MorningWord 7/09/12: Tech Wreck

by Dan July 9, 2012 8:35 am • Commentary

MorningWord 7/09/12: As Enis mentioned in this morning in his MacroWrap, volume was anemic last week, and aside from the move in the Euro/USD (making fresh 52 week lows), there wasn’t a whole heck of a lot to write home about, Except the almost 30% collapse of INFA in Friday’s trading.  INFA is a $3.3billion infrastructure software company that had a little less than $800 million in sales last year, with 25% of those sales coming from Europe.  The company stated on a conference call Thursday that “customers in Europe had an increasingly cautious tone”.   Whats most significant about the miss is that investors extrapolated European weakness to some very large software companies like SAP, CRM, CTXS and VMW, with all of them down btwn 4.50 to 7.9% on big volume.  

INFA taken with warnings from STX in the hard disk drive space and APKT in the networking equipment space on Thurs/Fri shed a fairly dim light on Technology shares on Friday with defensive meg caps like IBM taking it on the chin down 2%, badly under-performing the broad market.

Unmistakably, large cap tech has been a bit of a safe haven since the Oct 2011 lows due to their decent dividend yields and their generally defensive nature, while financially related stocks remained in focus, but a slowdown in China and a recessionary environment in Europe would likely cause massive under-performance in this very cyclical sector.  The tech sector has the potential to be  ground-zero for any market rout of 2012, as financial shares (particularly banks) are generally in shooting distance of last years lows, many tech stocks, like INFA, could take a 20% plus plunge to make those lows from last year, while many are still up 20-50% from the Oct lows…….I’m just saying, not fear mongering……but if I had lots of gains in Tech shares I would be pouring through the press releases of last week’s pre-announcements to make sure they were not just “company specific misses” as the Wall Street bulls love to label early cycle misses before a trend is confirmed.  We would never expect Wall Street analysts to be ahead of the trend.

I like my short exposed trades in IBM & INTC (both July premium, may look to roll to Aug on anyt real weakness this week) and will like be adding more through weeklies (puts and put spreads) in QQQ or Aug in XLK as we head into the meat of Tech earnings next week.


MorningWord 7/05/12:  There is lots going on this morning, and I not exactly certain there is anyone here in the U.S. is here to witness the rash of Central Bank action from Beijing to London (and Brussels in between) that was dropped on global markets in the last few hours.  Enis did a nice little round up here in his MacroWrap about the PBOC and BOE, and since, the ECB came in as expected and lowered interest rates to record lows and their deposit rate to zero.  Nothing really that unexpected other than the S&P futures relatively frantic reaction, up 7 handles then down 7, just to settle in a bit below break-even on the session.  Low volume and few market participants have the potential to make for volatile markets.

While the Marco set up gets a lot of attention, I think it is important to keep a close eye on some retailers that reported worse than expected same store sales for June.  While many want to look to Europe and China for guidance on the direction of the global economy, I would suggest that we are getting data points right here at home that may be more telling for the near term future of the S&P500.  There is a ton of money parked in U.S. equities from U.S. and overseas investors for that matter that see the U.S. as a bit of a safe haven relative to the potential recessionary environment in Europe, and slowing of growth in emerging markets.  Many see the U.S. consumer in the same light as they saw the emerging middle class consumer in EM back in 2009, the last bastion of hope for a global economy that was going through a massive de-leveraging process.  Well as most over here know, the U.S. consumer is fickle, and with unemployment not showing signs of hope for what is now 4 years, this may be the exact wrong place to look for “de-Coupling” action. This morning alone we saw decreases in comp sales across the spectrum in retail from TGT to M, (I will add that TJX is bucking the trend and actually raised full year guidance, but I have a feeling that has something to do with M weakness).

I guess the point is, U.S. consumer alone ain’t gonna save the day, we will need to see a gradually improving global economy, and at this point, as evidenced by this morning’s central bank actions, they see a quickening decline!


MorningWord 7/03/12: To state the obvious, there is not a whole heck of a lot going on this morning.  Most market participants have likely checked out till Thursday morning at the very least and possibly Monday July 9th!  The path of least resistance for the time being (meaning this Holiday shortened week) seems sideways to up, barring any big surprises out of the ECB on Thursday.   The price action on weeks like this are generally not very instructive to the overall trend in my opinion, usually they are of low volume, and thus low conviction.  

