MorningWord: 10/4/11

by Dan October 4, 2011 8:21 am • Commentary

MorningWord: 10/4/11:  Yesterday’s price action, with U.S. equity markets breaking key support and making new 52 week lows was nothing short of disappointing to the many market commentators who were convinced that the low for the year was in on Aug 9th……While it was a bold statement echoed repeatedly by market strategists, technicians, economists, portfolio managers and journalists/pundits, the truth is it was a dumb statement and the odds of it being right were far less than a coin flip.  I have long felt that the Aug 9th low was a target that was most certainly going to be tested and breached this year and that we could not bottom until that happened.

Frankly, I felt prior to the break and now that it was a much easier trade to sell rallies and press shorts to this level than to try to keep picking a bottom. Unfortunately yesterday’s close does not mean that we just turn on a dime and head back up……The real question, is whether this recent downdraft (-20%)from the multi-year highs is the start of a bear market similar to March 2000-March 2003 and October 2007 to March 2009 or was it more like the July-Oct 1998 market swoon caused by Russia’s financial crisis and the collapse of Long Term Capital.  Chart below shows the peak to trough sell-off of about 22% and the double bottom made on Oct 8th of 1998.

[caption id="attachment_5165" align="aligncenter" width="300" caption="SPX May 1, 1998 to Oct 23, 1998 from Bloomberg"][/caption]


What’s interesting about the pattern above is that this sell-off was caused by a foreign financial crisis but was in the middle of a massive bull marker phase…..the chart below is of the same time period this year……does it look familiar?  Interesting to note that both charts made their last highs on July 20th and 21st and the million dollar question will both make a double bottom around Oct 8th?

[caption id="attachment_5167" align="aligncenter" width="300" caption="SPX May 1, 2011 to Oct 3, 2011 from Bloomberg"][/caption]


Many equity investors are scratching their heads and trying to figure out whether to pull the plug or hang on at current levels, now down about 20% from the highs of the year.  Unfortunately I don’t have the answer to that question, but I will tell you that the closer we get to 1050 in the SPX (the level where we bottomed summer 2010 before the QE2 rally) the more likely we are to get a fierce bear market rally that will rip the faces off shorts……So I continue to ride shorts but on every sell off I take some profits.  My hope is to whittle down those positions to tag ends by the time we make that little near term bottom.

AAPL announces their next iPhone today at 1pm eastern time and I will be actively watching the blogs following the update…..I suspect that once Tim Cook walks off the stage and the lights go out that AAPL’s stock takes a little swoon, maybe back to mid 360s…..I will look to sell my Oct weekly AAPL 380/370 Put Spread that I bought last week for 2.00.   Sticking with AAPL, many of you know I am a huge fan of the company and their products and it is hard to argue with their financial performance and product execution….But I do feel this is the most one-sided story I have ever seen and before this market correction is over stocks like APPL and AMZN have to break and scare the fear of you know who into the lives of long term investors……

SO with the DAX down 3.5% and our futures down nearly 1% we could have a bit of scare as the sell off from last weeks highs has been orderly and the likelihood of a quick move to 1050 seems fairly good.  That said the more oversold we get the more likely we are to have an intra-day V reversal that will be very painful for the shorts….so I continue to trim shorts and slowly add to longs…..I have made money pressing this market and I refuse to give it all back on a snap-back as I did staying short in June……SO I will not nail the crash if it happens right now, but I will have plenty of bullets to fade a bear market rally.  


MorningWord: 10/3/11:  Last week was one of those weeks that  if you blinked you might not have noticed that we ended the week at about the same spot that we started it……but there was a little movement in between on a week that capped the worst quarterly performance since the throes of the financial crisis in 2008….the SPX was up 5% on the week on Tuesday’s close and then down about 1/2% on Friday’s close…..

