MorningWord 1/03/13: Just as most traders earlier in the week were eyeing the 1400 level in the SPX and the 200 day moving average on the downside at ~1390 as support, the market catapulted nearly 5% in a straight-line to ~1460 which has served as some fairly healthy resistance since the Sept multi-year highs. While the move was largely predicated on investors positioning in front of the fiscal cliff deadline, and the resulting compromise, seasonal factors were also likely in play. Remember that the first trading day of the year in 2012 saw the SPX rally ~1.5%. Just as we had been discussing mutual fund rebalancing since late Oct (out of winners and into some losers), some of this action continues into the new year as investors look for laggards.
Take the price action AAPL yesterday, while the stock was up 3.17%, largely in line with the Nasdaq Comp, the gains were eclipsed by the likes of FB (+5.19%), HPQ (+5.40%) & DELL (+5.28%). I think there are very few folks on the planet that would argue that the fundamentals of FB, HPQ & DELL are remotely in the same stratosphere as AAPL, but maybe given AAPL’s long term out-performance and its recent fall from grace this signals better investment opportunities elsewhere.
Another name that caught my eye as an under-performer on yesterday’s massive rally was JPM, which was up only 1.57%, vs the XLF which was up nearly 3%. Again this could have been investors favoring recent under-performers, or beta in the case of C and BAC respectively.
I am not going to make the same mistake that I made last year, by fading the strong equity performance right out of the gate, but I will look for opportunities to get short exposure where I feel the fundamentals don’t match the price action, and where I can identify catalysts. My short biased trade in XLY yesterday is just one of these ideas where I think we will start to see some kinks in the consumer discretionary armor as we get into the meat of Q4 earnings later this month. I would also argue that while the VIX move above 22 was likely a near term overshoot earlier the week, yesterday’s close below 15 might have been the same on the downside. Given the potential for uncertainty around corporate earnings in the weeks to come, a trade similar to the one that we detailed on December 19th (here) could make sense at current depressed levels.
At this point in the rally, as most major equity indices approach long term resistance I would lean a tad cautious, especially as it relates to chasing longs here, the healthiest thing for the market to do here would be to consolidate some of the recent gains near highs and gather some steam for a break-out.
MorningWord 1/02/13: The shenanigans in Washington over the last few months remind me a bit of my second semester senior year in college that started off with me doing a whole lot of nothing (good that is) the last couple months. When the eventual year end deadline was looming, and not until the realization that to get my degree on time there would either need to be a “grand bargain” with my French teacher (who barely knew me) to get a “Proficiency” stamp to graduate, meaning I had to learn a foreign language to the standards of an Ivy League institution in a matter of weeks. Well, let’s just say my professor was less than impressed with my politicking and the compromise was between me and my desire to partake in senior week. I passed my proficiency exam with hours to spare prior to graduation, although it wasn’t pretty, and I can still barely make out the items on French menu and I certainly can’t order them aloud!
Our elected officials had to bite the bullet and forgo most of their Holiday break and do what their constituents elected them to do. We have been squarely in the camp that a compromise would get done, but one that would more likely cause further deadlines on some of the most pressing issues, which this one does. This likely means continued volatility in equities, due to continued uncertainty as a result of further self imposed deadlines. Maybe investors have become accustomed to this sort of price action since the 2011 Debt Ceiling debacle to the most recent. I doubt it though. But I would suggest that the post election sell-off in Nov, and last week’s were both fairly orderly, and it wasn’t until volumes got very light last week that the VIX actually breached 20 on the upside. My sense is that investors were not all that bothered, and very few expected the “worst case” scenario, as Enis so aptly discussed in his MacroWrap this morning.
Just as it so happens, investors who have been “cliff dwelling” and had moved to the sidelines are quickly trying to play a little catch-up in the last few days. I can’t blame them, especially with the new year upon us, but very quickly the conversation will turn to corporate earnings and what sectors will see a drag from increased tax rates on close to 80% of Americans.
We are clearly a bit more cautious than most in the near term, and will be very inclined to get fairly short above 1450 prior to Q3 earnings. But as we have also been saying, the Q4 earnings set up may be a bit dicey as we expect to hear the words Fiscal Cliff and Hurricane Sandy as frequently as we hear the words cautiously optimistic.
As we get back in the saddle for 2013, we will be most focused on single stock stories in the near term attempting to separate the forrest from the trees, that’s where we think we can add the most value to our readers, not forecasting fiscal outcomes in Washington.
We wish all of our readers a healthy, happy and prosperous 2013, and we thank you for your interest in RiskReversal and your continued support.