MorningWord: 4/25/12

by Dan April 25, 2012 9:04 am • Commentary

MorningWord: 4/25/12: Yesterday wasn’t a bad showing for equity markets that seemingly could have cared less about anything else other than AAPL’s fiscal Q2 earnings to be released after the market close.  In a lot of way’s AAPL’s 2% loss on the day weighed fairly heavily on the Nasdaq, while banks, industrials, healthcare, telco and energy names all traded pretty well.

The S&P futures are trading up about 60bps after very a disappointing Durable Goods Orders number came in far worse than expected, which comes on a day where the UK’s GDP print officially confirms recession.  While U.S. corporate earnings on the whole appear fairly solid for the period just ended, the uncertainty appears to lie more on the macro front as we head out of earnings season and into what has been a volatile couple months for the last 2 years, facing many of the same issues that we faced ranging from European Sovereign debt crisis, slowing worldwide growth and don’t forget our little debt ceiling drama.

As for this afternoon’s FOMC announcement, expectations aren’t exactly running very high, but watch the Euro and gold for a quick indication of whether markets view the language as dovish (higher Euro and gold) or hawkish.  The had a nice preview of today’s meeting (here).

SO back to the main event, AAPL, the company crushed consensus estimates with and eye-popping 35 million iPhone units sold in the qtr, while iPad and Macs came in slightly below the whisper numbers.  The stock is up close to 10% in pre-market, blowing though the implied move that ended up being about 6.5%.  The options market clearly got this wrong and this is a very good example where often times a quantitative assessment can be aided by a little qualitative judgement.

I was reminded in the middle of the night last eve of why iPhone units beat so dramatically by some genius who apparently doesn’t agree with my generally contrarian view towards AAPL’s ytd move,   DBM writes, “it would appear you got the Apple estimates WAY wrong! Like most, you forgot about the international growth”.  But here is the thing, I don’t make “estimates” I am not an analyst, I make trades where I think the odds are in my favor.  So “fading” the implied move as I did by selling an Iron Condor with weekly options will be a bad trade, but it certainly wasn’t predicated on any “estimates” of iPhone sales.  Interesting thing is, this trade would likely make money 7x out of 10, but here we are in the midst of what will be the largest one day move in AAPL shares  following an earnings event since Jan 2008.  But I guess the main point here is if you a really bullish analyst or market commentator on AAPL, you don’t have to look very hard, just turn on the TV, open up your web browser, call your broker, or hell ask your cab driver.  This is a mania, and I won’t play this game, that is not the value proposition here at RiskReversal, no, I won’t make apologies on some wrong way directional trades in the name, or in the above case wrong way % moves, I will just try to be right a lot more often than I am wrong.  Thnx DBM for giving me the opportunity to address this issue.

As for today’s Price Action in the stock, I would expect the stock to settle in and those who were taking profits over the last 2 weeks for reasons ranging from carrier subsidies, to weak domestic carrier iPhone activations, to the simple law of large numbers are likely to come back into the fray. IN my opinion I think it is very likely that the stock finds a home somewhere around $600 this week which would be almost the exact mid point of the 2 week peak to trough range of about $644 to $555.  The stock will need to base a bit before it can make a new all time high, which is most definitely in the offing.

As for today, will be interesting to keep an eye on Europe as it heads into it’s close prior to the FOMC announcement, on a day that Euro banks are bouncing nicely, the Euro Stoxx Bank Index (SX7E) is having one of it’s biggest rallies in weeks. I also want to keep an eye on industrial names like CAT and BA which reported better than expected Q1 earnings, if we see a bit of “sell the news” and AAPL can’t hold above $600, I would expect the broad market to follow.  Personally I don’t see much to do in front of the Fed, but regardless of expectations for Bernanke’s press conference this afternoon I would guess that the markets will definitely move one way or the other.



MorningWord: 4/24/12:  Yesterday’s action in Europe was about as bad as it gets and is very likely to portend a fairly rocky spring for the region, both politically and economically.  On the flip side, our equity markets acted about as well as can be expected, continuing demonstrate impressive  relative strength with the SPX closing down less than 1% on the day and at the high end of the daily range.  Not Bad.

2 Day SPX chart from Bloomberg


As for today, European equities got off to a decent start after Bond auctions in Spain, Italy, and the Netherlands all passed without much fanfare, but have since give back most of the gains as of 8:45am.  Asia was mixed, with Japan lower and Hong Kong higher, with investors eyeing the Bank of Japan’s stimulus decision on Friday amid rumors of a doubling of the asset purchase program to 10 trillion yen (approx. $120 billion).

Speaking of central banks, the language in the Fed’s release will once again be the subject of much scrutiny, though no surprises expected this month.  The reaction will be more important than the actual release.  The has a great preview of tomorrow’s meeting (here).

