MorningWord 3/19/13: Are We There Yet?? Not Via Cyprus $SPX

by Dan March 19, 2013 9:08 am • Commentary

MorningWord 3/19/13:   Yesterday at this time, I penned my morning piece, titled, ” Treacherous Set Up For Bears, $SPX = Flight To Quality”.  As a trader who came in to the day net short, I should have been elated for the early morning weakness, but instead I hated the set up (down 12 but up 11 from the overnight lows).  It was gonna take a bit more, something closer to home or at-least on the continent of Europe to derail this raging bullish beast known as the SPX.  No matter how you look at it, most of the bad stuff going on anywhere in the world, particularly outside of the U.S., is bullish for U.S. risk assets, plain and simple.  

Many of our readers are able to differentiate us from our daily written word, from the appearances on TV a couple times a week, we are not perma-bears, and in fact we have our moments when we can be uncharacteristically bullish.   But regardless of our positioning, we will never forsake our training.  The most profitable situation for my trading book yesterday would have been a re-test of the overnight lows in the S&P (down about 23) and a very sloppy close  to new lows.  But walking in yesterday morning, after being inundated by the ridiculous round the clock chatter regarding Cyprus in the echo chamber that is my Twitter feed, I was not going to press the short trade.  So I sat on my hands, adjusted a few small positions and continued to wait.

So What To Do Now?

As Enis stated this morning in his MacroWrap, the internal breadth indicators that we look at do NOT scream long term top, for now, but the slight deceleration in said indicators could be suggesting a short term pause/pullback.  We have been of this belief for 30 points in the SPX (so a tad wrong on direction), but have not been pounding the table to that affect, at least as represented through our documented trading.  Instead we have preferred to be short gamma (read CC’s piece on the topic here) rather than outright long premium on a pure directional basis.  Trying to pick tops is difficult business and there are 2 ways to be consistently successful at it, either be extremely lucky on your timing, or have significant liquidity that offers you the ability to average into the trade.  Most of us lack both and therefore are left to trade what the market gives us.

I have said it on many occasions this year, tops are processes, and long term ones usually incorporate at least one or 2 intermediate term ones (see the definition of head and shoulders tops), so no matter how bearish you want to get as a result of Italian elections, Chinese Ghost Towns, or deposit haircuts in Cyprus, recognize that not one event will be the undoing of a market that has its share of embedded tailwinds (see FOMC).

We will remain vigilant on our mission to routinely articulate different uses of options to add yield to longs, fade excessive optimism, leverage to best ideas, or merely to risk manage portfolios.  This is where we can add the most value to our readers, not by making table pounding market calls on individual stocks or the broad market.  We hope you see it the way we do!


MorningWord 3/18/13:  Treacherous Set Up For Bears, $SPX = Flight To Quality

Since Super Euro Banker “Extraordinaire” Mario Draghi said the now infamous words back in late July, the Euro Stoxx 50 is up about 25%, but understandingly under-performing the SPX since the European Sovereign Debt Crisis has gripped the region since early 2011.

Euro Stoxx 50 (SX5E) vs SPX 5 year chart from Bloomberg
Euro Stoxx 50 (SX5E) vs SPX 5 year chart from Bloomberg

As Enis so aptly put it this morning in his MacroWrap:

The European debt crisis is a crisis because it’s the culmination of 20 years of unproductive, ill-advised, debt-financed investment and consumption.  It’s the culmination of 20 years of structural imbalances caused by a misleading convergence in interest rates in a poorly-conceived common currency community.  It’s the culmination of 20 years of meager banking oversight by more than a dozen national banking regulators, allowing European banks to amass leverage ratios of 30 and 40 to 1.  It’s the CULMINATION.


This is fairly clear – all parties involved had to choose from a lot of pretty bad options as it relates to a bailout for Cyprus, and if Draghi thought he took systemic risk off of the table with his “What Ever it Takes” comment, he was likely mistaken.  This crisis has keep a lot of journalists and bloggers in business, and I assume that we will be talking about Cyprus for at least the balance of the week as it appears we are in a slow news cycle.

Last week in this space I had some choice words of the usefulness of Twitter for those of us info-crazed financial soles, but man I got to tell you, Twitter ruined my Sunday as my stream lit up like a Christmas tree on the Cyprus thingy.  The use of CAPS and superlatives relating to the proposed bailout was like nothing I have seen in the stream in a while, and suddenly everyone who has an account and traded a stock in the last year has a view.  So maybe I’ll be the first to tell you, I have no opinion on the goings on in Cyprus, and while I have been eagerly awaiting a pull back in the SPX, the chart above worries me that we will continue to see SPX out-performance as investors will continue to view the U.S. as a flight to quality.

SO then the next obvious question is with the $ rallying against the Euro, can this relationship continue to stand in both the equity and currency world??? Crude is down this morning I assume on slowing global growth concerns, which could be a positive right??   You get my point, just when we thought we could focus again on corporate earning growth for the next leg of the bull run, for the third year in a row, for the third spring in a row, we have the Euro Sovereign Debt Crisis rearing its ugly head and the micro guys like me are stuck trying to sift through all the noise and figure it out.

As we approach Q1 earnings in April and start to meander into pre-announcement season, have U.S. multinationals just received their latest excuse for poor earnings viability?  Hurricane Sandy was soooo Q4 2012.  If the overnight action in the S&P Futures is any indication (up 11 handles off of the lows) this will not be an easy ride for those of us who are short, and the most disappointing aspect of the overnight session is that we are right smack dab in the middle of the range.   I would have preferred a down 20 opening and shorted the first rally to down 10, or a I would prefer a down 3-5 opening so you could just lay into them.  But here, down 12, this is a tough call, and you kind of just have to sit on your hands and see what happens.  In many ways I could see U.S. investors flipping Cyprus and the Euro the Bird, but we are extended and it seems like everyone and the mother, both bulls and bears would like to see a little short term pain.