MorningWord 9/27/12: Back and Fill, Or Maybe Just Back

by Dan September 27, 2012 9:18 am • Commentary

MorningWord 9/27/12: Many market technicians have suggested that the SPX and DAX will need to “back in fill” a little bit before they will be able to make new multi-year and 52 week highs respectively.  In simple English that just means they need to consolidate a little bit, base, before they can gather the steam necessary to move higher after such a sharp rally since early June.   I don’t view myself as technician  but rely heavily on an underlying’s chart to help inform strikes that I choose when structuring a trade.  If I were of the belief on a fundamental basis, that the broad market was going to close higher than current levels on the year, then I would also be of the belief that the last 2 days’ weakness in equities was healthy and that before they can make a sustained move higher, they must marshal a bit more assistance from some names/sectors that have not exactly been participating so far.  SO for the rally to continue we will also need to see a broadening out of the rally.  

We spend a lot of time formulating our macro views from the top down and then the micro from the bottom up and then try to meet in the middle with single name stories that serve as a means of expressing the macro view.  This is a tricky game, but as Enis referenced this morning in his MacroWrap (here), getting individual stories right in single names can make all the difference for most traders/investors in years like this, where we have seen heightened levels of broad market volatility.

We remain in the camp that macro picture remains very strained, that without unprecedented levels of easing and stimulus that the likelihood of global equities testing 52 week or multi-year highs would be nearly impossible.  We are more likely to rely on the price action of stocks like CAT, MCD, BA & NKE to help inform the direction of the broad market than that of AAPL, GOOG & AMZN.  The underpinnings of the global growth story continues to be very constrained in our opinion and it will be interesting to see just how long the enthusiasm lasts for the latest round of liquidity by the PBOC overnight.  Sentiment regarding China’s health remains extremely poor and likely to get worse before it gets better, but I would suspect that a new low in the Shanghai Comp (was up 2.5% last night after the PBOC’s announcement of liquidity actions) is in the offing, and that it is not likely to be viewed favorably by Western equity markets that seem to be discounting a Chinese recovery.

Back to the Micro though, NKE may be the latest large U.S. multi-national to sound the alarm on Chinese and European demand tonight when they report their fiscal Q1 and offer guidance for the balance of the year.  If NKE speaks to weakening demand, higher input costs, and thus weak sales and margins, this sentiment is likely to spill over to other higher end consumer discretionary names like COH and TIF that have already re-traced a nice portion of their summer bounces.  (read our NKE previews here and here)

Back to the Macro, I am not in the camp that the West can de-couple from the woes in emerging markets (and for the time being, this will likely be evidenced by the guidance of such companies like NKE) and without continued massive stimulus and easing in China, we can not continue to breach pre financial crisis highs, as the Shanghai Comp makes new pre-crisis lows.  Something has to give.



MorningWord 9/26/12:  I have been trading since 1997 in all sorts of markets, and in hindsight none of them were easy.  Making money trading is never easy, and throughout my 16 years trading at hedge funds, a large bank and on my own I have always found the psychology of other market participants around me truly fascinating.  Those who experience very high highs and very low lows, those who become infatuated with specific stories and are unable to separate the Forest from the Trees, and those who just want to bust the balls of others and talk their own book.  I am sure I have exhibited a few if not all of these characteristics over my career at different times, but I can honestly say that none of them are mainstays, and none of them will consistently help you make money in the markets.

As most of you know, for the last 3 1/2 years or so, I have had a side gig, basically a hobby as a “talking head” on CNBC, as a weekly panelist on Options Action and the for the last year or so on Fast Money.  I enjoy both shows and feel that I have something to add to the investing public.  At first, it started out as little bit of a personal challenge to see if I could actually go on National TV, talk intelligently about the markets/stocks/options and not wet myself.  Well, Mission Accomplished, and here I am today, still around to talk about it.

I fully recognize that putting myself out there on TV, and now the web, I open myself up to all sorts of criticism.  I am a big boy, and generally have pretty thick skin.  Over the years I have gotten my share of hate-email  usually when speaking negatively about a specific stock that has been loved by all, but overall, the communications I get have been positive.  I can only call it like I see it, I have no axe to grind, and truly nothing really to sell. has been a great outlet for more of my and the team’s trade content and market commentary, but, it is not for everyone, sign up, don’t, I really don’t care, we are gonna keep pumping out the best possible educational content we can on a daily basis.

So as I said above, I generally have thick skin, but some of the monkey business that goes on in the “Twittersphere” is truly nauseating, and when we roll our eyes at some of the funny business that goes on, as it relates to trading, we can say nothing other than, F@#king Twitter!