As for Today, yesterday’s playbook probably still holds, U.S. banks stocks need to continue to show relative strength, and not start trading in lock-step with it’s Euro Cousins, if this starts to happen and we see stocks like BAC meaningfully below $8, or GS approaching $100, you can be sure that the SPX will once again be testing 1300.

Additionally, stocks like AAPL that are the “poster-child” for this year’s rally, need to remain orderly, or  the Nasdaq’s out-performance will be very short lived as the stock makes up a disproportional amount of the index’s gains given it’s 12% weighting.   As AAPL heads into it’s much anticipated fiscal Q2 earnings report tonight after the bell I would expect the stock to continue to be whippy, the stock has already traded in a pre-market range of nearly $18.   This morning it traded as high as $579 and now as of 8:45 it is trading at $561.   AAPL’s swings today, and we will get at least one rally most likely to up on the day, will dominate the Nasdaq trading as it is really the last tech titan to report in this cycle that has market moving implications.

Check back after the open, we will have a preview of the report and later in the day we will update the trade idea of selling a weekly Iron Condor.


MorningWord: 4/23/12: So much for all that enthusiasm early last week regarding Spain’s successful debt auction…..the bottom appears to be falling out with the Spanish 10yr yield briefly trading above 6% for the first time this morning since Nov.  Spain’s largest equity index, the IBEX  is down 20% on the year with all of these losses coming in the last month.

5 yr chart of Spanish IBEX 35 from Bloomberg


That chart is nothing short of frightening as it is within 2% of the 2009 low and apparently in a free-fall.  But that is just Spain’s relatively insignificant equity market, to drill down a bit deeper would be to look at the European banking sector as a whole.

The most recent ECB data from Feb 2012 indicates that the total size of European bank balance sheets is 33 trillion euros.  For comparison, the size of all U.S. bank balance sheets combined is around 16 trillion dollars, 33 trillion euros is approximately 2.5 times larger than all U.S. bank balance sheets
It is our opinion that the the investing community is incredibly complacent in the face of a financial crisis with much more far-reaching implications than the 2007-2008 crisis led by the weakness in the U.S. banking system.  Meanwhile, European bank equity prices (SX7E) approach levels not seen since the 1990’s, the most glaring warning signal flashing bright red.  

[caption id="attachment_10784" align="aligncenter" width="300" caption="Euro Stoxx Bank Index 1986 to present from Bloomberg"][/caption]


Our futures are down about 1% as I write at 9am, vs the DAX down 3%.  Our bank stocks hold the key in my opinion to our day’s trading, if they can hold then we likely hold, but I am still of the opinion that they are sales on rallies, that their Q1 earnings are likely as good as it gets for 2012 and that Europe appears to be on the precipice of a redux of last years credit crisis.  Sorry to sound so somber on a Monday morning, maybe it’s the weather…..As many of you know I am not jumping on the bandwagon here, we are merely just starting to see some of the cracks emerge after a fairly complacent investment period, Operation twists, EFSFs and LTROs were like putting band aids on gaping wounds, kicking the can down the road can only prolong the symptoms, not cure the disease.  I am not exactly going to press the opening, but look to short a rally, I had a lot of short exposure roll off with Friday’s expiration, and I am not going to compound my frustration with making a worse mistake of pressing a 1% down opening.


MorningWord: 4/20/12: I started the day yesterday discussing Tech and Bank earnings and fortunately or unfortunately (depending on your investment view) for most other sectors in the market, these 2 sectors appear to be driving the bus for the moment, or at least capturing most of the headlines.  QCOM‘s fiscal Q2 beat coupled with curious fQ3 guidance wiped out more than a month’s performance closing down 6.6% on massive volume and dragging much of the SOX with it.  Bank stock’s inability to maintain gains post earnings (except C and MS) is a bit of a problem, especially with some names liek GS seemingly breaking down, these stocks including MS (which closed up following better than expected results yesterday) still trades horribly in my opinion and will most likely break-down in the weeks to come.

AAPL’s increasing volatility over the last two weeks, after making what appeared to be by some, a blow off top, could be signaling a warning sign for the broad market in my humble opinion.  Since making an all time intra-day high on April 10th, the stock has seen some pretty crazy up and down action as evidenced by the chart below.  With 2 moves of 5% and one of about 3.5%, the stock is gaining or losing more market cap in intra-day swings the most stocks total value that make up the S&P500.

15 day chart of AAPL from Bloomberg


European stocks are up across the board this morning on an unexpected rise in German Business Confidence, but it’s all noise to me.  The market should be trading on prospects for corporate earning as evidenced by the guidance we are getting during this earnings period and the general feel for the potential for European Sovereigns to F things up again this summer, not one little number here or there is gonna change much.

