MorningWord 3/28/13: Something’s Got To Give – $SPX

by Dan March 28, 2013 9:26 am • Commentary

MorningWord 3/28/13:  Enis posted a couple great charts this morning in his MacroWrap on the SPX and what its eventual break above new highs could mean (read here).  The powers that be, really want to see a close above 1565.15 (the Oct 9, 2007 all time high) and the chart below is just screaming that fact at you:

[caption id="attachment_24180" align="aligncenter" width="589"]SPX 10 day chart from Bloomberg SPX 10 day chart from Bloomberg[/caption]


What I find so interesting about SPX’s performance of late, is that there has been 5 sell offs from above 1560 on average of about 1%, and in all 5 instances in the last 10 ten days the index has been drawn back within striking distance of the all time high like a magnet.

All of this comes as the VIX has settled at above 13 (below):

[caption id="attachment_24181" align="aligncenter" width="589"]VIX Ten Day Chart from Bloomberg VIX Ten Day Chart from Bloomberg[/caption]


But also at a time when the Euro Stoxx 50 (SX5E) has had a 5% decline:

[caption id="attachment_24182" align="aligncenter" width="589"]EuroStoxx 50 ten day chart from Bloomberg EuroStoxx 50 ten day chart from Bloomberg[/caption]

And the Euro Stoxx Bank Index (SX7E) is down more than 11%

[caption id="attachment_24183" align="aligncenter" width="589"]EuroStoxx Bank Index (SX7E) 10 Day Chart from Bloomberg EuroStoxx Bank Index (SX7E) 10 Day Chart from Bloomberg[/caption]


Oh and lets not forget the Shanghai Comp, which closed down 2.8% last night, at the dead lows of the session, placing the index down 1.45% on the year (down almost 9% from the Feb highs), and trading near the lows of the year. From purely a technical standpoint, the index is approaching its 200 day moving average which is interesting support for a handful of reasons, none more interesting than marking nearly a 50% re-tracement of the move off of the 4 year lows made in late 2012.

[caption id="attachment_24184" align="aligncenter" width="589"]Shanghai Comp 1 yr chart from Bloomberg Shanghai Comp 1 yr chart from Bloomberg[/caption]


Well I am not sure what all these charts tell you, but what is obvious is the SPX’s relative strength, to almost every other equity index in the world of late.  Is it a single case of flight to quality, or some old fashioned quarter end window dressing?? Who knows, But my sense would be that something has to give and soon.  We either get a new closing high and then maybe even best the intra-day high of about 1575 and then see the forces of gravity come to play, or we get some sort of blow off top that just breaks the will of the bears.  My guess would be that Q2 is likely to be a bit more volatile that Q1, it was all a bit too easy for the bulls, and if recent history, specifically 2012 and 2011 are any guide, it may be time to strap on your helmets.  Q1 earnings seasons that starts in a couple weeks could be the very catalyst for volatility, up or down.


MorningWord 3/27/13:   The breadth of the rally has been declining all year as measured by the NYSE New Highs, charted below (a series of lower highs and lower lows):

NYSE New 52 wk Highs vs New 52 wk Lows from Bloomberg
NYSE New 52 wk Highs from Bloomberg


On the single stock level, it is interesting to see stocks like GOOG, which has dramatically outperformed the SPX from the November lows, but has stalled in the last few weeks since making a new all time high on March 6th and now sits ~2.5% below those levels.

[caption id="attachment_24134" align="aligncenter" width="589"]GOOG vs SPX ytd from Bloomberg GOOG vs SPX ytd from Bloomberg[/caption]


GS and TOL are a couple other names I have been keeping a close eye on as both have failed to make new 52 week highs since doing so in earlier in the year.  In my mind, some of the names that have gotten us here are losing a bit of their upward momentum, and this could be a clear sign of a sell off to come.

Add to that the mess in Europe, with the Euro hitting its lowest levels since November, and European banks down more than 20% in 2 months, and you have all the ingredients for a more severe pullback than anything we’ve seen so far this year.  We’re set up relatively bearish, so a bit talking our book, but we’re bearish for all these reasons combined.  And the sectors that have leading this BULL in the past month?  Health care, consumer staples and utilities…just the sectors you want to see if you’re a raging bull, right?


MorningWord 3/26/13:  Back in late September when YHOO was trading ~$16, and prior to its 45% rally to almost 5 year highs, we thought the stock was cheap on a sum of the parts basis, and with implied vol at 2 year lows it made sense to take shot on the long-side (read here, also see positive view on Feb 1 here).  At the time I suggested:

The market is pricing in a No Catalyst environment from now until Jan13 expiry. While the market may be right, the risk/reward is very favorable, with the upside obviously skewed to higher volatility between now and Jan13.

