MorningWord: 10/13/11

by Dan October 13, 2011 8:33 am • Commentary

MorningWord: 10/13/11:  JPM reported Q3 earnings this morning and beat already lowered expectations.  The stock’s 20% rally in the last week into the print will not exactly help the stock today. The earnings call starts at 10am eastern and I would expect the stock to remain in a tight trading range until the q&a of the call.  

Citi’s early read on the results:

Results showed core miss — JPM posted 3Q EPS of $1.02 vs. our $0.96 estimate

and consensus of $0.91. The $0.06 beat vs. our estimate was driven by: 1) $0.26 from

better than expected one timers (mostly $1.9 billion DVA gain), 2) $0.05 from slightly

lower tax rate (27% in 3Q), offset by 3) $0.14 miss on core PTPP ($8.9 billion vs. our

$9.7 billion estimate) on weaker results across the board with each business line

missing by $20-180 million, and 4) $0.13 higher credit costs due to less than expected

reserve release in credit card. Stock likely to be a bit soft today, but we continue

to viewthis as the best positioned of the capital markets/universal names…reiterate Buy.

-Credit losses below our est.Retail deposits increased 2% LQA and commercial deposit

growth looked very strong.

-$4.4 bil of Buybacks, virtually completing 2011 allocation of $8 bil — JPM bought

back $4.4 bil of stock, vs $3.5 bil in 2Q11, using nearly all of the remaining 2011

allocation for buybacks in the quarter.

-Cautious Guidance on Investment Bank for 4Q — JPM guidance for 4Q is cautious

for the I-Bank, stating it is not unreasonable to expect market conditions to be

similar to3Q. None of this should be viewed as a surprise and is in line with our


-2012 Guidance cautious on markets, reduces NII guidance $400 mil due to

spreads – 2012 Guidance sets a cautious tone for the I-Bank and AM, spread

compression expected to reduce NII in Consumer & Business banking by $400 mil.

JPM’s reaction today to the quarter will very likely set the tone for the early stage of earnings……After the market’s 12% rally in the last week a healthy consolidation in names like this that have doubled the performance of the market in this time period would not be alarming……But if the bank stocks get a little sloppy and appear to lose their recent bid then we could see a retest of their previous lows…..

GOOG reports tonight and the implied move is about 6% vs the 4 qtr average move of about 8.5%……Monday I spoke about buying Oct 550/600 call spreads when the stock was $534 into the print (read here).  The stock is up about 15% in the last week or so and defining your risk into the earnings event could make sense for those looking to make a directional play….Also for those who own the stock and have no intention of selling could consider collaring the name in a tactical fashion around earnings……with the stock around $550 you could sell the Oct 585 call at about 7.50 and Buy the Oct 515 Put for about 7.50…….This way you pay nothing for the collar and your long is protected below $515 until Oct expiration next Friday and on the upside your long stock would be called away at $585 on Oct expiration.  You would only do this if you didn’t want to sell the stock for tax reasons but were worried that the stock could face an out sized move the downside…..

So for now I am sitting on my hands and waiting to see how JPM reacts to the earnings call, which I think will be very instructive to the direction of the market….Yesterday in the last hour of the day I bought a JPM oct weekly 33/32/31 Put Fly for .15.  with the stock down 2% pre-open I will look to take a portion of this off if and when I am in a position to take the original cost off the table and let the other half ride….


MorningWord: 10/12/11:  Yesterday saw the sort of healthy consolidation that one would expect if a rally like we just witnessed over the past week has any chance of going higher near term.  If the last week has shown us anything, it’s that markets can defy gravity, but an 11% 5 day move needs to gather a bit more steam before it can meaningfully test the  next resistance level.  After opening lower the SPX rallied to unchanged and spent the rest of the day trading within 3 points of either side of that level.  That’s fairly impressive action and tells me that there are still plenty of shorts in the market and even on days when the market participants should be nervous, they are nervously optimistic.   [private]

[caption id="attachment_5354" align="aligncenter" width="300" caption="1 day SPX chart from Bloomberg"][/caption]


