MorningWord: 12/27/11

by Dan December 27, 2011 9:00 am • Commentary

MorningWord 12/27/11: While I am kind of back to it (I still have a few slopes to get nasty on this week), I want to reiterate that this is not the sort of market that you want to dig your heels into…..Last week saw the SPX start the week by testing its 100 day moving average of about 1200 on the downside, only to bounce and break-through, and close above its 200 day moving average on the upside.

6month SPX chart from Bloomberg LP


This is obviously pretty healthy action from a technical perspective when you also consider that the SPX gained about 3.5% in that time period to place the index in the green for the year with only 4 trading days left.

This sort of window dressing in a normally seasonally strong/low volume/low conviction environment doesn’t really impress me too much, and thus my dis-interest gauging any sort of trend from the recent performance.

There continues to be cross-currents, and last week happened to show-case a couple in a very stark manner.  It is difficult to argue that the economic data here in the U.S. is not getting better and that it appears that we are “de-coupling” a bit from the potential recessionary environment in Europe and the fear of a cooling in the emerging markets, specifically China.  Our data on the housing and employment from are showing slight sings of life,  albeit from decade long low readings, but I guess the icing on the cake has been the better than expected durable goods and consumer confidence data that we got last week.

All of this may be explained away as seasonal in the coming weeks but I guess the real test, and what I perceive to be the real cross-current will be U.S. corporate earnings that have seen some signs of weakness as Q4 limped into its final month of 2011.  Last week’s earnings disappointment and guide down for the current quarter caught many (including me) by surprise.  For a company like ORCL who has been consistently meeting or beating expectations for the better part of the last year, to see some of their weakness come from their bread and butter licensing revenue and application sales caused many analysts to cry foul.  When weakness arose over the past couple years since ORCL’s acquisition of SUNW in early 2010, the company had usually explained it away as growing pains in with their new hardware initiative, but while SUNW’s business continued to stink, the overflow to ORCL’s core business was certainly cause for alarm sending the stock down 12% the following day, back within in a few % of the 52 week lows and down solidly for the year at about 17%.  ORCL’s disappointment has implications that could throw the U.S. “de-coupling” theory on its head a bit as the company gets ~30% of its revenues from Europe and a disproportionate amount of the overall comes from businesses and governments.  One disappointment does not make a trend, but in early December a number of Semiconductor companies pre-announced misses for Q4, including INTC and if we continue to see misses as we head into Q4 reporting season with murky visibility for the first quarter of 2012, then any gains we have (including last week) into the new year could be setting up forre-trace early in the new year.

The way I see last weeks and this week’s potential for a rally is that we would be “stealing from Peter to pay Paul”.  When you consider what has gone on this year, the May 2nd to Oct 4th peak to trough (intra-day) sell off of more than 21% and the fact that we are basically right back to where we started the year with 4 days left, is by some accounts fairly impressive, but by my account fairly manipulated.    I’ll go back to my little thesis, that everyone, and I mean everyone (well except the ballsy short-sellers) have a vested interested in everything (risk assets) going up!  SO when we are this close to year end, and large fund managers think that by gunning their favorite names into year end they can help performance or maybe even get them paid$, they semi-consciously say why the hell not.  I would go as far to say that some smaller fund managers probably play a little game with some illiquid names with high short interest by establishing positions and then buy them right up into year end in an effort to pad (or add) a little performance to what has been a dismal year for most hedge funds.

The wild card continues to be Europe and as expected the news flow out of the Euro-zone, as it related to their debt crisis ground to a halt over the Christmas Holiday.  I would not hold  your breath for any significant news from policy makers this week and in many ways this lack of news is helping our equity markets, but don’t get lulled to sleep here as the yield on the Italian 10 year has worked it’s way back up above 7% on the eve of the country looking to sell as much as 20billion Euros worth of debt this week.  All eyes will be on this sale (or lack thereof).  As for today, European markets appear to be trading on fumes as most markets are trading about 20bps around even, while the SP500 futures are down about 25bps.  The Euro continues to hove around 1.30, while Gold is down a bit and Crude up hovering around $100.

There are no corporate earnings to speak of this week and just a few economic reports including Jobless Claims and pending home sales on Thursday. The Bond Market will be closed for Friday afternoon, so I would expect things in general to be quiet by Thursday afternoon.  My Plan for the week is to avoid day-trading and look for goofy moves to take the other side of as we head into the new trading week in the new year.  Specifically what I mean is that if banks stocks for instance which have been very hard hit this year, find them on the wrong side of some late year hate selling, or some silly window dressing rally I will look to take the other-side.  Also I will look to see if names like ORCL, which are cheap in my opinion get beaten up into the final tick of the year Friday and will look to buy some of that for a bounce as fund managers may re-establish positions or get back up to market weight…… check back for updates and some names that I will start to put on a hit list….