5 day SPX chart from Bloomberg


Just when you thought that a debt crisis in Europe and slowing growth in the U.S. wasn’t enough for your 401k to deal with, we get thrown the little nugget for the potential hard landing in China from a debt-crazy property bubble that has been itching to burst for 2 years now…….the point here is that the hits keep coming, and while things here don’t feel great with unemployment hovering above 9% and the housing market barely inches higher, things are relatively better here than they are anywhere else in the world….there I said it, we are a little safe haven at the moment, all you have to do is look at the $ vs the Euro and Treasuries…..and our equity markets down half as much as European indices.  

This morning’s ISM reading to be released at 10am will dictate the course of action for the coming days, barring any further details on the Greek situation. After that, the markets will be focused on Friday morning’s Jobs data……With the SPX hovering within a % of the Aug9th closing lows, things could get dicey if we meaningfully close below that level.  While sentiment has gotten particularly poor of late, and though we are fairly oversold near term , there seems no will to buy the market at this time of such heightened uncertainty about so many issues.

I have been bearish for most of the summer, and frankly,  getting mildly exhausted on the short side….I am trying to add some longs here, but I fear that if Chinese demand falls off a cliff, the world economy will clearly go back into a recession and our markets will quickly catch up with the losses in most other developed and emerging countries.

So to today’s main event,  ISM  at 10am…there is 2 ways this thing goes, the number comes in better than expected or in-line and we rally off a fairly oversold, pessimistic position, and then we have the real test….if we can’t hold those levels then it is lights out and we make a new closing low and then we have to wait for Greece and Jobs Friday.  Or we come in worse than expected get a flush lower and then we test levels not seen for 12 months prior to the notion of QE2.

How am I going to play? I am looking to cover a portion of shorts on the latter scenario and look to be nimble, I do not want to get caught short in a meaningful bear market rally as I feel strongly that the next real rally to the top end of the range will be a great opportunity to really get back into your favorite shorts (banks and high-fliers)…..If we bounce off of a slightly better number than I think you let them run for a bit and then try to lay them out with stops….I have been actively trading index etfs, normally cash and have yet to buy them, other than to cover shorts intra-day, but if you trade like this intra-day, if you don’t use hard stops be very disciplined to use mental ones…..there is not other way to trade this market, remember while this sort of volatility here there are great opportunities to play these intra-day moves, but capital preservation is the name of the game!

MorningWord: 9/30/11:  Yesterday’s late day rally was nothing less than excruciating for those who were short the market, but I will say it can’t be that surprising when you consider lightly manned trading desks for the Holidays……most traders have become used to intra-day volatility around late summer, and shortened days around Thanksgiving, Xmas and New Years, and particularly on days when the Bond market is closed….While it was excruciating it brings up a great time to make a great point…..don’t be a pig in volatile markets…. pick spots to take profits and that will give you some firepower to fade moves.

As for today, we are faced with the last day of a horrific quarter and a bad month…the SPX is down 12% quarter to date/ down 4.8% month to date, and still going!   The DAX is down 26% qtd and 5.5% mtd….Europe clearly crashed and we feel like we are not too far off…..As I write at 9;15am our futures are down 1.4% in sympathy with Europe which is getting clobbered on higher than expected inflation data that may put to sleep any hope of an imminent rate cut.

I think you continue to fade rallies, but don’t be a pig with trading shorts, cover portions when you feel things getting oversold, that’s usually when the rallies come….if yesterday showed us anything, bear market rallies come fast and hot, but evidenced by this mornings opening, they can also be opportunities if you are nimble.

Keep an eye on the “pretty girls” that CC highlighted in a post yesterday….performance (or lack thereof) in this culty sector could hold the key to any potential breakdown below the Aug9th low…..if names like AMZN and AAPL give up then watch out….

Keys today are the above mentioned high-fliers and of course the bank stocks….banks acted well yesterday and at one point fought off a decent assault to the downside, which could be part of their bottoming process……but new lows in this sector would clearly signal new lows for our markets……

Europe’s close today will be very important….if they close on the lows and we follow suit into our mid day I will likely look to cover trading shorts and avoid any late day heroics by those look to mark into quarter end.


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.