Bank stocks continue to act in a curious manner as sentiment in a lot of ways has shifted from worst case scenarios to the possibility that the worst is over.  As I think about the carnage that this sector has been subject to this year, I can’t put my finger on just one reason why the sector has massively under-performed the broad market.  At any given moment over the last 6 months there were different headlines that took them down, it started with financial regulation and what that would do their ability to grow revenues from depressed levels, to mortgage  portfolios and potential liability stemming from past deals, to their exposure European sovereign debt to the final and more difficult reason, to downright hysteria…….The memory of the 2008/09 banking crisis has much to blame with the stocks’ action this summer, at times watching the stocks go down 7% a day for no real reason other than sentiment had an eerily similar feel to the last crisis, but for much less quantifiable reasons.  I have rode shorts in this sector all summer and frankly can’t tell you that i have done so for any of the reasons listed above other than the last one……I just made the decision in April/May/June to apply the 08/09 playbook to the sector for sheer sentiment reasons and it was the right one….SO the gazillion dollar question; is it over?  I have no clue and the stocks’ reaction over the next couple weeks as they report Q3 earnings will likely hold the key.  I said yesterday that the higher they go off of last weeks lows the more vulnerable they are in my opinion.  But I will reiterate you do not want to be pressing a sector like this near the lows…..There is no doubt in my mind that while fortunes were being lost by the likes of Paulson in this sector, those with fresh capital and longer term time horizons will most likely be rewarded by taking the other-side of his misfortune.

So I guess my point is, if we can figure out this little bank stock thing in the next month or so there is likely to be a definable short term trend….if the stocks take mediocre results and earnings and don’t make new lows I think I will want to take a shot on the long side and abandon the 2008/09 playbook.

JPM reports tomorrow morning, check back later for a preview.

As for today our futures are climbing the little Slovakian mountain of worry here, up 1%, and Europe is up across the board about 1.8%……SPX is is approaching 1200 and a close above that level would obviously be bullish near term…..Chart below shows the ranges the market has traded in since early this year and clearly shows the no mans land that 1200 to 1250 is…..

[caption id="attachment_5357" align="aligncenter" width="300" caption="1 yr SPX from Bloomberg"][/caption]


SO a handful of closes above the 1200 range could signal a test of what is now massive resistance at 1250.  If the market blows throw 1200 and continues to run as we head into earnings I will look to fade this move as I have suggested.



MorningWord: 10/11/11:  Yesterday was one of those days when the fix was just in, trying to short them was a futile endeavor as the first 5 handle sell off didn’t come until the last hour of the trading day and it was met by furious short covering.  In some ways given the benign news flow over the weekend and the fact that the bond market was closed for Columbus day (give me a break bond market) the intra-day action of gapping up 1.5% and then quickly moving to up 3% and then flatlining for most of the day until the late day surge was the exact inverse to the action we saw near the lows in the beginning of the month.

[caption id="attachment_5342" align="aligncenter" width="300" caption="SPX chart 10/10/11 from Bloomberg"][/caption] [private]

Yesterday’s overwhelmingly bullish action could be powerful for the continuation of the rally, if the all or at-least 2 of the following were to happen in the near future: the news continues to get less bad relating to Europe, U.S.earnings and Q4 guidance come in better than expected and if in fact China is not slowing then we could see hedge funds throw in the towel on their short bets, and get long, and then adding fuel the fire mutual funds do what they know how to do best, chase performance until they have bought every last share of every last stock they can get their hands on.

The chart below, which many of you have become very aware of over the last couple months, shows the fairly tight but volatile range the SPX has been in since breaking down in late July.

[caption id="attachment_5343" align="aligncenter" width="300" caption="4 month chart SPX from Bloomberg"][/caption]


In a lot of ways, what the SPX does on its next attempt to break through the resistance in the 1200 to 1220 range could hold the key to the performance of the index for the balance of the year.   If some or most of the potential catalysts don’t materialize in the coming weeks we could be headed right back down to 1100 level and if we do again I fear that we could establish a new range between 1100 and 1000…..

The SPX’s 11% rally off of the lows from last Tuesday while fierce and rather convincing, could find itself undone by a factor unexpected by most market participants until just a few weeks back…..China.  Unlike the situation in Europe, or the health of our economy here, the economic situation in China is not likely to be as transparent for those hoping to get their arms around the potential affects of such a slowdown on our economy. China had been tightening since about the time our central bankers embarked on their QE2 folly and are now faced with the potential of a hardlanding that could send shockwaves around the world, a world that is desperately looking for pockets of growth to help get out of this summers soft patch.

For those commodity watchers out there I guess there is one chart that could be telling for what we have in store for us as it relates to Chinese demand, Copper.  China is the largest consumer of Copper, somewhere in the range of 30-40%, while the U.S. is only high single digits…..many traders perceive Copper’s recent sell-off (nearly 20% in a month) as a strong signal that demand has fallen off a cliff of late as China’s intention to slow the pace of their property bubble was finally too successful.

[caption id="attachment_5344" align="aligncenter" width="300" caption="4 Month chart of DEC Copper Future from Bloomberg"][/caption]


I guess we will get a good sense of what is behind this decline as we start to get some data out of China this week: CPI and PPI on Oct 13th, and next week GDP and Industrial Production on Oct 17th.  China is clearly the “canary in the Copper mine” and the European debt crisis could be a side-show if China truly is weakening greater than most expect.

