MorningWord: 5/31/12: May 2012 started off with the increasingly familiar question asked by many market pundits heading into the guts of the second quarter, “Sell in May and go Away?” For the last 3 years if you had sold the SPX in late April you would have avoided a peak to trough draw-down of ~17% from April to July 2010, almost 20% April to Oct 2011, and now the almost 8% re-tracement from the April multi-year highs.
While May 2012 has been the the worst month for most stock markets since Sept 2011, much of this weakness seems to be masked by the fact that all major U.S. indices and the DAX are still up on the year, for now. Like a monkey, when the SPX got off to a strong start out of the gate on Jan3rd, and never looked back, I was fairly insistent on suggesting that if you think we saw the lows of the year, well you better think again. At this point, I am fairly certain we will likely be down on the year, maybe not the Nasdaq as AAPL will likely keep it afloat, but the financial, industrial, energy and tech-laden SPX will continue to fall on the weight of actual slowing global growth, not the fear of it.
As always we don’t love pressing oversold conditions, and at some point soon we would fully expect sentiment to shift a bit as market participants get focused on the potential for central bank intervention heading up to our FOMC meeting on June 20th, and the EU summit in late June. Prior to that their will be much attention paid to shifting sentiment in Greece heading into their June 17th elections.
At this point we don’t want to press the short too hard, and look for opportunities in names like MS (read trade here) where the potential payout as a result of the trade structure trumps our better judgement of pressing such an oversold name.
So as we remeber May, while some try to forget, we are going to stick to our bearish guns, but do it tacically, we fully expect to see trade-able rallies, but we are more inclined to short them.
MorningWord: 5/30/12: I like technicians, I really do, I have some good friends who made great careers gleaning things from squiggly lines that strategists, analysts, pm’s and traders are unable to do through exhaustive hours combing over fundamentals. In My opinion, Technical Analysis is an input (and a very important one) to a broader investment/trading regime, as a standalone, it can be a very difficult backbone for consistent trading/investment returns.
When I started in this business in 1997 as a clerk at a long/short equity hedge fund, I worked for a young guy whose primary input for entry and exit points of most of his trades was his exhaustive technical analysis, coupled with certain momentum indicators. In the volatile markets of the late 90s, this guy was one of the best, but it wasn’t until this trader combined a top down macro view, with a bottoms up fundamental view of the companies he was trading to his technical inputs did he really help separate himself from most other active traders in the field at that time, and in doing so achieve very out-sized returns for an extended period. And no, this trader was not me, but I did learn a lot from him and the environment we were in.
One of the main goals of RiskReversal.com is to put forth daily discussions of the inputs that we use to express our views in the market, both qualitative and quantitative. We spend a lot of time looking at charts, but as stated above, we use them as one of many important inputs. Lots of technicians like to put a minimum of about 5 lines on a chart or it won’t adequately tell the story, we like to dumb it down a bit and use about 2. The chart below is of the Hang Seng over the last year. There are 2 lines that tell the whole story. The Uptrend from the Oct lows had been intact until the massive gap lower in early May on slowing growth concerns in China and specifically some weak earnings data out of some large Chinese companies. This technical break should have been all you need to see when combined with a macro view focused on slowing global growth and a micro view of overly optimistic earnings expectations.[caption id="attachment_12524" align="aligncenter" width="300" caption="1 YR Hang Seng from Bloomberg"][/caption]
The red circle shows the obvious danger zone that led to further significant losses for the index, but now it is in another sort of troubling point, the chart has based below what has served as an important support resistance level. The chart is broken, and now it is in the technicians hands, the fundamentals have started to affirm the technicals and this could be weakness worth pressing on the short side. We want to be careful in this endeavor though as any whiff of broad stimulus in China could cause a fairly painful short covering rally. But this is the exact sort of combination of technical analysis, macro view and fundamentals that we think like to think is in out wheelhouse, even though we have not been in the “China trade”, it has definitely helped inform our trading investment thesis (bearish), and we could not have been of this view with solitary inputs.
MorningWord: 5/29/12: It was a relatively quiet weekend, with the most market moving news coming out of Greece (shocker), as multiple polls showing the New Democracy party back in front (ahead of Syriza) giving a boost to the Euro and European stocks early yesterday, but they ended up closing flat, and are hovering around flat again today (despite the DAX’s 1.1% gain as of 9:15am). Having said that, Asia was a bit stronger (up 0.5% to 1.5%), and emerging market currencies and S&P futures are a bit perkier, with futures hovering between up 7 and 10 handles for most of the last 36 hours.
The bailout of Bankia spooked Spanish bond investors, with 10 year yields near their highs of the last year, and European banks trading near their lows of the last 2 weeks. U.S. markets feel resilient given that price action.
Bonds are relatively flat after closing for a half day on Friday, and focus in the U.S. will be on ISM and Payrolls on Friday. With earnings season basically over, so next few weeks will be very macro focused, with everyone eyeing the June 17th Greek election date.
With our positioning light, we will be keeping a close eye on long premium plays as we inch closer to June expiration. Enis laid out every options traders internal (daily) debate about long premium in his Chart of the Day this morning, and if June 17th elections in Greece increasingly appear to be “bail-out” friendly, then the markets are likely to calm a great deal and we will witness volatility seep out of the market.
With a Holiday shortened week off too a decent start so far I think it makes sense to see how Europe closes, if they can hold their gains, unlike yesterday and look to build on a what appears to be a short term base above the 200 day moving average in both the SPX and the DAX.
MorningWord: 5/25/12: Yesterday’s late day recovery in the SPX, the second in so many days, was once again fueled by rumors that ze Germans were warming to the notion of joint Euro bond sales. The strength felt nothing like Monday’s surge, and quite different from Wednesday’s late day heroics, as it felt purely futures driven…..many stocks that I was looking at (or short) didn’t rally. What I also find curious is that the SPX as of yesterday’s close has recovered about 2.25% from Friday’s close, yet bank stocks have barely participated, GS, C and BAC all up about 2% during this period. This is bad price action, I would have expected out-performance given how badly the stocks have been battered, and this suggests to me that these stocks are very likely to make new lows on the year in the coming weeks.
A little more than a month ago, we highlighted the simple fact that CDS on bank stocks had been picking up but implied vol was not following suit. This led us to believe that credit traders were far less complacent than those focused on the equity and helped inform our bearish view on most large cap banks exposed to Europe. The chart below is of GS implied vol vs its 5 yr CDS, which clearly shows the elevated levels in the credit market vs the recent pick up in implied vol from levels not seen since last spring.[caption id="attachment_12374" align="aligncenter" width="300" caption="GS 5 yr CDS vs Implied Vol from Bloomberg"][/caption]
We think this is worth keeping an eye on.
July options in banks will be very interesting, and we want to own premium if implied vol comes down dramatically in bank stocks as a result of any calming to the situation in Europe. We think that the mid July earnings period should see most banks report Q2 prior to expiration, and could signal a whole host of other problems for the banks, primarily a lack of earnings visibility for the balance of the year.