MorningWord 12/31/12: Holding on for Six & Half More Hours -$VIX, $SPX

by Dan December 31, 2012 9:29 am • Commentary

MorningWord 12/31/12:  The New Years Eve trading session is normally a bit of a quiet session with not a ton relevance, but today, with just six and a half hours left to trade in 2012 it feels like the SPX is fighting to hold on to its 11.5% ytd gain.  I say that somewhat in jest, but the price action of the past week (SPX down about 2.8% since Dec 2oth) and the corresponding price action in the VIX (up 28% since Dec 20th) suggest that we are likely in for at least a volatile session today (S&P futures are up 80 bps as I write) and possibly for days to come. This morning in his MacroWrap, Enis ran through a couple likely deal scenarios for the “fiscal cliff” and I don’t believe either that he laid out offer any real long term clarity for investors, but one thing I am fairly certain of is that we will look back in 3 to 6 months on the cliff crisis and chuckle a bit that this little  debate caused the second largest vol spike measured by spot VIX since the throws of the European Sovereign debt crisis of 2011 (which was a real crisis with potential systemic risk).  

SO what to do today? My guess is that today’s wrangling in Washington will see little results and any early gains will likely evaporate as this becomes apparent. But I would suggest that Friday’s late afternoon spike in the VIX could already incorporate a bit of the expected near term disappointment.  The chart below of the SPX vs the VIX over the last three years shows the instances where set against one another the 2 indices converged, in 2010 duding the “flash crash” and again in 2011, during the European Sovereign Debt Crisis.  While there is nothing scientific about this chart it is interesting to note that in both previous cases of convergence, spot VIX started from about 15 or 16 at lows, while the SPX was at 52 week highs, not too different from the current situation.

[caption id="attachment_21073" align="aligncenter" width="490" caption="SPX vs VIX since 2010 from Bloomberg"][/caption]


While it may appear to be a pretty bearish set up, I can’t for the life of me dream up a near term scenario where we see the VIX at ~3o AND the SPX at 1250, NEAR TERM.  I can definitely envision this set up at some point in 2013, but would take a confluence of bearish happenings coupled with some unforeseen ones.

SO for today, I would likely “fade” and early morning strength, but with a tight stop, as who knows what sort of late day “window dressing” shenanigans could take place.  January could be an interesting month as this week could see Q4 earnings pre-announcements as companies use the “fiscal cliff ” and Sandy mulligans coupled with continued horse trading on the “Cliff” in Washington.  SO buckle your seat belts as we could be in for a little ride near term.


MorningWord 12/28/12:  You guys have heard us say it on many occasions, timing isn’t everything when it comes to trading, but it sure is pretty important.  Three weeks ago I felt the way to play for further weakness in AAPL was through QQQ options as AAPL makes up nearly 20% of the etf’s weighting and its implied volatility was trading a few points from 2 year lows, while AAPLs was trading a few points from 2 year highs.  Making directional bets via short-dated options in AAPL was at the time, and still is very expensive on a historical basis, but playing the index/etf that it makes up a large share of was not, possibly for good reasons.  

Back on Dec. 7th, when AAPL was $533 (on its way back to $505 from $595) I bought a Dec31st quarterly put spread as I felt that concerns about the “fiscal cliff ” would continue to weigh on some large ytd gainers and that ultimately AAPL would attempt to break the Nov low of ~$505, and take with it some other tech high fliers like AMZN.  Well my AAPL thesis was correct, and my AMZN thesis may have just started to be correct, but my entry point was a tad early on the QQQ.  While AAPL continued to trade very heavy, stocks like AMZN started doing some heavy lifting (until yesterday).  After 4 consecutive down days, and with the market down more than 1% today its 5th, and only 2.5 trading days left in the year (til expiration) we decided to pull the plug on the trade for a small loss (here).  While I conceded I was a bit early on my entry point, I was not going to make the same mistake on my exit!

