MorningWord: 2/10/12

by Dan February 10, 2012 8:18 am • Commentary

MorningWord: 2/10/12:  The SPX continued its recent trading pattern yesterday of putting the daily lows in morning, prior to the European close, and then letting AAPL drag it up the rest of the day as that stock seems to slap on an additional $10billion in market cap a day!

For a stock like AAPL, with the largest market cap in the world to be up 3.5% yesterday making its 5 consecutive all time closing high on massive volume has to tell you something.  Now as many of you know I haven’t exactly traded this well this week, but I think we are very near a point at which this could be a great near term short…..yes I did say the same thing this Tuesday, Wednesday and Thursday, but I really mean it today!  As I write at 8:40am, AAPL is trading up in the pre-market with the S&P futures with their worst pre-market action of the year (down 90bps) while the DAX is down about 1.8%.   AAPL wants to go to $500, and some very silly people are doing everything in their power to get it there…..My fascination with AAPL this week is not because I don’t like the company, the valuation, their growth prospects or their products, in fact I am a fan of all of the above, my fascination is with the “cult of the stock”……..I don’t buy into this sort of price action whether it be GOOG in 2007, AOL in 1999 or CMG now.   All the power to you guys that do, I guess I am just a bit jaded after living through the internet bubble and I know how this story ends.

As for today, while I am bearish and short, I am going to be careful not to press the down opening and wait for a rally to press the short….I think this could be the near term top and AAPL’s action yesterday and this morning could be the tell, it just felt too giddy….

AAPL is going to defy the overall market action this morning and take a shot at $$500, and thats when I get aggressive.

The breadth has been getting worse and worse and in a lot of ways this last attempt at 1350 feels like it has been on the back of a handful of stocks…..

MorningWord: 2/9/12:  In what has been a fairly uneventful week so far as it relates to news flow, the SPX continues its trends of putting its lows for the day in the morning and seemingly spending the afternoon rallying post the European close.

5 Day SPX chart from Bloomberg LP


Obviously this is healthy looking action, but it appears that the breadth in the market is getting a bit narrower as we approach last years highs.  Chart below makes this point pretty clearly, with the SPX at 1350 (or there abouts) we had 397 new 52 week highs yesterday vs the readings of over 100o last Feb, Apr and May when the SPX traded above 1300, and specifically the 1200 reading on the May 4th, 2011 52 week high.

Bloomberg's New High Index VS SPX 1 yr from Bloomberg LP

It feels to me that this is the AAPL blow off rally in the market, because everyone owns AAPL and wants it to go higher it is and dragging the market up with it (AAPL the largest weighted stock in the SPX at about 3.6%).  I have gotten a lot of hate mail about my AAPL call the other day…..and such is life, some people out there are emotionally attached to the stock and that’s all fine and good, I tend to be emotionally attached to things like family and friends.  But I guess the point is I am a trader and tend to trade the speculative portion of my portfolio in a contrarian fashion, so with a gun to my head I would much rather sell APPL here than buy it, and Tuesday based on my overall market call (which has been wrong week to date…it happens) I decided to risk less than 1% of the underlying stock price to make a bet that the stock would start to pull back a bit and fill in a portion of the earnings gap……I will do this trade time and time again, and while I will usually be a bit early, this has been a winning strategy over the long run, it certainly isn’t for everyone.

So as I write, it appears that the Greek Parliament has reached a deal on a Austerity package and now maybe the SPX at 1350 with declining breadth can take a bit of a pause….


MorningWord: 2/8/12: It is not often that the first story that I read in the morning from Bloomberg top stories makes me vomit a little in my mouth, but this one, “BlackRock’s Fink Says Investors Should Be 100% in Equities, Take More Risk” takes the cake.   I think it is safe to say that Larry Fink, the co-founder of BlackRock which manages more than $3 trillion in assets (your assets),  just won the first of what will likely be an ongoing series here at for the most Self-Serving A-Hole of the week.

If that doesn’t make you want to take some profits in stocks that you own I am not sure what will.   Many of you have heard me say this on numerous occasions over the last year, but everyone and their mother want/need risk assets to go up, and most of the time those who have the most to gain from the investing public being “bullish” and calm will do their part to make sure they don’t send the wrong message and be a bit cautious while their still appears to be a whole host of risks out there.   But you guys know me, I am just here to rain on everyone’s parade.  

U.S. equities remain amazingly resilient, the last  2 trading days in a row the SPX shook off early weakness to close near the highs of the day.  This is obviously pretty good action, but again it seems like we are trading on fumes here….AAPL computer alone is not going to be able to break us out to new 52 week highs….