As for today and the balance of the week, I think the stage will be set by Slovakia’s vote for the EFSF, a deeper look into Trichet’s comments regarding the European Debt Crisis  (The crisis has reached a systemic dimension,”) which helped the major indices push to lower levels shortly after the open, and a focus on U.S. corporate earnings…..I want to try to fade yesterday’s rally and 1200 seems like a good level to get in there….but it may be prudent to first get a sense for who the market will perceive earnings results from GOOG and JPM in the coming days……


MorningWord: 10/10/11:  European markets and our futures are up this morning as the news continues to sound “less bad” relating to European debt crisis………Merkel and Sarkozy yesterday pledged ” again” to recapitalize Euro banks if necessarily.  European indices are up small across the :board as the S&P futures are up more than 1% as I write at 9:05am.  [private]

The yield on the 10yr quietly closed above 2% for the second day in a row on Friday after spending 2 weeks below that mark.  I guess the biggest mover of the day is the Euro vs the U.S. dollar, up almost 2% on the recap talk of European banks…… Crude and Gold are both up this morning, but it is the chart on Gold that I find interesting here…..After about a 16% drop in a month, the commodity has based right above support at the 1600 level and seems poised for a big move one way or the other in the near future.

[caption id="attachment_5310" align="aligncenter" width="300" caption="1 YR Gold chart"][/caption]


As for the SPX the chart below is the one that I want to focus on….since making a a near term high Aug 31st at about 1230, the index has made a series of lower highs and lower lows since that day…I want to continue to try to fade this move at the high-end of the range…especially from an intra-day perspective….I think gap openings like today can be faded on the short side with tight stops, until proven otherwise…..


[caption id="attachment_5314" align="aligncenter" width="300" caption="3 Month SPX from bloomberg"][/caption]


U.S. corporate earnings will be the key this week, and any decent guidance from the likes of JPM, AA and GOOG could be the thing to get us to close above 1200 and make a new level of support……SO again I want to be disciplined and use stops on the short side…..If the situation in Europe appears to be abating and our earnings surprise to the upside….we could get a quick test of 1250.




MorningWord: 10/7/11:   Well, we had kind of a constructive week so far even if it started out looking like we may crash…..Tuesday’s volatility was saved by rhetoric in Europe that was picked up by the FT and caused a late day 4% rally….this is what was said:

“There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Olli Rehn, European commissioner for economic affairs, told the Financial Times. “There is a sense of urgency among ministers and we need to move on.”

“Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” Mr Rehn said. “This should be regarded as an integral part of the EU’s comprehensive strategy to restore confidence and overcome the crisis.”

Not sure there was anything new there, but since that story hit the wires, the SPX is up about 9%……again, not sure there was anything new there…..

I guess what was new is that the ISM was better than expected, the ECB didn’t cut rates as many had expected yesterday, and the jobs data just reported was better than expected, albeit to very low expectations.  I guess the key here was the market rallied in a dramatic fashion to perceived positive and negative news alike…..additionally and maybe more importantly the bank stocks might just have had that capitulation bottom that many have been looking for.  MS is up 34% from its lows this week after making new multi-year lows…..[private]

[caption id="attachment_5288" align="aligncenter" width="300" caption="5 day MS chart from Bloomberg"][/caption]


Now all that is fine and good, and I have said on a few occasions this week that I am essentially sitting on my hands to see if the rally had legs….I don’t think this is a great environment to continue to press shorts when things get oversold playing for a crash, or chasing longs in fear of missing the rally……The futures are up about 1% as I write at 9am and we should open up somewhere near 1185 in the SPZ…..this is a level where I want to take shot at shorting the market and get a little more aggressive at 1200 if the 1185 level doesn’t work….if the market can’t hold its gains this morning then I want to press any weakness as I perceive we are near-term over bought.  I do this with SPY or SDS (which is less appropriate for most readers) and I use tight stops….I will short, get stopped out, and then do it again, until I realize we are not going down or until I get it right……

[caption id="attachment_5289" align="aligncenter" width="300" caption="5 Month SPX chart from Bloomberg"][/caption]


The key to this strategy is to try to take in different inputs that are telling you that buyers are getting a little exhausted…..I will keep a close eye on banks and some high-fliers that have had massive 2-3 day runs…..if they start to lose their steam, I will take a shot on the short side….the other key is not be too early… many of you know the most activity that I had on the trading front was covering shorts on Tuesday…..I am trying to let some longs run a bit…..but I refused to get caught short in this rally.   This has afforded me the opportunity to add an AAPL long on weakness and now take a shot on the short side…..I will not be stubborn in this endeavor….if I am wrong and the rally starts to broaden out and we close above 1200 then that might have been it for the selloff……

Since the the Aug 9th low and up to Tuesday I was convinced that the low for the year was not in……I am not in that same camp after we did what i felt was necessary… now it goes back to what I wrote on Tuesday in this space:

From MorningWord Oct4, 2011:

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.

