MorningWord 2/25/13: Over my fifteen year career trading equities I have compiled a so called “process” for identifying potential trades, both long and short. This process uses many inputs and it usually begins with a “something” that catches my eye like an event, price action, unusual options activity, insider buying or selling, or some sort of corporate action – you get the point. As an active market participant, now more than ever we are inundated with these “somethings” from our financial firms that we deal with, and the financial press seems to be coming at us from every possible angle (print, tv, online, social media, etc etc). The best traders these days embrace all this noise but have a skill for separating the forest from the trees. When I started there was just brokers’ noise. That usually came through a phone call, or the WSJ, IBD or Barron’s (sadly there was no RiskReversal.com in 1997!).
The guy I initially learned to trade from had a process and his starting point for trade ideas was almost always a chart. His evening routine was scrolling through the same few thousand charts in his quest to find the next inflection point. We have said it in this space on many occasions that we are not technicians but we rely on technicals as an important input to our process. Rarely if ever do we place a trade solely on a technical setup.
Here is a real-time example of how a chart may stimulate the idea for a trade. Just this morning I saw that VMW was upgraded to a Neutral from a Sell at Citibank. They were the lone sell rating, now placing Wall Street analysts at a fairly even 22 Buys and 22 Holds. The Upgrade was the “Something” that got me to look at the chart. The chart of the 5 yr was sort of eye popping to me, see below, textbook Head and Shoulders top.
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VMW 5 year chart – Head & Shoulders top from Bloomberg[/caption]
So the Upgrade, and now the Chart, is gonna have me taking a closer look at the stock in an attempt to find out what’s going on in VMW.
Obviously there was an earnings miss last month, but how big, and what sort of whack did management take to guidance? Is the full year guidance now achievable and set up for a series of beats? If I had been scrolling charts daily looking for chart patterns that appeared to be at inflection points I am not sure that VMW prior to the gap last month would have suggested a screaming short but coupled with a fundamental view, and maybe some sort of insight from the options market there might have been a trade with the strong notion that a break of 2 year support would most definitely see lower lows…
Now what to do? Well some work on the name with the strong notion that $80 could serve as some serious resistance for the time being.
Stay tuned.
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MorningWord 2/22/13: Now What?? “The Most Hated Rally Ever” finally got one of the most “anticipated” pullbacks over the last 2 trading days. The SPX’s peak to trough sell off from Tuesday’s multi-year highs was only 2.2%, which was likely very disconcerting to those (me included) who were expecting something in the magnitude of 3 – 5%. BUT we are not likely done just yet. putting aside the disastrous action in the commodity complex this week, equity weakness was very orderly, with little notice of “risk off” action reminiscent of 2011/2012. This suggests to me that this week was merely a screen-test for what could be, as Marc Faber of the Gloom,Boom & Doom Report stated on Fast Money last night, it could be an “intermediate top” for equities.
With yesterday’s late afternoon bounce off of the lows, and this morning’s 50 bps lift in the pre-market, bears will likely use this opportunity to lay out some shorts. On Wednesday in this space, I suggested that while I am short the broad market, I wasn’t that short, and:
Until it becomes apparent that we have made a near term top, I will continue to probe the short side with small size and low conviction and take down long exposure where possible.
This morning will be an interesting tell so to speak, with Europe up strong out of the gate, the ability of the SPX to hold early gains and attempt to re-trace the last couple days move could be the one thing that keeps me sitting on my hands a bit. But if there is no early leadership, and prior leaders like the XHB, XLP and XLF quickly give up, this could be a great opportunity to press them on the short side. A close below 1500 in the SPX in the next day or so, would likely cause a re-test of support at ~1475, and at that point your guess is as good as mine. While I am near term bearish, I would be shocked to see weakness in the next month or 2 that would cause the SPX to go down on the year (another 5.5% lower), but I do think at some point in 2013, there will be shock-waves through equities that causes at least a 10% peak to trough sell off caused by fears of the Fed shifting gears on QE.
