MorningWord 1/19/12: Making a living trading during earnings season is like the equivalent of being a Center in the NFL, you basically get nailed on every play from the guy right in front of you in plain site…..Most of us who are attracted to “trading” equities for a living, do it for the day to day excitement, and we prefer volatility, while most “investors” are a bit more risk adverse and prefer less volatility.
So for us “traders”, we know for certain that every publicly traded company has 4 dates a year, set in stone where management has to spill the beans on the previous 3 month period, and usually offer an outlook for at least the next 3 months and possibly the next 3 to 12. This occurrence obviously has the potential to cause far more volatility than the average volatility for any specific stock on a daily basis where there is not a perceived “event”. SO while there are opportunities abound, there are just as many potential “minefields” during this period, and the truth of it is, unless you are preparing to be in the next seemingly annual insider trading perp walks, you can not possibly have a “take it to the bank” edge, and you are left to just make a bunch of educated guesses based on a ‘process” of inputs that arrive at a trade.
For me in my past life, I invested on an intermediate term basis, and traded actively around core positions, that usually included playing earnings. Most of the time this was expressed through naked long or short positions in the stock. I can’t tell you over the long run that this sort of event tradingadded a bunch of alpha to the intermediate term “investing”, but it sure was exciting……
Now I have a slightly different approach, I still use a very similar process (using many of the inputs that are detailed in my posts), but I will use options, usually from a long premium perspective and define my risk. This strategy will only make sense if you size the positions correctly, meaning because you are defining your risk, and risking what you are willing to lose that you don’t get too geeked up with the leverage you get from options. SO the idea of looking to the options market and finding what you deem to be miss-priced options and applying that to your fundamental thesis and placing some chips on the table should be a decent way to trade events where you have both strong and mediocre conviction. So the name of the game is sizing as a key theme aimed towards “portfolio risk management”.
SO Back to the markets……Last night and this morning saw a bit of mixed bag from some Big Tech names…….INTC, MSFT and IBM all posted results that are better than expected and the outlook given was by no means worse than expected……for MSFT and INTC this shouldn’t come as huge surprise given some recent commentary from tech peers, but IBM might have come as a tad of a surprise given ORCL‘s commentary in Dec. GOOG on the other hand had a fairly sizable eps miss that is resulting in a sell off of close to 9%. SO like I said a mixed bag…..
Obviously for today, what should be a busy expiration, the ability for IBM, MSFT and INTC to hold onto their modest pre-market gains (IBM and MSFT up ~2.5%, INTC up less than 1%) should be a fairly important determining factor whether or not the ytd rally is getting long in the tooth. GOOG on the other hand is likely stock specific, but it will be important to see the stock hold in at some point, which it appears to be doing in the pre-market around the $590 level.
My position remains light and very soon I will be playing for a decent move back towards 1250, I have been a little early in a few names like INTC, MSFT and BAC in Jan expiration, but I will be starting to place trades that isolate support ranges in stocks that I think are vulnerable for a pullback in a broad market decline.
MorningWord 1/19/12: By just looking at equity and credit markets this morning, all seems right again in the financial world…..The DAX, now up 8.5% on the year has recaptured more than half of last years losses, the SPX is up more than 4% and sovereign yields in Europe are down dramatically in just the last couple weeks.
Yesterday’s market action was interesting as market participants seemed slightly unsure of what to make of GS‘s better than expected Q4 report with the stock only opening up about 1%, to close up nearly 7%. The SPX had a fairly similar response, as the opening tick, which was down from the previous day, was practically the low, and the closing tick at 4pm was the dead as high……more importantly the index saw its first close above 1300 since July 28th, when the financial world was a very different place.
Bank stocks continue the “yoyo” action we have become accustomed to since last spring, as investors navigate what appeared to be a “minefield” of earnings in the sector in the last 4 days……With GS yesterday and now better than expected results this morning from MS and BAC (both stocks trading higher in the pre-market) the fix seems to be in for the time being.
The SOX was the other big story yesterday in the US markets with seemingly less important names like LLTC sparking a massive rally in the sector that saw the index rise 5% and many of the components up high single digits. What I found more interesting than stocks like LLTC, PMCS, ALTR & TXN up more than 8% on the day, was that stocks like INTC and QCOM dramatically unperformed most of their peers. This is peculiar because those 2 names are considered best positioned in PCs and Mobile respectively. Obviously investors are searching for beta, but there seemed to be an interesting trend as Old, Big Tech seemed to lag yesterday. For instance CSCO was up 1.2% as JNPR was up 6%, MSFT was basically flat on the day as CRM was up 4%, GOOG was up only 70 bps as GRPN was up 5.5%…..u get the point, but the Nasdaq is clearly driving the train so far this year with the index up close to 6.5% vs the SPX up 4%.
