1200…….Since the little flash crash period in Spring 2010 the market went up and down about 15% on either side of 1200 level and now here we are grinding in a very tight formation basically right back at 1200……

3 Yr SPX chart from Bloomberg


Yesterday’s strength (before the late day rally when the market was still down almost 2%) in some high(er) end consumer names like AAPL, AMZN, HANS, WFM, CMG and RL was very curious to me on a day that the President adamantly suggested raising taxes on the wealthy by $1.5 trillion.  All of those cult like names made new all time highs yesterday while names like LULU, WYNN and PCLN are just a few % away from doing the same….I guess the only thing I would say about that whole group (maybe excluding AAPL) is what goes up must come down.  There couldn’t be a better example of this than NFLX which is down more than 50% in a little more than 2 months.  When these cult stories break they break hard and I am almost certain this is likely to happen at some point to CMG, HANS, LULU and WFM.

As for today barring any really negative news out of Europe, I would expect a little consolidation with an upward bias as we head into tomo’s conclusion of a 2 day FOMC meeting…..My take is at this point if we just get “Operation Twist” the markets will be disappointed after our almost 10% rally off of the August lows….I am confident this will not be a redo of last fall with a silly rally into year end…..


MorningWord: 9/19/11:  This morning is the third Monday in a row where we wake up to weakness in equity markets the world over resulting from the European debt crisis.  The past 2 weeks our markets have taken such weakness in stride and staged peak to trough rallies of at least 5% (chart below).

11 day SPX chart from Bloomberg


This week could offer a slightly different outcome, as it appeared in the last 2 weeks we were climbing a wall of worry without too much news flow or catalysts driving the rallies…..this weeks news flow is likely to be plentiful….Greek aid, and thus the potential for default hangs in the balance this week, and particularly today could be the beginning of the end as EU and IMF officials hold a teleconference with Greek finance minister to access the progress of austerity measures which will determine whether or not Greece will receive the desperately needed next tranche of aid to avoid default.

This comes on the heals of German Chancellor Angela Merkel’s ruling party’s defeat in Berlin State elections over the weekend, the sixth defeat this year….the weaker her coalition gets the more opposition she will see to a Germany playing such a dramatic role in the bailout of their weaker EU brethren…….especially as we get closer to the all important EFSF vote now scheduled for Oct.  Europe is down across the board with the DAX hardest hit with an almost 3% loss, close to the lows at 6:30am.

The 2 day FOMC meeting starting tomorrow, oddly, appears to be taking a backseat to concerns in Europe at the moment, and will likely be a sideshow to what could be the impending debt default in Greece………I want to be careful not to get too geeked up and try to press shorts on the open today as that has not been a sound strategy following Euro equity weakness in the start of the last 2 weeks, but I think you can short bank stocks on any rallies….as always on gaps lowers wait for that first rally to lay them out.  Because of last week’s 5% surge in our equity markets there is plenty of room below and this thing could get some legs…..Usually I suggest taking some profits on a portion of shorts on lower gap openings like today, but given last week’s melt-up and the potential I think for lower lows in the coming weeks, I would rather keep shorts intact and add on rallies.

By the time the Fed releases its policy initiatives on Wed afternoon we will already have gotten some tough tax talk from Obama, none of which should be friendly to the equity markets….so a busy week calls for some disciplined trading….




Market Touch: 9/16/11:  

The Focus will be on Europe again today as EU central bankers/finance ministers meet in Poland (insert obvious joke), accompanied by US Treasury chief Geithner, a man who is familiar with banking crises.  After a few hours, and once the “brain trust” has fixed all the financial ills the continent over, ECB President Jean-Claude Trichet will give a little speech detailing the success.   Now the only reason this is interesting is because it falls smack dab in the middle of our trading day in what could be shaping up as a busy quad witching expiration.

European equity markets are up for the 4th straight day, as the DAX has mounted a massive rally off of Monday’s lows of approximately 12%.   Gold is back below 1800 an oz and many technicians are looking for a retest of the 1700 level that it got down towards in the sell off in late August.  Crude oil continues to hold near $90 a barrel a fairly significant technical level (support that it had held most of the year till breaking down in early August), a move back above $100 could be deemed threatening to an already fragile economy.

The VIX is curious here, down almost 25% from the recent panic highs and quickly approaching a what could be a very important psychological near term support level of 30.  Since peaking at at about 48 on the day that the markets made their near term bottom in early August, the index has made a series of lower highs and lower lows…..this has been the inverse to the SPX chart (below yesterday) which has made a series of higher highs and higher lows……Now I generally don’t find the VIX that instructive to my trading as it usually maintains this inverse relationship, and I have long abandoned trading etfs of the VIX (because they are generally untrade-able), but if the VIX doesn’t meaningfully break below 30 as the market settles, it could tell you that option traders and investors see rocky times ahead as they continue to buy protective puts.