But something interesting happened today.  I was not in front of my normal set up on a trading desk with others around and CNBC on in the background, and not speaking to some of my normal peeps (as I am traveling) But at 12:30pm I opened my Twitter feed and I started to see people that I follow, who are usually bullish no matter what the market environment is, getting bearish, or cautious at the very least.  I immediately called CC (who has the honor of wearing RiskReversal’s Risk Manager hat) and suggested we could be close to a near term bottom which, not only did he agree but he suggested this may be our only chance to get out of the QQQ position for anything near what we paid.  We gave the market one more shot to make a new low, and when it held, we closed it.  At that point today, the trade was actually a bit binary, it was either going to be a total loser or a small winner, but unlikely to be much more than a double.  We either had to make the decision to let it ride and write off the premium or cut our losses and be happy to have our money back.

SO the net of it is, obviously, not only is timing important, but monitoring sentiment to assist in the timing of trades is also very important.  Now this is all a bit anecdotal, but I saw alot of tweets all of a sudden, from a few guys who I know and like ready to throw in the towel on the market due to the fiscal cliff headlines. I felt that I had just landed on a bizarr0 planet. I am not trying to pat myself on my back for booking a loser but I thought this would be a good opportunity to highlight a couple of fairly important aspects when it comes to sudden shifts in sentiment that when used as a contrarian indicator can assist with successful exit and entry points in trading.



MorningWord 12/27/12:  Yesterday’s weakness in the retail sector was sort of eye-popping, with a hint of irony when you consider most apparel and dept store stocks were down 2-5%, and JCP was actually up 4.4% on the day.  The fairly broad equity weakness in most retail and consumer names was and could continue to be the realization (as I wrote about in this space yesterday morning-below) that no matter how good or bad Q4 was for most retailers, it may be “as good as it gets” for at least a quarter or two.

Taking a quick scan across retail sub-sectors, aside from some lower end dept stores and big box retailers such as WMT, TGT, KSS & COST that were all down less than 1%, very few retailers we spared in the carnage, as teen apparel names like ANF & GPS were both down about 3%, high end department stores like SKS and JWN were down 2-4%, while high end consumer discretionary was hit particularly hard as TIF, COH, RL, UA, NKE & LULU were all down btwn 3-5%.  

Based on my worldview, this weakness doesn’t surprise me much and I think there is a good chance we see more of it in the New Year because, like it or not, the U.S. will find itself in a period of austerity just as some economists are suggesting our economy, particularly housing and employment, are starting to see “green-shoots”.  The obvious monkey wrench in the whole recovery is this little “fiscal cliff” we are on the precipice of.  As readers know we fully expect some compromise whether it be this month or next, but your guess is as good as mine where we go from there, we think eventually down.

Back to retail, AMZN had one of it’s largest sell offs of the year (down ~3.85%), possibly the largest since this past February.  Have investors come to their senses that increased sales and market share rarely equate to greater profits with this company??  We will continue to look for defined risk/solid risk reward ways to play AMZN’s impending unwind (most recent here, APR 240/200/160 Put Fly), hopefully with the idea of not throwing good money after bad so to speak!

JCP is another name that we have kept our eye on of late, largely because of the massive sentiment shifts the stock has been exposed too, which has resulted in some extraordinary price moves.  As the new CEO continues his plan to revamp the entire shopping experience at the once giant department chain, the stocks nearly 45% short interest has made it impervious to bad news since mid November when the stock made fresh 3 1/2 year lows.  Make no mistake about it, this story is coming to a head in the next couple months, as investors will get a sense of just how successful the new strategy was in the all important holiday selling season, with same store sales readings in early Jan & Feb, an analyst meeting in late Jan, and earnings in late February.  The way to play will be calendars, possibly diagonals, as the term structure is fairly flat in the options market, meaning all expirations are nearly equally well bid.  I will likely look to own March when it is listed after Jan expiration.

As we head into year end it makes sense to keep a close eye on exaggerated moves, as some have the potential to reverse themselves early in the new year (JCP), while others may just be the start of a greater trend (AMZN.) We could be in for a slightly different volatility regime than we had become accustomed to in 2012, which could present itself with plenty of opportunities for nimble traders, frankly, I can’t wait, Bart Scott style!