[caption id="attachment_8670" align="aligncenter" width="300" caption="2 Day SPX chart from Bloomberg LP"][/caption]


As for today/this week, Greek deal or not I am positioning for what I think is an impending decline in Equities….

The chart below shows the very tidy channel the SPX has been in, basically btwn 1350 and 1250 barring the early AUG to late OCT meltdown from 1250 to 1100….SO here we are, the markets moment of truth, do we get through and make new highs?  Well you guys know where I stand, but that clearly doesn’t mean it is not gonna happen, it just means that i am not positioned for it to happen, and the higher it goes in the near term the better the shorting opportunity will be.  I guess the real issue is sizing of the short at current levels and that is why for those of you who agree, you have to avg in a little to this position and then press it when it starts to go your way…..

[caption id="attachment_8671" align="aligncenter" width="300" caption="1 YR SPX chart from Bloomberg LP"][/caption]


MorningWord: 2/7/12: Greek default fears spooked yesterday’s opening a tad, but as we have become used to in 2012, the opening tick was in fact the low for the day, and quite impressively we closed on the highs, nearly unchanged.

Yesterday Intra-day SPX chart from Bloomberg LP


U.S. equities display amazing resilience even as they appear to be a bit overbought and approach last years highs.  It is my strong opinion though, that our equity markets appear to be trading on fumes as yesterday’s NYSE volume was the lowest of the year so far and that is not a good sign for those looking for volume to display conviction of buyers.

Yesterday late in the day I bought a March Call ButterFly in the VIX as I feel with the index trading at lows not seen since late July that the time is right to look for a spike in Vol btwn now and March expiration.  While there appears to be many reasons for the markets to take a pause after the first 38 days of the year and almost 7% rally in the SPX, it also appears that we will likely need a little push from elsewhere to get us on our way……maybe it will be the eventual Greek debt default and the realization that Europe will in fact go into a recession, or the 2nd consecutive Arab Spring, or maybe a hard landing in China, who the heck knows, but when thing I am fairly certain about is that when things are this complacent it usually doesn’t last too long.  The call fly above is not exactly a high probability play, but I am spending a small amount of premium for a trade that would be up substantially if the VIX spike some 40%, which it most likely would do if there was a meaningful sell off in the SPX.   The position could serve as a nice hedge to a long portfolio of stocks, or an outright bearish bet.

Speaking of complacency, a lot of you seem to be itching to short AAPL here, as I have gotten numerous emails with charts showing that AAPL has just touched the high end of the uptrend channel it has been in since last Spring….even with the futures down this morning, the stock is up in the pre-market, I obviously don’t get it and I think you would have to an absolute fool to buy the stock here at all time highs……Obviously thing are firing on all cylinders here and the company will continue to execute (for now) as they have the blue prints already in place for new iPads and iPhones, and anything else they can come up with will just be gravy, BUT everything that goes up has to come down at some point, and this stock seems very close….

[caption id="attachment_8633" align="aligncenter" width="300" caption="1 yr AAPL chart from Bloomberg LP"][/caption]


SO not to disappoint any of you, I have had my finger on the trigger and have been waiting to buy a near the money put spread that offers a good risk reward, or looking to leg into a spread.  Stay Tuned, as I was really waiting to look for an opportunity where the stock appears to be making a giddy blow off top!  I will be looking for a move to about $435, or at least an attempt for the stock to fill in a portion of the earnings gap.

MorningWord: 2/6/12:  Call it a bit of a Super Bowl hangover if you will, but the liklihood that the SPX’s close on Friday (the highest close since July 21st) would be able to follow through on today’s opening wasn’t particularly great……Since briefly flirting with 1200 in the SPX on Dec 19th, the SPX has rocketed nearly 12% with out a pullback of more than 1.5%, I guess my point here is that equities feel a bit extended and maybe discounting a fair bit of good news at current levels.  I know I know I sound a bit like a broken record here, but at this point I think it is fair to say that even if you are int he bull camp you would rather see the market consolidate up near last years highs and then make an attempt to meaningfully breakthrough.

Last week prior to QCOM‘s earnings I posted a long term chart that I thought was kind of interesting (below).  The stock on a few occasions in the last 12 months had flirted with the $60 level, a level that it had not traded above since crashing below in June of 2000 during the tech wreck of that period.

QCOM long term chart 1991-2012 from Bloomberg LP


While this is an amazingly bullish chart, last weeks breakout wasn’t exactly that convincing as the volume seemed fairly mediocre when you consider that the stock broke out of a 12 year range.