As for today, it’s kind of the same play as yesterday which was fairly instructive, watch U.S. banks and see if they can hold early gains (they didn’t yesterday), watch to see if tech companies with mixed results can keep it together (they didn’t) and watch how Euro Banks and the broad market trades into the Euro closes (they closed like Crap).  Today we are up pre-market on Euro equity strength and decent results from MSFT which is up 3% at the moment…..let’s keep an eye on this one, as it is one of the few bright spots so far in tech guidance.   As we get through the meat of S&P earnings early next week, all eyes will turn to the FOMC’s Apr 24/25th meeting capped with Chairman’s Bernanke’s press conf on the 25th.

MorningWord: 4/19/12: Another day and another fairly divergent view on earnings from the 2 best performing sectors in the market in the first quarter.  This morning BAC and MS, 2 of the perceived weakest members of the banking group handily beat expectations and the stocks are up about 5% in the pre-market, while QCOM is following the trend of a few other tech behemoths this week (IBM and INTC)  down about 4% following a definitive beat, but weaker than expected forward guidance.  In a lot of ways this price action makes perfect sense, even-though Bank stocks have had great year to date performances, the stocks across the board have come off prior to earnings about 10%, and well off of the 52 week highs made last spring, while INTC, IBM and QCOM were all trading within 1 to 3% from multi-year highs.  

Investor sentiment heading into earnings was a bit more cautious on the banks and a bit more overzealous on tech, and thus we are seeing a mild re-set following the earnings events.    Whether or not BAC and MS can hold the gains remains to be seen, 2 of the stronger names to report GS and JPM were not able to, while Citi has been since their Q1 prints…..This will be important to keep an eye on as BAC’s conf call is going on now and MS’s starts at 10am.

Big news this morning outside of U.S. earnings was the Spanish debt auction that went better than expected, ZeroHedge summary:

Spain sold 2.54 billion euros of government bonds on Thursday in an auction that met solid demand, though with 10-year borrowing costs rising as investors worried the country may miss budget deficit targets and over the health of its banking sector.

  • A 10-year bond was sold at a yield of 5.743 percent compared with 5.403 percent when the paper was sold via a syndicate in February. The yield on a two-year bond dipped to 3.463 percent from 3.495 percent at a previous auction on Oct. 6.

Spanish equities aren’t exactly taking the sale that well, now trading almost 3% off of the morning highs (below), while the DAX is now down on the day erasing earlier gains.

[caption id="attachment_10711" align="aligncenter" width="300" caption="Spain's IBEX 35 Intra-Day from Bloomberg"][/caption]


SO for today’s trade I am focused on how European equities close into the noon hour here and whether or not BAC and MS can hold their gains and keep the group up with it, it is interesting to note that Euro banks are down across the board, and GS and JPM are unchanged in the pre-market.  If I were in the bullish camp, I would want to see big cap tech stabilize a bit here, names like IBM that were weak yesterday hold important technical levels like $200, and not have a name like QCOM get too sloppy.


MorningWord: 4/18/12:  Europe has taken charge of global markets, as the move from 4-5am Eastern time has been setting the tone for the past week.  Today is no exception.  After a quiet Asian session that basically just followed Europe and the U.S. in the green yesterday, Europe started to see selling shortly after the open and has stayed in the red ever since.  Some hawkish comments from the Bundesbank head Weidmann (saying no more LTRO should be needed) and worse delinquent loan data from the Spanish banks were culprits.  Interesting to see John Paulson finally jumping on the short Europe bandwagon, coming out this week saying that he’s shorting European sovereign bonds.  Better late than never, or just too late?  The European banks down 3.5% after a +4% day yesterday doesn’t send a strong signal.  If the banks can’t hold such a long overdue bounce, we might be at the start of a 2010/2011 Europe repeat.

Meanwhile, earnings have started strong here in the U.S., but price action might have gotten ahead of itself based on IBM and INTC after hours moves yesterday.  Both names reported decent numbers, with light revenue a bit of a concern for IBM and weak margin guidance the soft spot in the INTC report, but the main reason for the move lower is probably the lack of buyers after such a consistent run ytd.  Also, just an interesting side note, if you didn’t see it, check out the WSJ lead article about the Instagram acquisition by Facebook.  Mr. Zuckerberg basically negotiated the deal solo at his house and pulled the trigger on his own.  Nice to throw around a $1bln check in a weekend…New economy indeed.  

Yesterday’s price action was a kick in the teeth for the shorts, and those sorts of rallies where the low of the day is the opening tick and the close is near the highs, just don’t give you a minute to get out alive.   While my shorts definitely hurt a tad yesterday, my risk management strategy of taking half off on “doubles” (XLF, KO & MSFT of late) has served me well, and I am trying on getting better at cutting losses or adjusting the position before an event causes full loss of premium (CRM, IBM, NKE).

You’ve probably also noticed an uptick in actual volatility in the market that you haven’t seen in months. You’re not crazy. The WSJ pointed out that:

Tuesday’s surge, which saw the Dow Jones Industrial Average gain 1.5%, marked the sixth triple-digit move this month—as many as in the three previous months combined.