Tonight’s earnings from MSFT, INTC and GOOG may give us some answers to where investors will make money in Tech this year. As I have said on a few occasions of late, and appears to be evident from the Q4 earnings reports we have had so far, weak Q4’s are “baked into the cake” at this point, and if commentary about Q1 continues the way it has in the early going of earnings season than this rally could test last years highs, in what is shaping up to be a little bit of a blow off top.
My own 2 sense is that if you have been cautious like me and have not participated in the ytd rally than it probably doesn’t make a ton of sense from an intermediate term perspective to jump in now as I do feel there is a strong likelihood that we will see all major equity indices down on the year at some point in the next few months…..
So for today, I watch to see if the banks and the Sox can keep it’s upward momentum into what will be some important earnings reports tonight. Futures are pointed up this morning, and again the S&P is up 38 bps while the DAX is up 70 bps…..I would suspect that we take a bit of a breather and try to consolidate above 1300 a bit before they stage a move higher to test 1350.
My own position remains fairly light, as many of you have noted in recent correspondence, I have been a bit cold on direction on single names and the market. Yesterday’s trade in EBAY is a good example of doing some work on a name, and making a “low conviction, low premium” bet that if it doesn’t work, no harm no foul. But the way I think about it, I spent a couple hours on the name, so I can make what I deem to be my best judgement and put a small amount of capital to work that offers a high risk reward, but doesn’t break me if I am wrong. As a trader I am in the business of putting capital to work, what I am trying to do is make the best judgements on how to allocate that risk capital on what I feel are my best Ideas. If for instance as I said in my EBAY post, “I want to make a very short term BUT NOT VERY HIGH CONVICTION PLAY that Q4 is inline , but Q1 and 2012 guidance below expectations and the stock heads straight back to support at $28.00” than that should be taken at face value and not sure can be perceived as a fist pounder.
MorningWord 1/18/12: Yesterday’s price action in US equities was a real head scratcher with the SPX only closing up 36 bps, less than 2 points off of the lows of the session on a day that saw the DAX up more than 1.5% and the Shanghai Comp up almost 5%. Our markets feel a bit tired to say the least, or maybe just a tad fatigue from a long period of out-performance vs most every other equity market the world over, or maybe it is just a case of neglect by investors looking for more leverage to a potential rally fueled by the reflation of global growth. Either way, its all fine and good because in some ways the US will be best positioned to benefit from that potential occurance and likely be the safest place to be whether the markets go up or down.
But for now we wait and see what is in store for us from corporate earnings which start in full force today. As I have been saying in this space for a couple of weeks now, a weak Q4 2011 is baked in the cake at this point given some recent reports and late 2011 pre-announcements. So the real driver for the next few weeks and probably the most important factor to whether or not the SPX sees last years highs at some point this quarter will be guidance given in the next 2 weeks by the bulk of the S&P500 for Q1 and 2012.
For many multi-nationals, they still face some of the same headwinds that they did in the back half of 2011 as it relates to input costs with commodities like crude oil above $100, but now throw in the 11.5% drop in the Euro vs the U.S. dollar since Aug 30th and currency starts to play a potential brutal blow-back to an environment that should start to see re-acceleration of revenue growth.
Price Action in the bank stocks obviously continues to capture most market participants attention especially when you consider the out-performance by the sector in the first half of January. Citigroup‘s 8.25% drop yesterday following disappointing earnings was in some ways a bit eye-popping when you compare it JPM‘s mere 2.5% drop Friday following it’s own lackluster report. Citigroup gave back about half of its gains on the year in one day and vastly outperformed the implied move in the options market. This tells me there was just a tad bit of complacency in the sector as we headed into this weeks plethora of earnings.