1 yr QCOM chart from Bloomberg lp


Volume for instance on Thursday (the day after their Q4 report) was about 35 million shares vs the 44 million shares the stock traded on November 3rd the day after the company beat their Q3 estimate.   So i guess my point is we want to see break-outs that are confirmed by volume and in this instance while price action is fairly impressive, I am not sure this one sticks…..Much like my discussion above of the SPX, I think there is a good chance that QCOM will need to consolidate here before making a meaningful move higher…..


MorningWord: 2/3/12: 1350 here we come in the SPX……that employment # (just released) was kind of the final nail in the coffin for those (me) who felt that we would likely get a re-tracement  of a portion of this years gains before breaking 1350, and possibly testing the May 2011 high of ~1370.  While the magnitude of gains was clearly unexpected, the unemployment rate hitting 3 year lows couldn’t come at a better time for certain incumbent politicians.  Not to rain on anyone’s parade, but the unemployment rate still sits at 8.3%, and from what I can tell state and local governments are going to continue to struggle to add jobs, let alone stop cutting, and there are plenty of companies, like AMR just this week that have suggested they will need to cut 13,000 jobs.   SO I guess my point is, we are gonna get a lot of headlines as it relates to OUR economic recovery in an election year that may or may not be warranted when you consider the fact that Europe very well maybe headed into a recession under new found austerity, that could clearly turn things on a dime on this side of the pond.  

My trading positioning remains light, while I continue to short the market intra-day playing for a reversal on gap openings (like today) but I do so with tight stops and taking little trading risk over night (this means outside of longer term positioning, generally I cover trading shorts before the closing bell, and especially in front of market moving events like this morning’s employment data)… some point very soon I will start to average into some short positions that will be playing for a 3-5% decline in the broad market, and I will clearly take a shot at shorting the SPX on an intra-day basis on this sort of gap opening.  AT SOME POINT VERY SOON A LOOK OF GOOD NEWS WILL BE DISCOUNTED IN A MARKET THAT HAS DONE AN ABOUT FACE IN A MATTER OF 5 WEEKS.

The DAX has basically made back all of last year’s losses, and our markets (including this morning’s open) are up 6.5% and 10.5% for the SPX and the Nasdaq ytd!

MorningWord 2/2/12:  SPX showed fairly decent resilience yesterday with strong performance coming from almost every major sector in the index.  Volatility continues among single names following events with at least a half dozen names on my screen yesterday moving in high single digits (BRCM up 8%, OVTI up 10%, STX up 20%, WHR up 13.5%, AOL up 9.5%, XCO down 8%, RENN down 10%, FMCN up 10% and AMZN -7.7%).   That’s a lot of movement with the VIX at 18.55, near its lowest close in 7 months!

Aside from the movement following events, I want to keep a close eye on some market leaders that seem to be running out of steam like AAPL. When the SPX was up 1% yesterday AAPL couldn’t get going and actually finished down on the day…..I don’t find this that important considering AAPL’s massive out-performance of the market over the last 12 months, up 32% vs the SPX up about 5.5%, but if we start to see some other prior leaders unable to keep pace with the SPX as it attempts to retake last year’s highs, then I will firmly be in the camp that the rally is nearing an end… some ways I don’t think stocks like STX up 20% in a day is that normal or healthy with the market up here.

On the flip side though, yesterday afternoon I quickly highlighted QCOM’s long term chart (below) heading into earnings…..there is no other way to read it than bullish, especially with the stock’s ability to break through very long term resistance… I guess we will need to see the rally continue to broaden out a bit, and not just be concentrated in 30 names like AAPL, IBM, BAC CAT etc etc.

I remain very much inclined to short the market, and continue to do so intra-day using index etfs, this has been a fairly tough task and only works using relatively tight stops as it does not appear we are there yet……in the coming days I will be suggesting portfolio hedges and or short term ways to benefit from a potential spike in volatility and a re-tracement in the broad market of 2-5%


MorningWord 2/1/12:  All is right in the world again this morning, the DAX is trading up nearly 2% this morning, marking new 2012 highs, and placing the index up almost 12% ytd, equaling close to 80% of last years losses for the index.  Our futures are up about 70bs totally erasing yesterdays losses and quickly nearing last weeks highs for the year.

In less than an hour (at 10am) we will get an important read on manufacturing, as the ISM expectations are for 54.5, up from last months 53.9.  Any disappointment here will likely show the potential continued resilience of the market to shrug off “bad news” or be the start of what could be a re-tracement of a portion of this year’s rally.  

The SPX held important support yesterday a tad above 1300 and that is the target level for many looking to press shorts.  I for one have been easing into some shorts and intra-day trying to short rallies…..At this point I think it makes sense to wait and see this morning’s reaction to ISM and then Jobs data on Friday.