This kind of volatility is interesting and could signal a couple of things. The most obvious being that the market may finally be topping after its extended run. It probably also resembles the market trying to find a new trading range. More swift moves up and down are likely.

I think today will be a fairly important day to see how much this market really has…..Yesterday the market rallied  handily despite a tepid response to GS’s generally ok earnings report…..With 2 large Tech bellwethers down after generally decent results this will be an interesting “tell” to how much good news are actually in stocks at 1390 in the SPX and how much we are trading on the Macro vs the Micro.

Clip from my iPhone from Furthur Show last night at the Beacon Theater

MorningWord (Late): 4/17/12:  Since I last posted there has been plenty of news, but the futures are practically in the same spot they were at 7am.  GS beat estimates, but not by the margin some might have expected, the stock is basically trading unchanged in the pre-market as investors await the 9:30am conf call.  Bloomberg’s summary of the results:

(Bloomberg) — Goldman Sachs 1Q EPS $3.92 vs est.
$3.55 (range $3.05-$4.00)
• Rev. $9.95b vs est. $9.41b (range $6.7b-$10.5b)
• Boosts qtr dividend to 46c-shr from 35c, BDVD est. 40c
• FICC rev. $3.46b vs $1.36b Q/q
• Equities rev. $2.25b vs $1.69b Q/q
• I-banking rev. $1.15b up 35% from $857m Q/q, down 9% Y/y
• Underwriting $665m vs $387m Q/q; advisory $489m vs $470m Q/q
• Investing and lending rev. $1.91b vs $872m Q/q
• Includes $169m ICBC gain, $266m in other net rev.
• Inv. management rev. $1.18b vs $1.26b Q/q
• Comp. ratio 44%
• Tier 1 capital 14.7% vs 13.8% Q/q; Tier 1 common 12.9% vs 12.1% Q/q
• Bought back 3.3m shrs at avg. cost of $111.28 vs 9.2m shrs at $98.54 in 4Q
• Call 9:30am 888-281-7154


On the data front, Housing starts dropped 5.8% month over month, which was well below the consensus estimate, while building permits jumped, which is probably a net neutral.  The fact is that our economic data is surprising more to the downside than the upside at the present, and this should possibly serve as little reminder to the situation last year at the same point.

As for today, I think it makes sense to trim some shorts, especially if stocks like AAPL and PCLN that got beat up of late find there footing and if they appear they are poised to re-trace a bit of the last few days slide.

Banks stocks likely to hold the key, along with some of the aforementioned high-fliers today, as any disappointment on GS’s calls could cause the group to re-test Friday’s lows.  Equities did their best yesterday to hold despite some prior leadership (AAPL, PCLN, SBUX, CMG, CRM, GOOG) all taking it on the chin……but as suggested below, maybe we are seeing a changing of the guard, that the next leg of the rally (if it comes) will be a bit broader than the last few months.

MorningWord (Early): 4/17/12:  Europe has been the region of strength to start this week, trading higher after a weak open for the second straight day, despite another broadly red finish in Asia, (Shanghai Comp was down close to 1%).  The U.S. had a hard time holding gains yesterday even with a strong retail sales report, but earnings, particularly in financials might be the catalyst to continue the rally started in Europe.  A slew of financials reports this morning, with GS the highlight (in addition to NTRS, STT, and USB), and KO and JNJ reporting as well.  

European financials very strong this morning, up 4% at one point, as the Spanish bills auction exceeded its target issuance, though at higher yields.  The whole market feels like it’s in a bit of a positioning shuffle given the way AAPL and some of the other high fliers (like PCLN) have performed in the past week, against strength in some of the more defensive or beaten down sectors.  April is the first month so far this year that XLU is outperforming SPY.  So a shift in tone is certainly evident, but will the G20 meeting this weekend refocus hearts and minds on further rescue efforts for Europe?  Japan is the first large country to add to the IMF war chest overnight, pledging $60 bln in additional aid to Europe through the IMF.

One area of impressive risk-on strength yesterday was the rally in the Euro.  After briefly falling below 1.30, it closed the day at 1.314, and that 1.30 level has been magnified in importance (3 day chart below).  Keep your eye on the Euro and on SX7E, the European banks index, for signs that investors view this weekend’s G20 meeting as potentially successful in providing another European bandaid.
[caption id="attachment_10626" align="aligncenter" width="300" caption="3 day EUR/USD from Bloomberg"][/caption]
The One year chart of the EURO vs the US$ (below) shows the importance of the 1.30 support level, clearly a battle line for currency traders…..if this thing bounces just a bot more we may have to re-visit our FXE 130/125 Put Fly that worked so well in Dec/Jan.
I’ll be back after the Housing and Building data at 8:30am

MorningWord: 4/16/12:  As I write at 9am, the S&P futures are up about 50 bps, which is fairly unimpressive when you consider the Index’s last hour swoon of almost 60bps on Friday.  Europe’s strength this morning is fairly impressive when you consider that Yields on the Spanish 10 yr are topping 6% for the first time since December, and despite headlines of European doom and gloom, markets actually found some strength shortly after the open, as strong export orders in Europe (moving the region to a trade surplus of 2.8 bln from a deficit of 2.8 bln last year) gave bulls a reason to buy, and are an indication of continued German strength despite the gripping austerity in the South.  Interestingly though, the Euro finally broke the 1.30 level despite the robust trade numbers, touching 1.2995 overnight and still trading lower from Friday’s close.  Pay attention to the unchanged mark on the Euro for the year, around 1.2950, where asset managers go from up to down on long Euro-related assets.  

