MorningWord 1/3/12: After a fairly volatile year in 2011 that saw a 21% peak to trough draw-down in the SPX and a 30 plus point surge at its highs in the VIX (but still closing up over 30% on the year), the SPX closed dead flat on the year, who would have thunk it?
The DAX has had a heck of a year so far up almost 4% in less than 2 days of trading after closing down about 15% on the year in 2011. This sort of early enthusiasm could have some legs, but I sincerely doubt that we have seen the lows of the year (haha). The higher they go in Jan the harder they will ultimately fall when European sovereign debt fears hit once again…..
Even with the relative calm int he equity markets over the last few weeks, there continues to be signs of fear……..As I mentioned above, the VIX remains elevated well above the historical average of ~20, but with the new year rally it will be interesting to see how long it holds before once again becoming a teenager (the VIX has remained above 20 since July 26th). As European equity markets rally the yields on European Sovereign debt remains elevated towards last years highs….the yield on the Italian 10 year continues to hover around 7% signalling continued fears that the crisis is not over.
As I write at 9am the S&P500 futures are up about 1.6%, about 50 bps off the opening highs……while Europe’s equity market strength can be attributed to better than expected manufacturing and unemployment data in Germany, but all eyes will be on our own ISM Manufacturing data to be reported at 10am today.
The Euro is trading at a one week high vs the US dollar and back above 1.30, while crude oil is back above $100……Gold is having a day after collapsing into year end to close at the lowest levels since mid July after falling almost 20% from the peak made in Sept.
As for our equity markets I think it is important to keep an eye on the banks, after many suffering their worst performance ever (excluding 2008 of course) it will be very telling to see if they fall right back into the pattern of last year of taking one step forward and 2 back, or whether they can actually start the bottoming process……As I noted in this space on a handful of occasions in December, many fund managers might have been exciting very unprofitable holdings in the banks to get them off of their sheets into the year end, possibly for tax reasons only to reestablish new positions in similar but different names in the new year. Many savvy market participants feel that the banks stocks hold the key to any sustained rally in US equities…..and this relatively un-savy market participant agrees.
I am also keeping a close eye on many of the high valuation growth names that in my opinion started to come undone last year, names like HANS, GMCR, LULU, DECK, RL, CRM, NFLX, GRPN, LNKD, SINA, BIDU, WYNN and the like…….early strength in this group clearly shows conditioned appetite for risk, but I would argue the more bullish would be the selling of these sorts of names and the move into more stable holdings……..Either way I expect these stories to come back to earth one by one as AMZN, NFLX and GMCR did in Q4.
Oh and then there is AAPL…..everyone’s favorite. I have a lot to say here and am writing up some thoughts regarding this stock for 2012 and beyond. After fairly dramatic out-performance last year (up 25%) vs the SPX unchanged and the Nasdaq down a little less than 2%. I think the likelihood of an early rally followed by under-performace as investors digest the company’s prospects for its first full year without Steve Jobs is fairly strong. The company will get an early test as media reports suggest that the company is holding a press event in late Jan that will focus on iBooks, my goodness who cares, just put out a press release and get back to trying to innovate. Remember the Stocks reaction in Oct to the “evolutionary” release of iPhone 4s, get ready for more disappointment, or “sell the news” price action after Tim Cook fails to captivate the Apple faithful during these events.
As for my own trading I come into the year with the least amount of positions in more than a year and find myself largely in cash……..I will look to the 2011 playbook of taking profits on longs when things get extended and laying out shorts soon after and conversely covering shorts when things get oversold and even getting long shortly after. Again it comes back to not forcing things in an uncertain market, I am going to sit back a bit until a clear trend exists or things get a little overdone on either side.
Either way I am excited to get back to trading after a couple weeks off, stay tuned.