MorningWord: 12/21/11

by Dan December 21, 2011 9:07 am • Commentary

MorningWord: 12/21/11:  Let the window-dressing begin, yesterday’s equity market surge of 3% in the SPX and almost 3.20% in the Nasdaq was a bit head-scratching as the main catalysts were better than expected Business Confidence in Germany and Housing Starts here in the States that saw a big jump.  But A 3% rally? seems a bit suspect.   This morning European equities are cooling with the DAX unchanged on the day (after being up about 2%) and the yield on the Italian 10 year up above 6.8% on the news that 523 European banks took advantage of the cheap funding from the ECB in a new program.  This news was initially taken as a positive as many thought program participants would use the funds to buy Italian and Spanish sovereign debt, but since has cooled both the debt and equity markets, while the Euro is now down from a 1 week high.

The S&P futures are also unchanged on the day, but down about 1.3% off of the overnight highs…….As our economic data continues to point to a better than expected recovery, U.S. corporate earnings continues to provide headwinds.  Last night many had their eyes on ORCL as their results and commentary could offer some visibility into questions like demand from corporations for IT products and demand from geographic regions like Europe where they get almost 30% of their sales from.   The problem is that ORCL’s reported results and guidance for the current quarter were weak across software, hardware and services, with few geographic regions standing out….ORCL is down 10% in the pre-market hovering above the August lows….this will clearly be a drag on tech sentiment as we head into year-end (or it should be) especially when you throw in the last couple weeks pre-announcements from semiconductor giants INTC and TXN.  Yesterday I looked to Jan options looking to play ORCL for a bounce and this was obviously wrong, At this point I will probably not sell the Jan 30 calls that I own but will most definitely cover the Jan 32 calls that I am short as they will generally be worthless.  (check back after the opening for more color on this).

For my own trading, my book is very light, I am in Holiday mode and trying to be on vacation, after last night’s earnings trades in ORCL and NKE, I prob should have stayed on vacation.  If yesterday’s market action told us anything, it is that things will continue to be whippy and in some ways this could offer some opportunity for those active engaged day traders, but for those looking to avoid “disasters” into the year end this could serve as a small challenge.  Whether I am on vacation or not, these would not be markets that I would be that active in due to poor liquidity and to what I would expect to be a declining volume environment.  Also I have been saying this for at least a week now, the event trades that I am doing (last night’s) are on significantly less capital than normal, it is hard to have a ton of conviction on a market that has half checked out.

So I guess the point here is play small and keep things tight.  As many of you know I am not a fan of owning stocks or shorting into events, and ORCL’s 10% sell off this morning is exhibit A.  I risked .50 to maybe make 2.00 if the stock was up 10% in the next month, if I sized this position properly, which I did, I will lose much less money than if I bought a corresponding position in the stock.  This is the name of the game here, define your risk on events where you maybe have a 50/50 chance on making money.

 

 

 

MorningWord: 12/20/11: Equity markets are reversing yesterday’s afternoon weakness on the heals of lack of negative news out of Europe and better than expected economic data in the U.S.  This is becoming a trend, and the glass has clearly shifted towards half full as it relates to the direction of our housing, manufacturing and employment data.Housing starts and permits are hitting levels not seen in a year, at a time where earnings, even though we have seen some disappointments of late are heading for record highs as it relates to the S&P 500.

The last 24 hours in the SPX may be a bit indicative of what to expect for the balance of the year.  As we head into  Holiday shortened weeks, with little economic data and corporate events like earnings, and most market participants looking to take a breather after a long and exhausting year, volume should be light and market easily manipulated.  This is not a good time to make significant bets as price action may be misleading on a day to day basis and we could see a bit of yo-yo action as we head into year end.

The banks are still the sector to watch, and yesterday as BAC made a new closing low from March 2009 and GS quickly approaches its Oct 4th closing low, I fear that the course of these stocks over the coming trading days is likely to be the course of the market into the Dec 31st close.

With the SPX opening up over 1% I would think this is as good as shot as any, much like yesterday to trying selling the opening (with a tight stop), but again, if the banks start to fail after yesterday’s weakness this is all you will have to see to gain the conviction needed to put the short on an stay short.   But you have to watch those “risk”trades like long Euro, Long Crude and Long Gold all of which appear to be rebounding today…..I covered half of my FXE short last week as I thought the Euro might have hit support near term after such a big move lower and it appears the Euro vs the Dollar is re-tracing a bit of that move this morning after being stuck around 1.30 for the last few days….I will keep a close eye on this one.

ORCL’s fiscalQ2 earnings tonight will be closely watched for their commentary surrounding their European revenue exposure as it accounts for about 30% of their total sales.  Look for my preview after the opening.  