On this side of the pond retail sales came in better than expected which has helped the S&P futures make new highs in the overnight session. Citi reported earnings that on the surface appeared to miss already low expectations, but analysts are citing decent expense control which has helped lift the stock about 1.7% in the pre-market, making back about half of the stock’s losses from Friday.  Citi’s conference call with analysts is not until 11am, so the stock could be a bit volatile btwn now and the end of that call.   Here is a quick summary of the report from Bloomberg:

Citigroup 1Q EPS 95c vs Est. $1.02 7:59
Citigroup 1Q rev. $19.41b.
• 1Q rev. includes CVA/DVA adjustment $1.3b, $477m net gain on minority interest
• 1Q excl CVA/DVA: EPS $1.11; rev. $20.2b
• Global consumer banking rev. $10.0b vs $9.9b Q/q
• Securities & banking rev. $6.65b vs $3.27b Q/q (includes CVA/DVA ($1.24b) vs ($74m) Q/q)
• Securities & banking rev. ex-CVA/DVA $5.28b vs $3.19b Q/q
• Fixed income rev. $4.74b vs. $1.72b Q/q
• Equity mtks rev. $902m vs $232m Q/q
• Investment banking rev. $865m vs. $638m Q/q
• Lending rev. $56m vs $165m Q/q
• Tangible BV-shr $50.90 vs $49.81 Q/q
• Call 11am 866-516-9582 pw 55701551

As for Today, the 11am to Noon hour is likely to set the stage for our close, Citi’s conf call coupled with the European close will be the “tell”.  Frankly If I were long Citi (which I am not) I would much prefer to see the stock down heading into the call after 1 1/2 hours of trading rather than the stock up and set up for a re-test of Friday’s lows.

Also if you missed this from last night’s post of my Trading Diary of the previous week, this chart is fairly interesting to me on a pure technical level.  The SPX vs the VIX over the last year, and the obvious inverse relationship, but it would appear to me like the profile view of a Venus Fly Trap, and is very close to seeing a gobbling up anything in the middle of it’s trap?

[caption id="attachment_10572" align="aligncenter" width="300" caption="SPX vs VIX 1 yr from Bloomberg"][/caption]


There is obviously nothing scientific about this chart other than it is safe to conclude that in the 2 periods of fairly volatile equity action last summer and last fall, these charts converged at about 1250 in the SPX and about 30 in the VIX.  I am not suggesting 1250, but 1315 could most definitely be in the cards in the weeks to come if the situation in Europe intensifies, and/or earnings season disappoints.

MorningWord: 4/13/12: Yesterday’s market breadth was fairly impressive when you consider the lack of participation by AAPL, notching it’s 3rd consecutive lower close.  In the last 2 trading days, the SPX has nearly recovered 50% of it’s losses since making a new 52 week high on April 2nd, which seems like a fairly reasonable re-tracement as we head into the think of what will be a very crowded earnings reporting period, and likely to be very instructive for the potential of the continuation of the year to date rally.

10 day SPX chart from Bloomberg

One of the big stories overnight was that China’s reported GDP for last quarter came in weaker than expected at 8.1%, vs 8.9% last year, but this is not a huge surprise as expectations had been lowered last month.  The Shanghai Composite closed up about 35 bps while the Hang Seng raged up 1.8% as investors feel the likelihood of monetary easing to help re-invigorate growth which likely aid equities.

The main focus of the next few weeks will be earnings guidance for Q2 and while Q1 beats will likely grab the headlines, the quality of the beats and the earnings visibility going forward will be the key to the continuation of the rally.  We are likely to continue to see many cross currents, where U.S. companies who are largely exposed to North America should be somewhat insulated to slower sales in Europe and possibly even China, and face less headwinds from a relatively stronger dollar.  The chart below of MCD vs CMG, MCD gets more than 60% of sales overseas vs CMG which gets 100% from N. America.  This divergence could continue to hold for a bit as fears of European sales weakness for companies like MCD could derail it’s ytd performance.

With the DAX down 70 bps as I write at 9:10am, and our futures only down 40bps, I would be careful pressing shorts on the open here…..JPM and WFC both beat and it will be interesting to see how investors digest the commentary on their conference calls.  JPM is up about 1% in the pre-market and WFC is practically unchanged, I will keep a close eye on the ability for these 2 strong performers to hold gains today. This will be the “Tell” for the market in my opinion.