A trade that I am looking to re-enter is short FXE, as I did a decent Job covering, by selling a Jan 130/125 put spread earlier in the month when the currency was about 1.265.  This became a very crowded short in Q4 and I would expect much of the recent strength has to do with a little short squeeze.  I will look to re-intiate this bearish view when I see the currency tick about 1.34 vs the US dollar and look to isolate a move below 1.30 as I did in late Nov.

So for today, while I want to short rallies I am cognizant of the fact that the least bit of unexpected good news out of Europe or our own economic data could cause a little bit of a blow off rally, so I will be prudent about my stops, especially while intra-day trading index etfs.  I am trading small and tight on the short side and that makes sense in a market that feels geared to the upside.


MorningWord 1/31/12: Yesterday’s opening blip, down ~1% was just that, a blip as the SPX spent most of the rest of the day drifting back towards unchanged.  Investors fears of the Euro Summit not producing the desired results have quickly been quelled by the (near) completed treaty that will place sanctions on debtor nations that don’t keep to the plan……The DAX is up a little more than 1% on the kind of good news, and our futures are up 45 bps on what appears to be an unconvinced rally.

Yesterday on “quick hits” I mentioned that I am near laying into this market on the short side and if today’s opening doesn’t hold I will look to press the short.  The SPX held 1300 yesterday and very frankly showed some impressive resilience, but again on light volume and if there is ever a reason for sellers to take profits we could see a fairly sharp decline in a short period of time.

On another note, for those of you who are long stocks and are looking for a sort of out of the money disaster hedge in the near term, you could consider out of the money VIX Call Butterflys in effort to spend a small amount of premium to offer a decent bit of protection if the VIX spiked….

Last night on Fast Money I quickly laid out the strategy while offering a couple of caveats….first this strategy is intended to lose money, it is to act as a hedge in the event of a vol spike so by its structure has a low probability of being in the money……I guess my point is, if you are long stocks you want them to go up, but in the event we see a quick sell off this structure could offer some cheap protection.

Here was the trade that I laid out last night on Fast, with the market’s up opening, the VIX will be down and this will be cheaper, but I will tell that when trading VIX options always place your bids or offers inside the market, they will likely get filled rather than paying full bid ask.

VIX (19.42) Buy Mar 25/30/35 Call Fly for .40

-Buy 1 Mar 25 call for 2.10

-Sell 2 Mar 30 calls for a total of 2.50 (1.25 each)

-Buy 1 Mar 35 call for .80

Break-Even On March 21st Expiration (note that VIX options expire on different day than equity options):

Profits btwn 25.40 and 30, make up to 4.60, profits trail off btwn 30 and 34.60, with max gain at 30 of 4.60

Lose up to .40 btwn 25 and 25.40 and 34.50 and 35, with max loss of .40 below 25 and above 35.

VIX Call Butterflies as a Hedge against a long stock portfolio on Fast Money 1/30/12

MorningWord 1/30/12: As I write at 9am, the S&P futures are down about 90bps, marking one of the lowest pre-market readings of the year and also signaling what will likely be the first print for the SPX below 1300 since closing above that level (for the first time since late July) on Jan 18th.  On a week that is expected to see some news out of Europe with today’s start to a Summit in Brussels on Greek bailout, the markets will need to find support in the 1290/1300 level if they intend to keep the uptrend-line intact.

SPX daily chart since Nov 30th 2011 from Bloomberg LP


Aside from Europe, there will be a ton of economic data in the U.S. this week ranging housing, manufacturing, consumer confidence and then of course jobs…..this coupled with the back half of earnings season could see the market action look a bit like “buy the rumor, sell the news” for the January effect.  At current levels in equity market’s like ours up ~4.5% and the DAX up a bout 9% ytd, I think it is safe to say that there is a lot of good news priced into stocks at these levels, especially when you consider that a lot of the issues that plagued us last year have not exactly been fixed yet.

I remain cautiously positioned, and will look to short rallies as I am looking for at least a 30-50% re-tracement of the 2012 ytd rally.   As for this morning, I would expect to see the market try to rally after the almost 1% down opening and I will look to short that first rally buy either buying SDS or possibly looking to buy SPY weekly Puts, again, on a rally, I don’t press down openings on little news.  As many of you know I had begin to position for this last week, by closing longs like GS and adding a short (stock) in MSFT.  I want to short names that I believe benefited from dumb mutual fund buying in the beginning of the year (like MSFT) and look to add longs that are likely to continue to outperform after a little bit of a pullback (like GS, heck I would even buy BAC back below $6.50).