1 YR VIX chart from Bloomberg


As for the SPX, this week was a fairly impressive rally at a time where it looked like the bottom was going to fall out in Europe. As I have said in this space on many occasions, you will not get rich trading in these markets by getting to bearish when things look horrible and too bullish when everything gets rosy.  The mob is usually wrong.  Negative sentiment and short interest data over the last couple weeks has been highlighting levels not seen since early 2009……now that is all fine and good, but as I often argue short-term tactical approaches with defined risk can be one way around this.   For instance I am fairly bearish on the macro picture (if you hadn’t noticed) but all week I have been trying to put forth the other side of the coin for a short term bounce…..While I didn’t play for the bounce I was very cognizant of its potential (and didn’t press my shorts)… some may say that may make me stupid, and some may be right, but one thing I am really trying not to do in this market is over trade…..3 weeks ago I thought we had the potential for a trade-able bounce following Bernanke’s Jackson Hole speech and I got long, made some money and then rolled out long stock positions into call spreads, thus defining my risk and playing with profits.   I did not see the same opportunity this week as I deem the volume and the breadth of this rally as weak (I will get some data later today to support this) and I think there is a very good chance that the markets find stimulus announcements following next weeks FOMC meeting disappointing…..

So the net of it is I think we will make new lows in the coming weeks and I am sticking to my guns…..I am going to stay short some banks and some indices (all with defined risk) and then continue to look for catalyst driven opportunities on the long side like I did in AAPL, CSCO, ETFC and S.

Performance of stocks like NFLX yesterday and RIMM today should be worrying to some as once cult stocks are now being sent out to pasture…..some may argue this is a good sign that this is happening at what some see as a bottom, but I would take the other-side and suggest that until we see more rational activity in other names wit ridiculous valuations like WYNN, CMG, HANS, PCLN and AMZN to name a few there is still plenty of speculation out there……

Market Touch: 9/15/11:  

The SPX did its best to close above the physiological 1200 level yesterday on what was by all accounts a strong showing by equities the world over.  The late day weakness (1% off of the intra-day highs) may be a sign that the 3 day almost 5% rally off of the Monday low maybe running out of steam at an important resistance level.

1 YR SPX Chart from Bloomberg


As of 9am the S&P futures are up about 20bps after a quick retreat following a slew of economic data out that basically showed weak jobs, weak manufacturing and higher consumer prices in the US…..hmm sounds like the perfect storm.

European equities are extending their gains off of Monday’s bottom, with the DAX now up almost 10% from the lows!   This index got very oversold, but I would be very surprised to see a quick march back u pt 6,000.  Much of the strength this week in Europe has come off rumor and innuendo in my opinion…the initial jolt came from the FT report that China would buy Italian debt, which the Chinese have since distance their selves from, and the jawboning from European leaders about their support for Greece without anymore detail about how the country will avoid default…..As an added bonus to Euro confidence one of their largest banks, UBS booked a $2billion loss of an authorized trading by one of their employees……

If there was ever a good level to lay them out it could be here, except that we have expiration tomorrow and as of now it appears that flows have been to buy.  All eyes will quickly turn to our FOMC meeting starting next Tuesday and the policy statement hat will be read Wednesday afternoon at about 2:15 eastern.  I have stuck it out with my short thesis and will continue in this direction until we get a stronger sense for Euro policy response to their banking crisis and to our own Fed’s action to help stimulate our weakening economy.

As for my own trading this week, I have been quit, I have some short term tactical bearish bets on, all with defined risk.  I have cut some longs positions on the way up when I had profits (CSCO, S and ETFC) and continue to try to find opportunities to short single names (AMZN) when I think the risk reward looks attractive.

NFLX this morning down 10% is a great example of how you have to be persistent in this market….this is a name that I have loved to hate and shorted (through options) on numerous occasions this year.  Well, the story is coming undone in front of our faces and unfortunately I am not there…..I recently highlighted in this space that I was looking for another spike to put this back out as near-term I felt it was oversold….truth be told I think you can short on rallies, I wouldn’t press it here at $180 but if you got a short covering rally back to $190 I would do it there.

So for today, a close below 1200 shows me the potential difficulty of getting through this important technical level and could be a good level to play for a retreat to the lower end of the highlighted trend channel…..this will likely take a bit of unexpected news, but be nimble here, there are plenty of expected and unexpected catalysts both here and abroad in the coming weeks….so again I suggest keeping exposures low and on the short side risk what you are willing to lose in a defined manner, the markets are oversold, pessimism is high and it feels like it wants to go up……but just because all that lines up does not mean it will be…..sooner or later we will make a lower low, and I am just trying to keep my head above water to get there.



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… 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… 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… 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.