Trading Diary: Jan 3rd – 6th

by Dan January 8, 2012 10:57 pm • Commentary

The new year got off to a bang right out of the gates on the heels of an impressive rally on Monday in Europe while we nursed our hangovers for the second straight day.  After only just 2 trading days on Tuesday afternoon, the DAX had reclaimed almost a third of its 2011 losses of 15%.   The “January Effect” was in full effect.  The SPX got off to a decent start Tuesday, but after gapping up almost 1.75% on the opening tick above its 200 day moving average, the index spent the balance of the week trading in a fairly narrow range, mostly between 1270 and 1280.

5 day SPX chart from Bloomberg LP


In many ways this action has some conflicting messages for the early going, while it was fairly impressive that the index had 4 consecutive closes above the important technical level, it is also evident that we are in a bit of a holding pattern as the markets wait for news from tomorrow’s Sarkozy/Merkel meeting, and maybe more importantly given Friday’s U.S. unemployment data, Q4 earnings reports and Q1 guidance to either confirm or refute the recently improved economic data (barring pre-announcements, we will likely have to wait until the week of Jan 17th for earnings season to really kick off).

I for one am taking a wait and see approach and find myself with fewer trading positions than I have had in a very long time.  I honestly have no clue what is going to happen in the early going of 2012, and in many ways the markets are also telling you that most market participants don’t have a clue either.   The fact that the SPX closed on Dec 30th at the exact same spot it started 2011, after being up about 10% in the Spring, and down about 10% in the Fall, coupled with a historic spike in the VIX, tells me that no one has an effen clue.  Well except maybe the overseers of your 401ks, the genius mutual fund managers who usually only know how to buy high and sell low.

A perfect example of this behavior is the 4 day rally in MSFT this year,  seriously WTF??  Can anyone tell me what changed in the story between Dec 30th when the stock closed at 25.96 and Friday Jan 6th when the stock closed at 28.10?  I’ll answer my own dumb question, nothing changed other than some genius at Fidelity, or Wellington decided that after 10 years of sideways action this was finally the year the stock would outperform its peers and quite possibly the markets. But yes,  the company does have a 2.84% dividend yield, $45billion in net cash, and only trades at 10x earnings.  If I had a buck for every-time someone suggested buying MSFT over the last decade because it was cheap, well you know the rest, but I guess that is probably not the reason to buy the stock….the reason to buy cheap stocks is because you feel they have a catalyst that can help them grow future earnings.  Given some of the negative semiconductor pre-announcements in December (including INTC) I would suspect that MSFT will have less than inspiring Dec qtr results when they report Jan 19th and offer very little hints as to how they really intend to grow their earnings from the less than inspiring 5% expected growth this year.

On Wednesday I made the case that implied vol in the name looked very cheap and decided to buy some out of the money Jan Puts, and followed up on Friday (after the stock had rallied ~2% from my initial trade) by buying closer to the money puts.  I think there is a fairly decent chance that if the stock does not go too much higher, or possibly retraces a bit of the recent strength that implied vol in the name will at least stay bid at current levels or possibly go higher between now and their earnings announcement.  I like fading this recent move.

Early in the week I wrote a bit of “think piece” on AAPL after reading the Steve Jobs bio over the holidays.  I laid out a case, 99% conjecture why the company might be on the verge of an innovation plateau and why the stock may have a far more difficult time over the couple years as it has over the last couple.  We encourage readers to take another look and have opened it up for comments.  We are very eager to hear what you guys have to say, as we expect that most will disagree with the thesis………..but that’s what makes a market.  (Read and comment here)

Thursday morning I tweaked a position in INTC that I put on in early December playing for negative sentiment in the Semi space heading into what I thought would be disappointing outlook from TXN into their mid qtr update.  Not only did TXN disappoint, but INTC pre-announced a poor 4th qtr.  At the time I took some profits on half of the position in my Jan Put Spread as I had a nice gain that turned out to be a double from my initial purchase price.  On Thursday I decided to cover the short strike of the balance of the Jan put spread and add the long strike as the stock had risen all the way back above the level where I first put the position on.  At this point I am averaging back in, albeit at much cheaper price levels given all of the decay in the options since early Dec.  I am now playing for weak Q1 guidance, as we already know that Q4 will come in below expectations.  This may be pressing things a bit as many analysts figured that some large orders were pushed into Q1 and the company may be able to actually beat Q1 if they are able win back some of the lost Q4 business, I would say at 25.40 that is in the stock, and disappointing guidance could send the stock back to 23.00.

Late Thursday staring at BAC’s 8.5% rally on the day and the 13% ytd rally at the time I thought things were getting a bit frothy as the stock hadn’t seen a downtick in hours on the rumors that the White House was about to announce a mortgage refinance program……With a low dollar stock like BAC that has been down so much over the last year, and sentiment probably the worst in the space I think you would have to be a bit crazy in the first week of the year to outright short the stock, but with 50 cent strikes, there are plenty of low premium ways to express this view while defining your risk.   With the stock up on a spike, I bought a .5o wide (kind of close to the money) Jan Put Spread that would capture the company’s Jan 19th Q4 earnings release…..I paid .10 for a .50 wide Put Spread that pays 5 to 1 if the stock is trading at levels seen in the last week of 2011.  It won’t take much to break-even on this trade with the slight bit of bad news, I like these sorts of contrarian plays into events where I define my risk and risk what I am willing to lose.

Sticking with the bank thesis,  on Friday’s Option’s Action (and previously on the site) I laid out a near term bearish thesis on JPM heading into their Q4 earnings report on Friday morning Jan 13th.  I bought the Jan13th weekly 35/33 Put Spread for .45, playing for a pull back heading into earnings and possibly an outsized move following….the options market is only implying about a 2% move.  The action in Deutsche Bank last week, down about 9.5% vs the DAX which is up about 2.7% in that same time period is a bit troubling.  Something stinks here, and with the yield on the 10 year Italian treasury handily closing the week above 7%, and the Euro in a free-fall closing at practically the dead lows of the week and at 52 week lows, our banks stocks don’t appear have gotten the same memo as their European counterparts that the Sovereign debt crisis has not been resolved.

SO early this week Europe will likely dominate the headlines as we sit and wait for the bulk of U.S. corporate earnings to get underway. As usual I like most others have little edge on this front.  As the Euro approaches 1.25 against the U.S. dollar I will look to take some more profits in the FXE Jan 130/125 Put Spread that I bought in late Nov as this has been a nice gainer for me.

I remain a bit cautious here and as evidenced by my positioning (or lack there of) I don’t have strong conviction, but I want to take advantage of situations where I think vol or price appears to be mis-priced.