MorningWord: 5/16/12

by Dan May 16, 2012 9:03 am • Commentary

MorningWord: 5/16/12: Yesterday’s close in the SPX a tad above 1330, while only down about a half a % on the day, was downright ugly from a technical perspective.  The problem, the way this pseudo-technician sees it there is no real solid support until 1300, which sits about 1.5% above the index’s 200 day moving average.

2 Yr SPX chart from Bloomberg

I guess slightly more concerning than the approximate 6.5% peak to trough draw down from the early April high is the fact that just last week, the chart broke, in a meaningful fashion the uptrend channel since the Oct lows.  1300 is a foregone conclusion from here, just a matter of this week or next, and the gazillion $ question is what happens then?  If anything has become clear in the last few years, markets can overshoot on the upside, just as they can on the downside and this year, as last and the year before that we maybe gettin a little dose of both….

Barry Ritholtz who writes the Big Picture Blog had a great Tweet this morning:    @ritholtz “Tops are processes, bottoms are events”.   The way I see it, if we get some better econ data here, and the situation in Europe calms a bit in the near-term, I could very easily see the SPX attempting to re-take 1400 on the upside, but I am not sure that would serve as an “event” and quite possibly just another leg of the “process”.

As the market’s take 1 step forward and 2 back, we get a smidge less bearish, and in some ways if worries about Europe end up trumping worries about slowing global growth in the next few weeks, we will likely look to get long into Greek elections to be held June 17th, especially at SPX 1280/1300.

Overnight, the Hang Seng got clobbered down a little more than 3%, while the Shanghai Comp was down about 1.2%.  Europe this morning is a mixed bag, while most indices are well off of their morning lows.  The DAX is down 10 bps, but up more than 1.5% off of today’s lows.  The DAX is almost 11% off of the March highs and quickly approaching a key support level of 6000.  Things feel slightly panicky and we don’t want to be caught too short on the V reversal that retraces 30-50% of the recent decline.  So we keep trimming shorts.

Markets feel crappy to say the least, and the reversal of fortunes in the financial sector, the fever breaking in names like AAPL, crises of confidence in “fortress” stocks  like JPM and speculative names like GMCR, NFLX and HLF coming undone, all point to a “Process” and unfortunately for the near term that may equate to continued pain for longs.  But again we continue to trim shorts on sharp declines in names like MS and C and look to re-initiate on rallies in names like XLF. We want to be nimble and opportunistic, but most importantly live to fight another day.

MorningWord: 5/15/12: As of yesterday’s close, the SPX sits about 6% lower than the 52 week high made in early April, closing below its 100 day moving average for the first time since November and trading at levels not seen since early February.  Wow that was a mouthful. But you get the point, we are in correction mode   I don’t see a whole heck of a lot of support below that level, next stop being 1300.  I fully expect the SPX to test 1300 in the next couple of weeks, but to be clear, barring things coming unraveled in Europe quicker than most think I see 1300 as massive battle line that will likely be defended aggressively.

The action in U.S. banks stocks, even before JPM’s disclosure of losses in their CIO group on Thursday had been troubling us for weeks and was one of the pillars of our bearish thesis heading into Spring/Summer.  While Financial stocks were one of the best performing sectors in the S&P in Q1 (besides Tech of course), the fact that some like MS have already round-tripped gains that topped 40% on the year should be a massive warning signal for BULLS.  It seemed that most had been ignoring this fact, as many market participants thought most U.S. banks were unfairly punished and thrown out like the “baby with the bathwater” last year in the height of Europe’s sovereign debt crisis.   Listen I have said it before and I will say it again, they are just stocks and most of the price action most of the time will not make much sense, but as a general rule of thumb, when stocks are moving around 40% a quarter, it probably makes some sense to take profits when you have such extraordinary gains in such a short period of time.  To that same point, on the short side, stocks like MS and Citi soon maybe getting a bit oversold near term and the risk reward of pressing them here is getting a little stretched.  While we think banks continue to get weaker throughout the balance of the Spring, into summer, we want to do so tactically and on rallies.

One way we try to hang onto shorts, even as the stocks get oversold is taking profits on half of a position when we have a double, this way we have dramatically decreased our potential for any loss in the position and have essentially established a position for free.

As for today, the futures have had a fairly dramatic turn in sympathy with European equity markets that are well off of their highs from the morning, S&P futures down 1% from the overnight highs, while the DAX is down about 2% from it’s morning highs.  Horrible price action to say the least, and if they can’t hold this morning we are likely to get an out-sized down day very soon…..If I were a bull, looking for a bounce, I would be playing for a big down opening, and then some strength into the European close, followed by a rally in the afternoon here and a close on the highs…..this would be the sort of reversal, barring any specific news that could likely be ridden higher for a day or so.  As always we don’t press down openings and will trim winners as the market gets increasingly oversold in the near term.