MorningWord: 4/12/12:  I’ll be brutally honest, it’s been a little hard for me to concentrate much on the markets for the last 16 hours since meeting one of the all time greats in rock n’ roll last night on the set of Fast Money, Bob Weir of the Grateful Dead.

Me, My Sister Stacy and Bobby


But let’s give it a shot.  Yesterday’s bounce of about half of the previous day’s losses was  generally unimpressive with the breadth fairly week.  The chart below of Bloomberg’s Composite New 52 Week High Index showed and anemic reading of 80, levels not seen since the little early March sell off, and just a tad above the readings we saw during much of last summer and fall.  This is not exactly that surprising given the fact that the broad market was down for 4 days prior to yesterday, but something to keep an eye on today as it appears we are going to be up on the opening.  

[caption id="attachment_10477" align="aligncenter" width="300" caption="Bloomberg's Composite 52 Week High Index"][/caption]


I guess when speaking of Breadth yesterday it is important to note that the broad market generally went sideways after gapping up on the open nearly 1%, but closing at the lower end of the daily range, but Bulls will point out that it did this with AAPL closing down on the day.

With Sovereign debt yields in Spain and Italy the focus this week I think it is important to keep an eye on the banks, Specifically DB as a proxy for European banks, but also our banks to see if they hold Wednesday’s lows as we head into WFC and JPM earnings tomorrow morning.

One other interesting observation from yesterday is that the VIX closed on the highs of the days range above 20 on a day that saw the SPX open on the highs and close up, but near the lows of the days range.  The chart below displays this inverse relationship and I think worth keeping an eye on especially on up days.

[caption id="attachment_10480" align="aligncenter" width="300" caption="1 Day Vix vs SPX from Bloomberg"][/caption]


Today is a fairly important day for determine in the near term what this correction has in store for us as we head into Q1 earnings that start in earnest next week.  Not to sound like a broken record, but keep an eye on the DAX as we head into their close.   The index was outperforming all European indices as of an hour ago and now down the day, off about 1%.

MorningWord: 4/11/12:  It only took about 100 days for the SPX to book it’s second down day of more than 1.5% this year.  Talk about orderly, and even yesterday with the VIX up 8.4% after the previous day’s melt up it didn’t seem like fear was abound.  There is an obvious underlying bid to equities (specifically in the U.S.), it could have something to do with the Fed’s intended goal of keeping rates really low, for a really long time, the yield on the 10 yr is back at 2%, so most money managers continue to ask themselves; where the heck else am I going to put my cash??

Fears of a resurgent debt crisis in Europe have been permeating the markets for the last few weeks, and fairly quietly, European equities had been showing this strain, as of yesterday’s close the DAX was down about 8% from the March high, while Deutsche Bank a decent proxy for the health of Euro Zone financial services was down about 17% from it’s March highs.  

The other big worry among investors was the rate growth deceleration in China, and this one has been a bit tougher to pin down.  The Shanghai Composite has clearly lagged most large equity indices, only up about 5% ytd, but taking a closer look at some U.S. multinationals that are very levered to the “global growth” trade like CAT was likely telling you all you needed to know.  CAT as of yesterday’s close was down 14% from it’s all time high made in February.

These were some of the inputs that have helped frame my near-term bearish thesis, but by no means am I doing a victory lap after a mere 4% sell-off over the last week in the SPX.  I was clearly early and as I have stated in this space on numerous occasions I usually always will be, which is why it is important to continually question your trading/investment thesis.

Overnight some earnings news from AA and specifically their comments about China could be a sort of “canary in the aluminum mine” so to speak for those looking for a “hard landing” in China.  AA beat fairly subdued estimates last night but sited increased demand for aluminum from demand from China, where they expect 11% consumption growth in 2012 after recording 15% growth in 2011.  The stock was lagging the broad market ytd only up about 7.75%, but off about 15% from the 2012 high made in February.  Clearly investors were treating the report with a bit of suspicion.  The stock is up about 5.5% in the pre-market which is basically inline with the implied move from the options market……but AA’s ability to hold the gains today should tell us something about investors appetite to wade back in the water after this last weeks little sell off.

On the flip side, NOK is down about 15% in the pre-market making new 14 year lows on what can only be labeled as a disaster of a quarter.  The company will disappoint on sales, margins units and probably a bunch of other metrics.  The company sited “Cited “competitive industry dynamics” impacting net sales in both Mobile Phones and Smart Devices unit, as well as gross margin declines in Smart Devices unit”    Yeah I think we can just use 2 words to answer the reasons for NOK’s woes, iPhone and Android.   More importantly keep an eye on MSFT, as they have pinned much of their Smartphone strategy going forward on NOK’s lame hardware through a broad reaching partnership.   I think it is fairly safe to say that NOK’s disappointment has little to do with Smartphone Demand and much to do with share-loss to better positioned competitors.  But earnings cross currents none the less.