Looking at last year’s performance in the SPX concluding what had been a fairly volatile late Spring, may shed some light on what is in store for us in the coming weeks.  The chart below shows the Spring sell off concluding at about mid June, with another test of those lows towards the end of the month, only to make one last attempt at the previous multi year highs.

[caption id="attachment_13975" align="aligncenter" width="589" caption="June/July 2011 chart of the SPX from Bloomberg"][/caption]


The chart below shows the SPX ytd, which we are all fairly familiar with at this point.  Much like last year the index had a very steady and healthy rally into May setting new multi-year highs only to quickly descend nearly 10% from those levels.  Much like last year, following some supposedly backstopping action in Europe in late June, equity markets looked like they were off to the races heading into the July 4th Holiday.

[caption id="attachment_13976" align="aligncenter" width="589" caption="SPX ytd 2012 from Bloomberg"][/caption]


This whole analysis is a bit pedestrian, I know, but what I find interesting is that much like last year, when U.S. economic data that was apparently weakening, was explained away by most at the time as a “soft patch”, while now the data is very clearly more than just a patch, and aside from Housing it appears that we could be headed towards an all out stall of the economic recovery that has been in place since early 2009.  If the data does not get better over the course of the summer from seasonality adjustments fading, and S&P earnings continue their softening pace, the SPX will once again be vulnerable to a summer/autumn swoon.  This is not fear-mongering, the stage is clearly set, and for those who don’t see it refuse to open their eyes.  While I am fairly certain we re-test the early June lows at some point in the near future, most likely August at this point, it would take the global economy to turn on a dime, and some new-fangled QE here in the States and a lights out solution to the Euro debt crisis to stop this from happening.  I am not calling for a crash by any means, merely a test of the previous lows, and then at that point, who the heck knows, but for now, “while the Cats away, the mice will play”.

One last thing, the 1250/1300 range has been the danger zone for the SPX over the last couple years, we obviously bounced from there (~1265ish) last month, but it wasn’t until that level that we really collapsed last summer.  Make no mistake about it, it is not just a nice round number, it is a HUGE technical level.

[caption id="attachment_13978" align="aligncenter" width="589" caption="SPX 2010 thru present chart from Bloomberg"][/caption]



MorningWord 7/02/12:  As many of you know, Traders are creatures of habit and often times drawn to make decisions that are influenced by history, with the calendar providing some framework.  As a kid I was a big fan of Simon and Garfunkel, and one of my favorite movies growing up was The Graduate starring Dustin Hoffman, whose soundtrack featured many now S&G classics.  The following lyrics (the only lyrics in the short song), are from S&G’s, April Come She Will, which feels like it was written for star crossed lovers and traders alike:

April come she will
When streams are ripe and swelled with rain;
May, she will stay,
Resting in my arms again

June, she´ll change her tune,
In restless walks she´ll prowl the night;
July, she will fly
And give no warning to her flight.

August, die she must,
The autumn winds blow chilly and cold;
September I´ll remember.
A love once new has now grown old.

What I love most about this song is how concise it is, and it’s focus on just the months that make up the 2nd and 3rd qtr of the calendar year.  As a trader April thru the end of Sept have often times been the toughest to make money and in my career and have been fraught with many pitfalls.  For instance my track record while at hedge funds was often times marked by great starts out of the gates in Q1, when incentives to take risk are very high, as time is on your side, and often times equities are buoyed by seasonality that assists the “Long” trade.  Much of the years gains happen in this period for many hedge funders.  Q4, Oct thru the end of Dec are often reflective of defensive positioning to maintain gains, and not “blow it” so you can get PAID!

Which leads me to April Come She Will, the song’s lyrics come to my head in the start of each month featured in the song (oddly only months in Q2 and Q3).  As hinted to above, traders can be sentimental and superstitious, so when I start a month thinking about a classic lyric like, “July, she will fly,  And give no warning to her flight”, I think about where my market call is and whether I am thinking about things properly?  Sometimes I even peak ahead a little to the next month for a little preview of what I should be thinking about, in this case, “August, die she must, The autumn winds blow chilly and cold”…….this is more my speed, as many of August’s have been rocky months for the markets during my career and I much prefer that the market “Dies” than “Flies”…….but you get the point.

Don’t be shy to get inspiration from sources other than the WSJ, FT, BI, GS, MS, BAC etc, and even for that matter.  Trading is like many other challenges in our lives, we are not robots, we are sensitive thoughtful beings, so lets trade that way.  Ok enough with the Tony Robbins crap, lets make some money in Q3.