MorningWord: 5/14/12: If you didn’t think the news could get much worse in Europe after last week’s uncertainty regarding Greece’s future in the Euro-zone, think again, their government’s inability to form a coalition government and agree to endorse previously agreed upon austerity terms in exchange for bailout funds, has likely caused the need for a second parliamentary election that could see the anti-bailout party Syriza gaining more ground and make the EU exit much more likely.  Aside from Greece, Angela Merkel who watched her better half of last year’s Glam Couple of the year, “Merkozy”, beaten by a Socialist, and now she watches her own party get toasted in Germany’s most populous state.

Aside from that Euro-zone Industrial Production sucked, marking the largest drop since late 2009.  Ok You get it, things in Europe seem to be reaching 2011 sort of panic levels as evidenced by yeilds on the Spanish 10 yr nearing levels not scene since Dec 2011.

[caption id="attachment_11789" align="aligncenter" width="589" caption="10 Yr Spanish Yield from Bloomberg"][/caption]


With the Euro hitting levels not scene since mid January, we seem to be setting up for the perfect storm in the weeks to come…..We are long an FXE May 129/125/121 Put Butterfly that expires on Friday’s close, we are expecting a test of the previous lows some time in the next few days and we will look to take this off, hope for a bounce and put it back out on the short side looking out to June expiration setting up for volatility in front of Greece’s next election.

I guess I have to hit China here, but it seems so boring relative to all of the excitement in Europe.  Over the weekend China lowered the reserve ratio for banks in an effort to stimulate growth. IN a normal news cycle this would likely have been a top headline, but the soft vs hard landing debate will have to wait for a few days.

Equity markets the world over are weak, the Shanghai Comp couldn’t even rally on the above news, which should have been seemingly positive for stocks…..European equities are down about 2% across the board, not too far from their lows, while our futures are down about 85 bps….IT’S A REAL TOUGH CALL HERE, NEAR TERM EQUITIES SEEM A LITTLE OVERSOLD, AND THERE IS A TON OF BAD NEWS IN STOCKS (THE JPM FIASCO FROM THURS/FRI OBVIOUSLY WAS LIKE THROWING KEROSENE ON A BONFIRE) BUT THIS ALSO SEEMS LIKE THE PERFECT OPPORTUNITY TO PRESS THEM ON THE SHORT SIDE.

We are short and riding them, but will not be pressing the lows, we will get a bounce and soon, but I will not be playing it from the long side, more from a risk management decision to take profits on shorts.  We will also be looking to short sharp rallies.  But as usual, we do not press down openings and will wait for the first rally to lay out any new shorts.  As we have talked about on many instances in the past, in fast markets like this, we often trade inverse or levered etfs like the SDS or the FAS, as they are liquid and we can make multiple decisions a day without paying all of the bid ask in what can sometimes be illiquid options.


MorningWord: 5/11/12: Another day, another disaster…….Yesterday’s swoon in CSCO, down 10.5% on a disappointing outlook might not have had the sort of impact on technology stocks as a whole that some might have expected (INTC, AAPL, IBM & MSFT all up small of down small), but the affects were felt in the relative high valuation tech names like CRM, FFIV, NTAP, VMW/EMC, RHT.  make no mistake about it though, CSCO was a drag on the broad market as we did the opposite yesterday of what we had done in the prior 3, we opened higher and spent the rest of the day going lower.

CSCO’s CEO John Chambers on every conf call refers to the “factors that they can control” which sets up nicely as we turn our attention on today’s disaster which was JPM’s acknowledgement of a large trading loss that CEO Jamie Dimon described on a conference call with investors as `EGREGIOUS’ MISTAKES, ‘SELF INFLICTED’, so not only did they violate the “Dimon Rule” but it appears they Violated the “Chambers Rule” too.

Enis has done some great analysis on this situation so please read here and here, it is our house view that this will not be a “one off ” situation,  until there is more clarity on the size and the exit of these positions with a defined PnL, we think that investors will leave the stock in the penalty box, as the whole notion of “best of breed” has been turned upside down for the time being.  It will take many quarters for JPM’s management to earn back investors trusts.  It is not our view that investors need to try to catch a falling knife here, wait for the stock to settle in some where, probably in the mid 30s and then depending upon your time horizon maybe you start to nibble at it.  But we are also not buyers of the banks near term as many readers know we have been very negative on the banks and in fact after the “London Whale” story came to light in early April we put on a Put Calendar into their Q1 Earnings report.

Earlier in the week we trimmed short structures in MS and C for nice gains and will closely monitor the price action today and possibly look to take them off….I am more focused on the MS May 16/14/12 Put Fly as it expires next Friday, as we have a bit more time with the July 32/27 Put Spread in Citi.

As for today as usual be careful pressing a down open, but this could definitely be a day to get short the first rally.  If the XLF sees some relative strength as WFC and BRK/B make up ~17.5% of the index, possibly offsetting a bit of JPM’s weakness at about 8.6% of the index, then I think you can short it through out of the money Put Spreads in July.