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MorningWord 2/21/13: We have gotten our share of questions about GOOG of late, most of which relate to how to get short at all time highs. We have done our best to fight certain urges in the recent run up. Many traders want to make the comparison to AAPL’s run to all time highs, and subsequent 30% plus decline in 2012. From where I sit and taking off my contrarian hat, there are few AAPL related analogies that suggest GOOG is set to decline 30% over the coming months, barring, of course, a market meltdown and / or substantial consecutive disappointments.
The chart below, since GOOG’s IPO in 2004, shows the steady run up from $85 to almost $750 in its first 3 years, and its almost 65% decline from those highs in the throes of the financial crisis. Since the 2008 lows (and it’s interesting to note, that GOOG bottomed well before the SPX) the stock has made a series of higher highs and higher lows, building up some steam that ultimately led to the breakout to new all time highs.
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GOOG chart since 2004 from Bloomberg[/caption]
From a pure technical perspective, the stock will likely have to base btwn current levels and possibly as low as $700 for a bit more time before the stock has any chance of hitting that nice round $1000 price target of many.
So back to the question of, Why not short here? GOOG has clearly been a beneficiary of AAPL’s price action since the Sept highs. The big money guys who rode the AAPL gravy train for years needed to find a big liquid name that had similar growth characteristics as AAPL did just a couple years ago. The chart below has been passed around a bit by some of the conspiracy theorists out there who liked to think the whole market thingy is a rigged game. The one year chart of AAPL and GOOG shows the perfect symmetry of AAPL and GOOG’s run to all time highs in late 2012 and the subsequent bifurcation in mid November that has seen 25% gains for GOOG and 15% losses for AAPL since.
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1 Yr AAPL vs GOOG from Bloomberg[/caption]
From a purely valuation and expected growth perspective, off the top of my head, I can’t think of another $250 billion plus market cap company that analysts expect to grow earnings and sales at 15% plus for the next 3 years that sports a PE consistent with that growth rate (GOOG trades ~15x next years expected earnings). I don’t have a ton to add on the fundamentals as I am fairly neutral on the story, but if I were an investor, I would continue to worry about competition from FB and Twitter for real time search, the lack of traction in Social and obviously the continued threat of the secular shift to mobile computing, which sports lower cost per clicks than desktop. But, as I am not an investor in GOOG, I will defer to some recent bullish reports from large Wall Street houses that suggest that GOOG is well positioned to increasingly grab more dollars of advertisers’ entire budgets on other mediums, that smartphone ad revenue will be an incremental positive despite being lower margin as it will be made up in volume and that the market share opportunities overseas will be the real driver of the next leg of growth.
So to sum it up, GOOG appears to be in a fairly enviable spot compared to most large cap tech stocks (AAPL, MSFT, INTC & IBM). They still have expected growth north of 10% and the stock is likely to continue to be bought on pullbacks by the “Big Money”. So for now, despite being at or near all time highs, the stock does not look or feel particularly overbought when I consider other inputs aside from price action and technicals. I am not a buyer here, but on a broad market downdraft, possibly back at $750, I might dip my toe in, oh and still fighting contarian urges.
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MorningWord 2/20/13: Last night I spoke on a panel at the Traders Expo in New York and met a lot of self-directed traders, just like you. During the presentation we took a bunch of questions, and I spoke to probably 2 dozen individuals before and after, and to be frank I was mildly interested by the state of worry that exists about the market at current levels. Maybe just maybe they knew exactly who they were talking to, a current bear, but my sense is that these people were not “all in” the market, and in some ways fearful of missing a blow off top, while looking for a near term pullback. The reason I bring this up is it’s sort of opposite to the apparent levels of complacency that exist in sentiment readings and instruments like VIX.
Josh Brown, writer of The Reformed Broker blog had a great quote last week on CNBC’s Halftime show, stating something like “this is the most hated rally ever”…….and by polling these retail investors and many so called professionals, I would agree with that assessment. Let me be clear, this market is starting to make me absolutely ILL, the non-stop upward bias, the apparent levitation on consolidation days, the inability to sell off on what appears to be bad news and most of all the runawy break-outs to new all time highs in stocks like Proctor & Freaking Gamble without any regard for expected growth or valuation. All that said, I am not that short right here, I have spent the last few weeks taking shots on the short side, but in fairly innocuous size, I refuse to dig in so early in the year. I have made this mistake in years past, and I have seen this movie before so to speak.