SPX May 1, 1998 to Oct 23, 1998 from Bloomberg


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?

SPX May 1, 2011 to Oct 3, 2011 from Bloomberg


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……


And Again, I don’t have those answers……..But U.S. corporate earnings to be kicked off next week for the third quarter could hold the key….and obviously if the news in Europe got incrementally better….



MorningWord: 10/6/11:  ECB did not cut rates as many market participants expected and now it all comes down to tomorrow’s jobs data…..The DAX was up over 2% prior to the rate decision and our futures were up about 1%, both are now down….the Euro continues its weakness vs the dollar and Gold is flat….after the almost 6% rally from Tuesday’s lows the market is likely to consolidate here to trend lower over the course of the day as tomorrow morning’s data will certainly dictate whether the next 50 points in the SPX is up or down.

As for my own trading this week I have been quiet, I spent some time Tuesday covering some shorts and getting down to the tag ends of some winners to the downside….I have repeatedly said over the last few weeks that I refuse to get caught short in what could be a vicious V reversal from an oversold condition and I have acted accordingly….I have also resigned myself that the likelihood of catching the bottom is not great and I will look to pick at some beaten up names from the long side without getting too dug in…..

While the news cycle concerning Europe appears to have become “less bad” of late, there remains considerable risks….If the period from early June to now has taught us anything as it relates to the brewing financial crisis in Europe is that just when you thought it was safe to get back in the pool one or a couple of the 17 Eurozone members find a way to screw things up….There are no quick fixes here….

I know I sound like a broken record here, but Tuesday’s lows in the banks stocks remains the key test here, and I know I know it is a moving target depending on the week….If those stocks appear to be threatening to break those levels and make new lows, than that will be the true test in my opinion if we are going to make new lows in the markets…..

After the Jobs data tomo, all eyes will be on U.S. corportate earnings which get kicked off next week in earnest with names like AA, PEP, GOOG and JPM all reporting.  The guidance and visibility of these companies will likely be the driving force for the equity markets for the balance of the year and not Europe…..If our earnings picture appears to become affected by the uncertainty in Europe than watch out below……Even with implied volatility at very elevated levels, use of options to define risk, use leverage or add yield could be the name of the game in this environment……check back today as I will be adding a bullish structure in AAPL for their Fiscal Q4 earnings to be announced Oct 18.


MorningWord: 10/5/11: Well, yesterday’s action, even before the last hour’s 4% rally, was getting a bit whippy….I was starting to see some signs that we are either close to a bottom or we were about to crash…..look at the intra-day chart of Sprint, the stock traded in a 25% range, people, that is not normal.  

[caption id="attachment_5202" align="aligncenter" width="300" caption="1 Day Sprint Chart from Bloomberg"][/caption]


Morgan Stanley, while in the eye of the storm of potential issues about the industry’s capital levels also traded within a 20% range peak to trough closing up 12.5% on the day after making new multi year lows.

[caption id="attachment_5207" align="aligncenter" width="300" caption="1 Day MS chart from Bloomberg"][/caption]


AAPL’s 5% sell-off immediately following the introduction of their much anticipated iPhone 4S, while not unexpected given the build up into the event, was again certainly not normal when you consider that the stock closed down 2.00 after being down 18 at one point and trading in a 7% range peak to trough….

As I said in yesterday’s morning comment I think we were getting a little oversold and was fearful of a V reversal and did not want to be short…..As most of you saw through my updates starting in the morning, I started aggressively cutting short positions and I am now down to tag ends running a very neutral trading book.

As for now I want to see if this rally has any legs whatsoever, if we give back half of the gains achieved yesterday over the next day or so, traders will have a very difficult decision to make, whether to try to press shorts and re-test yesterday’s lows or whether it is a healthy consolidation and the markets are getting ready to stage a little bear market rally in the range of 5-10%.   Unfortunately, this week’s ECB meeting, any incremental news out of Europe about recapping banks and our own Jobs data Friday will dictate this action……

As for today, I would not be surprised to see a little consolidation after such a monstrous run in such a short period of time and I would be very surprised to see another big rally…….So I am going to remain balanced and wait a bit here, sitting on my hands for a day may be the most profitable thing I can do at the moment.

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.