In hindsight, this was the right call, as the combination of poor investor sentiment and low implied volatility, shortly after the addition of a new highly anticipated CEO set up for “cheap” ways to play in the options market.  The chart below, shows that on a relative basis, this is not exactly the case any more, as 30 day implied and realized volatility is bit higher than where they were back in late Sept, pricing in a bit more risk to the shares at current levels.  

[caption id="attachment_24077" align="aligncenter" width="589"]YHOO 30 Day Realized Vol vs 30 Day Implied Vol from Bloomberg YHOO 30 Day Realized Vol vs 30 Day Implied Vol from Bloomberg[/caption]

On a technical basis, the chart could be getting just a tad overbought, especially when you consider the lack of fundamental news that has been associated with the stock’s recent strength.   The chart below shows the stock pressing up against 5 year resistance in the $24/$25 area.

[caption id="attachment_24078" align="aligncenter" width="589"]YHOO 6 Yr Chart from Bloomberg YHOO 6 Yr Chart from Bloomberg[/caption]

Yesterday’s price action was quite interesting after opening flat and than opening to new 4.5 year highs, the stock stalled and closed on the low of the day.  Are Buyers starting to get exhausted?

[caption id="attachment_24082" align="aligncenter" width="589"]YHOO ytd chart from Bloomberg YHOO ytd chart from Bloomberg[/caption]

This price action comes on a day that YHOO supposedly bought a 17 year old kid’s iPhone app turned internet startup for $30million!!!  The news reports that I have read suggest that YHOO will shut the company down and incorporate its technology and retain its talent.  Pahleezzz.  This is the exact sort of behavior that smacks of a near term top.   Marissa Mayer’s presence at the helm of YHOO has clearly excited an investor base that has had little to be excited about for 5 years, but at some point very soon it will be time to put up or shut up.  There was a time not too long ago, when you backed out YHOO’s stakes in Alibaba and YHOO Japan, and then their cash, that you were getting their core business for free, with the stock in the low to mid twenties, that is not the case anymore, and the incremental buyer of the shares up here will likely need to see a viable roadmap for YHOO to compete with leading web and media properties, that until now investors have given Mayer a pass on.

I am looking at short premium ways to play for a near-term pullback/consolidation in the shares in front of what I think will be an important Q1 report in a few weeks.  Stay tuned.


MorningWord 3/25/13:  Last Monday, at this exact time I sat down to pen this piece and I suggested that the down 1% opening on the flare up was a “Treacherous Set Up For Bears, $SPX = Flight To Quality“.  Here we are a week later with the S&P futures above the close prior to last weekend’s Cyprus flare-up.

S&P 500 Futures 6 day chart from Bloomberg
S&P 500 Futures 6 day chart from Bloomberg

My contention at the time was that U.S. risk assets would once again be perceived as less risky from those in Europe and the ones under-performing in emerging markets, and therefore were likely to continue to display relative strength.  

With the SPX cash regaining all of the ground that it lost early last week, it now looks poised to break out to new all time closing high above 1565 (less than 1% away from the Oct 2007 Euphoric levels) and possibly test the intra-day highs of ~1575. On Thursday I suggested the same in this space, “Why Come To The Prom If You Don’t Intend To Kiss The Queen?”.  This doesn’t make me bullish, it just suggests that I am not immune to noticing the obvious.  This week also is an interesting set up, with a holiday shortened week due to Good Friday and many out for Passover, the powers that be who want to mark their portfolios into quarter end may be able to do so with little resistance.

I will add one caveat – if and when we make that momentous close, the chart below shows the relationship of the SPX to its 200 day moving average over the last 2 years.  What is obvious again to me, is that when the SPX is making new highs and gets btwn 8% and a bit over 10% from its 200 day moving average, it had always had a pull back in the coming months of at least that amount.

[caption id="attachment_24027" align="aligncenter" width="589"]SPX 2 year chart from Bloomberg SPX 2 year chart from Bloomberg[/caption]


I’m just saying.  I guess it sounds a bit old at this point, but if you are gonna try to steal that kiss from the Prom Queen you may want to slip out the back door of the gym before her boyfriend comes looking for you!

I do not believe we can have a sustainable second leg of the ytd rally until we have a meaningful pullback in the range of 5-10%, so I remain stedfast in my belief that this is not a good entry point for committing new capital to equities despite U.S. equities generally favorable attractiveness to other regions.

I will add one more thing, our markets appear to be a little sick of the whole Cyprus thingy, and as of now (9:15am), the S&P futures are up only 16 bps, and the Euro Stoxx Bank Index (SX7E) which was up 2% is down on the day, how much of the Bail-Out are in stocks at current levels.

[caption id="attachment_24030" align="aligncenter" width="589"]Euro Stoxx Bank Index (SX7E) one day chart from Bloomberg Euro Stoxx Bank Index (SX7E) one day chart from Bloomberg[/caption]