MorningWord 12/26/12:   Back to the grind, well not really, as we are fully expecting the last 4 trading days of 2012 to be fairly uneventful, despite anticipation of near term resolution to the “fiscal cliff” debate.  We are in the camp that a cliff deal will not necessarily be viewed as positive for the markets, as the reality of austerity sets in and the fear of any initial short covering rally has been cleared from the markets. While we don’t style ourselves as skilled “Washington Watchers” it seems fairly obvious to us that market participants will likely be focused on the results of austerity on the economy for months to come. Although, if a deal were to include short term stimulus and really kick the austerity can down the road, the market could pop on something that hasn’t been priced in.

So in the interim most investors/traders are probably best served focusing on fundamentals of individual companies as we head into Q4 earnings season that starts in earnest the week of Jan 14th , as most of the large banks and brokers report (JPM, C, BAC & GS) and a couple tech heavyweights (EBAY & GOOG).  Prior to earnings though, next Thursday on Jan 3rd, we will get a an early look into Holiday retail sales as a laundry list (KSS, TJX, SKS, TGT, M, GPS, JWN, COST & LTD to name a few) of retailers will report same store sales for December.  My sense would be this could be a market moving day, as Q4 is generally a make or break for many retailers year, and early reads suggest that year over year sales increases lagged that of last year by a large margin, and that the worst reading since Dec 2008 could be signaling an “as good as it gets” situation for many retailers well into 2013.

If my household was any indication, our holidays gifts were dominated by 2 retailers, AAPL & AMZN.  While AAPL gifts were bought at full retail, most of what we bought was on AMZN, and was at rockbottom prices with free shipping.  A bit of a “tale of two cities” so to speak.  As a bit of an exercise, I took a walk through a nice mall in Dallas, Texas (visting family) on Dec 23rd and 24th, which is full of high and middle end apparel and dept stores, plus AAPL of course.  I would say that the traffic was brisk, but not overwhelming as I have felt in years past, but the the thing that stuck out to me was the MASSIVE discounting prior to the Holiday.  Wasn’t the age old retail business model to gouge shoppers prior to Christmas and then discount the crap out of unsold inventory after?  Now it seems that you can get 25-50% off prior and 50-75% off after.  Purely anecdotally, but from where I am sitting, retail is screwed for the time being, especially when you consider the period of austerity that our nation is headed for, but lets leave that for another convo.  AAPL got all my margin dollars, and AMZN took market share from bricks and mortar retail as a result of my patronage, but for little to no profit I can assure.  We will get a good sense for how unprofitable AMZN’s Q4 was when they report in late Jan, but my sense this was not the quarter where the company finally realizes that “operating leverage” they have been dangling in front of investors noses for years.

With the SPX near multi year highs, I thought it would be interesting to get a sense for how closely consumer confidence tracks the performance of the stock market index.  As I said above, it appears that this years holiday sales growth may end up being the worst since Dec 2008 when our nation was in the throws of the “Great Recession”, but does the recent decline in consumer confidence signal and impending stock market decline?

[caption id="attachment_21014" align="aligncenter" width="490" caption="5 yr SPX vs U. of Mich Consumer Confidence from Bloomberg"][/caption]


While it is clear the readings track fairly closely, it is not entirely clear which tail is wagging the dog.  On any meaningful pullback in equities, confidence tracks, but was interesting last year was how negative consumer confidence got relative to what was a very mild pullback compared to 2008/2009.  With consumer confidence coming off of a 2012 print that marked 5 year highs, where are we headed now??

Obviously there is nothing scientific here, as Consumer Confidence is backward looking, but I guess my point here is to think about your own spending habits over the holidays, and project out a bit how you feel about where and what you will buy in the next 3-6 months.  When I do this exercise, and consider what will most definitely be a period of higher taxes and less spending, I am hard pressed to see a market that will be generous to consumer and retail multiples that are starting to look a tad stretched in many instances.  I want to short consumer discretionary names that are extended on both a price basis and a multiple basis, while I also think crowded longs in names like COST could come undone early in the new year.