MorningWord 2/5/13: Where Do We Go From Here? $SPX

by Dan February 5, 2013 9:10 am • Commentary

MorningWord 2/5/13:  All that talk of last week of fresh highs in the Dow Jones Industrial Average was bit silly to me, the Dow, Really??  1960 called, they want their stock index back.  The Dow consists of 30 of the safest well owned equities the world over and let’s be honest, if AAPL was in the index over the last few years there would have been material out-performance resulting in new all time highs last year while the world was still focused on such blase topics like European Austerity, Blue & Red States, and Fiscal Cliffs.  Because the Dow is price weighted, AAPL would have made up well over 25% of the index at any point last year, compared to IBM’s current ~11% weighting………traders on the NYSE would have been dusting off those Dow 20k hats they had printed back in early 2000.  Quoting the Dow is a fairly meaningless endeavor and I am not really sure why the financial media continues to do so, 99% of U.S. equity traders I know stare at the SPX or corresponding futures for the better part of the day as it is a much clearer indication of breadth even though the top 10% of the index make up 50% of the weighting.  

No matter how you slice it though, when you look at the all maximum price history of either the venerable Dow, or the SPX, the near term set up does not look great from a technical perspective. Where the hell do these charts go from here.  The first chart below of the Dow from 1980 to present shows the near breach of the 2007 all time highs, which is most likely coming to a theater near you in the first half of 2013, but where from there? Uncharted territory??

[caption id="attachment_22321" align="aligncenter" width="589"]Dow Jones Industrial Avg 1980 to Present from Bloomberg Dow Jones Industrial Avg 1980 to Present from Bloomberg[/caption]


The Chart below shows the SPX from 1980 to the present which is now about 5% from the all time highs.  While I think there is a good shot we test those levels, we will need a heck of a lot of things to go right from here to have the SPX close 2013 above these levels, especially when you consider ytd gains of almost 5%.

[caption id="attachment_22320" align="aligncenter" width="589"]SPX 1980 to Present from Bloomberg SPX 1980 to Present from Bloomberg[/caption]


I don’t bring all this up because I am particularly bearish, I  merely think that 14k in the Down and 1500 in the SPX are HORRIBLE entry points for new money earmarked for equities.  Obviously there is nothing scientific here, just a couple observations, complacency seems very high, which appears dangerous at nosebleed levels.  Those 2 charts look like the mother of all double and triple tops, I’m just sayin…….

Yesterday’s 3% decline in the Euro Stoxx 50 (SX5E ), capping a near 5% decline from the 52 week highs, should serve as a healthy warning that equities can decline when we least except them too.





MorningWord 2/4/13:   As a trader, I make my fair share of mistakes, usually not the same one over and over again, but often times it takes a few attempts to break a bad habit   A week ago Friday, while Bill Ackman and Carl Icahn were duking it out on CNBC (below) over their opposing views/positioning on HLF (among other things), my sense was that the spike in short dated implied volatility offered an opportunity to sell Feb to own options in March expiration that would include HLF’s next quarterly report.  I bought a Feb/March 40 Put calendar when the stock was ~$44.50, and my play was that the stock would remain btwn the high 30s and the mid to low 40s btwn then and Feb expiration.

And here is the mistake, using options to get too cute trading a potentially binary event where the timing is uncertain……….this morning, the NY Post is reporting that the FTC is looking into HLF’s sales practices, which is a main tenet of the Ackman’s short thesis.   My cynical predisposition and Ackman’s very public accusations against HLF led me to side with his bearish argument, yet the fact that Ackman is short nearly 25% of the float made me nervous to commit capital to an outright short position. Outright put purchases would have been very profitable in hindsight.  IN the  trade that I put on, I sold the Feb 40 Put at 1.20 to buy the March 40 Puts for 2.70.  The Feb 40 Puts closed Friday at 5.50 and they will be worth a heck of a lot more this morning with the stock trading ~$32 in the pre-market.

Hindsight is obviously 20/20 and if I had thought the stock had the potential to drop 30% like a rock in less than 2 weeks,  I would have obviously bought puts or put spreads, or sold call spreads, and for the most part the trade that I chose offered a much higher probability of success.  I have said it before in this space, trading is hard, and sometimes those of us who use derivatives of the underlying make it harder than it needs to be, but the longer I do this the more interesting the trading opportunities become, aside from just being long or short.  Stay tuned for a trade update on how I manage this trade.


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