As for today’s trade, yesterday I updated some of my short biased positions (here) and suggested that I would likely trim a few on such a big down day, but generally sticking with most.  With the futures bouncing this morning things could set up for a slight disappointment.  If I were coming in Long I would much prefer that the market open lower after the last 4 days weakness rather than opening up.  I am going to keep a close eye on the DAX into mid-day as we are likely to trade with Europe, at least into their close.  I will definitely sit tight with existing shorts, but will also take a shot on the short side through index etfs after the open and play for a re-test of yesterdays lows of about 1357 in the SPX.  At this point we should then be focused on the March low of about 1340, which should serve as good support.  This is the level where I will take off most shorts and actually look to play for a bounce (yep I said it).


MorningWord: 4/10/12: The 4 day, nearly 3% sell off from the intra-day 52 week high made last week has been in a word, Orderly.  Even yesterday, with Europe closed, when they had the opportunity to get a little sloppy, the underlying bid remained, and before 3:30 or so it appeared that the SPX would close on the highs of the day.   Frankly the first and last 30 mins of the day, were really the only moments with any resemblance of uncertainty.

The so called “fear index”, the VIX, popped more than 12% yesterday, on what seemed like a sell-off that lacked a ton of “fear”, but the pattern of early to mid month pops maybe one to take a closer look at as market participants try to gauge the potential for a meaningful re-tracement of the SPX’s ytd move.

4 Month VIX chart from Bloomberg

The chart above shows a series of lower highs and lower lows in the VIX, dating back to the Mid-December move of above 30, which also corresponds to the SPX’s last real test of the 1200 level that had served as an important technical level that served as support and resistance at different times throughout much of 2011.  On each of the lower highs made in Mid Jan and Feb, and then early March, all were met with a lower low within a matter of days if not weeks.  What will the Early April Vol spike bring?  In each of the last 3 spikes we were coming from higher levels in the VIX, where market participants were still struggling with last years Volatility regime and trying to figure out what this year would be like…..March sucked the life out of Spot Vix and after being at such depressed levels (15 or below) for weeks it only makes sense to get a bit of reset higher.

This is all happening as we head in Q1 reporting season, and while I am fairly certain that a solid Q1 is in most stocks here, forward guidance will be the key to the markets ability to maintain current levels.  I am in the camp that thinks that visibility should be poor, and with many stocks up 20 or even 30% ytd, I don’t really see the upside for most companies to give overly optimistic outlook’s just to maintain stock performance.  If I were a C -level executive at a company whose stock was up 50% from the Oct lows and maybe up more than the market at this stage of the year and the rally, I would look to be cautiously optimistic with guidance so to not set up for un-expected disappointments later on in the year….but lucky for all you I am not.

SO the risks to me at this stage of the game lie in expectations, not what has happened in the past.  If the market continues to sell off into Q1 earnings which get started this week, but the bulk come in the next 2 weeks than I would say that expectations have been tempered, but if we resume the rally and are pressing against new highs in a week than I would say there is serious disappointment risk.

As for my trading, I have been sitting on my hands net short, and not pressing down openings which has seemed to be the right strategy.  The next big down day of 1% or more I will look to take some profits on shorts.  

Bonus: Last night I saw Bruce Springsteen at MSG in NYC and it rocked…..a clip from my view of a Rarely Played cover; Trapped.  Enjoy, I did!


MorningWord: 4/9/12:  This morning will mark the 3rd consecutive lower opening for U.S. equities in so many sessions, and the first time this has happened all year.  While most global equity markets were closed Friday in observance of Good Friday, the weakness we saw in Asia overnight was a bit of a delayed reaction to the weaker than expected U.S. Jobs report issued Friday morning and inflation data in China that was hotter than expected.  European markets are still closed today and I think it is safe to suggest that they would likely be down in sympathy with our  futures which are weaker by about 1% as of 9am.  

Today’s opening is going to be a bit tricky for those looking to press the short trade, especially with European markets closed, largely because U.S. equities have been perceived as a flight to quality as we have gotten weaker data from Europe and China.  So today’s action will be an interesting test to the wills of U.S. equity bulls, on a day that could see light volumes as market participants limp back from Holidays and with no clear direction from Europe.  I remain net short, specifically in the 2 best performing sectors from last quarter, Tech and Financials, but I am starting to wade into the water a bit with large retailers like WMT (taking a hard look at HD) where they may have all but factored in a full blown economic recovery.