Today will be an interesting test for the sector as GS reported this morning and solidly beat (previously lowered) expectations on tighter cost controls. The stock is bid up in the pre-market by only 1.5% and I suspect it will be down on the day shortly after the open….this will be the moment of truth for the sector as we head into reports by MS and BAC tomorrow that are likely to look a bit more like Citi’s than GS’s. If the stocks can’t hold onto a good portion of the 20112 gains then we may be right back to the financial stock playbook from last fall. I am long Feb upside Calls in GS, not playing for the qtr but thinking if anyone of these stocks could start to discount some of the ills of 2011 it will likely be GS first….but I am still long a boat load of BAC Jan 6 Puts that will be very difficult to recoup the premium from unless we get a monster move into and out of their Q4 print tomorrow morning…….
As some of you might have seen on “Quick Hits” and in my update on INTC, I day traded some stocks from the short side yesterday……INTC I felt should have been down on the JPM downgrade and it was not, but interestingly it reversed with he market in the second half of the day……again INTC will come down to Q1 guidance and I honestly believe that companies like INTC will lie and hold guidance in line with consensus even if they think there is a chance that the qtr will be weak…..the way they see it they have 2.5 months for things to turn around and why jump the gun. This is why any trader or investor who suggests they have an edge in playing earnings on a pure fundamental basis probably knows something they shouldn’t.
As we head into the meat of earnings this week I am going to do my best to avoid the urge to play binary earnings events and will look to stretch out the duration of the trades…….A good example of this would have been JPM last week…..rather than using weekly options to play the event, if I had used the Jan regulars I would have still been in the game with yesterday’s follow through that saw greater weakness than Friday…….The name of the game is too book winners when playing events and I will continually look for the most advantageous risk/reward relationships.
As of 9am, the S&P futures are now down on the day showing a bit of continuation from yesterday’s late day weakness…..barring any huge positive earnings surprises this week I think there is a good chance that the markets just crossed the threshold from glass half full to glass half empty. The quick early gains in world equity markets have now shifted to a bit of a “show me story”……so now all we can do is sit and wait a bit.
Also stay tuned for a preview on EBAY’s Q4 for tonight, and working on GOOG for tomo.
For as long as I have been in this business, living through the; Asian/Russian debt crises/Long Term Capital/ internet stock market bubble in the late 90, real estate bubble and our own debt crisis here in the previous decade and now in the last year with the European Sovereign debt crisis, the question that I have been unable to answer or have adequately answered for me is the the U.S. economy and capital markets, the tail wagging the dog?
In times like these it seems like we are not and the truth is, the answer to the question does not by an way shape or form help make you money in the markets, but recognizing who’s driving the train can most certainly help you make better informed trading decisions on a day to day basis.
Overnight, even-though China posted their weakest GDP reading in 2.5 years, the 8.9% print was higher than the forecast and launched a massive rally in the Shanghai composite of almost 5%. Investors are clearly seeing the negative as a potential positive, more easing. While the Shanghai Composite is up about 4.5% ytd, it is still down about 25% from its April 2011 high and only up about 7.5% from the 52 week lows. So I guess my point here is that while China is grabbing the headlines this morning, their equity markets have a ton of “wood to chop” to get out from under the bear market they are currently in.
Taking a look at some of the other dogs in the Pound this morning, Europe is trading fairly well for the second day in a row since the downgrades of many EU nations debt ratings from the venerable Standard and Poors organization. Since Friday’s close, the DAX is up about 3% seemingly unfazed by the fact that not only will many EU nations pay more to borrow but so will the EFSF. The DAX much like Shanghai has some “wood to chop” getting out from under the bear, with the index sitting some 19% below last years highs, but for the first time in months trading within a couple % of its 200 day moving average and quickly approaching the massive support/resistance level of 6500.
SO what to to with U.S. equities? I suspect we will have that answer in the coming days and in some ways we may continue to under-perform both the upside and downside moves that our European and Asian friends have been subjected to over the last 12 months. Our markets reaction to continued weak bank results and any negative surprises similar to what we saw from multi-nationals like ORCL and INTC in December should set the tone for the coming months. At this point it is a wait and see in my opinion I see no real advantage to digging in too hard on either direction at the moment. As I have repeatedly stated in this space, if you think for a second that the lows are in for the year and that we will not be down at some point on the year, than you better think again. I am in the camp that there will be a much better entry point in the coming weeks for U.S. equities, but the difficult question where does the sell-off begin, here or above 1300 in the SPX?
I think it is important to note that as of 9am, the DAX is up 3% in 2 days and Shanghai up a little more than 5% and our futures are only up 70 bps. Ask yourself who is wagging who here if you want, but our equity markets seem a bit tired and not as willing to climb a wall of worry.