As Mike Santoli mentioned yesterday on his blog on Yahoo Finance, this year is tracking not too differently than the last couple years:
Yet in some important respects, the way the first weeks of 2013 have played out is quite similar to the opening acts of both last year and 2011. Consider: As of Valentine’s Day, the S&P 500 was up 5.9% year to date in 2011, and up 7.4% last year. This year, the index is up 6.5%, right between the two prior years’ appreciation pace. In both those prior years, too, the various investor-sentiment surveys were indicating some complacency, hinting that conditions were ripening for at least a market correction.
In both years, the market reached higher levels in April. In 2011, there was about a 5% decline from mid-February into mid-March, which fleetingly swept away all the gains from the first weeks of the year, before a q uick recovery stretched the S&P to an 8.4% year-to-date gain by April 28.
So I guess my point is, while there appears to be a fair bit of good news priced into stocks at current levels, which for all intents and purposes also appears to be discounting any potential bad news, trying to pick tops is difficult business, and can be costly if not sized properly or done so with stops. This is one of the most important comments you will ever read on this site, and should be applied to most aspects of trading, not only just picking tops and bottoms.
The chart of the SPX for the last 3 years shows 4 peak to trough draw-downs of btwn 9% and 21.5%,m with the avg about 14.5%.
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SPX 3 yr chart from Bloomberg[/caption]
The higher we go, and the further we get away from the Euro Sovereign debt crisis, the smaller the sell offs have become. But make no mistake, another one is coming and usually when we least expect it. As a trader though, I have to keep my mind on the prize, capital preservation, and living to fight another day, so until it becomes apparent that we have made a near term top, I will continue to probe the short side with small size and low conviction and take down long exposure where possible.
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MorningWord 2/19/13: Sometimes when it comes to trading, I like to kick it Ol’ Skool by looking at company whose products I can see and feel in everyday use, or in the case of GRMN, RARELY see or feel. The evolution of GPS devices from personal navigation devices (PNDs) a decade ago, to nearly universal in car navigation to now FREE turn by turn directions on Google Maps Apps (or if you feel like getting lost, Apple Maps) for nearly every smartphone has the potential to bring a multi-billion industry to its knees, if it hasn’t already.
I started looking at GRMN a few weeks back when I saw the gap on volume in late Dec on the announcement that they were being added to the S&P500 index (below).
Over the past few years when the smartphone wars have been raging, and casualties have been mounting (PALM, MMI, RIMM, MSFT, NOK), GRMN’s failure with their NUVI-phone a few years back has widely been forgotten. As I do more work on the name I am trying to get a sense for their continued reliance on the auto/mobile segment in a VERY crowded field where cannibalization will be a new way of life for their entire suite of product offerings.
I am writing about the company this morning because they are slated to report Q4 earnings tomorrow before the bell. The options market is implying about a 6.25% move vs the 4 qtr avg move of about 4.5%. On the surface this a very cheap company, as 35% of their market cap is in cash, which is also equal to their annual sales. They have no debt and pay a dividend that yields 4.6%. The only obvious problem with the stock, is that earnings and sales have stopped growing, and are expected to flat-line or even decline a bit over the next couple of years.
The company is clearly at a crossroads, and how they choose to spend their cash to redirect will likely be one of the most important decisions the company will every make. To stay the course will likely prove to be fatal, but an ill advised trans-formative acquisition could have a similar result. Given the company’s strong cash flow generation and no current leverage I would assume this could be an LBO candidate, but your guess is as good as mine as I have not seen it on any short lists. GRMN is a very tightly held company with the top 6 holders representing nearly 50% of the shares outstanding, and 40% of which are founders or insiders. With nearly 14% of the float short, my sense would be that if the company lays an egg on Q4 and substantially guides down for 2013, GRMN may very quickly be on the tip of banker’s tongues.
Just as I would not have bought DELL late last year on its fundamentals, I would not buy GRMN either, but DELL’s recent history could serve to be instructive to other floundering tech companies with massive leverage on the financial engineering front. I will likely do a deeper dive preview later today.