So my plan for today is to NOT press the down 1% opening, and look to short the first rally with a tight stop.  Here is the thing, if they can’t keep them down then we know where they are going, especially after 3 days of orderly weakness.  Just because we got used to 2-4% intra-day swings last year in reaction to bad news does not by any means suggest that this is how any meaningful sell off will happen this year. It could be a slow grind and this will take some concentration for the shorts, there will be fits and starts, not likely to be down in a straight line.  While I might have been early in a few shorts like WMT, IBM, MSFT, KO, NKE and CRM but these are all starting to work now and I want to be patient and let some things play-out.  When trying to pick tops I usually resort to using options rather than stock because I can define my risk, in names that have a tendency to become increasingly whippy at highs, and this is not the sort of risk I want to manage, especially when I kind of know that the position is likely to go against me before it starts to work…..define my risk and risk what I am willing to lose.

I remain net short and cautious as we  head into Q1 earnings seasons, but I recognize the definite potential for squeezes that come from sellers lack of commitment or exhaustion.  Make no mistake about it, the “jury is still out” on whether we are back in a full fledged Bull Market or whether we will re-trace a bit of the recent rally off of the Oct lows.  I obviously don’t have a clue about what will likely happen, just what I think would make sense, and that would be a little fear put back in the generally complacent views towards owning risk assets.

MorningWord: 4/5/12:  

9:20AM: Jobless claims fall to the lowest levels in 4yrs, while this news doesn’t come as a huge surprise, the markets reaction on a holiday shortened week could.  S&P futures got a tad of a lift off of the data, but the DAX has not, and is still down 90 bps on the day.  So the real question longs have to ask themselves is what is “IN” the market at current levels? Have we gone from a glass half full to a glass half empty scenario?  U.S. data continues to show incremental improvement, while Europe is soft and Asia is generally mixed.  Over the long weekend I am sure we will hear all those self-serving mutual fund A-holes who want you 100% invested in stocks suggest that the U.S. economy is about to do what it has never done before and “de-couple” from Europe and China.  Obviously you know where I stand on this, and the truth is, U.S. equities are probably a decent buy with the SPX btwn 1300-1325, my sense is that we will have that opportunity in the coming months if Q1 earnings are inline to slightly worse and Q2 guidance is a bit guarded.

The easy money has been made this year, and while correlation reached historic levels in the last 12 months, we may be entering a period of haves and have nots.  A quick example of this would be SNDK down almost 10% ytd after this weeks pre-announcement and the SOX  and INTC up about 15%.  Or MSFT up 20% ytd and GOOG down almost 2%, I use these big cap tech examples as tech was the one of the best performing sectors in Q1.  So as the next 9 months may not be the layup like the last 5 months, investors may need to roll up their sleeves a bit and do a little old fashioned stock picking.

So for today I want to wait for the first rally and then lay into it on the short side with index etf’s, but keep a tight stop, don’t want to be selling a low here after a 2.5 day sell 0ff.  A good level to attempt this maybe unchanged on the day or up a bit above 1400.

8AM: Yesterday’s price action in U.S. equities was fairly orderly (despite being the second worst daily performance of the year) with the SPX trading in about a 65 bps range after the markets initial gap lower, and closing about 5 points off of the lows.  Many (including me) who were looking for a confirmation of a topping out, leading to a sustained sell off, should be mildly disappointed as there was clearly a bid underlying the weakness.  

2 day SPX chart from Bloomberg


As I stated yesterday afternoon post close, our equity markets, despite their relative under-performance ytd to European indicies like the DAX, still massively out-perform since the start of 2011 and are most definitely treated with a certain “flight to quality” on down days.  The DAX closed on its lows almost down 3% and continues to make lower lows with the index down 90bps as of 8am eastern time.

3 day chart of the DAX from Bloomberg


I am focussed on the strongest market in Europe, that is also perceived to have the strongest Economy as most market participants feel that recessionary pressures out of the regions new found austerity, aside from an economic slowdown in China, pose the biggest risk to our delicate economic recovery.  I think it is important to note that the DAX is now down about 7% from the 8 month highs made in mid March, and below it’s 50 day moving average for the first time since December.  This break in Momentum as we head into Q1 earnings season could be problematic as we stare down the sights of the month of May which has been slightly problematic over the last 2 years for equities (remember Flash Crash in 2010 and the market top in 2011).

1 yr DAX chart from Bloomberg


As for today’s action, and coming in short,  I would have much prefereerd an up opening, and who knows we may still get it when we get the Jobs data at 8:30am, this will be the real test how react to what is expected to be positive news.  Check back before the open for my set up for the day.

I will add on a bit more of a micro note, that stocks like MSFT which is the 4th largest weighted name in the SPX which has had a monster run this year appear to have topped out and is on the cusp of breaking down and establishing a new lower range.  The chart below of the last 30 days shows an obvious head and shoulders pattern with the neckline at $31.  The stock is up 20% ytd but about 6% off of the mid march high.  SO the broad market continued to go up while initial leaders like MSFT stopped going up, thanks a lot AAPL.  I am just saying, the rally was narrow and was getting narrower.

30 day MSFT chart from Bloomberg