So again, the name of the game is avoid disasters and keep things tight in what is likely to be a low volume whippy remaining days into year end.

 

 

MorningWord: 12/19/11: Not a ton to add this morning, as Asia was weak on the news of the death of Kim Jong Il (let’s all take a moment,) I guess the simplest explanation for the weakness is the new uncertainty that faces a recent center of tension (the Korean Peninsula) and the new leader who has the potential to be entirely unpredictable (you know that old saying about “better the devil that you know.”)

Europe is up about about a % point across the board on some talks of European finance ministers meeting to secure greater finding from the IMF for bailout funds……I can’t imagine much will materialize in the next couple weeks before year end, but these comments are being met with some more sobering commentary by ECB head Draghi regarding a potential Eurozone breakup without making further commitment to supporting Euro sovereign bonds.

I am going to take things a bit light between now and year end and will not be doing my normal intra-day trading of index etfs as I am trying very hard to take a little vacation….but I do expect volume to fall off a bit until we may see some late year action setting up for the new year as large funds look to exit poorly performing positions and set up with new crappy names for a little “dogs of the Dow” play.   So again the name of the game is to avoid any late year disasters, and anything you want to take “punts” on I think it makes sense to do it with dramatically decreased size….this is how I attacked a few event trades last week and when they didn’t go my way I wasn’t too worse off for wear.

 

 

MorningWord: 12/18/11: As we head into the last expiration Friday of 2011, there continues to be a stark divergence between the performance of U.S. equities and that of almost every other developed nation’s equity market performance.  As for 9am our futures are up about 60 bps as the DAX is basically flat.  Whats interesting about this is that the Euro is actually up a tad for the second day in a row, while yields on European Sovereign debt are in fairly dramatically.  

U.S. economic data that continues to be constructive is one of the drivers for this out-performance, and  many market participants believe that any lasting resolution to Europe’s debt crisis that avoids global recession, could be the final piece of the puzzle to get the bull running  again.  U.S. corporate earnings continue be mixed with most disappointments being blamed on Europe or natural disasters in Asia, and many feel that continued slight improvements in employment and housing market hear could add a bit of fuel to the fire……

On the close last night we had some earnings in the tech space and the results couldn’t have been more divergent.  RIMM had already pre-announced their fiscal Q3 a couple weeks ago and the stock had been down about 20% since….expectations weren’t exactly running high into the print, but with the company’s reduction of Q4 guidance and the push-out of their QNX based funds too some time in the second half of 2012, this could be the death rattle for this company.  Yesterday I  bought a calendar call spread in an effort to take advantage of the elevated implied volatility in Dec for earnings and look to cheapen the purchase of longer dated calls.  This trade should be ok, and given my original intention of not expecting much from last nights print, at this point I will just sit and wait a bit for this management (or outsiders) to finally realize that they are screwed and need to take aggressive action to save the company.  The stock is down about 11% in the pre-market and I would not expect anything else in tech to trade lower in sympathy (other than some of their large component suppliers) as this is a very stock specific story.

On the flip side, ADBE reported their fiscal Q3 last night and beat expectations, while their Q4 guide was mixed to lower.  Expectations weren’t exactly high running into the print and without a significant downgrade to expectations the stock is trading higher by about 5% in the pre-market.  Nothing really stood out to me yesterday in the name prior to earnings and in with little conviction as stated in my post (read here) I bought a Dec Put Fly in the name to play for a slightly outsized move to the downside following the report.  With just one trading day to expiration this position will most likely be a total loser (barring any big reversal in the market).  For those who watch my trading closely I ask that you go back and re-read the ADBE post from yesterday.  It is important to me that we focus as much attention on losers as we do on winners in an attempt to learn from the losers.   As it relates to ADBE, I think it is fairly clearly stated that I didn’t have strong conviction to the short side but that is the way I would lean with a gun to my head.  I think it is also important to remember that position sizing is key to this whole game in and with an eye towards capital preservation.  Here is a situation where I wanted to play but without a lot of conviction I stuck to a low premium structure in an effort to define my risk.  I think it is also safe to say that when I lack conviction I do not commit the same amount of capital that I would to something that I am really geeked up about.  Trust me if you do this consistently you will be pleasantly surprised that total losers on low conviction ideas will not ruin your day, unless your trading book is littered with them and then in that case you should probably liquidated and stop trading for a bit.

As for today, with the futures up 50bps, I will look to short the open using index etfs and play for a test of about 1210 in the SPX which is about the low of the week.  It is expiration and who knows what that will bring, but 1230 on the upside looks like a decent level to place stops.