MorningWord: 5/10/12:  Well the one thing I nailed in yesterday’s “Word” was the Groundhog day thingy, the Titanic thing, not so much.  But going back in looking at my first take on how I thought things would play out yesterday and why I thought there was a definite potential to have a different outcome is fairly important for some of you (including us) who are looking to get things right, not only on an intermediate to long term basis, but also some days on an hour by hour basis.   The biggest take-away should have been, and as we tried to make the point through out the day with Enis’s fancy charts and relative strength observations on QuickHits and the Twitter, that we are getting to a near-term over sold condition and whether or not you think we break 1345 in a meaningful way in the coming weeks (as I do), there will be rallies, SO DON’T PRESS DOWN 1% OPENINGS. Additionally if you have noticed over the last few days we have taken some profits on a postion of our short biased positions like C, MS & MCD, by taking our “cost” of the initial position off of the table, and leaving half of the position on, thus greatly increasing our odds of success.  That is an enviable position to be in, and we think given the likelihood of increased “tape-bomb” activity, both positive and negative, that it makes a ton of sense to be nimble not dig in there, and take profits when you have them, on positions with shorter time horizons.

As for the news overnight, while the markets have been fairly pre-occupied with the global macro picture over the last few weeks since the end of the meat of earnings season, last night’s commentary from CSCO on their fiscal Q3 earnings call was a bit sobering for those who have been shrugging off the notion that U.S. multi-nationals will somehow be immune to a slowing economy in Europe.  CSCO CEO John Chambers might have given an overly downbeat assessment of enterprise spending and how once again the uncertainty in Europe is affecting cap ex decisions by corporations, or maybe he is spot in line and things are about to get much worse as they did last year at this time.  Who the heck knows, but if fund managers aren’t looking very closely at large U.S. technology multi-nationals that have similar geographic and customer concentrations to CSCO this morning than I would be very surprised.  I would first start with those companies like INTC and IBM that clearly showed  some signs of potential weakness in certain verticals and then broaden out to names like MSFT that are relying on significant product cycles that are very dependent on corporate upgrades in the coming months to keep the ship moving forward.

As for CSCO, I am not sure I would press the stock on the short side below $17.50, but if the stock rallied to $18 I would look to Buy some July 17 puts, or possibly the 17/15 Put Spread as I think Q2 reporting season could be a rocky one, and while CSCO’s Q4 report will not come until Aug expiration, the July options may be cheap on a relative basis to Aug and you may get some bang for your buck as the stock will clearly be influenced by potential Q2 pre-announcements and or early disappointments in tech that could fall in July expiration.

From ENIS:  Based on the oversold signal I mentioned yesterday, we are due for a bounce.  In fact, if the Euro ended down vs. the dollar today, it would be the first time the Euro has been down 9 straight days in its history, according to HSBC.  So the green opening is not surprising, and Dan, CC and I discussed initiating some long ideas yesterday throughout the day, but what kept us from pulling the trigger was the lack of strength on the up-move.  XLU continues to outperform, even when the indices briefly touched green yesterday, and broader risk indicators like emerging market currencies remained weak on that rally.  So we sit tight for now.

MorningWord: 5/9/12:  This week is kind of shaping up like a bad version of that brilliant Bill Murray movie Groundhog Day.  While that movie had a happy ending, this one may be shaping up like the final scene in the less than brilliant movie Titanic.   Open lower, rally, open lower, rally….well today we are opening lower, but I am not sure you want to hold your breath waiting for that rally, I have a sneaking suspicion that today is a bit more like Friday where the open lower and close lower, near the lows is the set up.  Lots of market participants think that the last couple days afternoon moves off of the lows were a sign of sellers exhaustion, I would contend that those who tried to pick a bottom maybe quickly reversing course if we get a close below 1350 in the SPX as the next bit of support isn’t till 1340, and after that could be a straight shot to 1300.

2 Yr Chart of SPX from Bloomberg


Yesterday’s price action in names like SBUX, CMG, CRM, PCLN and RL to name a few was less than bullish to state the obvious and if those names give up things could be about to get very ugly.  Oh and I spent a full hour on Fast Money last night and the Word Apple wasn’t mentioned once, must be the first time in weeks or maybe even months.

As usual, and this is where I start to sound like a broken record, but I don’t want to press the market here and in some situations where I am outright LONG Puts I want to look to lock in gains by legging into Put Spreads by selling a lower strike put.  This is a great time to do this, as the puts I am long are benefiting from elevated implied volatility, and then I am selling an option that will be pumped on a vol basis. I will look to Spread MCD and GPS today on any significant weakness and I am keeping a close eye on the May FXE 129/125/121 Put Fly as my long strike is finally in the money.

On the Flip Side, check out Enis’s chart of the Day:   He makes a pretty good case why the breadth indicator he is looking at could be signaling a near term bottom.  Key word there, could.

I guess the key point though is that there has been a high level of complacency in the markets for months, and I have no clue how big of a deal the political fall out in Europe will be, but I am fairly certain that we are in for a much more uncertain near term future.  And in situations like this you don’t want to be pressing oversold conditions or buying stocks or the markets at highs.

So, as always, don’t press down openings, look to take some profits on a portion of your shorts and live to fight another day with your longs……