Since Saturday some dude on Twitter has been bugging me about a GOOG trade that I executed, posted on, and detailed Friday on Options Action (read here).  The trade is bearish, and the guy was seemingly taunting me about the stock’s 2% rally on Monday and 2% rally on Tuesday, and reminding me about all that I missed about the trade, and how I am just swimming up stream… until about Noon Yesterday when the stock reversed from an all time high.  It almost seems perfect that at about NOON yesterday I got a tweet (below) from the guy, time-stamped that might have been the best piece of news for my trade:

I mean come on, that was the dead high of the stock.

GOOG Sept 25th Day Chart from Bloomberg


Now obviously this trade isn’t over, and the stock could very possibly make a new high very soon, but when you consider the almost 200 point (~37%) move the stock has had since the June lows, and the last 10% in such a short period of time, and yesterday’s reversal on large volume, that could have been the mother of all tops.

GOOG ytd chart from Bloomberg


But sometimes, F#@king Twitter delivers a little gift from the “Trading Gods”, and I believe my GOOG trade got one yesterday! I’m not saying that getting taunted on Twitter causes the stock to selloff, just that it’s a sign of a possible turning point where people feel that they can publicly talk about a stock as if it will never go down again. These are usually turning points and can be great contrary indicators of sentiment.

On one other note, I don’t know the guy who tweeted at me, and from other tweets it seems like he is a hard charging trader who has some good ideas, but I guess one of the biggest issues I have with Twitter is that anyone with a computer and a mouse can just get up in your grill, so to speak.  CC calls it internet muscles, that most comments that strangers pose to each-other on sites like Twitter, they would never do face to face.  So that is the world we live in, and likely to persist from here on out.  I probably spent more time and energy on this one, but I thought it was funny if nothing else.






MorningWord 9/25/12:  Overnight Asian and European markets closed practically flat for most major indices. A veritable calm has taken over world equity markets, as our futures are pointed 4 points higher as I write, continuing global investors’ general preference for the perceived safety of U.S. risk assets.  Central banks in the west have obviously set the lows for equities and most risk assets for 2012, and at this point the question for most market participants is very simply, how much??   How much higher or lower from the current multi-year highs do the major averages close on the year.  

Performance anxiety may begin to set in for under-performing money managers as they stare at the certainty of a big winning year in their benchmarks.  This group has generally gone from doing real work to earn their high fees, to just piling in to what is working as a form of closet indexers.  And if you are in or out of the index closet,  MegaCap U.S. stocks have been the trade for you this year for  many reasons including their fortress balance sheets, reasonable dividend yield, at least 30% revenue exposure to U.S. and stable earnings growth. But most of all because they have been working.   The top 10 weighted stocks in the S&P 500 (in order: AAPL, XOM, GE, IBM, MSFT, CVX, T, PG, JNJ, GOOG)  make up about 21% of the weight of the entire index of those 10 stocks. Only MSFT is not trading within 2.5% from either a 52 week high (as many trade at multi year or all time highs).  I made this point in other ways yesterday in the Word (below), but I can’t emphasize it enough, very few are doing the work for many, and this is largely a function of a flight to safety back in late Spring and early Summer.

A great example of this price action would be yesterday’s 2% surge in GOOG on what appeared to be no news, other than possibly AAPL’s perceived disappointing iPhone5 sales for their opening weekend.  I am not exactly sure why that benefits GOOG directly, but I am sure GOOG bulls can dream up some decent reasons.  But the main point in my mind is that the stock broke out above the previous all time high made in Nov 2007, and SAY IT WITH ME: mega cap, rock solid balance sheet, ~20% of their market cap in cash, expected high teens earnings growth for at least 2 more years, reasonable valuation etc etc, wash, rinse, repeat.  Big safe and it’s working.   These sorts of trades seem to work, until they don’t, largely because of the high concentration among almost every investor the world over either through direct ownership or through etfs and mutual funds that it makes up a large weighting of.

In full disclosure, I bought a bearish Oct Put Fly in GOOG on Friday, and detailed on Options Action that night, but while it might seem that I am talking my book, my view is unchanged on the name, the trade was primarily due to a technical set up, and when I put it on I acknowledged the stock was very likely going to make a new high, you don’t go to the prom and not kiss the girl so to speak.    So some of you may think that I moved on from AAPL and now have turned my sites to GOOG, not the case either, what interested me most about the GOOG trade was its near term overbought nature, and the attractive risk/reward characteristics of the Put Fly.

But make no mistake about it, once the GOOG fever breaks, and if the company falls shorts of expectations, the stock will be vulnerable to a pull back to the break-0ut level, because at that point, from all time highs, the stock won’t be working anymore.