MorningWord: 5/21/12

by Dan May 21, 2012 9:15 am • Commentary

MorningWord: 5/21/12:  News over the weekend appeared to get less bad as China hinted to more easing and the tone regarding Greece among world leaders at the G8 meeting here in the U.S. was that of mild optimism as it relates to Europe’s Sovereign debt crisis.  The problem the way I see it is that Asian markets barely rallied, and the DAX has already given up half of its early morning gains of more than 1%.  So the glass continues to be “Half Full”.  

Over here in the U.S., FB’s price action is likely to continue to be a distraction for investors, especially those retail investors who were shut out on the IPO but got fills on the open at about $42.  The stock is trading at  36.70 in the pre-market as of 9:15am, which is about 12% lower from the euphoric levels seen at 11:30am on Friday.  FB is a problem for retail investors in the near term, those willing to place orders in the after-market expected quick gains, and are probably less likely to sell those shares because of all of the brainwashing that has been done over the last few weeks by Wall Street, the financial media and essentially the company on its ipo roadshow…..this is likely to result in selling of other names like GOOG, LNKD and maybe even AAPL.  Enis had a great write up this morning in his “Chart of the Day”.

As for today’s open, it is a fairly tough call in my opinion, we are pretty oversold on a short term basis, but if the market keeps taking one step forward, then two back we are setting up for a puke.  We have covered much of our short positions, but this does not mean we think the market will not puke here, we just think the risk/reward is becoming less attractive the lower we go playing for the puke.  We prefer to re-short oversold banks, industrials and tech on rallies.

MorningWord: 5/18/12:  One Step Forward, Two Steps Back ain’t gonna get it done….for the SPX to close down 1.5% near the lows yesterday and only be up 45 bps on the open today is becoming increasingly troublesome for equities…..we have been saying this for the last few weeks, and yet we continue to trim shorts.  We are not talking out of both sides of our mouths, we are just trying to be practical.  We have found throughout our careers that the Markets rarely trade in a rational manner at inflection points, which clouds investors judgments…..we try to learn from our past mistakes and not press oversold conditions, and certainly not buy into mania’s (see FB) or runaway break-outs.

So while we think there is a distinct possibility that we see some capitalization in the near term, and  we are less and less geared towards profiting from it.  We have had the “Short” on for weeks, and have gotten it right and just think that to press the lows here is a risky proposition.  We still have our share of shorts on, but want to continue to whittle them down on further weakness……

Sellers exhaustion is likely coming, but from what level? We have no clue, but much of we look at is getting very oversold and rather than play for a bounce, we will look to re-short on a real rally.  WE DO NOT VIEW ANY RALLY IN THE COMING DAYS/WEEKS AS INVEST-ABLE.   For you swing traders out there, have a ball in individual names, we will likely buy out of the money call spreads in etfs or indices, but again, we view it more as a BETTER entry point to RE-SHORT things….

 

MorningWord: 5/17/12:  While Europe is grabbing the headlines, Chinese news flow is concerning as well, and the easiest way to see that is the massacre taking place in the industrial commodity complex.  David Einhorn mentioned China’s endless empty apartment buildings on his slide show yesterday, and Chinese import and export data is declining steadily.  After a strong start to the year, the Hang Seng is almost back to flat (up ~4% after being up 18% in Feb).  

But let’s not kid ourselves, Europe is the focus of global markets, and it feels a bit like 2008 when banking and central bank rescue headlines gripped newsrooms and trading floors for more than half the year.  The events in Greece are important mainly because of the possibility of a bank run, discussed by Enis yesterday.  European banks are now down more than 30% from their highs 2 months ago, a very steep change in sentiment for sure.  The Euro Stoxx Bank index SX7E is down almost 2% today making new all time lows!

[caption id="attachment_12010" align="aligncenter" width="300" caption="25 Yr Euro Stoxx Bank Index (SX7E) Chart from Bloomberg"][/caption]

 

Things are bad out there, and the worst part about it is the bad price action has been all too orderly.  We have seen very few signs of capitulation, at least in the U.S. (and clearly excluding Sovereign Euro debt yields and Spanish and Greek equities).  In the U.S. the VIX is still at levels that equity investors seem fairly comfortable about, not much higher than 10% above the long term average and trading below the level where it traded in January when the SPX was only a couple % lower than here.  I guess my point is, if things are gonna get worse than we havn’t seen nothing yet!  As I started to say in yesterday’s “Word”, we are getting less bearish as we go lower and would likely cover most shorts on a down 2-3% day, or a day that felt “panicky”.  Near term we are getting oversold and while “Grexit” is dominating the news flow, overshadowing slowing growth in China and maybe even the U.S., we feel European situation could serve as a  little misdirection and cause a short covering rally that could be a great opportunity to sell in front of what we feel could be a very week economic backdrop for the second half 2012.  So the point is, we are positioned correctly at the moment, and don’t want to get too greedy.  Just as the bullish sentiment turned on a dime just a few weeks ago, the almost 7% sell off since could see a 50% re-tracement if central bankers decide to bust out the 2010 and 2011 playbook.  The lower we go in the short term, the more risk to “TapeBombs” that are likely to cause short squeezes.

We will continue to look for good risk-reward trades on the short side, some  in indices and etfs as we take off single stock winning positions, as we did with MS and XLF on Friday.

For Now we wait for a capitulation through 1300 and then we re-position for a bounce…..

 

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.