MorningWord 1/27/12: I am gonna go out on a limb and suggest that Mr. Bernanke had a sneak peak at this morning’s Q4 GDP reading that came in weaker than expected (forecast for 3%, actual 2.8%) prior to announcing on Wednesday that the FOMC would keep interests rates near zero till some time in late 2014.  Statistically the miss isn’t a huge deal, but it is one of the first pieces of significant economic data that I can remember this year that has disappointed expectations.

The S&P futures have dipped about 70bps on the news on what appears to be very light trading.  When you take a look of the 10 day chart of the SPX (below), since breaking above the psychologically important 1300 level on Jan 13th for the first time since late July, the index has done it’s best to base about that level and appeared to be ready to make a sort of blow-off top towards last years highs, or at least to 1350 resistance.

10 day SPX chart from Bloomberg LP


Yesterday’s reversal from almost 6 month highs could be the sign that a lot of the good economic and earnings news that we have had so far this year was in the market, up about 5% ytd (as of yesterday’s close).  I for one have been skeptical of the rally and have been waiting for signs of the rally getting narrower on declining volume.

AAPL is a name that I usually keep an eye on as it is a decent sentiment indicator in my mind for how the big money is thinking. There are 2 main reasons for this, as one of the few largest market cap company’s in the world, this is not a name that hedge funds can really push around (so there has to be a level of commitment by large holders to get this thing moving, as we saw on Wednesday), and second it is such a widely held name among retail, whether they own it outright or not, as it makes up a large percentage of many domestic mutual funds and index etfs…..

Following AAPL’s blowout Q1 reported Tuesday, I really wanted to see the stock get a bit overdone on its runaway break-out to all time highs as I felt strongly that any holder who had significant gains in the name over the last year or 2 (it would almost be impossible not to if you bought it at any time prior than Tuesday) would have to take some profits….Well as the 5 day chart of AAPL (below) shows that the opening tick Wednesday morn at about $454, was the high over the last 2 days.

5 day AAPL chart from Bloomberg LP


Now AAPL’s 2% sell off since Wednesday’s opening is by no means scary, but I would expect the stock to fill in a bit of the earnings gap and look to consolidate before the stock can attempt to rally into the expected iPad3 launch in late March or early April.

As for today, I would look for the SPX to hold 1310 which is essentially the level in which we have based for the last week and a half and then the next real level of support is about 1300.  I have been waiting for a little bit of a pull back and if we rally off the down opening this morning, I will look to fade it…..


MorningWord 1/26/12: If the Fed’s intention by signalling that interest rates would remain low until late 2014 (previous target was sometime 2013) was to encourage investors to buy riskier assets, then they certainly got things going in the right direction yesterday.  The SPX had an almost 1.5% reversal off of the morning lows to close a tad off of the highs, while Gold had a massive reversal of about 4%, with gains continuing into this morning.

2 day Gold chart From Bloomberg LP


With the SPX at 1326, now only a few % from the May 2011 highs, and up almost 5.5% on the year, it is becoming fairly apparent that the market seems ready to make a little “blow off” top…….meaning a last little push to test some levels not seen since that will cause shorts to climb over each-other to cover.  This move won’t exactly be the most bullish thing for those who are long for the intermediate term, or who bought into the rally yesterday as it will likely be followed (in my humble opinion) by a fairly sharp sell-off.

The chart below is a bit obvious to most, the divergence btwn the SPX and the VIX both hitting levels not seen since the last week of July.  While this relationship could continue to exist for a bit longer, at some point, with equity markets approaching previous highs, and European indices like the DAX up 10.5% ytd (recouping about 2/3’s of last yr’s losses), something will have to give.

1 YR VIX vs SPX from Bloomberg LP


I will continue to look for signs that the equity market rally the world over is getting narrower, but for the time being my positioning remains lite from a trading perspective, but will likely start to average into some market shorts in index etfs.

Earnings data continues to be mixed to slightly better which is obviously helping sentiment, but we will get a few broader reads in then next 25 hours about the economy as whole with New Home Sales data expected today at 10am, and GDP and Consumer Confidence tomorrow morning.

The question of earnings beats is interesting to me, because most are coming off of previously lowered estimates….in the case of NFLX for instance, the stock is rallying close to 19% this morning as they beat Q4 and raised Q1, but remember where these estimates came down from just 6 months ago…..listen this move will be great for the Jan/Mar calendar that I bought yesterday, but that doesn’t mean exactly that the move is rational.  On the flip side a stock like SNDK that was about about 65% from the Aug lows, is getting creamed this morning on worse than expected results.  As we head into the back half of earnings season, it will be important to watch how some prior leaders act, as investors digest what amount of good news is in individual stocks.